Branson: Behind the Mask (14 page)

Instead of re-evaluating the strategy, in 2006 Branson arrived in South Africa to launch another credit card, this time in collaboration with the Barclays-owned Absa Bank. Once again, he promised the ‘biggest shake-up ever’ to end ‘rip-offs’. The joint venture to provide insurance, savings, mortgages and pensions would cost, he estimated, $32 million over two and half years. His expectations went unfulfilled.

In early 2007, believing that he had learnt from his mistakes, he welcomed Jayne-Anne Gadhia’s return to Virgin. First, she tried to buy back Virgin One from RBS. The preliminary discussions convinced the RBS bankers that ‘Branson had not got the money’, and their discussions ended. Next, Gadhia wanted to establish Virgin Money in America, to offer Virgin credit cards. Anthony Marino, the head of Virgin’s development in America, searched for an opportunity. The hot topic, he reported, was peer-to-peer lenders.

Unregulated by law, peer-to-peer lenders negotiated the terms of personal loans between families and friends for student loans and mortgages. The attraction for the lenders was high profits and special tax benefits. Among the best was CircleLending, created in 2001 by Asheesh Advani in Waltham, near Boston. Marino approached Advani out of the blue. Describing Virgin as a venture-capital company searching for opportunities in the mortgage business, Marino outlined Branson’s ambitions to break into banking’s internet age. Excited by Virgin’s plan, Advani negotiated with Gadhia to sell CircleLending for about $52 million and remain as the chief executive. Weeks later, Advani and Branson stood together in Waltham to launch Virgin’s latest investment. Dressed in a black T-shirt bearing the logo ‘Go Fund Yourself’, Branson gave his audience a familiar message: ‘We like shaking up industries, and I think we can give
mortgage companies, banks and credit-card companies a run for their money.’ Over the next five years, he added, CircleLending would expand from thirty to a thousand employees. ‘Richard has told me’, said Advani, ‘that he’ll be investing tens of millions of dollars in the business.’ The launch coincided with Branson finding his best chance to break into global finance.

An entrepreneur’s success depends on hard work, skill, inspiration, ruthlessness – and also on luck. All those ingredients are necessary when a suitable opportunity arises. In some instances, entrepreneurs create their own chances; at other times, an event materialises that is ripe for exploitation. In Branson’s career, he had both created and exploited the breaks. The collapse on 13 September 2007 of Northern Rock, a bank based in Newcastle, was a chance for the latter – and an opportunity for Branson to become a serious banker after ten years on the fringes.

The television pictures of depositors queuing to withdraw their savings – the first run on a British bank in nearly 150 years – terrified Gordon Brown, the prime minister. The government’s loan to the bank was rising towards £90 billion as Brown and Alistair Darling, the chancellor of the exchequer, searched forlornly for a saviour among the established banks. After dithering for two months, Brown acknowledged that the government’s only alternative to nationalisation was to find a buyer among the minor players, including Branson.

‘Go for it,’ Branson told Gadhia. By capturing Northern Rock, Gadhia had explained, Virgin would inherit one million customers and a network of branches. She was supported by Stephen Murphy and Peter Norris, the former Barings director blamed by many for contributing to that merchant bank’s collapse in 1995. Despite his notoriety, Norris was trusted by Branson. To compensate for Gadhia’s lack of experience in retail banking, she secured the financial support of RBS; and, to bolster Virgin Money’s credibility, she recruited Sir George
Mathewson, the sixty-seven-year-old retired chairman of RBS and Toscafund, to Virgin Money’s executive. Investors in RBS and Toscafund would eventually lose substantial sums of money, and some blamed Mathewson for their losses. To add more gravitas, Branson also recruited Sir Brian Pitman, a seventy-five-year-old former chairman of Lloyds TSB and a director of Virgin Atlantic. Two retired bankers were the stars of the Virgin cast hoping to save the stricken bank.

Kept in the background was Wilbur Ross, the source of Branson’s cash. Ross, a sixty-eight-year-old American, had earned his fortune by turning around insolvent steel mills. Since the financial crash, his targets in America and across Europe were failed lenders. Once bought, his plan was to return them to profit within two years and resell them. Northern Rock fitted the profile. The only obstacle in owning a bank notionally worth £94 billion was Virgin Money’s credibility.

In 2006, Virgin Money had issued 2.5 million credit cards, but its profits were just £10.6 million. The company had no experience in managing credit cards, and certainly not in banking. Even Gadhia, keen to promote Branson’s takeover, unintentionally admitted the weakness. ‘We believe the Virgin brand’, she explained, ‘is exactly what is needed to reassure the public.’ Branson’s launch of Virgin Cola, she continued, had aroused her enthusiasm for the man and his empire. ‘It was great,’ she gushed about an outright failure. Branson’s bid depended on Gordon Brown’s judgement.

Ever since Branson had flown to London in 2003 to travel with Brown on a Virgin train from Euston, he had improved his relations with the politician. Because much of Virgin’s business depended on government franchises and regulations – especially its airlines, trains and cable – Branson, who had endorsed Labour in the two previous general elections, had agreed to participate in Brown’s ‘enterprise’ seminars and serve in the
‘star chamber’ of his Business Council for Britain. He also had good reason to complain about the party: his two bids for the national lottery had failed, he had lost two bids for rail franchises (Cross Country and the East Coast line) and he was angry that his bid in 2006 to buy ITV had been stymied by Labour’s support for Murdoch. But bearing grudges, Branson knew, was futile. Instead, he told the prime minister how Virgin’s interest in Northern Rock coincided with the government’s.

Branson offered to inject £1.3 billion in return for a 55 per cent stake of the bank’s £94 billion of assets. Virgin Money, said Branson, would invest up to £250 million, although there were doubts whether this was cash or his valuation of the Virgin Money brand. £400 million in real cash was offered by Wilbur Ross. The remaining £650 million, Branson proposed, should be put up by the existing shareholders, although he did not explain how they could be persuaded to commit more money to a bad investment. To repay the government’s loans to the bank, he proposed to raise £11 billion from other banks instantly and to borrow a further £13 billion over the following three years. The security for the huge loan, said Branson, would be a government guarantee. ‘We feel we have a winnable [
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package,’ he said. ‘I believe it’s the best option because we would rebrand it the Virgin Bank, which is a very strong brand.’ Alistair Darling supported Branson’s bid. Critics highlighted Branson’s trivial conditions: his proposal to charge £10 million a year for using the Virgin brand and his stipulation that the shareholders should pay £5 million towards his costs for the takeover. The more serious criticism was that he had seemed to have forgotten that Northern Rock had collapsed precisely because established banks had refused to lend money to the insolvent institution. Unable to borrow money themselves, they were unlikely to lend £24 billion to Virgin.

To resolve the doubts about Virgin’s plan, Gordon Brown
spoke to Branson over a weekend. Days later, the prime minister announced that Virgin was the government’s choice ‘to steer the course of stability and protect the taxpayer’. Northern Rock’s shares surged by 20 per cent. ‘We have made it clear’, said a Treasury spokesman on 29 November, ‘that we support the Virgin Group as a preferred bidder but we have always said we are keeping all other options open.’ There was one other realistic bidder.

Brimming with confidence, Branson issued full-page advertisements in national newspapers addressed to Northern Rock’s depositors. ‘I have the greatest respect for customers,’ he wrote, ‘and I hope you will continue to be a valued customer of our new and exciting bank.’ Under Virgin, he continued, they would receive better service, their savings would be protected and Northern Rock’s debts to the Bank of England would be repaid. The value of Virgin’s investment, he predicted, would double within three years. With limited risk, Branson expected to earn £1.5 billion, while the taxpayer would receive at most £500 million in return for risking over £24 billion.

The depiction of Branson paying a fortieth of the bank’s original value and channelling the profits into his tax-free Caribbean bank accounts resurrected well-rehearsed questions about his reliability. Ever since his unethical buy-back of Virgin Music shares, the hippy outsider had few friends in the City; not so much because of Virgin’s sleight of hand but more on account of the consistent losses suffered by its publicly owned companies. Among his most hostile and prejudiced critics, he called to mind the pavement artist performing the three-card trick instead of a serious financier who could be trusted to care for £65 billion of mortgages and £24 billion of loans. Virgin Money did not have a banking licence to accept deposits of money, but it asserted its directors were ‘fit and proper’.

Entrusting Branson with public money roused Vince Cable,
the Liberal Democrats’ financial spokesman. Branson’s past, said Cable, made him unreliable as the government’s partner, even if he would not be a director of the enlarged Virgin Money. ‘Branson’, he said, ‘is the front man for a consortium of hedge funds and private-equity operators whose aim is to make a killing from a highly leveraged acquisition.’ Virgin Money, he continued, was a branding and marketing organisation lacking the credibility to manage a bank. Barred by his tax status from spending more than ninety days in any year in Britain, Branson could only fume offshore that ‘Virgin’s plan and the Virgin brand will attract customers, get growth and earn rewards.’ Off the cuff, he promised taxpayers a £5 billion profit. Although the City shared Cable’s opinion that Branson’s promises were a gamble, Gordon Brown disagreed. To protect his reputation, the prime minister wanted to avoid nationalisation, not least because he would be accused of nationalising the losses. The alternative he favoured was to privatise the profits, although both options were unpalatable to politicians.

Over Christmas, Brown despaired. Treasury officials judged Branson’s solution to be credible, but Cable’s criticisms had gained sympathy. While the prime minister fretted, Branson jetted around the world on his Falcon, being anointed ‘Citizen of the Year’ by the UN, meeting Nelson Mandela and addressing pupils at the Branson School of Entrepreneurship in Johannesburg. In the new year, Brown resolved to trust Branson, and the businessman was invited to join the prime minister on a business tour of the Far East on 18 January 2008. Just before leaving from London on a chartered BA flight to Beijing, Branson mentioned that he was ‘fairly confident’ that a deal could be struck with the government. Soon after take-off, he moved to the front of the plane and sat with Brown, boasting to the accompanying journalists on arrival that during the journey he had presented what he called a ‘winnable package’ to rescue Northern Rock.

Questioned about giving Branson preferential treatment, Brown denied having any discussions about Northern Rock during the trip. ‘I haven’t spoken in any detail to Richard Branson,’ said the prime minister at Beijing airport. ‘There was no cosy arrangement. The commercial decisions are not a matter for me.’ Then Branson also went into reverse, denying even speaking ‘one to one with Brown’ about Northern Rock. ‘We avoided discussing the matter,’ he insisted. ‘If I did want to have a word with the prime minister, I would not board a British Airways plane with 100 journalists aboard.’ Two nights later in Shanghai, Brown appeared with his wife at a party hosted by Branson. Cable exploited the contradictions: ‘If Gordon Brown’s mate Richard Branson is going to become the private buyer, he’ll be laughing all the way to the Bank of England.’

Political pressure compelled the government during late January to stiffen the terms of the sale in its favour, forcing any buyer to guarantee repayment of the government’s loans. Virgin’s only competitor withdrew, and Branson became convinced that he held all the cards. The government had no alternative to accepting his terms – other than nationalising the bank. Then Virgin changed the terms of its offer, reducing its payment. ‘There’s not much room for sharpening pencils,’ said Branson. Brown’s negotiators were surprised by the rough tactics. On the same day, the shares of Virgin Mobile USA fell to $6.12 from their $15 flotation price. Virgin Blue’s shares in Australia also slipped, to A$1.30, half their flotation price. In the financial crisis, Virgin companies were suffering more than others. Treasury officials perceived a gap between Branson’s promises and performance and, after Virgin changed the terms of its offer, started to question the company’s sincerity.

Cable returned to the attack. He described Branson’s bid as a ‘con’ and doubted whether he was ‘fit and proper’ to run Northern Rock. In Cable’s opinion, Branson’s arrest in 1971 for
masterminding over twelve months a tax fraud worth £500,000 in today’s values made him unsuitable ‘to run a public company, let alone a bank, and let alone as someone responsible for £30 billion of taxpayers’ money’. After all, said Cable, Branson’s personal tax status in Britain was questionable. ‘There are serious public-interest grounds for worrying about the Branson bid,’ he wrote. Replying from Necker, Branson accused Cable of ‘ignorance’ and complained that his request for a meeting had been ignored. ‘Perhaps you could explain why this is a sweetheart deal?’ he asked from the Caribbean, but the political argument had been lost.

Alistair Darling now switched sides. ‘The numbers’, he agreed with his advisers, including Goldman Sachs, ‘do not stack up.’ Virgin’s bid, advised the government’s bankers, carried ‘a degree of risk for taxpayers’ because Virgin would be given a ‘very significant subsidy’ to make a profit, while the taxpayer had no realistic chance of earning any return. In headline terms, the risk of entrusting custody of £94 billion to someone of questionable credibility wrecked Branson’s hopes.