Where did it all go wrong?

OUSTED RBS chief Sir Fred Goodwin must sit and watch as his replacement takes a shredder to his strategy.

SIR Fred Goodwin is not a man who enjoys life in the shadows. After eight years of jetting around the globe on a private jet, the outgoing chief executive of the Royal Bank of Scotland is now confined to the dark corridors of the bank's sprawling headquarters at Gogarburn. As his replacement Stephen Hester embarked upon his first charm offensive with City analysts last week, "Fred the Shred" had little choice but to remain at his desk and subject himself to the excruciating ritual of unpicking the strategy that led to his, and the bank's, embarrassing demise.

If he had been hoping for an early exit from the nightmare that forced him to go cap in hand to the Government for extra funds last month, he is going to be sorely disappointed. Goodwin will have to endure life on the banking equivalent of death row for a while longer. Hester, who is used to chasing foxes with his wife on Warwickshire hunts on the weekends, made it crystal clear he will not let his predecessor out of his sight until he has stamped every last piece of information about the bank's vast and complex operations out of him. Although he'll have around £300,000 each month with which to console himself, Goodwin is not now expected to be let off the hook until January.

"As an incoming chief executive, I have no desire for the chief executive to disappear without having a chance to pick his brains," Hester told the City ebulliently.

According to Hester, Goodwin's departure date will be dictated by his handover needs.

As if to rub more salt into Goodwin's wounds, Hester also chastened the previous management for the "bull market culture", which he suggested was to blame for the bank's present circumstances.

It'll no doubt be an unhappy Christmas for Goodwin as he watches his successor draw up a battle plan to pull RBS out of the quagmire it, and several other UK banks including HBOS, now find themselves in. The Government has thrown Hester a lifeline, offering to underwrite a £15bn share placing and buying up £5bn of preference shares, but the big question occupying both shareholders' and analysts' mind is: can he succeed?

RBS shareholders choose next Thursday whether to participate in the latest fundraising plans but, according to banking analysts, the signs aren't good. Although RBS was one of the few banks that succeeded in raising millions from shareholders earlier this year – when it asked for £12bn through a rights issue in June – analysts suggest fundraising fatigue has set in among many shareholders after a summer of cash calls.

The markets have dived 31% in the past six months, and shareholders have seen their stakes in RBS devalue by 79%. Faced with the prospect of recession for at least a year, it has been suggested only the brave and cash rich are likely to come to Hester's rescue.

"RBS got their last rights issue away because they were first in queue," Mike Trippet, banking analyst at Oriel Securities, points out. "I've got a suspicion the Government is going to end up with a lot of this."

Collins Stewart analyst Alex Potter agrees: "The share pricing will not go well. I think the Government will end up with a fair chunk of the equity."

The £15bn share placing, which differs from a rights issue as it does not confer the right to sell the shares, is not an enormously attractive proposition to shareholders, according to Bryan Johnston of Bell Lawrie stockbrokers in Edinburgh. Although Hester made it clear he hopes to resume dividend payments in 2010, shareholders face at least 13 months, and possibly more, with no income from the shares. And as RBS stock languished at 65.036pat the close of markets on Friday, there are concerns that when it comes to judgment day on November 20, shares will be trading below the 65.5p asking price.

Johnston says: "Short-term the critical question is whether the share price can stay above 65.5p at which the new shares will be offered. You are looking at 12-19 months with no revenue flow from them."

Analysts argue many shareholders also feel they have been misled over this year's incredible events, rendering it unlikely they'll jump to the bank's aide unless an offer is put on the table that they can't refuse. Although the alarm bells had been ringing for several months before last month's humiliating government bail-out, there are those who suggest management behaved with a certain air of arrogance, consistently ignoring calls for resignations and denying rumours that weeks later turned out to be true.

"The biggest factor for RBS is that there is total disenchantment with it," says Johnston. "A lot of people feel very let down. Sentiment is against it and sentiment is a pretty crucial factor at the moment."

To pull the share placing off, Johnston suggests Hester will have to go on a serious 11-day wooing mission to get the institutional investors in particular back on side. "They have to build bridges with the institutional market in particular. The placing puts shareholders in a very difficult position. It'll have to be a big woo."

However, after last week's first analyst meetings, Hester appears to have the support of the City – for the moment at least. He has a solid reputation as a recovery man after helping to overhaul Abbey National ahead of its sale to Santander.

There are still nagging concerns over potential government interference in future strategy if Westminster ends up with a 58% stake as many in the City fear, but as Nic Clarke, analyst at Charles Stanley stockbrokers points out, the fundraising will leave RBS with an enviable capital position. Regardless of whether shareholders or the Government provide the bulk of the cash, RBS's core tier one ratio – the measure of its financial strength – will leave it better capitalised than most banks in Europe.

"The capital raising would take the core tier one ratio to 7.9% and the tier one ratio to 11.6%... leaving the capital ratios at top end of its peer group," Clarke said in a note.

This, according to Trippet of Oriel Securities, will buy Hester important time. The new chief executive last week announced he is conducting a strategic review of the entire business, the results of which will be made known early next year. He insisted he has no plans to sell off further assets immediately but most analysts agree he is likely to part with operations in RBS's global business in the near future. Trippet suggests some of RBS's businesses in Asia might be candidates for guillotine. He also points to Charter One in America, which RBS paid $10.5bn for in 2004. "Is that actually delivering?" he asks.

Goodwin earlier this year placed the insurance business, which includes Direct Line and Churchill, up for sale, but Hester is now uncertain about whether to proceed. He told Scotland on Sunday he would not part with the business unless it is for the right price.

While some analysts are anxious the insurers will be the next victims of the credit squeeze, others point to the relative health of RBS's insurance assets. "I have got a hunch they won't sell their insurance business," says Trippet.

But as Hester continues his charm offensive this week, he can at least comfort himself with the thought he's not the only banking chief executive working to deadline. On November 19, Lloyds TSB holds a general meeting to vote on the acquisition of HBOS, which would lead to the creation of the Lloyds Banking Group. The once-certain deal is hanging in the balance this weekend but analysts say it would be to Lloyds shareholders' advantage. "They are getting HBOS at quite a discount," says Johnston.

But if the deal does proceed Lloyds chief executive Eric Daniels won't be without his own battles ahead. There is scepticism among analysts and sources close to the bank about his ability to raise the £13bn he would need next month to bolster Lloyds' tier one capital ratio to a level that will satisfy the FSA. This will leave Daniels in a similar position to Hester, with a large stake of the bank in the hands of the taxpayer.

If all goes to plan, most analysts are optimistic about Daniels' and Hester's chances of the returning their respective banks to health eventually but as Trippet concludes: "It's just going to take time."