CNBC’s UK Exchange publication: A lament for the losses on Royal Bank of Scotland

This document is from this week’s CNBC’s UK Exchange publication. Each Wednesday, Ian King brings you knowledgeable insights on crucial trade tales from the U.Ok. and the important thing personalities shaping the scoop. The publication can even spotlight different key traits within the U.Ok. that you will not need to leave out, plus a preview of crucial occasions which might be set to make waves. Like what you notice? You can subscribe right here.

In my greater than 30 years in economic journalism, few reminiscences are more potent than the ones of Tuesday, April 22, 2008, the day Royal Bank of Scotland — then probably the most international’s largest banks — introduced it used to be tapping shareholders for £12 billion ($16 billion).

The sum used to be, on the time, a document for a rights factor by way of a European corporate and adopted the U.Ok. financial institution’s calamitous acquisition, the former autumn, of the Dutch lender ABN AMRO.

That deal used to be meant to had been the final touch of Fred Goodwin, the RBS leader government, a former accountant who, for the former 8 years, had established himself as the sphere’s largest identify following RBS’ takeover of National Westminster Bank (NatWest) in early 2000.

As deputy to CEO George Mathewson, Goodwin had earned the nickname “Fred The Shred” for his cost-cutting prowess. He used to be no shrinking violet; nor used to be Mathewson himself, who gained notoriety in 2001 when he shrugged off shareholder complaint of that yr’s government bonuses by way of announcing “they would not win bragging power in a Soho wine bar.”

That self belief ran during RBS. In March 2001, slightly a yr after the NatWest acquisition finished, Goodwin — in a in most cases laconic commentary — advised me he used to be considering “mercy killings” of different U.Ok. banks.

Those killings by no means got here to go however, within the next six years, RBS quadrupled in measurement because it made a string of acquisitions together with of U.Ok. insurers Churchill and Direct Line, the U.S. lender Charter One (for a then eye-watering $10.5 billion), a 10% stake in Bank of China and, moderately improbably, the automobile dealership Dixon Motors in April 2002. That yr noticed him topped Businessman of the Year by way of Forbes mag.

By the time he introduced the bid for ABN AMRO in April 2007, trumping a deal the latter had prior to now agreed with Barclays, Goodwin used to be best canine in U.Ok. banking.

All of which made that rights factor in April 2008 so dramatic. A press convention used to be all of a sudden convened for noon at RBS’s previous London headquarters. (The world head place of work, opened in 2005, used to be a huge campus at Gogarburn, at the outskirts of Edinburgh, constructed at a value of £350 million on a web site previously occupied by way of a psychiatric health center and nicknamed “Fred’s Folly” by way of locals).

I took my position within the presentation middle at the floor ground of the construction along Peter Thal Larsen, then banking editor of the Financial Times, as Tom McKillop, the profession pharmacist who had succeeded Mathewson as RBS chairman in 2006, thanked us for coming and invited Goodwin to make his presentation.

Gone used to be the super-confident determine to whom we had change into accustomed.

“He looks like a condemned man mounting the scaffold,” I whispered to Peter.

During the clicking convention, McKillop needed to fend off questions on whether or not Goodwin could be brushed aside, pushing again at tips that the board had been “patsies” who had no longer sufficiently challenged their CEO.

“There is no single individual responsible for these events, and to look for a sacrificial lamb just misses the whole point,” McKillop stated.

I wrote in my diary that night time: “McKillop came close to losing it a couple of times, particularly when grilled on the board composition. Fred Goodwin looked chastened but composed.”

This wasn’t an funding — it used to be a rescue

Memories of that day got here flooding again when, on the finish of final week, the U.Ok. govt in the end bought its closing shareholding in NatWest (as RBS used to be rechristened in July 2020).

By the time RBS were given its cash in 2008, its percentage value had fallen by way of 1 / 4, wiping extra from its inventory marketplace price than it raised within the rights factor.

On Oct. 7, 2008, with company consumers dashing to withdraw their cash, McKillop used to be compelled to invite Alistair Darling, the then Chancellor, for a bailout that finally charge Goodwin his process.

As has been properly documented, Gordon Brown’s govt took keep watch over of the financial institution, pumping in £45.5 billion in 2008 and 2009 to obtain a stake that peaked at just about 85%. Over the years, the federal government has recouped some £35 billion by means of charges, dividends and percentage gross sales, crystallizing a loss on disposal of just about £10.5 billion.

That determine has, naturally, featured closely in U.Ok. media protection.

However, a lot of the statement has overpassed that the federal government concluded greater than a decade in the past {that a} loss could be made at the shareholding, in addition to the truth that this used to be by no means meant to be an funding producing a good go back for taxpayers — it used to be a rescue.

One commentator even urged RBS/NatWest must had been allowed to fail, arguing that “we could have surely done something more productive with all the money that was tied up in NatWest for the last 17 years,” quite overlooking the catastrophic have an effect on the financial institution’s failure would have had. At the time of the rescue, RBS’s stability sheet used to be larger than all the U.Ok. financial system. 

That the U.Ok. taxpayer misplaced £10.5 billion over a 17-year length is, after all, miserable. But it’s compounded by way of the truth that, all the way through the length, RBS/NatWest used to be obliged to dump quite a few treasured belongings, together with Direct Line and its U.S. banking trade Citizens, as stipulations of its bail-out (the U.Ok. used to be, on the time, matter to the European Commission’s state assist regulations).

Much cash used to be additionally wasted seeking to carve out a separate retail financial institution which used to be to had been demerged within the identify of bettering festival, once more on the behest of Europe, below the exhumed Williams & Glyn emblem.

Saddest of all used to be the compelled sale of WorldPay, a bills processing trade, to U.S. personal fairness companies Bain Capital and Advent International for simply $3 billion in August 2010. The trade used to be later floated at the London Stock Exchange, later nonetheless taken personal after which bought in March 2019 to the U.S. fintech company FIS for $43 billion — a significantly larger lack of price than anything else continued by way of the U.Ok. govt on its RBS/NatWest stocks.

It is difficult to keep away from the belief that had the U.Ok. no longer been sure by way of the European Commission’s state assist regulations, as is the case as of late, the destruction of price would had been some distance decrease.

A few issues are most probably extra vital, long run, than any loss incurred by way of taxpayers.

The first is that the teachings from the RBS cave in had been correctly realized. Many other people now operating in senior positions in U.Ok. economic services and products had been nonetheless in school or school on the time of the bailout, however institutional reminiscence of the development stays exceptionally robust, no longer least amongst U.Ok. regulators.

The primary reason why RBS failed, exacerbated by way of the hubristic ABN AMRO acquisition and the procyclical U.Ok. economic rules on the time, used to be as it used to be over-leveraged. Post-financial-crisis legislation has aimed toward lowering procyclicality and banks had been obliged to extend their capital buffers.

The 2d is that below Goodwin’s successors — Stephen Hester, Ross McEwan, Alison Rose and Paul Thwaite — RBS/NatWest has been reshaped right into a financially powerful and extremely winning lender well-placed to give a contribution to U.Ok. expansion in coming years thank you, particularly, to its robust place in trade banking.

Much of the benefit it throws off within the coming years is perhaps passed again to shareholders within the type of dividends and percentage buy-backs.

On that foundation, whilst some will have a good time the truth that a line has been drawn by way of the federal government getting rid of itself from NatWest’s shareholder check in, others will query why, precisely, it will no longer have held onto its shareholding for just a little longer.

It could be attention-grabbing to listen to what readers assume.

— Ian King