CNBC’s UK Exchange newsletter: A lament for the losses on Royal Bank of Scotland

This report is from this week’s CNBC’s UK Exchange newsletter. Each Wednesday, Ian King brings you expert insights on the most important business stories from the U.K. and the key personalities shaping the news. The newsletter will also highlight other key developments in the U.K. that you won’t want to miss, plus a preview of essential events that are set to make waves. Like what you see? You can subscribe here.

In my more than 30 years in financial journalism, few memories are stronger than those of Tuesday, April 22, 2008, the day Royal Bank of Scotland — then one of the world’s biggest banks — announced it was tapping shareholders for £12 billion ($16 billion).

The sum was, at the time, a record for a rights issue by a European company and followed the U.K. bank’s calamitous acquisition, the previous autumn, of the Dutch lender ABN AMRO.

That deal was supposed to have been the crowning glory of Fred Goodwin, the RBS chief executive, a former accountant who, for the previous eight years, had established himself as the sector’s biggest name following RBS’ takeover of National Westminster Bank (NatWest) in early 2000.

As deputy to CEO George Mathewson, Goodwin had earned the nickname “Fred The Shred” for his cost-cutting prowess. He was no shrinking violet; nor was Mathewson himself, who won notoriety in 2001 when he shrugged off shareholder criticism of that year’s executive bonuses by saying “they would not win bragging power in a Soho wine bar.”

That confidence ran right through RBS. In March 2001, barely a year after the NatWest acquisition completed, Goodwin — in a typically laconic remark — told me he was contemplating “mercy killings” of other U.K. banks.

Those killings never came to pass but, in the subsequent six years, RBS quadrupled in size as it made a string of acquisitions including of U.K. insurers Churchill and Direct Line, the U.S. lender Charter One (for a then eye-watering $10.5 billion), a 10% stake in Bank of China and, somewhat improbably, the car dealership Dixon Motors in April 2002. That year saw him crowned Businessman of the Year by Forbes magazine.

By the time he launched the bid for ABN AMRO in April 2007, trumping a deal the latter had previously agreed with Barclays, Goodwin was top dog in U.K. banking.

All of which made that rights issue in April 2008 so dramatic. A press conference was hastily convened for midday at RBS’s old London headquarters. (The global head office, opened in 2005, was a gigantic campus at Gogarburn, on the outskirts of Edinburgh, built at a cost of £350 million on a site formerly occupied by a psychiatric hospital and nicknamed “Fred’s Folly” by locals).

I took my place in the presentation center on the ground floor of the building alongside Peter Thal Larsen, then banking editor of the Financial Times, as Tom McKillop, the career pharmacist who had succeeded Mathewson as RBS chairman in 2006, thanked us for coming and invited Goodwin to make his presentation.

Gone was the super-confident figure to whom we had become accustomed.

“He looks like a condemned man mounting the scaffold,” I whispered to Peter.

During the press conference, McKillop had to fend off questions about whether Goodwin would be dismissed, pushing back at suggestions that the board were “patsies” who had not sufficiently challenged their CEO.

“There is no single individual responsible for these events, and to look for a sacrificial lamb just misses the whole point,” McKillop said.

I wrote in my diary that night: “McKillop came close to losing it a couple of times, particularly when grilled on the board composition. Fred Goodwin looked chastened but composed.”

This wasn’t an investment — it was a rescue

Memories of that day came flooding back when, at the end of last week, the U.K. government finally sold its remaining shareholding in NatWest (as RBS was rechristened in July 2020).

By the time RBS got its money in 2008, its share price had fallen by a quarter, wiping more from its stock market value than it raised in the rights issue.

On Oct. 7, 2008, with corporate customers rushing to withdraw their money, McKillop was forced to ask Alistair Darling, the then Chancellor, for a bailout that eventually cost Goodwin his job.

As has been well documented, Gordon Brown’s government took control of the bank, pumping in £45.5 billion in 2008 and 2009 to acquire a stake that peaked at nearly 85%. Over the years, the government has recouped some £35 billion via fees, dividends and share sales, crystallizing a loss on disposal of nearly £10.5 billion.

That figure has, naturally, featured heavily in U.K. media coverage.

However, much of the commentary has overlooked that the government concluded more than a decade ago that a loss would be made on the shareholding, as well as the fact that this was never supposed to be an investment generating a positive return for taxpayers — it was a rescue.

One commentator even suggested RBS/NatWest should have been allowed to fail, arguing that “we could have surely done something more productive with all the money that was tied up in NatWest for the last 17 years,” rather overlooking the catastrophic impact the bank’s failure would have had. At the time of the rescue, RBS’s balance sheet was bigger than the entire U.K. economy. 

That the U.K. taxpayer lost £10.5 billion over a 17-year period is, of course, depressing. But it is compounded by the fact that, during the period, RBS/NatWest was obliged to offload a number of valuable assets, including Direct Line and its U.S. banking business Citizens, as conditions of its bail-out (the U.K. was, at the time, subject to the European Commission’s state aid rules).

Much money was also wasted trying to carve out a separate retail bank which was to have been demerged in the name of enhancing competition, again at the behest of Europe, under the exhumed Williams & Glyn brand.

Saddest of all was the forced sale of WorldPay, a payments processing business, to U.S. private equity firms Bain Capital and Advent International for just $3 billion in August 2010. The business was later floated on the London Stock Exchange, later still taken private and then sold in March 2019 to the U.S. fintech firm FIS for $43 billion — a considerably bigger loss of value than anything endured by the U.K. government on its RBS/NatWest shares.

It is hard to avoid the conclusion that had the U.K. not been bound by the European Commission’s state aid rules, as is the case today, the destruction of value would have been far lower.

A couple of things are probably more important, longer term, than any loss incurred by taxpayers.

The first is that the lessons from the RBS collapse have been properly learned. Many people now working in senior positions in U.K. financial services were still at school or college at the time of the bailout, but institutional memory of the event remains exceptionally strong, not least among U.K. regulators.

The main reason RBS failed, exacerbated by the hubristic ABN AMRO acquisition and the procyclical U.K. financial regulations at the time, was because it was over-leveraged. Post-financial-crisis regulation has aimed at reducing procyclicality and banks have been obliged to increase their capital buffers.

The second is that under Goodwin’s successors — Stephen Hester, Ross McEwan, Alison Rose and Paul Thwaite — RBS/NatWest has been reshaped into a financially robust and highly profitable lender well-placed to contribute to U.K. growth in coming years thanks, in particular, to its strong position in business banking.

Much of the profit it throws off in the coming years is likely to be handed back to shareholders in the form of dividends and share buy-backs.

On that basis, while some will celebrate the fact that a line has been drawn by the government removing itself from NatWest’s shareholder register, others will question why, exactly, it could not have held onto its shareholding for a little longer.

It would be interesting to hear what readers think.

— Ian King