A lament for the losses on Royal Bank of Scotland

This report comes from the British CNBC exchange form this week. Every Wednesday, Ian King gives you expert information on the most important commercial stories in the United Kingdom and key personalities that shape the news. The newsletter will also highlight other key developments in the United Kingdom that you will not want to miss, as well as an overview of essential events that are ready to make waves. Like what you see? You can subscribe here.

During my over 30 years of financial journalism, few memories are stronger than those of Tuesday April 22, 2008, the Day Royal Bank of Scotland – then one of the biggest banks in the world – announced that it was tapping shareholders for 12 billion pounds sterling ($ 16 billion).

The sum was, at the time, a record for a problem of rights of a European company and followed the calamity acquisition of the British bank, the previous fall, of the Dutch lender Abn Amro.

This agreement was supposed to have been the coronation of Fred Goodwin, the director general of RBS, a former accountant who, during the previous eight years, had established himself as the biggest name in the sector after the takeover by RBS of the National Westminster Bank (Natwest) at the beginning of 2000.

As a deputy for CEO George Mathewson, Goodwin had won the nickname “Fred the Shred” for his prowess of cost reduction. He did not shrink purple; Mathewson himself was not notoriety in 2001 either when he raised criticism of the shareholders of this year’s executive bonuses by saying “that they would not win the power to boast in a Soho wine bar”.

This confidence crossed RBS. In March 2001, barely a year after the end of the acquisition of Natwest, Goodwin – in a typically laconic remark – told me that he was considering “murders of mercy” other British banks.

These murders have never passed, but, during the following six years, RBS was quadrupled in size because it made a series of acquisitions, notably British insurers Churchill and Direct Line, the US participation of China and, for a case of 10.5 billion dollars of 10%, ran improbably, the dealership magazine in April 2002.

As he launched the offer for Abn Amro in April 2007, against an agreement that the latter had already agreed with Barclays, Goodwin was the best dog in the British bank.

All of this did this rights problem in April 2008 so dramatic. A press conference has been convened in a hurry for noon in the former RBS headquarters in London. (The World Headquarters, opened in 2005, was a gigantic campus in Gogarburn, on the outskirts of Edinburgh, built at a cost of 350 million pounds sterling on a site formerly occupied by a psychiatric hospital and nicknamed “Folly de Fred” by the locals).

I took my place in the presentation center on the ground floor of the building alongside Peter Thal Larsen, then editor-in-bank of the Financial Times, as Tom McKillop, the career pharmacist who had succeeded Mathewson as president of RBS in 2006, thanked us for coming and invited Goodwin to make his presentation.

No more figure super entrusted to whom we got used to.

“He looks like a condemned man who rides the scaffolding,” I whispered in Peter.

During the press conference, McKillop had to repel the questions about the rejection of Goodwin, repelling the suggestions that the Board of Directors was “Patsies” who had not sufficiently disputed their CEO.

“There is no unique individual responsible for these events, and looking for a sacrificial lamb only lacks the point,” said McKillop.

I wrote in my newspaper that evening: “McKillop came to lose it a few times, especially when he is toasted on the composition of the painting. Fred Goodwin looked chased but composed.”

It was not an investment – it was a rescue

The memories of this day resumed the flood when, at the end of last week, the British government finally sold its remaining participation in Natwest (while RBS was recommended in July 2020).

As RBS obtained his money in 2008, his share price had dropped a quarter, wiping his market value more than his rights issue.

On October 7, 2008, with customers of rushing companies to withdraw their money, McKillop was forced to ask Alistair Darling, the Chancellor then, for a bailout that finally cost Goodwin his work.

As has been well documented, the Gordon Brown government took control of the bank, pumping 45.5 billion pounds Sterling in 2008 and 2009 to acquire a participation that culminated at almost 85%. Over the years, the government has recovered some 35 billion pounds sterling through costs, dividends and sales of action, crystallizing a loss of elimination of almost 10.5 billion pounds Sterling.

This figure naturally presented strongly the media coverage of the United Kingdom.

However, a large part of the comment has ignored that the government concluded more than ten years ago than a loss would be made on participation, as well as the fact that this has never been supposed to be a investment generating a positive return for taxpayers – it was a rescue.

A commentator even suggested that RBS / Natwest should have been allowed to fail, arguing that “we could surely have done something more productive with all the money that has been linked to Natwest in the past 17 years”, rather overlooking the catastrophic impact that the bank’s failure would have had. At the time of rescue, the RBS report was greater than the whole of the British economy.

The fact that the British taxpayer has lost 10.5 billion pounds sterling over a period of 17 years is, of course, depressing. But it is aggravated by the fact that, during the period, RBS / Natwest was forced to unload a certain number of precious assets, in particular the direct line and its American commercial citizens, such as the conditions of its bailout (the United Kingdom was, at the time, subject to the rules of aid of the European Commission).

Much money has also been wasted by trying to carve a separate retail bank which was to be dismerged in the name of the improvement of the competition, again at the request of Europe, under the brand Williams & Glyn exhumed.

The saddest was the forced sale of Worldpay, a payment processing company, to US Capital Capital Capital and Advent International companies for only $ 3 billion in August 2010. The company was then launched on the London Stock Exchange, later private and then sold in March 2019 to the American company Fintech Fis for $ 43 billion – a considerably greater value.

It is difficult to avoid the conclusion that if the United Kingdom had not been bound by the state of the European Commission aid rules, as is the case today, the destruction of the value would have been much lower.

A few things are probably more important, in the longer term, than any loss suffered by taxpayers.

The first is that the lessons in the collapse of the RBs have been properly learned. Many people who now occupy senior positions in British financial services were still at school or college at the time of bailout, but the institutional memory of the event remains exceptionally strong, especially among British regulators.

The main reason why RBS failed, exacerbated by the acquisition of the AMRO ABN, and the British procyclical financial regulations, was because it was over -gone. The regulations after the post-finate crisis aimed to reduce procyclicity and banks were forced to increase their capital stamps.

The second is that under the successors of Goodwin – Stephen Hester, Ross McEwan, Alison Rose and Paul Thwaite – RBS / Natwest was reshaped in a financially robust and very profitable lender well placed to contribute to British growth in the coming years thanks, in particular, to its strong position in the commercial bank.

A large part of the benefit he rejects in the coming years is likely to be given to shareholders in the form of dividends and share buybacks.

On this basis, while some celebrate the fact that a line was drawn by the government withdrawing from the Natwest shareholders’ register, others will wonder why, exactly, it could not have retained its participation a little longer.

It would be interesting to hear what readers think.

– Ian King