The FSA's Report Into RBS

The long awaited, and much delayed, report by the Financial Services Authority (FSA) into the Royal Bank of Scotland (RBS) near collapse has finally been issued.

The FSA concludes there were “underlying deficiencies in RBS management governance and culture which made it prone to make poor decisions”.

The report highlights that Sir Fred Goodwin (the then CEO) lobbied to have a warning letter from the FSA altered, to remove references to the deterioration in his relationship with the FSA along with the FSA's concerns over RBS’s commercial property lending.

Incredibly only 6 members of the FSA were overseeing RBS in August 2007 (when it went ahead with the disastrous "dule diligence light" takeover of ABN Amro).

Lord Turner, chairman of the FSA, attempts to explain why, despite these failings, “no-one has been punished” for this failure of governance and oversight:

 

“The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future.”

Blaming the "rules" is not sufficient excuse for inaction, given that the governance of RBS clearly failed on a spectacular level and that the oversight of RBS by the FSA was woefully inadequate.

Why is the FSA still in existence?

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RBS Slips Deeper Into The Mire II

Hot on the heels of the news that the Royal Bank of Scotland (RBS) will have to conduct a forced sale of some of its well known brands (eg Churchill) and that a further 3700 jobs (on top of the 16000 already lost) will have to go, RBS have also announced that it will be deferring the bonuses of higher paid members of staff (over £39K per annum) and board members until 2012.

RBS and Lloyds will defer bonuses in return for an additional £40BN of our money.

Part of the bonus payments will be deferred, and part will be paid in shares; ie there is no "bonus cut" as such, merely an adjustment as to how and when the bonuses will be paid.

Given that these two banks are in a complete mess, I don't fully "grasp" how it is that any senior manager is entitled to receive a bonus.

I would also note that by paying part of the bonuses in shares, the current shareholders will find their holdings diluted, and the management will be incentivised to talk the value of the shares up in future in order to maximise their personal gains.

Is this really an improvement in the corporate governance of these two failed banks?

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US Launches Probe Into BAE

The US Department of Justice has launched a formal anti-corruption investigation into BAE Systems' alleged payments of bribes to a Saudi prince, in return for a lucrative contract.

The allegations concern multi-million pound payments to Prince Bandar, a leading member of the Saudi royal family, as part of the Al Yamamah Tornado jet deal.

The investigation will look at BAE's compliance with anti-corruption laws, "including the company's business concerning the Kingdom of Saudi Arabia".

BAE shares have fallen 6% in opening trading today, as a result of the announcement.

The US action follows the UK government's decision to stop a fraud inquiry, last December, into BAE’s 1980s Al Yamamah deal to supply Tornado jets and other military hardware to Saudi Arabia. The UK government cited national security interest as a justification for their decision.

BAE have issued a statement:

"BAE Systems has been notified by the US Department of Justice that it has commenced a formal investigation relating to the company’s compliance with anti-corruption laws including the company’s business concerning the Kingdom of Saudi Arabia."

BAE is one of the largest defence contractors used by the US government.

BAE has already asked Lord Woolf to carry out an independent review of the company's handling of arms deals.

The review does not include BAE dealings with Saudi Arabia.

Prince Bandar has denied receiving improper payments, and BAE has said it acted within the law.

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The Wolfowitz Legacy

Following on from the much heralded resignation of Paul Wolfowtiz from the presidency of the World Bank, questions are already being raised about the willingness of member countries to maintain the tradition that the new bank president be nominated by the American president.

The World Bank, having thrust the issue of ethics and accountability firmly into the spotlight, is also facing some very hard questions about its internal structure and procedures.

Aside from internal accountability, questions are also being asked about the accountability and honesty of those nations that benefit from loans and aid handed out by the World Bank.

It is ironic that Bush and Wolfowitz may, quite unwittingly, have done the World Bank a service by forcing these issues into the spotlight.

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Wolfowitz Resigns

Paul Wolfowitz has finally comes to his senses and resigned (effective as from 30 June) as president of the World Bank.

The World Bank board will meet later today to discuss leadership issues, including the process of selecting the new president.

However, as is custom and practice, the White House still has the right to appoint the president. US Treasury Secretary, Henry Paulson, said that he would help President Bush to identify a nominee after consultations with other World Bank member countries.

The United States, the bank's largest shareholder, has named the World Bank chief since it formed the bank over 60 years ago.

However, this time around Bush will not find the process of nomination so straight forward:

1 Wolfowitz, a Bush nominee, failed in the post becuase he was arrogant and ignored ethics

2 Bush's presidency is imploding, rocked by domestic political scandals and the Iraq failure, his power and authority is draining away

3 Bush is despised by many European leaders

The failure of Wolfowitz is symbolic of the failure of Bush. The next US nominee will find that the other members of the bank will subject him/her to intense scrutiny before approving him/her.

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The Farce Continues

The ongoing farce over Paul Wolfowitz, the embattled soon to be ex president of the World Bank, continues.

The meeting of the World Bank's executive board adjourned last night, without a decision on Wolfowitz's future.

The bank's board spent the day discussing the report on Wolfowitz, and issued the following statement:

"The executive directors of the World Bank group continued their deliberations on issues raised by the report of the ad hoc group and in their meetings with Mr Wolfowitz yesterday. They will continue their deliberations tomorrow morning."

The committee is expected to endorse the report, and call for Wolfowitz's resignation.

Wolfowitz doesn't publicly, as yet, want to go quietly. His lawyer, Robert Bennett, suggested that Wolfowitz was happy to force the board into a showdown:

"Mr Wolfowitz will not resign under this ethical cloud and he will rather put this matter to a full vote."

This show of bravado is of course a negotiating tactic, designed to maximise his payoff and public plaudits when he actually resigns later this week.

Germany's development minister Heidemarie Wieczorek-Zeul summed it up succinctly:

"...would do the bank and himself a great service if he resigned. That would be the best for all involved."

Wolfowitz's tenure is over, such is the price for breaking ethical guidelines.

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The End Game

The end of Paul Woilfowtiz's career as president of the World bank is now in sight, all that is happening now is an elaborate negotiation about the terms on which he should leave.

On Tuesday evening, after World Bank directors accused Wolfowitz of breaking ethics rules in negotiating a promotion and salary raise for his companion, Wolfowitz pleaded with them to give him another chance.

Wolfowitz urged directors to separate the specific mistakes he may have made in handling his companion's reassignment, and larger questions about his contentious two-year tenure at the bank.

"If you want to have a discussion about my leadership, my management style and the policies I support, let's do it.

That's fair. That's legitimate. But let's get past this conflict-of-interest matter that was resolved over a year ago."

This last minute plea is unlikely to save him, as President Bush has now signalled that he is prepared to "allow" (in Bush's mind he has the power to keep Wolfowitz in situ - he does not) Wolfowitz to resign.

Bush has let it be known, that he would "allow" resignation if the bank board dropped its insistence to declare him unfit to remain in office.

However, as with many "new initiatives" and "changes of mind" that Bush proposes, this is too little too late. The majority of the countries who fund the bank are absolutely against allowing an easy opt out for Wolfowtiz, partly this being a reaction against Bush and his administration's unilateralism over the past 6 years.

It seems that the board will endorse the findings of a special committee that Wolfowitz broke bank rules, ethics and governance standards in arranging for, and concealing, a pay and promotion package for his companion, Shaha Ali Riza, in 2005.

Now is the time for Wolfowtiz to bring his lawyers in to discuss his severance package.

Another mess caused by the ineptitude of the Bush administration, that will have consequences for America's relationship with the rest of the world.

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Tick Tock

The end days for Paul Wolfowitz, the embattled President of the World Bank, are now in sight.

A panel of seven directors investigating the Wolfowitz scandal, stopped short of saying he acted in bad faith. However, they have given him until May 9 (today) to respond. The group also faulted the bank's ethics committee for giving him insufficient guidance on how to avoid a conflict of interest.

The findings will next be considered by the bank's full board, which may meet this week.

Support for Wolfowitz has all but disappeared in Europe, and is fading fast in Washington. President Bush will have to engineer a face saving exit for his former deputy defence secretary.

Germany's director at the World Bank has been instructed by his government to co-ordinate a board campaign against Wolfowitz.

Wolfowitz, for the moment, has vowed to stay.

President Bush, having publicly supported Wolfowitz, has now backtracked by allowing White House spokesman Tony Snow to say that Bush "has confidence" in Wolfowitz.

Wolfowitz is finished, the longer he stays the more damage he does to the credibility of the World Bank.

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The World Bank Fiasco

I hold my hands up to mistakenly saying on Friday, with confidence, that Paul Wolfowitz would be out of his job as president of the World Bank by the end of the day.

Monday morning, and he is still there vowing to stay on.

However, whilst I may have got the timing of his departure wrong, I am confident that his position is now untenable and he will soon be gone.

Unfortunately for the World Bank, and those hapless impoverished nations that rely on it, Wolfowitz's dogged determination to stay on and the rancour and negative publicity that this pig headedness is causing does the institution and those that it serves no good whatsoever.

The final nails in the coffin of Wolfowitz's career were driven in on Sunday, when the oversight committee of the bank delivered a public rebuke of his leadership, expressing "great concern" about the institution's future and the need to preserve its credibility and staff morale.

In simple terms, they want him to fall on his sword and go.

Unfortunately, Wolfowitz just doesn't seem to get it; he is working under the delusion that it is alright for him to act outwith the ethical requirements of the bank in the time honoured tradition of "do as I say, not as I do". He is also naively trying to ride the storm out.

The simple fact is that this storm will not die down, the European countries that contribute to the funding of the bank (such as the UK) want him gone. His only support comes from his friends President Bush and Dick Cheney, as the old saying goes "with friends like those..."

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Sex, Power and Money

Sex, power and money are a heady combination; as any seasoned politician, member of the media or hooker will tell you.

Paul Wolfowitz, Head of the World Bank, has also learnt of the power of such a combination.

His position within the World Bank now looks untenable, as he was publicly booed and heckled by his own staff at a meeting, and forced to leave.

His crime?

Wolfowitz personally intervened to obtain a pay rise for his girlfriend, Shaha Riza, who works at the bank. he got her a nice little earner from $132,660 to $193,590 tax free.

Aside from the obvious ethical issues surrounding the merits of this pay rise, the bank rules actually forbid couples from working together.

Ironically Wolfowitz, who was an advocate of the Iraq war when he was Deputy Defence Secretary for President Bush (who appointed him to the bank), is a strong advocate for tough rules on corruption and corporate governance.

He has forgotten the cardinal rule, lead by example. Those at the top of an organisation must not only be ethical, but must be seen to be ethical.

He will be out of office by the end of the day.

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