The rise and fall of 'Fred the Shred'

How the mighty are falling. The rise and fall of Sir Fred Goodwin is the classic tale of vaulting ambition which o'erleaps itself, of hubris brought low by the very qualities which led to such stellar success.

After eight extraordinary years that have seen Royal Bank of Scotland (RBS) transformed from a dully reliable regional institution to the fifth largest bank in the world, Sir Fred's departure as chief executive is a condition of the lifeline offered by the bank's rescuers from the Treasury.

Sir Fred took over as chief executive of RBS in 2000, and proceeded to make 26 acquisitions, topped by the €71bn (£55bn) takeover of the Dutch bank ABN Amro in the summer of 2007, just as the foundations of the world's credit-fat banking system was starting to audibly creak. Though RBS put up only some of the money paid by a consortium bidding for ABN, it proved to be a deal too far for RBS's over-stretched finances and the man once feted as the most talented banker of his generation said yesterday that he now has no plans more specific than "a good long rest". "If you've got any ideas let me know," he added.

But true to his reputation, Sir Fred defended to the last the takeover now widely characterised as the deal junkie's fatal overdose. "ABN is not the cause of all this – we would be having a lot of these difficulties whether we had bought ABN or we hadn't," he said.

The son of an electrician, Sir Fred was raised on a council estate in Paisley, near Glasgow, going on to become a partner at Touche Ross accountants at just 29. He made his name overseeing the liquidators recovering assets from the collapse of the Bank of Credit and Commerce International in the early 1990s. By 1995 he was deputy chief executive of the Glasgow-based Clydesdale Bank, only to be poached by Sir George Mathewson, then the chief executive of RBS, in 1998 to become his deputy.

Nicknamed "Fred the Shred" while at the Clydesdale for his ruthless cost-cutting, Sir Fred came into his own in 2000 with RBS's £23.6bn hostile takeover of NatWest, a rival three times its size, which resulted in 18,000 job cuts. A courteous, quiet man, Sir Fred won huge credit for his efficiency and attention to detail in the integration of the two businesses. But detractors accuse him of micro-management and the flurry of deals that followed saw him accused of megalomania.

"The vision for an ambitious bank built by acquisition was originally George Mathewson's; what he found in Fred Goodwin was the executor par excellence," Simon Maughan, an analyst at MF Global Securities, said. "He was exactly the right person because he would not suffer fools or listen to detractors, but just pursue the grand aim to take RBS to the top table."

NatWest was just the beginning, and the first grumblings from RBS shareholders started in 2004 when Sir Fred bought the US-based Charter One bank for $10.3bn (£5.9bn). Other major deals, such as the take over of Churchill Insurance and the purchase of a $1.6bn stake in Bank of China, reinforced the impression among sceptics of an insatiable empire-builder taking too many risks.

The shiny new £350m Edinburgh headquarters, opened in 2004, also caused publicity problems. Reports of his ordering a "scallop kitchen" to be built near his office were also denied, and a newspaper was forced to apologise for the suggestion that the facility was built only for scallops.

By the time of the Charter One deal, questions were being asked about the bank's capital, and by the end of 2006 vocal shareholders' demands for a buy back were met and Sir Fred publicly ruled out any more big deals.

But then came ABN Amro. Just as the credit markets were freezing over, Sir Fred's consortium of RBS, Fortis and Santander were ramping up their bidding war with rival suitor Barclays. In his desire to win, it now looks as if Sir Fred went too far, creating an internally-funded cash offer that Barclays' share bid did not stand a chance of beating but that left RBS dangerously leveraged. "The ABN deal totally stretched a balance sheet that was already stretched," Mr Maughan said.

ABN was not the only problem for RBS. Alongside the eight-year acquisition spree, RBS also massively expanded its investment banking business, building on both the City-leading conventional products inherited with NatWest and also the small Greenwich Capital operation concentrating on the then-novel field of mortgage-backed securities in the US. "It was the combination of acquisition and the aggressive push into the area of investment banking, many of which subsequently soured, that caused the problem," Mr Maughan said.

But it was ABN that pushed RBS over the edge and into the abyss. After repeated protestations of his bank's financial health, Sir Fred surprised shareholders in April with one of the biggest rights issues in British corporate history, aimed at raising more than £12bn to shore-up a balance sheet that was suffering under £6bn-worth of writedowns, a third of which were from the Dutch bank. But it was too late and between then and the start of this month RBS lost more than 80 per cent of its market capitalisation.

Ultimately, ABN was simply a risk too great. As Sir Fred said himself, shortly after RBS announced its plan to bid for the Dutch bank: "The key to good deal-making is being prepared to walk away." If only he had listened.

On the way out: Felled banking giants

*Sir Tom McKillop

The Royal Bank of Scotland's chairman will leave at the annual general meeting in April without a pay-off. He is out because he presided over the board that endorsed the ABN Amro deal. Critics say that his lack of banking experience made him unable to stand up to his chief executive. Sir Tom, from Dreghorn, Ayrshire, was chief executive of AstraZeneca until 2006.

*Johnny Cameron

The head of investment banking at RBS stepped down from the board today and there are doubts about his future with the company. he played a central role in the ABN takeover, and oversaw the massive expansion of RBS's Greenwich Capital division, which concentrated on the US mortgage-backed securities that have proved so toxic.

*Andy Hornby

The chief executive of HBOS will step down and forgo his contractual entitlement to a year's salary of £940,000, plus bonus, when the Lloyds TSB rescue takeover deal is formally signed. Despite attempts to minimise his role in the collapse of HBOS with claims that he merely followed the lead of his predecessor, Sir James Crosby, Mr Hornby has been heavily criticised.

*Lord Stevenson

The HBOS chairman is also being held to account for the collapse of the 300-year-old institution. The cross-bench peer will forgo his salary of £710,000 and, like his chief executive, will leave when the Lloyds TSB deal is finalised. He is suffering for his board's strategy to grow through over- reliance on the UK property sector and wholesale funding.

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