October 10, 2008 – 5:34 pm

2008-10-13 -Royal Bank of Scotland Implodes:

Once the king of European banks, the Royal Bank of Scotland finally ran out of credit and crashed over the weekend. The bank had been burning white hot profits from leveraged loan buyouts and acquisitions of enormous scale.

The speed of the RBS rescue plan underlines the depth of concern in official circles over the Edinburgh group’s finances.

Fears that RBS (down 31p to 65p) could run out of cash if wholesale lending markets remain shut have wiped over £30billion off the bank’s shares this week alone.

The government will get 60 percent of the bank in return for $35B, which we will consider as cash raised.

The bank survived revolutions, the Great Depression, and two world wars, but finally succumbed to the credit crunch. The banks current and final CEO, Fred Goodwin, reined in an age when competition is sin and self centered greed is virtuous.

Can one even wonder why Goodwin began a frantic hunt for the leveraged loan buyouts and subprime-backed loan portfolios as the credit bubble expanded? He spent almost $90B on takeovers since he became CEO in 2000.

Fred Goodwin became Europe’s highest profile casualty of the credit crunch after striking a deal too many at Royal Bank of Scotland

RBS was on Monday forced to get 20 billion pounds ($34.5 billion) in emergency funds. Chief Executive Goodwin stepped down, and Chairman Tom McKillop will follow next year.

Goodwin, a steely Scot, was the longest serving boss of a UK bank after becoming chief executive in 2000, but paid the price for his ill-timed takeover of parts of ABN AMRO last year.

Well, it’s more like “after striking as many deals as he could.” After all, the new capitalist model is to burn the flares at both ends while taking as much as you can and leaving the bank to crash.

Goodwin told you so himself when he said he “had to go some time.” Going is what usually happens to a CEO after a second fund raising. It would be nice to think that being forced out was the price he paid for his ill-timed takeover of parts of ABN AMRO last year, but the reality is that he was paid the price for the ill-timed acquisition. We mentioned this before.

The buy out of ABN was a botch to begin with, it made no sense except to the ones directly involved with the fees, royalties and sundry of other payoffs and kick backs, all quite legal if not proper I assure you. Show me the directors and insiders who benefited from them and I’ll show you who’s protecting Goodwin. But Mr. Goodwin well knows that a CEO is just the right rank for a patsy, high enough to quench blood thirst of angry shareholders and draw the attention of investigators, while low enough to give up with out skipping a beat.

Goodwin’s dream was to take as much as he could. He did just that.

Goodwin, who became the U.K.’s most highly paid CEO after the 24 billion-pound acquisition of National Westminster Bank Plc in 2000, has waived his right to bonuses and compensation for early termination of his contract and won’t receive about 1.2 million pounds for forfeiting his 12-month notice period, spokesman Carolyn McAdam said. He will continue to draw his salary until Hester takes over, helping the bank sell assets, reduce jobs and lessen its dependence on capital markets funding.

He should have returned bonuses from the heyday of the bubble, which is when he really should have been fired. Instead, management slams the door on an empty barn and Goodwin et al. make off with billions:

RBS is in advanced talks with two buyers to sell its insurance business, Goodwin said on today’s call. He didn’t say how much the bank may get for the business. The company also is looking at selling parts of businesses, assets and buildings to bolster its capital, Goodwin said.

2008-08-10 – Loss:

The Royal Bank of Scotland gave its second quarter 2008 results Friday and did something it had never done before. After 40 years in business, RBS reported its first loss loss, a record $55.3B. The bank also took $11.3B in write-downs. We were unable to determine total Level 3 assets, but the bank’s SFAS 159 comes in at $1.6B.

It said Friday that the charges were partly offset by a gain of 812 million pounds from the changing value of its own debt.

Here’s the tally thus far:

  1. Write-Downs/Charge-Offs: $3.6B + 11.3B = $14.9B
  2. Cash Raised: $24B
  3. Level III Assets $0.0
  4. Loan Loss Reserves: $2.84B

We now sum all the distresses to get Royal Bank of Scotland’s current Misery Index of $41.73B.  <>

2008-06-15 – Victory:

Royal Bank of Scotland declared victory from the right issue it announced last week. The bank raised $24bn of new capital. the $24 billion is already accounted for in our tally.

2008-06-06- Geting More More More:

RBS announced a rights issue, this week. The capital is meant to shore up a balance sheet battered by the battle over ABN Amro acquisition, and after massive write-downs on credit investments.

2008-06-04 – Raided:

Is the Royal Bank of Scotland beyond the long reach of the royal law? We may have an answer from an announcement that Britain’s version of the SEC, the Office of Fair Trading (OFT), raided the bank 13 days ago:

Barclays Plc and Royal Bank of Scotland Group Plc were raided by the U.K. antitrust regulator as part of an investigation into the price of loans to accountants, lawyers and other professional services firms.

The two banks were visited 12 days ago, Corinne Gladstone, a spokeswoman from the Office of Fair Trading said in an interview today. London-based Barclays said it approached the OFT with information about “inappropriate” contacts with one department in exchange for leniency on March 17.

Maybe we can start a count of the number of years in prison sentences for bank officials. <>

2008-05-14 – Outrageous:

Royal Bank of Scotland’s proposed rights issue was formally approved yesterday for $24B. The bank reminds me of a snake eating its own tail — this band aid can’t begin to stop the gushing from wounds opened by the acquisition of Dutch bank ABN Amro and the US subprime mortgage market. It was a forced move which only further fattens its usurers and elites, but delays the inevitable fatal hemorrhage.

In addition to the $3.6B in write-downs, we now count $24B in raised capital.

2008-04-22 – Unrighteous:

Royal Bank of Scotland first denied, then delayed, and finally confessed to the outrageous rights issue announced today:

Although the bank said at its annual results last month that it did not plan any significant asset sales, analysts at Cazenove said in a note this week that they expected the bank’s managers to pursue a number of other small disposals.

Forcing investors in Royal Bank of Scotland to come to grips with the most dilutive issue in the bank’s history:

Britain’s second largest bank will record write-downs of $11.7 billion and raise $23.9 billion in new capital to cover exposure to toxic U.S. loans

2008-04-10:

Royal Bank of Scotland wants to make sure everyone knows that the acquisition of Dutch rival ABN Amro has nothing to do with laying off 200 staff members of it’s global banking and markets business this week.

A spokesman for RBS refused to comment on changes to its workforce but said: “Most global financial institutions are reviewing their business in light of the current market conditions and we’re no exception”

I don’t believe you, but I don’t blame you either. In a world where ”competition is sin” according to David Rockefeller how could you resist the take down of your primary rival at the cost of only two hundred staffers?

2008-03-20:

About a month after the Royal Bank of Scotland reported earnings, someone noticed something funny, staggering actually:

Royal Bank of Scotland’s portfolio of mortgage-backed securities more than doubled to about £68.3bn last year after it led the consortium that bought the Dutch bank ABN Amro.

2008-02-28:

The nail biting is over as the results and consensus are in. And, the initial conclusion from most analysts was that RBS’s figures were far from reassuring.

If Sir Fred Goodwin had hoped the publication of a full set of audited results would help ease the stock market’s concerns about Royal Bank of Scotland’s performance, he will have been disappointed.

RBS came in with a pretax profit for the year to Dec 31 2007 of £7.3B ($14.5B), up 9 pct compared with the previous year, exclusive of earnings of businesses acquired from Dutch rival ABN Amro. The bank also raised its total dividend for 2007 to 33.2 pence per share, an increase of 10 pct. But the results could not deflect attention from the bank’s larger-than-expected write-downs stemming from the U.S. subprime housing crisis. Those write-downs of £1.6B ($3.2B) are due largely to a £456M ($904M) write-down on its exposure to U.S. bond insurers after they were hit by a rating downgrade.

The banks remaining exposure is listed as £8.8B ($13.4B) in commercial mortgages, £2.5B ($3.8B) to bond insurers, and a leveraged loan portfolio of £8.8B ($13.4B). Regarding that portfolio:

Johnny Cameron, head of RBS’s Global Markets business, stressed that – in the case of the bank’s £8.8bn leveraged loan portfolio - the writedowns reflected mark-to-market valuations that did not reflect the quality of the underlying loans. “We and most banks are unwilling to sell at a price that is quite wrong based on fundamentals,” he said.

Well… just because your level three assets fall short of the hoped-for value doesn’t mean that value is closer to their true worth in the long run. Indeed, even leveraged loans are pretty questionable right about now. Also, we will certainly see other write-downs worthy of immediate mark-down but not counted today. We will generously count the estimated write-down of $1.9B made only 48 hours ago against the actual of $3.6B. So RBS missed the mark by $1.7B.

2008-02-24:

Royal Bank of Scotland is set to report full fear 2007 earnings on Thursday, February 28, after market close. The company is reportedly like a confident athlete who expects a great performance before a championship match. And since earnings season has come to this, we will likely see a grand performance from the bank and CEO Sir Fred Goodwin.

Goodwin and his boardroom colleagues are relaxed about RBS’s financial health … barring a stomach-churning deterioration in the credit markets…

For much of the troubled year, turmoil swirled around everything from a rights issue to speculation about the bank’s low capital ratios, damaged in the take-down of Dutch bank ABN Amro last year. Through it all, the bank remained mum until December:

Last December RBS took a GBP 950 million, or roughly $1.9 billion, write down on its mortgage holdings, which was less than the market was expecting, and said that it expected to produce an operating profit and earnings per share “well ahead of market consensus.”

RBS said that net of hedges and writedowns, it had GBP 1.1 billion (or roughly $2.2 billion) of high grade CDOs containing commercial loan collateral, prime and subprime mortgage collateral, as well as GBP 1.3 billion (or roughly $2.6 billion) of exposure to “mezzanine CDOs based predominantly on residential mortgage collateral.” RBS marked the high grade CDOs at 90% of face value, and the mezzanine CDOs at 70% of face value, citing “outputs from our proprietary model, market data, and prudent valuation adjustments.”

Only RBS knows exactly what securities it owns, and the market price can vary dramatically. But a source on a Wall Street trading desk (who is not commenting on RBS specifically), says that in general, the high-grade CDOs are worth between 35 cents on the dollar and 75 cents on the dollar, and the mezzanine CDOs are worth between 10 cents to 50 cents on the dollar. That would imply substantial addition writedowns for RBS.

It is from this potential write-down that the bank will use all of its championship skills to deflect investors’ attention. First it will announce a record profit above £10.3B ($20.3B), up from £9.4B ($18.5B) last year. Any revelations of further losses on bad credit lines will offset that with a whopping 5% increase annual payout.

RBS is expected to announce about £400m ($0.7B) of additional write-downs stemming from its exposures to investments affected by the US sub-prime lending crisis. But the profit rise will still represent an increase of some 10% year on year.

Will Royal Bank of Scotland prevail Thursday or be upset? The only sure thing is that no one will remember if all that 90% rated junk (exposure) turns out to be 35% or less.

So, we begin our tally with the $1.9B it announced in December and look for another $700M on Thursday.

  1. 3 Responses to “Royal Bank of Scotland”

  2. I know that the RBS scandal is long past and that Fred ‘the shred’ has cashed in and gone but the effects still linger. I live in Helsinki where banks are still considered as monuments to sobriety but my memories of how scary it was when RBS tottered still plays on my mind when I husband my dwindling resources at Sampo her in Helsinki. It could happen here too. It could happen anywhere.

    By David miller on Mar 29, 2011

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