Why RBS shares fell

There are still people clinging to the absurd notion that RBS shares have been falling again because the ban on short selling was removed. Figures released show that no short positions were opened against RBS in the first three days after the lifting of the ban, yet the shares plunged downwards. Will these instant experts on this topic please look at the facts first?
The reason RBS shares have plunged again is primarily the company’s release of estimated figures for 2008. These showed an estimated loss of £8 billion, coupled with “impairment charges” (losses or write offs to anyone else) of £15-20billion! In other words the City forecast I have been using here for sometime of around £28billion of total losses gave people a good guide to the magnitude of their problems. Confirmation of this, allied to more sabre rattling about full nationalisation, was bound to flush out a few more shareholder sellers who had been a bit slow to realise just what a mess their bank was in.

PS: Can someone tell me why the taxpayer is underwriting the latest issue of RBS shares to replace the government’s Pref shares at the price of 31.75p, when the current share price is 12p?
Valuing RBS shares and paying sensible prices for them does not seem to be the government’s strong point.


  1. Ian Jones
    January 22, 2009

    I guess someone has been promised a nice job after the next election? The banks still dont seem to have worked out the party is over so dont expect the Govt to!

  2. A_Mullinder
    January 22, 2009

    I read about RBS’s potential losses on the FT not long ago and sat for several minutes aghast. USD50 bn!! That’s fifty — FIFTY! — billion bucks. It is a quite simply unbelievable amount.

    This is why the government’s latest plan is absurd. What they’re in effect doing is providing the shareholders and management with a big, fat stack of tax payer cash in the hope that A) they can correctly second guess the market by paying more than the market is willing to pay for the toxic assets AND ultimately make a profit and B) that this money will be enough to sufficiently re-capitalize the banks and get them performing their usual, essential economic duties.

    But why should we tax payers take all the risks? And in the end, we may spend this money and have to nationalize anyway. It’s time to nationalize the banks and damn the torpedoes. We should wipe out the stockholders and management, and take them under state control, but IMPLICITLY only for a specific length of time, after which they will be sold back to the market.

  3. Lola
    January 22, 2009

    “PS: Can someone tell me why the taxpayer is underwriting the latest issue of RBS shares to replace the government’s Pref shares at the price of 31.75p, when the current share price is 12p?”…’ ???? ‘

    1. mikestallard
      January 22, 2009

      Derek Draper wrote this on the LabourList.org website:

      “This old chestnut about potential liabilities, pensions and PFI etc. is an old Tory line. No govt measures their debt in this way – on the same basis should we be adding govt land assets to our net worth? It’s fantasy accounting. Just because the official measures don’t stand up the Tory claims, you guys seem determined to make up figures that do.

      “And while you claim debt is spiralling because of the bank recap, you are neglecting the fact that our loans are against their assets – Northern Rock, for example, has reportedly repaid something like half its loans already. And what would you and your right wing friends have proposed we should have done to support the banks instead? Nothing, I suspect.

      “Debt was lower when Northern Rock hit us than when we came into office – that’s why it can rise now as we take action on the banks and give real help now to help people through the downturn.”

      So there’s your answer.

      1. Waramess
        January 23, 2009

        Dereck Draper is a xxx then. We can all see that the liabilities are obligations to pay. Land assets only have a value if someone is willing to buy. If the government can demonstrate their capacity to meet all future obligations by selling land they would have an argument, but they have not and can not.

        We talk not of accounting niceties but of real obligations to pay.

        As for the indebtedness incurred to recapitalise banks (i) Draper the xxx must first take into account that the assets must first be used to repay the lenders (ii)the bank capital ratios are so low they are not likely to be of much help in a downturn so maybe the government might PRUDENTLY consider all sums invested as lost.

        Great news for us taxpayers

  4. Acorn
    January 22, 2009

    Do we know what the conversion rate was from prefs to ordinary shares?


  5. Adam-
    January 22, 2009

    John, can you give us an idea what would happen if the Government realised that the RBS liabilities were so vast that the that the only realistic option is to allow it to fail?

    How would it damage the domestic economy? Global economy? Couldn’t we just get the IMF to bail it out?

    As far as I’m concerned RBS is a private, global institution that just happens to have its head office in the UK. Its debts are not our problem. Why is Gordon making it our problem?

    reply: remember the Lehmans disruption to markets and multiply it by three.

  6. Waramess
    January 22, 2009

    in a word LUNACY.

    We expect the people who created the problem in the first place to fix it.

    All they can come up with are two solutions: spend money and print it. Exactly what got us into this fix in the first place.

    That they keep doing the same thing in the knowledge that it didn’t work last time is a sign of mental instability, keep repeating the same thing time and time again in the hope the result will be different this time

    This of course is where we are with the bank bailout.

    We are on the wrong side of the wall; we are in with the inmates, and they are doing the same thing with the economy.

    The scary thing is there is absolutely nothing we can do to stop these morons from dragging us all into penury.

    For gods sake let RBS go bust. It will cause waves; it will not cause a tsunami, but trying to bail it out will, be sure.

  7. Mike Wilson
    January 22, 2009

    Would it be cheaper to guarantee savers’ monies – and let them go broke? What would that cost?

    It would send a proper message to the banking system that securitization of debt – which neatly avoids capital adequacy rules – must never be allowed to happen again.

    If RBS are bankrupt – they have no capital – how was this allowed to happen?

    When Gordon Brown said ‘I will not allow a house price boom to put at risk the sustainability of the recovery’ – he did the exact opposite. He did stand by and milked the growth in personal debt for all it was worth in additional tax receipts.

    Now he says ‘I will not stand idly by while the mistakes of a few bankers ….’ Perhaps this time he should stand idly by.

  8. mikestallard
    January 22, 2009

    Do you know what?
    I think the Labour Party is so used to off balance accounting that it has fallen for its own figures. Derek Draper says today on his brand new and extremely useful website that the debt is nothing to worry about because, all in all, it is just about the same as everyone else’s.
    Anything like banks, or PFIs, of course, should not, he says, be included anyway.
    And, he thinks, the banks are gong to make a profit because Northern Rock has already paid off about half of its debts.
    Barclays and HSBC, both of which were mentioned yesterday on Newsnight as being possibly in difficulties, are worldwide concerns with trillions up their sleeves. R/: “And governments deal in millions”.
    As our host has warned so often, RBS and HBOS have different bits. Some of these must be got rid of now because they are very dangerous. Others are not quite so much of a liability. Without “due diligence” at the time of sale, however, the government scooped up the lot.
    I really do not think that Labour realises what it is getting itself – and us – into.

      January 22, 2009

      Mike – see our comments above about the ridiculous Derek Draper and his truly awful website!

      It really is a worry when the crazies get their hands on or near the levers of power but I think we’re all on the same wavelength here and can (deal with them-ed)!

        January 23, 2009

        Thanks Ed – but you know what we mean!

  9. The truth about RBS shares
    January 22, 2009

    […] The truth about RBS shares There are still people clinging to the absurd notion that RBS shares have been falling again because the ban on short selling was removed. Figures released show that no short positions were opened against RBS in the first three days after the lifting of the ban, yet the shares plunged downwards. Will these instant experts on this topic please look at the facts first? […]

  10. Gee_off
    January 22, 2009

    reply: remember the Lehmans disruption to markets and multiply it by three.

    Sorry not detailed enough John. I have yet to read anywhere a clear and precise explanation why a major bank cannot be allowed to fail, and only the retail depositors bailed out. All pundits, Peston, Ambrose et al trot out the same lines without full justification.
    If you’ve got an answer, I’d love to hear it.

    My somewhat cynical conclusion to date is that the banks “own” the governments of all the major economies, so all politicians will do whatever it takes to save banks.
    I don’t care about market disruption. As far as I can see the global banking system needs to fall so it can be rebuilt in the interests of people not bankers.
    I declare a Vested Interest as a saver with no debts.

    Reply: The Lehmans dislocation to markets led to less money and borrowing available which led to fewer jobs and less output.

    1. Gee_off
      January 22, 2009

      Yes, I know.
      As would letting RBS go.
      Are you suggesting that defaulting on the UK sovereign debt will not do this? (as will probably occur if the banks are nationalised and the foreign debt they’ve accumulated taken on board)
      I’m not suggesting letting banks fail would be painless. I’m saying if my leg was trapped on a sinking ship, I’d cut it off. Nasty, but I might survive.
      There is no painless option.
      It also occurs to me that if the banks want the countrys backing, then what they’ve done should be constituted as a form of treason. As always, they want it both ways.

    2. Adam-
      January 23, 2009

      I seem to remember Lehman Brothers collapsing, panic ensued, share prices plunged and when the dust had settled, everyone wondered what they actually did, other than siphon money off the world’s economy.

      I can’t see how a practically insolvent bank can lend to anyone? Isn’t there a real danger that any Government bailout will just end up paying out to existing depositors who will stuff it under the mattress? After all, who wants to keep money in an insolvent bank?

      I can’t see why the capital can’t instead be injected into a newly established bank or two with fresh balance sheets. A bank with no outstanding liabilities would attract capital from investors desperate to find a bank with… well… no outstanding liabilities, and the capital will be far more likely to reach the businesses and individuals that need it.

      1. Waramess
        January 23, 2009

        Certainly what Lehman proved was letting a big bank go bust would not lead to the catastrophic failure of the system as predicted.

        The greatest fear of the politicians and their economic advisers is fear itself (to borrow a phrase): The fear that others will follow.

        Another hidden agenda and, another supposition that has been debunked by the failure of Lehman.

        This is not so much a question of whether we can let it go bust but now, whether we as taxpayers are willing to see our hard earned income squandered on such false arguments.

  11. Nick
    January 22, 2009

    Share Cur Price Purch Date Mark Price Gov Price Size Take Up Shares Profit
    LON:HBOS 70.1 12/01/2009 84.1 113.6 8,500 99.76% 7,482 -3,247
    LON:RBS 12.2 28/11/2008 52.7 65.5 15,000 99.80% 22,901 -12,182
    LON:RBS 12.2 31.75 31.75 5,000 100.00% 15,748 -3,079
    LON:LLOY 49.1 12/01/2009 140.7 173.3 4,500 99.50% 2,597 -3,209
    TOTAL -21,716
    Preference Today Issue Rate Borrowing Size
    Non-RBS 22/01/2009 01/01/2009 12.00% 4.00% 4,000 18
    TOTAL -21,698

    Last Updated 22/01/2009

  12. Bryan Davies
    January 22, 2009

    Why is HMG paying the price it is? Well perhaps HMG have decided on the amount of the injection required and have overlooked adjusting their equity stake so that the revised price per shar is more akin to current market level.

    OK I am not into the fine detail here but perhaps any adjustment to take account of the current price might give HMG over 100% – sorry I know its not a laughing matter but there comes a time…..

  13. Soupdragon
    January 22, 2009

    Sorry John, but you need to check your sources, I know of at least twelve people who placed short sells on RBS first thing on Monday morning. Ever heard of naked shorting? Plus RBS has Tier 1 captial of over 7% when the minimum requirement is 4%.

  14. joe
    January 25, 2009

    While people may hark on about assests being overvalued they should possibly consider that the recent declared loses are possibly just as overvalued. Mr Brown is getting exactly what he wants with this, if say in 18 months RBS loses became RBS gains then our friend in number 10 would sit pretty in the eyes of many. History shows that house prices in the states should begin to rise again at the end of 2009, after funds asociated with these already being declared lost…

  15. jahual
    January 26, 2009

    I bought £1000 worth of RBS shares at around 11.90.

    What do you think I should do, hold or sell, i’m in two minds. I would like to know what you would do personally if it were your money. Thanks.

    REPLY: I AM NOT ALLOWED TO GIVE INVESTMENT ADVICE ON THIS SITE. You should seek professional advice based on your own circumstances, and current prices and prospects.

  16. Vijay Venugopalan
    August 17, 2009

    Well, Govt bought it high giving RBS the benefit of doubt and where are we now? RBS is in the mid to high forties and the government has made a profit as well.. I am happy that I bought as well…

  17. Bob
    October 10, 2009

    Hi John,

    Please could you comment on my thoughts as to why the RBS share price and banks are at rock bottom. And why banks were balied out.

    1) Around 30-40% of Britiains Economy runs through RBS IT systems and infrastructure every day (ie CHAPS, BACS, Business payments, big money transfers, Peoples wages, business banking etc). If RBS was allowed to fold this would all go with it, causing mayhem. This should never been allowed to happen and vital services such as the above should be run by independent people (just my opinion)

    2) RBS owns other banks such as Coutts (Which I believe has very prestigious clients) and Adam & Co. If RBS was allowed to fail then as far as I am aware depositors with these banks would also have lost all deposits above a certian amount. Basically a lot of welathy and ‘important’ people will have lost a lot.

    3) RBS employs 150,000+ people. That is a lot of people to be made unemployed all at once.

    4) Banks as we know are the real govt’s of countries, whether that be the central banks or normal banks (Federal Reserve, BOE etc). And Govt leaders would have been put under extreme pressue to bail them out.

    5) Federal reserve and BOE lend money to Govts at interest, so the latest bailout monies given by the Fed and BOE will in theory make them lots of money in interest in the future.

    6) Somehting fishy going on with RBS shares. My guess is that in the future RBS shares will spike at somepoint and the Govt will cash in then selling them to private investors (probably middle eastern/Chinese) who will then have a majority stake in the company. Or perhaps another bank will purchase the shares.

    7) Do we think the whole bankingfinance collapse was an accident. We have to remember that there are a lot of intelligent people in this industry. If yes then purely comes down to greed and shortsightedness on a massive scale. If not then why is this happening, is it a master plan from the capitalist elite?

    Maybe some of these comments are far fetched, but something to think about.

    Reply: No-one was suggesting in Parliament or banking circles letting RBS go under. The row was over the way of keeeping it going – loans or equity, longer term or shorter term, guarantees or purchase of shares etc. The shares have been depressed becuase investors cannot be sure of the extent of the losses. Taxpayers will only make an overall profit if the liabilities are well managed and the losses stopped.

  18. Carter
    October 20, 2009

    excuse my ignorace and total irrelevance to the discussion, but are the Govt not going against the usual flow of Bust and Boom. They are doing so by spendig in a recession rather that saving, so we can spend non stop, and once again find ourselves in yet another recession.
    I was only informed on this briefly but it seems like the plan is to get into more debt (not on purpose, just the way things go) so that in the future it is less likely to happen again. Is that not correct?

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