In June this year, Osborne announced he was launching a ‘Bad Bank’ review for the partly state owned Royal Bank of Scotland. Like Northern Rock before it, the Chancellor intends to sell off the valuable assets of the Bank to the private sector, while the toxic assets are retained by the public sector. And he’s paying the Rothschilds to draw up the plans. Yes, it is exactly as bad a deal as it sounds.
The RBS Story
In a nutshell: relatively small, parochial safe bank in Scotland decides to become a bigger player by taking more risk – and it all goes badly wrong.
Dating back to the 18th Century, the bank started with £111,347 and focussed on printing bank notes. Over time it developed a personal and corporate banking business, and grew south of the border through the 19th century. During the 20th century post war period, Royal Bank of Scotland began to grow in earnest, purchasing railways, insurance companies (latterly to become Direct Line) and moving into North America and Europe through mergers and acquisitions. In the beginning of the 21st century, having successfully avoided various takeover attempts by Standard Chartered and HSBC in the late 90’s, RBS continued its business of becoming the biggest boy in the playground – by buying NatWest Bank, an enormous player in the UK market, vulnerable after a failed attempt at global dominance.
AGM after AGM passed by through the noughties with incredible and gleeful reports of the successful ‘organic growth’ of RBS. However, organic growth is supposed to refer to growth by extending customer base, sales and capital. This was not the RBS model. RBS grew in two inorganic ways; 1) by a series of acquisitions through the 90’s and noughties and 2) by the astonishing growth of its Global Markets (investment) division, under the chairmanship of Johnny Cameron.
In February 2005, RBS posted pre-tax profits of £6.9bn, a rise of 14% after buying US bank Charter One and US credit card company the People’s Bank. In 2006, they were up £9.2bn, or 16%. In both years, Johnny Cameron’s high risk investment arm, busily brokering the Collateral Debt Obligations and Credit Default Swap derivatives, rose 18% and 20% respectively. In plain English, the RBS balance sheet was falsely inflated to a serious degree, by the carving up and repackaging of subprime lending – then rated as AAA, the highest possible credit rating by the crony credit ratings agencies such as Standard and Poor’s, Moody’s and Fitch.
RBS (as other banks and insurers later to fail such as HBOS, Lehman Brothers, Bear Stearns and AIG) were making enormous paper based profits on the backs of fraudulent lending practices – and turning this debt into real personal profit by paying themselves sky high wages, bonuses and dividends. In short, raping their companies for personal gain.
Time was called on these fraudulent practices in 2007 when the US subprime mortgage holders began to be unable to repay their mortgages, kicking off a chain reaction of default across the global financial system.
Despite the turmoil in the markets, RBS decided to pursue a hostile takeover of Dutch bank ABN AMRO. The bank was colossal, badly managed and worth practically nothing due to its enormous quantum of toxic assets, its books were full of the devious derivative instruments which had sunk so spectacularly on the back of the US mortgage crisis.
In light of the bank failures, the spreading contagion, the blanket media coverage and the FSA predictions of worse to come, one might think that ahead of a £49bn acquisition, Fred Goodwin and the rest of the RBS board would be exercising due diligence to the highest degree. Surely they would want a clear understanding of the ABN AMRO books, in order to know exactly what they were buying.
No. In fact, when questioned, Fred Goodwin repeatedly referred to the absence of need to undertake normal levels of due diligence. In fact, he stated that a mere “due diligence light” was all that was required. In short, the board had no idea that they were paying £49bn for worthless assets. But they should have.
In late 2007, just months before they turned to their shareholders for a bailout prior to the British taxpayer, RBS posted a £10bn pre-tax profit and throughout the AGM crowed of their ability to weather the storm. Asked directly, Chief Executive Fred Goodwin stated that RBS were not involved in the specialist investment instruments responsible for the US crisis. Asked about the ABN AMRO deal, he stated that RBS would see “better financial returns than we expected”.
In reality, RBS was months away from failure. It was enormously exposed to the collapsing network of toxic debts, it had massively increased this exposure through the ABN AMRO purchase and due to its disastrous decision to buy ABN AMRO in cash, and its cash reserves were too depleted to cover its commitments as borrowing dried up.
By June 2008, despite making almost £6bn of write offs (losses as those bad debts went toxic) and required to raise a lifesaving £12bn from the largest rights issue in banking history, RBS remained upbeat in the next AGM, predicting ‘satisfactory’ profits. However, by autumn, even Fred Goodwin couldn’t pretend any longer, and the Bank finally hit the skids with its funding crisis. Several bailouts commenced totalling £45bn of tax payer money going to shore up RBS.
The Financial Services Authority (having been pressured by the Treasury Select Committee) issued a report condemning bad practise at RBS, and poor oversight by itself, for this enormous failure and tax payer loss. However, no further action was taken against any of those responsible. Hardly surprising, when led by such disaster bankers as the former Head of HBOS, James Crosby.
Northern Rock Revisited
Northern Rock saw enormous growth through the early 2000’s, in a similar way to RBS. They were achieving this purported balance sheet miracle, by indulging in the same high risk ventures as other mortgage lenders. In short, they borrowed huge sums, lent out to subprime (skint) customers, then bundled loads of these debts together (to make collateral debt obligations), selling them on to investment banks like Goldman Sachs.
This practise created a paper based profit. In reality the bank was just generating debt; vast and unsustainable debt.
The bubble burst in 2007, and there was the first run on a UK bank in 150 years. The UK government took over the beleaguered bank, pumping in £1.4bn of public money. The Bank’s assets were managed at arm’s length by UKFI.
While the Northern Rock board, responsible for such catastrophe, walked away with their bonuses and pensions intact, thousands of ordinary staff lost their jobs. They also lost their savings which were manifested in company share save schemes, the shares now worthless. The same went for their wider shareholders. In January 2009, it was decided that shareholders were not eligible for compensation for their losses. This decision was upheld through subsequent stages of appeal.
By 2011, the bank had been split into two vehicles, one squeaky clean retail bank ready to go back to business; the other, a worthless toxic shell containing the debts which dragged the bank to ruin. George Osborne (UK Chancellor) sold the Good Bank to Richard Branson’s Virgin Money for a mere £747m, half what we paid for it. Furthermore, the Bad Bank, with its £21bn of toxic debt, remains ours.
This is the model that Osborne is seeking to use once more in the sale of RBS.
The Disaster Bankers Win Again
Rothschild have been doing a lot of business with the UK government of late. Most recently, they were paid to produce the paper advising the government to sell student loans taken out after 1998 to the private sector, and raise the interest rates retrospectively, enforce payments and meddle with other terms and conditions too.
Now we find they are about to be paid another commission in public money, to conjure up another means of extracting yet more profit for the private sector at the taxpayer’s expense. These disaster bankers must be falling over themselves laughing at the ease with which they are able to pick the public pocket, assisted by the very people purported to defend it. This is not a recession, it is a robbery.
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