_____________NEWS___________________
January 20, 2009
Royal Bank of Scotland: the bank that sank
The Royal Bank of Scotland was on the brink last night after the biggest loss in British corporate history sparked a collapse in its shares.
Billions of pounds were wiped from its stock market value despite the Government’s pledge to keep it afloat with more money from the taxpayer.
As Gordon Brown set out plans to increase public ownership to 70 per cent of what was once one of the world’s biggest financial conglomerates, City investors dumped the shares in a selling frenzy.
RBS, worth £75 billion only two years ago, is now valued at £4.5 billion, even though it received £32 billion from taxpayers and shareholders less than three months ago.
The bank’s plight prompted calls for the outright nationalisation of RBS, with some MPs urging the Treasury to take over its day-to-day running.
Lloyds Banking Group, another bank bailed out by the taxpayer, saw its shares plunge 34 per cent yesterday. Barclays and HSBC also fell.
The turmoil suggested that the Government’s second massive rescue package had failed to restore confidence to the financial sector. It was a graphic illustration of continued banking uncertainty that prompted calls on the Government from Labour MPs to nationalise the whole system, an idea resisted firmly by Alistair Darling, the Chancellor, last night.
The scale of losses at RBS is breathtaking. The bank, which also owns NatWest, estimated that bad debts and writedowns on past acquisitions could leave it as much as £28 billion in the red for 2008, nearly double Vodafone’s record £15 billion loss in 2006.
The bank’s admission that it had paid between £15 billion and £20 billion too much for the Dutch bank ABN Amro last year prompted an angry response from Mr Brown.
The Prime Minister was furious that British taxpayers were now having to pay for losses that were incurred on foreign investments.
“Almost all their losses are in the sub-prime markets in America and related to the acquisition of the bank ABN Amro,” he said. “And these are irresponsible risks which were taken by a bank with people’s money in the United Kingdom.”
Sir Fred Goodwin, who oversaw the bank’s acquisitions spree, resigned as chief executive in November when the Treasury was forced to acquire a 58 per cent stake to keep RBS afloat.
George Osborne, the Shadow Chancellor, said that the taxpayer had already lost £17 billion on the Government’s investments in the banks last October. He said that in taking a stake in RBS ministers had not understood what they were buying and had not attempted to find out. “They didn’t appear to know that RBS was preparing to post the largest loss in corporate history,” Mr Osborne said.
Yesterday’s slump in bank shares overshadowed the second rescue package, which has exposed the taxpayer further to the tune of hundreds of billions of pounds in the hope of getting banks lending to big business and individuals. The Chancellor announced plans to underwrite for a fee “toxic” debt held by the banks to encourage them to be more ambitious about future lending. The terms of the Northern Rock rescue will be altered to stop it running down its mortgage lending. The Government will also increase its share in RBS from 58 per cent to 70 per cent and kick-start home loans by guaranteeing £50 billion of mortgage-backed securities.
Mr Darling announced a £50 billion scheme for the Bank of England to buy high quality private sector assets to increase funding to big companies at lower cost. He admitted that this facility could be used by the Bank’s Monetary Policy Committee as a way of meeting its inflation target. Mr Darling was effectively paving the way for “quantitative easing”, the modern day equivalent of printing money.
The overall package was given a general welcome by business and politicians, but Mr Brown and Mr Darling were criticised for failing to estimate the potential liabilities for the taxpayer from the toxic debt insurance scheme. “We need to be absolutely sure that the threat of insolvent banks does not turn into the threat of an insolvent country,” Mr Osborne said.
Vince Cable, the Liberal Democrat Treasury spokesman, said that the Government was potentially writing “another blank cheque” for the banks that could leave the taxpayer with vast losses. “Ministers are offering hardly any details about the terms of this underwriting,” he said. “Taxpayers are being signed up to yet another bank bailout when it is clear the Government hasn’t done its homework.”
Mr Brown said: “I came into politics because of the scourge of unemployment in my own home area and I will not sit idly by and let people go to the wall because of the irresponsible mistakes of a few bankers.”
City analysts believe up to 30,000 jobs could go at both RBS and at Lloyds Banking Group, formed from the merger of Lloyds TSB and HBOS.
Stephen Hester, RBS group chief executive, said: “What we have to do is make sure our good businesses get stronger and the weaker ones are cut back. But we and all the other banks have to cut our costs — and that includes job losses.”
Lloyds Banking Group refused to comment on job losses but said that it expected annual cost savings as a result of the merger to be more than £1.5 billion by 2012. Sir Victor Blank, group chairman, said: “I think that what the Government has done today will make a significant difference. I think there are some green shoots.”
Yesterday’s package came as the European Commission predicted a deeper recession in Britain than the Treasury had forecast, and worse than that in most other EU countries. It suggested British growth of minus 2.8 per cent in 2009 compared with minus 1.8 per cent across the whole EU.
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