How to tame a bad bank

Mr Hester, the CEO of RBS, figures prominently in today’s papers with a plan to sort out the mess at RBS.

Some of what is reported makes sense and is welcome. There appears to be a realisation that the investment bank is undertaking too much risky business, and using too much capital This needs to be slimmed down drastically, with bits closed and other bits sold off. There is the outline of a cost reduction plan, which will need to go further than currently indicated.

There is some wish to sell off some overseas subsidiaries and assets . The more the merrier, given the stretch the whole bank imposes on public finances. One version of the story has a substantial programme with some urgency – the course I would recommend. Another version has a lesser programme with less urgency.

There is some suggestion the bank might need to make a further provision or write off of £2000 million to cover the costs of restructuring, on top of the £28 billion of losses and write offs. Let’s hope someone who understands figures is giving and independent view of whether this is fair and reasonable or not in the circumstances, as very soon we will be talking real money here.

Readers of this site will know that I have always thought RBS is too big and risky for taxpayers to take on. Once the government committed, I argued strongly for organised disposals and wind up of risky businesses, to limit our risks and likely future costs and losses. I restated the view at some length in “It’s the banks, stupid” on 3rd February.

The government and UKFI should encourage Mr Hester to go further faster than the outline plan we have seen today. The government should also be very wary of buying out loads of dodgy debts from the banks. The UK state is already overcommitted, so why do they think we can take on more debt? World markets may only a limited appetite and limited patience when it comes to UK government borrowings.

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5 Comments

  1. Ross
    Posted February 22, 2009 at 12:34 pm | Permalink

    I see from the Sunday Times that RBS proposes to retain branches in the USA and some other countries as part of its “good bank” while selling off branches in Easternm Europe.

    Which of these businesses will we, the British taxpayers, be guaranteeing in future?

    I’d prefer to hear “none of them”. One of the Gordon brown’s errors was paying more than the guaranteed amounts to Northern Rock depositors, which has led to an expectation that all customers of every UK-based bank would be underwritten.

    It’s time for this to stop. All bank statements should carry a notice about how much of the balance is guaranteed by which government – and that’s all the depositors should get if the bank crashes. Otherwise market forces will be undermined by the resulting moral hazard

  2. Demetrius
    Posted February 22, 2009 at 1:42 pm | Permalink

    My favourite uncle had a coal round, which depended on his horse and cart. Unluckily, his surplus of revenue over costs went on racehorses that were much less reliable than his carthorse. When the carthorse died, in the absence of people to give him credit, his business ended. He then became a labourer, still needing to work into his 80’s because he was short of national insurance entitlements. I think a lot of my uncle these days.

  3. Brian Tomkinson
    Posted February 22, 2009 at 2:09 pm | Permalink

    I hope you have read the following article by Liam Halligan in the Telegraph and, if you share his analysis as I do, that you and your colleagues will start to motivate yourselves in to proper action to prevent the destruction of this country’s economy. Brown is being given free rein to destroy our economy and you seem just like idle by-standers. Even in World War II we changed a useless prime minister.

    http://www.telegraph.co.uk/comment/personal-view/4742855/Inflation-is-the-greatest-danger-to-the-British-economy.html

  4. Susan
    Posted February 22, 2009 at 4:01 pm | Permalink

    Mr R, I hope your voice is being heard and acted upon within the Treasury team. However, I’ve come to the conclusion that this financial disaster was engineered following the failed Deutsch Borse takeover of the LSE.

    “Meanwhile, within Europe, nationalistic bickering especially about the future of London as the financial centre of Europe is weakening Europe’s interests. Too many aim to repatriate services from London and seek the illusory prize of becoming a significant financial centre.”

    here

    It all boils down to jostling for position within the EU and, if nothing else, surely the electorate deserve to know the truth?

    I know there are some will ask, “why reduce an argument to the EU?” but I think they should actually look more deeply into the EU and see what is planned. Like, love or loathe it we must abide by EU directives.

    Blame Ted Heath, the man who lied to this nation almost on a par with Gordon Brown and Tony Blair.

  5. no one
    Posted February 22, 2009 at 5:39 pm | Permalink

    better a few banks go bust than the british state

    really think folk need to pay more attention to how to keep the country itself liquid, profitable and a going concern

    importing thousands of (foreign-ed)workers, training them on the job, to go back (home-ed) and take our own competitive advantage is not a good idea, not fair international competition while we are paying for welfare state and health and safety etc and they are not

    bailing out banks and hiring ever more public sector workers is a one way train ride to oblivion

    and hampering the few of us left earning the country money with petty speed cameras which dont actually save lifes just raise more stealth taxes will just drive us abroad

    public sector workers should be like officers of 3 star rank and above in the USA, the law prohibits more than a certain number, our armed forces could learn from this, but the same kind of thing should be done for local government, the nhs quangos, and public sector staff of all kinds

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    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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