When Will RBS Be Put Out of It's Misery.....

I wonder how long it will be before people start wondering how long it is worth propping up RBS with state-spending. In my Money Week column this week, I've been addressing that.

In 1977, the Labour Government of James Callaghan created a new state-owned company, which, even by the unfortunate standards of Britain’s nationalised companies was to prove grimly useless. British Shipbuilder grouped together the old Scottish shipyards of the Govan, some of the mightiest in the world in their heyday, put them together with the equally historic yards of the North-East, and embarked on a doomed attempt to salvage an industry in terminal decline through state control and massive subsidy.
Fast-forward thirty years and another once great Scottish industry has just been taken into state-ownership. Royal Bank of Scotland launches bond issues rather than ocean liners. But its ultimate fate is unlikely to be any happier.
In truth, the extra £25 billion the British taxpayer has just pumped into RBS is no more likely to revive the company than the millions poured into those Govan shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank into administration today.
Better that than turning RBS into the Govan shipyards of the 2010s, a fate that looks inevitable if it stays on its current path.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto, paying little attention to basic banking good-sense – such as whether its funding was secure, or whether it’s customers were ever likely to pay back the money they had borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen, and ATMs stopped working. That would have created pandemonium. The risk wasn’t worth taking.
Yet last week, the government rescued RBS all over again, giving the bank another £25 billion, and taking its stake up to 84%. There is a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the immediate crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures this week. But RBS is still bleeding red ink. It lost £3.3 billion in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5 billion for the quarter.
Another £282 billion in risky assets are currently insured by the government. How much more bad news is there still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2 trillion, or around one and half times the U.K.’s entire GDP. The potential losses are still horrifying.
But it is not the immediate results that are worrying so much as the five to ten year outlook. It is impossible to feel confident about the future of RBS.
It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and are going to suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than two billion euros have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s massive balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people the rival banks don’t want, a certain recipe for decline.
Even worse, RBS now looks set to fall under political control. It will be guided not by commercial decisions about what suits its skills and its shareholder. Only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up companies in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Rolls-Royce, the aero-engine manufacturer, was rescued by the government, and prospered in the long-term. But that is just about the only example. It is possible – although not likely – that Lloyds will repeat the trick. RBS certainly won’t.
It would be far better to place the bank into administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that ending happily.