RBS – From Regal Backbone of Scotland to Reckless Banking Service

By Jamie Mann and Chris Sharp 

The Royal Bank of Scotland, Edinburgh’s favourite international bank, went from being one of the largest banking groups in the world to a near-collapse in less than a decade. Bailed-out by the government and currently 83% taxpayer owned, one would hope that RBS is a responsible and customer-orientated bank; but is RBS “Here For You” or is it simply another corporate entity addicted to profit?

For many Scots RBS signified a strong national institution, one with them in mind and working in the best interests of Scotland. This is evident by the vast number of Scots who still hold their money, investments and pensions through RBS. But the rapid expansion that led this Scottish national treasure to become one of the biggest banks in the world also lead to its sudden collapse and increasing nationalisation.

The downward spiral for RBS happened on the watch of then-Chief Executive Fred Goodwin. While bad investments and unjustified spending can land the common man in hot water risking unmanageable debt, bankruptcy and even homelessness; Goodwin’s reckless actions earned him an early retirement on just £342,500 a year (reduced from £700k), not to mention a generous £2.6m bonus and £2.8m lump sum.[1]

This week Goodwin was stripped of his honours, a step not yet taken even for convicted perjurer Jeffery Archer, yet was still defended by some as being ‘not a criminal’ and ‘not intentionally malicious’. [2]
However, in recent months it has emerged that it was his management that had established a specialist tax-avoidance department allowing deals to slip through the cracks of tax laws in several countries. Utilising these loop holes allowed RBS to entangle £25bn in tax-avoidance schemes while the US and UK treasuries saw losses of £500m in tax revenue according to the Guardian.[3]

More recently, RBS drained £5bn from the European Central Bank, a quarter of the £20bn wholesale funding RBS aims to recoup this year. (Source: The Telegraph) RBS are the only known British bank to tap into the ECB long-term refinancing operation (LTFO) and gained this right to borrow from the central bank due to their disastrous acquisition of the Dutch financial group ABN Amro in 2007.[3] Radio Netherlands reported in 2009 that RBS made historic losses of £28bn – the largest in British corporate history from “writing off bad loans and investments related to the purchase of ABN Amro”.[5]

Then-Prime minister Gordon Brown said of the loss:

“Yes, I am angry at the Royal Bank of Scotland and what happened. Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro. And these are irresponsible risks which were taken by a bank with people’s money in the United Kingdom.”[6]

But the government rewarded RBS’s negligence with even greater investment, rendering it 83% public-owned.

Last week, an onslaught of political and media pressure has led to Chief Executive Stephen Hester rejecting a £963,000 bonus on top of his £1.2m salary this year. What is all the more ridiculous than the extent of the bonus itself is the reason for such a hefty reward. RBS Chairman Sir Phillip Hampton said of Hester’s bonus: “His pay is strongly geared to the recovery of RBS, which he was recruited to turn around” and added “safer and more valuable RBS is in the interests of our customers, shareholders and the UK economy”.[7]

The belief that Hester’s bonus of almost a million will help the British taxpayer and restore lost credibility to RBS seems entirely nonsensical. With reported losses of over £500m in the last year it seems Hester has done little to help either the taxpayers or his own shareholders. Indeed, with the loss of over 5500 jobs in the last year it is unlikely that he has done much in his esteemed role as a ‘job creator’.[8]

We spoke to Ian Fraser, an award-winning journalist, commentator and broadcaster who was also lead consultant on the BBC Documentary RBS: Inside The Bank that Ran Out of Money:

“[the] massive increase and the widening wealth gap between the so-called ’1%’ and the ’99%’ is having a corrosive effect on society, and is definitely becoming unsustainable, to the extent that if it continues to widen, there will almost certainly be further outbreaks of civil unrest in the UK.”

Yet the furore over Hester’s bonus, or even the de-knighting of Fred the Shred, only plays out as a convenient side-show to the real problem that the collapse of RBS represents. Politicians appear willing to condemn excessive pay and even launch reform commissions, yet when it comes to the reckless practices of banks, the unsustainable practice of public borrowing or the shady position of money in politics, they keep remarkably quiet.

Excessive pay is, of course, an important issue – especially when the money is coming from jobs and the public purse. However, bonuses are only the symptom of a much more dangerous culture within the banking sector. This is a culture that politicians not only buy into as ‘the only option’ but are actively a part of through lucrative consultancy positions following office.

As Ian Fraser concluded:

“To conclude I would say that the row over Hester’s bonus is a diversion from the need for broader reform of the banking and financial sectors. Excessive banker pay is only a symptom of the disease not the disease itself. […] The trouble is, however, that it is much easier for politicians to pander to the British people’s fury over bankers’ bonuses than to seek to reinvent finance.”

Who will stand up to this culture if not our elected representatives? Who will not oversee these ‘too big to fail’ institutions when the regulatory body feels powerless to intervene? It seems it is up to us, the people, to stand up and say ‘No more of this insanity!’

Sources:

[1] (Source: http://www.guardian.co.uk/business/2009/jun/18/rbs-sir-fred-goodwin-pension)

[2] (Source: http://www.scotsman.com/scotland-on-sunday/business-opinion/bill-jamieson/terry_murden_dubious_morality_behind_burning_goodwin_at_the_stake_1_2070672)

[3] (Source: http://www.guardian.co.uk/business/2009/mar/13/rbs-tax-avoidance)

[4] (Source: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9026162/RBS-took-5bn-of-loans-from-ECB-emergency-facility.html)

[5] (Source: http://www.rnw.nl/english/article/rbs-losses-blamed-abn-amro-takeover-second-bank-consortium-sees-its-value-crash)

[6] (Source: http://www.rnw.nl/english/article/rbs-losses-blamed-abn-amro-takeover-second-bank-consortium-sees-its-value-crash)

[7] (Source: http://www.bbc.co.uk/news/business-16517432)

[8] (Source: http://www.bbc.co.uk/news/business-16517432)

Additional Sources:

http://www.guardian.co.uk/business/nils-pratley-on-finance/2011/dec/12/what-rbs-board-thinking-abn-amro

http://www.independent.co.uk/opinion/leading-articles/leading-article-crony-capitalism-and-craven-folly-6296284.htmlhttp://www.independent.co.uk/opinion/leading-articles/leading-article-crony-capitalism-and-craven-folly-6296284.html

http://www.bbc.co.uk/news/world-16787368

http://www.telegraph.co.uk/finance/2882151/Revealed-Royal-Banks-secret-jet.html

http://www.bbc.co.uk/news/uk-politics-16752358

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