Daily Times

Ten years ago the board members of RBS blithely approved a reckless management decision with catastrophic consequences that could yet sink the bank. At the time they were facing criticism from investors who thought Sir Fred Goodwin’s growth machine, over-reliant on making acquisitions, had run out of road. The bank’s answer in 2006 was an aggressive expansion, at precisely the wrong moment, into US mortgage-backed securities and the exciting world of collateralised debt obligations. The operation in Greenwich, Connecticut, was staffed up and CDOs started to accumulate in the “warehouse” and on the bank’s books. The stuff could not be sold fast enough, even though the market was already starting to wobble.

Not a single board member back in London and Edinburgh asked questions about the initiative in time and it turned out later that even the chief executive – certainly not a stupid man – did not know what a CDO was. After the damage was already done the head of the investment banking division drew him a simple diagram explaining the CDO tranches and how it all worked.

The billions of dollars of toxic soup sitting on the books that resulted from this basic management failure did not cause the near collapse of RBS in 2008. Most of the eventual post-crisis losses stemmed from old-fashioned poor lending in other parts of the bank. But amid the later panic in 2008, RBS’s inability to give clear answers about how badly exposed it was to CDOs helped destroy investor confidence – and provided one of the triggers for the subsequent explosion and collapse. In late 2007 the bank compounded its problems by doubling its balance sheet with the takeover of ABN Amro.

But it is no exaggeration to say that it is the denouement of the mortgage-backed securities drama that a decade later will dictate whether or not RBS survives in its current form.

The best chance of aggrieved shareholders pursuing their UK court case – ahead of which a settlement is being attempted – probably rests on claims that Mr Goodwin’s team obscured the extent of CDO exposure. Just before the crisis the wildly over-optimistic “marks”, the pricing of those securities, gave an unrealistic and misleading impression about the real condition of RBS when other banks were owning up earlier, say investors.

Not only that, the bank’s management, and the Treasury, are awaiting a settlement with the US Department of Justice over the mis-selling of mortgage-backed securities. That threatens to blow a fatal hole in the struggling state-owned British bank because the DoJ need have no interest in the future viability of RBS or the pain of British taxpayers. It is a non-American institution that has built a large capital cushion which US officials might feel tempted to plunder by levying a stonking fine.

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British taxpayers can only brace for impact, knowing that the recent fall in the share price, and the bank’s struggles in a low interest rate environment, mean that if it is ever sold off the loss is likely to be in excess of £10 billion.

For taxpayers, the temptation might be to blame the current management, led by Ross McEwan, for taking so long with their clean up, but that is unfair. The problems of RBS are doubly intractable because it is trying to adapt to the digital transformation sweeping finance while also dealing with a uniquely
toxic legacy.

In another respect, not all the blame should be heaped on the heads of bankers. There are many lessons from the disaster, about excessive expansion, the too big to fail concept and board responsibility. But another key lesson is the inadvisability of nationalisation and state-ownership.

While those who rescued RBS did so at speed and for understandable reasons, and in the midst of the panic, the nagging fear was always that embedding politics in banking would make for corporatist coercion and bad business decisions. And so it has proved. At almost every turn RBS has been hampered by its ward-of-state status.

Meanwhile, the idea of an assertive “industrial strategy” is back in fashion in the UK thanks to the new Theresa May-led government. Labour’s leader Jeremy Corbyn and his supporters want to go much further, of course. They seek to nationalise almost everything. We should beware. The next time anyone suggests state ownership as a solution, just point to RBS – and the taxpayer’s large and growing bill.