What should we do with RBS, now we are all enforced owners?
RBS is too big for the taxpayer to stand behind. The bank made a foolish acquisition of ABN Amro near the top of the market which stretched it too far. It is now being made to repair its capital ratios, against a backdrop of reporting large losses on its credit market positions and its loans. I don’t think the taxpayer should be made to pay for the past mistakes.
We need the government to get a grip on this leviathan, and to slim it down quickly before it does more damage to the taxpayer and the national accounts. Presumably the government’s justification for taking it over is to safeguard and increase the lending to UK individuals and companies. This is a small portion of what RBS does.
In the half year figures for 2008 we learn that only £282 billion of loans have been made to UK borrowers. The rest of the £721 billion loan book is overseas. The total UK loans are only 15% of the balance sheet, a manageable amount for the UK government. It is the remaining £1700 billion of risk that is over the top for UK taxpayers.
The sensible thing to do is to slim the bank down to the bit that the government is concerned about. It should seek to sell:
1. The Insurance company
2. The Manufacturing division
3. ABN Amro
4. Citizens bank in the US
Taxpayers are on risk for nearly £500 billion of derivatives. That’s playing with the whole tax revenue of the country for a year. Why? Why aren’t these speculations on currencies, interest rates and commodities closed down? The Bank says much of it is matched business, but there is always scope for it to go wrong. In the first half of last year the bank wrote £5 billion off its credit market assets. They need attention.
The costs of the bank are huge. In 2007 10 non executive directors averaged more than £100,000 a year each for a part time job. Why not have fewer at more realistic fees for a loss making company? The 6 executive directors were paid £15 million between them, or an average of £2.5 million each. Nice work if you can get it. In its current state I wouldn’t pay the executives more than one tenth of that, until they can make some profits again and slash the risks.
RBS showed just £6 billion of “impairment” or potential loss on its lending book of £721 billion at the last half year. This looks very low for the conditions. Presumably all the current fuss has come about because they now realise they need to put in much larger figures for possible losses on their loans and their financial instruments. This just makes it crazier that the government rushed in to buy shares in them when they did without demanding a proper analysis of the loans and financial instruments then, and sensible write downs for the conditions. It is possible the bank will have to declare that is has lost most of the government’s new capital in the second half of 2008.
There is no need to panic today. The falling share price does not undermine the bank. The depositors are not in a panic as they assume the government stands behind them and the bank has substantial liquid assets. What needs to happen is the production of some sensible figures on the current state of the loans, and some active management of the bank to cut our risks.
We need to see a string of disposals of the non banking interests and the overseas banks. We need some serious cost cutting starting with the top executives pay. We need some intelligent new UK lending to re start the business.