RBS: a failure made in Scotland

The likely nationalisation of the Royal Bank of Scotland is a humiliation to rank with the collapse of the Darien scheme in 1699. Just as they did 300-odd years ago, Scottish ambitions to cut a dash on the world financial stage have turned to dust, leaving the money men of Edinburgh to scuttle cap in hand to Westminster.

The failure of Darien, a colonial venture intended to carve out a Scottish empire on a fever-stricken isthmus in central America, cost the nation its independence. In return for bailing out the Scots mercantile class, which had been wiped out speculating on the venture, the English essentially bought the entire country. The RBS fiasco is unlikely to roll back devolution, but may give Scots pause as they wonder how far to pursue Alec Salmond's separatist dream.

For this truly was a failure made in Scotland. The RBS that has just fallen into the hands of the British state was essentially the creation of two men - its current chief executive Sir Fred Goodwin and its former chairman, Sir George Mathewson (pictured previous page). They transformed what was until a decade ago a small (but successful) Scots bank into the giant we see today. They did so principally through one transformative deal - the takeover of an ailing English bank, the National Westminster, in 2000.

Although this was supposed to be a friendly takeover, it was anything but. Goodwin and Mathewson were prickly and aggressive. They had contempt for the English bankers running NatWest. In their view, the English were lazy, second-rate and smug. After the deal went through, the English board running NatWest was swept away, its offices in the City sold off and the whole show moved to Edinburgh where it was placed under a predominantly Scottish board of directors.

Culture and national identity have their place in banking, just as everywhere else. But once the purchase of NatWest had gone through, Scotland accounted for just a fragment of the group's revenues. Increasingly, the bank did business all round the world. Was there not a need for a broader range of views around the boardroom table?

There was, but Goodwin and Mathewson were in no mood to entertain the idea. The Scots directors knew their place and tended to be compliant. It is hard for an outsider to understand what superstars Goodwin and Mathewson became in Scotland after the NatWest takeover. This, after all, was a country in which takeovers generally led to power going south, not the other way round. So it was hardly surprising that their Scots colleagues were reluctant to question their judgment.

But it became ever clearer in the years after 2000 that Goodwin's judgment did need questioning. Drunk on the success of NatWest, where he pushed up profits sharply by cutting costs, Goodwin forgot that the success of the deal had been built on buying a valuable asset relatively cheaply. He made costly acquisitions that upset the City. For instance, when he bought Charter One, an American mortgage bank, for £5.8bn in 2004, shares in RBS fell by £2.5bn on the day of the announcement.

Goodwin spent shareholders' money on a vainglorious new headquarters building outside Edinburgh and sued a newspaper when it mocked the luxuriousness of the interior fittings. Senior directors walked out of the bank. Shareholders grumbled and outsiders were slowly (and reluctantly) injected onto the board. But still the Scots bloc remained.

The second wave of settlers at Darien set off from Scotland, not knowing that the first arrivals had perished and they too were going to almost certain death. Similarly, Goodwin launched a bid for the giant Dutch bank ABN Amro last year on the very eve of the credit crunch. It was the antithesis of the NatWest takeover: instead of buying a good bank cheaply, RBS was bidding for a poor one at a top-of-the-market price.

Of course Goodwin cannot be blamed for not seeing the crunch coming, but his decision to pay for the Dutch bank in cash increased the riskiness of the move, as it made the bank's future dependent upon continued access to ready capital. By the time RBS completed the purchase, Northern Rock had collapsed and finance was moving into a new era. Its fate, like that of the Darien settlers, was already sealed.

The Treasury has extracted a price for propping up this tottering edifice. Notably it has inserted an English chief executive in Goodwin's place. So a story that started with RBS buying National Westminster and may end  up with Westminster nationalising RBS. Like Darien, the whole thing has ended up with humiliation for the Scots - and the English sent in to clear up the mess. ·