RBS – now we will be paying for the government’s rushed folly

Yesterday’s Sunday Times reported a City analyst saying that RBS may report losses of up to £28 billion for 2008 when it reports its full year figures.

If it does, or if reports a mere £20 billion of losses for last year, that means all the extra capital pumped in by UK taxpayers will have gone in just a few months of ownership. Many of the losses will be on foreign banks and overseas investments within the RBS group.

In the meantime we do know, now that RBS shares are trading around 42p, that the taxpayer has lost a small fortune on the shares – around £8 billion at current market prices.

When the government first started briefing that it was thinking of buying stakes in several major banks I urged them to carry out due diligence, to ensure the assets they were buying were realistically valued. Why on earth, I asked, should taxpayers have to take the hit after they bought in? Surely any sensible person buying into such banks would demand write offs before putting in so much money?

I was told the government was in a hurry and would not therefore do what any commercial purchaser would do. They could have applied a sensible discount to the asset value when constructing the deal, but even that proved too much for this feckless and naïve government. Their bail out of the banks was their ERM – and its impact will be far worse than the damage the ERM did to the British economy.

Taxpayers have thrown their money down the drain, putting it into banks that had not written down their assets sufficiently to warrant the new capital. Nor have they cut their costs enough. If a bank is losing such huge sums it cannot afford all the people it is currently employing, and cannot afford the giddy level of salaries and bonuses it is paying to the managers and directors. The government should have insisted on proper write offs and proper action to cut costs before purchasing any shares. Instead we are all losing a packet, without helping fix the banks, who carry on incurring costs as if the world was still the same as during the boom.

Now we need to know from the Regulator whether it will inisist on replacing the lost capital or not. A few weeks agao when the government and Regulator increased the banking panic by insisting on extra capital we were told it was essential they have a higher capital ratio – i.e. more share capital relative to their lending. Does that rule still apply to RBS, or will it be allowed now post any losses to have a lower ratio again? If it is allowed a lower ratio can we have some assurance these losses mark the end of the likely write offs? Will the government do some due diligence on the figures this time to make sure they are prudent?

If the Regulator is still insisting on the higher capital ratio, where is the money coming from? Are taxpayers to be made to put more in, as Mr Bean of the Bank of England hints? Or will they now get on with selling assets and cutting costs in a way which gets the bank’s balance sheet back into better trim?

What should they do? Demand a full independent audit of the assets. Agree realistic values. Agree with Regulator and the bank an appropriate capital structure for the revised position. Then get the bank to raise any extra capital it needs through cutting costs and retaining more profit, selling assets, or finding someone other than taxpayers to put up the money. Taxpayers have had enough.

I pointed out in Parliamentary debates that the 3 banks with state shareholdings could lose the equivalent of the defence budget in a year. According to the Sunday Times RBS may have done most of that on its own within the first few months of state ownership!

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22 Comments

  1. Ian Jones
    Posted December 29, 2008 at 9:50 am | Permalink

    Pretty obvious why the banks aren’t too keen to lend to housebuyers or companies!!

    Good to see a number of bankers still getting bonuses even as their banks are bankrupt!!! Crazy times.

  2. DBC Reed
    Posted December 29, 2008 at 10:34 am | Permalink

    Although there is a case for the full and permanent nationalsiation of banks, Mr Redwood’s comments are still apposite. Far too much was paid for RBS ,which in commercial terms was not only insolvent
    but bankrupt.Neither is anybody factoring in the bank’s reported exposure to losses on commercial property loans which are said to be colossal.Incidentally the fact that the commercial property market headed down a long time before the house price “adjustment” puts into question a lot of the simpler explanations for the property price downturn.

    reply: The bank was clearly thought not to be bankrupt, for had it been bust the Directors would have to put it into liquidation and the auditors would say something in the Accounts. However, we agree that more write offs were all too likely, and it beggars belief why they were not made before putting the capital in on a precuationary basis to protect the taxpayer.

    • Stuart Fairney
      Posted December 29, 2008 at 12:44 pm | Permalink

      “Although there is a case for the full and permanent nationalsiation of banks”

      Amazing, quite amazing!

  3. Lola
    Posted December 29, 2008 at 10:36 am | Permalink

    Thisn really is bonkers policy isn’t it? Just how does he get away with it? Eh? Just tell me how?

  4. John
    Posted December 29, 2008 at 11:20 am | Permalink

    Don’t worry John. “Lessons will be learned.”

  5. rugfish
    Posted December 29, 2008 at 11:37 am | Permalink

    In any other walk of life this would be criminal.
    Why is it not criminal of a government to blindly throw taxpayers money down a drain, and for bankers to take money on personal account from a business which is in all but name bankrupted?

    Government decisions to recklessly throw our money away stinks of moral turpitude. Bankers being paid fat salaries and bonuses, knowing the only way they remain in business is as a result of government stupidity, is sufficient reason to hold an enquiry and order it to be repaid or their assets made forfeit.

    Talk of banks getting back on their feet and our money being safe is just garbage. They are bust without our money, they have our money and they should be nationalised and forced to merge.

    Government claptrap and spin must end so we can move forward in 2009 with honesty and integrity and with moral considerations which have been sorely lacking these last 12 years under a Labour Government.

    Banks and Government should be made to pay.

  6. Ian Jones
    Posted December 29, 2008 at 12:21 pm | Permalink

    One further thought is that RBS has recently taken on new management. They will want to make sure they come out smelling of roses so will have written off everything they possibly can.

    Be interesting to see where the losses are taken i.e. does it include the British commercial and housing sector which has only just begun falling!

  7. David Eyles
    Posted December 29, 2008 at 1:06 pm | Permalink

    It’s getting to the point where I almost avoid reading this blog because the numbers are escalating almost on a daily basis. It is terrifying to read and then try to comprehend the exposure of the taxpayer to the sheer folly of this government. We have reached the point where a billion sterling is almost small change.

    May the Good Lord bless us and keep us from the perils of a Labour government.

  8. Hawkeye
    Posted December 29, 2008 at 1:39 pm | Permalink

    I take it John, that you or someone on the front bench (perhaps Cameron in the first PMQs) will ask the questions you raise in this blog entry?

    reply: I have sent a sugesiton and will wait and see.

    • Robert
      Posted December 29, 2008 at 5:25 pm | Permalink

      It amazes me how all these well paid advisers did not seem to take into account the huge commercial and residential w/offs that were/are on the way, not only that, we still have the credit card and loan bad debt cycle to really hit home – it beggars belief that this deceit or if you want to be generous the incompetence of all involved still goes on without comment in the media! Maybe everyone just hopes that we are living in a dream and that when we all wake up it won’t really be happening!

      Reply: Yes – I have sent this story out to all national media outloets and briefed a couple of papers, but don’t hold your breath. The story did not come from Mr Mandelson!

      • John Moss
        Posted December 29, 2008 at 9:59 pm | Permalink

        Ah, John, perhaps this could be your role? Lord Redwood of Wokingham…. sounds good to me.

  9. alan jutson
    Posted December 29, 2008 at 3:20 pm | Permalink

    So RBS Losses are worse than originally expected.

    Did the Directors know this when they asked shareholders for an investment (Rights Issue) earlier in the year ?.

    Were the then Shareholders duped into investing into a Bank which was in a far worse financial position than was made public at the time ?

    If this is the case then surely a Legal Class Action should be taken out against RBS for misrepresentation.

    This is the situation at the moment with an action against Shell for knowingly overstating their reserves in past years. Such action being taken in America which also includes European shareholders.

  10. Brian Tomkinson
    Posted December 29, 2008 at 4:38 pm | Permalink

    JR: “Taxpayers have thrown their money down the drain, putting it into banks that had not written down their assets sufficiently to warrant the new capital.”

    I am sure you meant to say that BROWN AND DARLING have thrown the taxpayers’ money down the drain. There must be some form of sanction against this flagrant refusal to follow normal practice i.e. due diligence, and the subsequent massive loss of taxpayers’ money. In local government such action would have led to the personal surcharging of a councillor, perhaps leading to personal bankruptcy. Why is there no such retribution in central government? Even this would be too generous treatment for these two scoundrels but it appears they can do as they like without fear of personal penalty. Defeat at the ballot box, although essential and soon, is by no way sufficient punishment for their malfeasance.

  11. JoblessJoe
    Posted December 29, 2008 at 5:09 pm | Permalink

    I work for RBS. Probably not for too much longer, as layoffs are coming.

  12. mikestallard
    Posted December 29, 2008 at 5:58 pm | Permalink

    It is very rare for me to feel sorry for a politician, but I must say that, having followed the blogs for some time now, our host has been meticulous in pointing out the total failure to negotiate a proper settlement for the Banks which it has taken over.
    At the time – I confess it – I neither understood nor appreciated his concern. Why were the banks going to lose us money?
    Now I see how terribly frustrating it must be for someone, who actually understands what is going on and who publicly warns what will happen, to stand by and watch his worst fears confirmed.

    Reply: Yes, all they had to do was to assess a sensible value for all the assets they were buying into. Anyone with some business sense could have told them the assets were bound to fall in value come the year end.

    • Bazman
      Posted December 29, 2008 at 10:27 pm | Permalink

      Quite a number of these ‘bankers’ need investigating. You know this John.

    • APL
      Posted December 29, 2008 at 11:51 pm | Permalink

      JR: “Yes, all they had to do was to assess a sensible value for all the assets they were buying into.”

      Do you think they actually thought they were buying assets? Rather than thinking it was an excellent opportunity to nationalize the banking sector.

      After all, Brown has lost little time trying to direct his latest acquisitions to follow this or that policy. Even if there wasn’t a nationalization plan fifteen months ago, Brown’s socialist instinct must have led him to think this was an opportunity too good to miss.

  13. Peter Holttum
    Posted December 29, 2008 at 6:55 pm | Permalink

    Its all bonkers – just done to obfuscate the economic disaster to obtain electoral success. The Tories are just as complicit as they lacked the confidence to fight these appalling bank subsidies, or indeed the whole charade that passed for economic management in the UK.

    It would have surely been quite easy to rescue depositors but close the banks in trouble. Why do we need three or four bank branches per high street? Not for normal current or savings account banking! Banking transactions are much easier to do on the internet. When did you last visit your branch?

    Once the new government owner applies due diligence to the banks regulatory process – they will find the whole charade is a can of worms. Who needs all the dodgy financial services products – the selling of which for commission is the main purpose of the branch network. Missold pensions, missold annuities, missold life insurance, missold endowments, missold credit cards, missold investments, missold mortgages – and scarcely a peep from the FSA from Equitable to the present day. If you think I am exaggerating, wait until you try to get a firm quote for your own retirement annuity.

    MP’s are living in a dream world. The poor are being asked to subsise the rich.

    Incidentally I am a conservative by leaning. But its not big hitters we need on the front bench. Its big policies, and a shadow cabinet with enough confidence to attack the government in the way that we know Blair/Brown would have done, and indeed did so effectively, 15 years ago.

  14. Hawkeye
    Posted December 29, 2008 at 8:29 pm | Permalink

    John – I think you should do a blog article called “How I manage to get up and face each day” given the amount of ineptitude you witness from this incompetent govt. Do you not throw your hands up in the air and yell out loud in sheer frustration when you see them smash into an obvious brick wall?

    My personal bank account is with RBS and I do wonder what the new year will bring. I have already emptied my NatWest credit cards.

    It is also my hope that by March we will be at the mid-point of this mess and that from there things will either stop getting worse or begin to improve. Many people neglect the fact that growth starts at the bottom of a recession and not when you cross the “zero” line. A slowing in the rate of decline would be a good thing that might start to improve confidence. Recessions are all about confidence.

    I wonder if anyone here wants to make a prediction on the rate of “growth” in the last quarter of 2008? -1% perhaps?

    • Bazman
      Posted December 29, 2008 at 10:37 pm | Permalink

      Anyone want to make prediction for the growth forward? The fat ones are going to die ! LOL!

  15. Adrian Peirson
    Posted December 30, 2008 at 12:42 am | Permalink

    The EU wouldn’d allow it of course but I wonder what this country would be like if we the people were allowed to vote electronically on issues under debate in Parliament.

  16. Sava Zxivanovich
    Posted December 31, 2008 at 4:06 pm | Permalink

    RBS should had been allowed to fail and be taken over by creditors.

    They would install better management.

    Same happens all the time in other industries, why not in banking?

One Trackback

  • By Billions lost : Mark Hendy on December 29, 2008 at 1:30 pm

    […] The quote above is from a larger piece by John Redwood which can be read in full here. […]

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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