The original cost to the British taxpayer was £45bn, curiously quite close to the amount (£49bn) paid for Dutch bank ABN-Amro, of which more later.
Some 13 years and several governments later, the British taxpayer still owns a majority stake in the bank – 54.7%.
It could be on its way to becoming a minority shareholder soon, however, with UK Government Investments Limited (UKGI) instructing an American investment bank, Morgan Stanley (NYSE:MS), to offload some of the government’s shares from 12 August if it can get a decent price for them.
It will be a nice little earner for Morgan Stanley (NYSE:MS) and makes you wonder how banks can fail to make money. It turns out there are numerous ways for banks to lose money and RBS tried a lot of them so let’s have a look at how we got to the situation where banks, and NatWest in particular, get to coin it and trouser the profits in good times while the taxpayer ends up footing the bill in the bad times.
Of course, it is not quite as black & white as that but what are banks for if not providing something we can all complain about?
The Greeks have a word for it
Hubris, meaning overweening pride, is a Greek word but RBS, once Scotland’s largest company by market capitalisation, put a very British take on it.
In November 2007, it had a global workforce of 226,000; by the beginning of January 2008 when it announced an eye-watering loss of £28bn, that number had fallen to 170,000, with more redundancies on the way of a size that quite possibly would have elicited gasps of appreciation from the bank’s hard-nosed, widely reviled former boss, Fred “the shred” Goodwin.
Goodwin was the driving force behind the bank’s ill-advised takeover of Dutch bank, ABN-Amro, which was probably the culmination of some truly dumb decisions by a man who was knighted in 2004 for services to banking by the Labour government; Goodwin was stripped of his knighthood in 2012 by the Conservative/Liberal coalition government. Prior to Goodwin, only convicted criminals had been stripped of knighthoods.
While Goodwin was being stripped of his knighthood and keeping a subterranean profile, the bosses of Barclays bank were thanking their lucky stars that RBS had outbid them in the battle for ABN-Amro.
RBS did pay its banking advisors to do due diligence on the deal but it looks like they outsourced it to a mate of Matt Hancock.
At the time, RBS’s loss of £28bn was the biggest in UK corporate history and came about after the bank reviewed the true value of its past acquisitions, including ABN-Amro, and wrote them down by between £15bn and £20bn.
“Today’s write-off by the Royal Bank of Scotland is for irresponsible losses accumulated in American subprime markets that partly derive from the acquisition of the Dutch bank ABN Amro,” said the prime minister, Gordon Brown.
Brown was the chancellor of the exchequer when Goodwin was knighted.
The year before, RBS had made profits of around £16bn, and was assuring shareholders worried about the growing sub-prime lending crisis that “we don’t do sub-prime”.
Unfortunately, ABN Amro did; as a result, RBS made provisions of between £7bn and £8bn related to losses on sub-prime lending in its accounts for 2007.
Making the Hester of a bad job
Company turnaround specialist Stephen Hester was called in for an epic fire-fighting job and its generally regarded he made some tough but necessary decisions, although these did not always meet with the approval of the government.
For many years under government ownership, the underlying business was profitable but it still posted mammoth losses, thanks to write-downs on past investments or assets on the balance sheet. These sorts of adjustments are often passed off as “non-cash” charges but that just means that instead of a large pile of cash disappearing from the coffers in the reporting period, the company has instead recognised that bundles of cash previously spent was essentially wasted.
It’s a bit like you in 2009 chucking out that huge £1,500 cathode-ray tube telly you bought in 2006 because flat-screen monitors had become so cheap and were so much better.
Not the right time to be declaring dividends
Although the underlying business was often in profit, it was deemed politically unacceptable for the bank to pay dividends until 2018 when the bank resumed paid out 5.5p in regular divis and a special divi of 7.5p.
In 2019, it paid tuppence (2p) plus a special dividend of 12p while in 2020 it paid thruppence (3p), jolly, jolly thruppence.
Government reduces its stake in the rescued banks, starting with Lloyds
RBS, of course, was not the only bank to be bailed out by the UK government in the first decade of the new millennium. With mortgage lending markets around the world freezing up, the likes of Northern Rock and HBOS (Halifax Bank of Scotland) – both of which would probably have been better off remaining as mutual societies, were in danger of collapsing.
Northern Rock, the former building society, did collapse, of course, while HBOS was only saved after the Labour government bounced the management of Lloyds Banking into taking it over. The combined entity had to, in turn, be bailed out by the government after HBOS turned out to be a bigger mess than had been anticipated.
The government started selling off its Lloyds’ stake in 2016 but it wasn’t until 2018 that it started selling down its stake in what was still at that stage called The Royal Bank of Scotland Group PLC.
The UKGI announced its intention in June 2018 to sell roughly 7.7% of RBS, thereby reducing its stake to about 62.4%.
In March of this year, NatWest bought back £1.1bn of shares from the government, while in May the UKGI reduced its stake by another five percentage points for roughly £1.1bn and today it has announced plans to reduce its holding further.
In the meantime, in July 2020, NatWest changed its name from RBS, although the brand lives on north of the border. As such, the group has pretty much come full circle. RBS’s takeover of NatWest was one of the few things Goodwin appeared to get right; NatWest was a bigger operation than RBS at the time the Scottish bank swooped but it was at a low point and changes made to put the bank back on an even keel had not yet become evident to the stock market. RBS pounced, won the prize and reaped the benefit of those changes implemented by NatWest’s previous management.