Royal write-downs
The figures are truly mind-boggling, as the lets rip the latest volley of bad news from its balance sheet. It's known as kitchen-sinking, in that you throw everything out there at once.
Top line is the estimated loss this year of between £7 and £8bn, and a huge amount more to come, once it figures out the loss of what accountants call "goodwill", much of that on its purchase of Dutch giant ABN-Amro. That could be another £20bn, making this the largest loss in British corporate history, and by a very wide margin. The annual report, in five weeks, should give us the audited figures.
The pace of the accelerating problems is particularly alarming. While retail and commercial banking is holding up relatively well, the Global Banking and Markets division is facing £3bn worse losses for the final quarter of last year alone, when compared with the assumptions made three months ago.
The value of its global operations' risk-weighted asset base is down £200bn in the last quarter of last year, as it reported an acceleration of its problems from November into December, though sterling's weakness proved to help the situation by clawing back £70bn of that paper loss.
The good news for the Royal Bank is not so good for the taxpayer. The agreement by the UK Government to transfer its £5bn in preference shares (purchased as part of the October bail-out) to ordinary shares removes a £600m per year bill that the Royal Bank had to pay the government. At 12% per year, that charge was seen as damagingly punitive, holding back the bank's ability to get back to "normal" lending.
Part of the new price the bank pays is further dilution of the private shareholding, with the government stepping up its share from 58% to 70%. Full nationalisation may not be far away at this rate, and today's decision to take the shackles off fully nationalised Northern Rock is a sign the government is getting more relaxed about how to handle that prospect.
The need to get rid of the preference share stake had meant that new chief executive Stephen Hester was under pressure to sell anything to raise the £5bn for a buy-back. His sale last week of the Bank of China stake, for £1.6bn, was just one part of a programme of raising the funds, with the sale of the insurance division, including Direct Line and Churchill, still hanging in the balance.
We'll now have to see if Lloyds Banking Group, under which the Bank of Scotland finds itself from this morning, will seek the same deal to get out from under its similar preference share arrangement.
Other parts of the RBS deal struck with the Treasury include a £6bn extension of its lending commitment to larger corporations, while continuing its commitment to make lending available to smaller enterprises. With political pressure over the lack of clear movement on credit lines to business, the Government needs to see that feeding through quickly.
Its main means of doing that is the announcement this morning of the second vast tranche of banking bailout, this time without a clear figure attached, as the insurance of toxic assets looks like a bottomless pit, at least until the banks can be clear what their exposure is. Gordon Brown wants them to "come clean", but it's not clear they know how bad it is yet.
The banks taking part in the insurance scheme are not expected to pay in cash, but in handing over securities in their more reliable investments. That means the British Government holding a bigger tranche of mortgage debt.
And with recent talk of "quantitative easing" to try to avoid the threat of deflation - ie expanding the money supply, without actually printing more notes - it's worth noting that the Treasury announcement this morning gives the Bank of England's monetary policy committee the power to do just that.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at ³ÉÈË¿ìÊÖ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 19th Jan 2009, NConway wrote:Isnt it time to finally accept that the UK and the pound is to small to cope with this crisis, surely being part of the Euro would provide a better safety net ?
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Comment number 2.
At 19th Jan 2009, corporationtax wrote:Quantitative easing, don't you just love the term? Nothing more than spin, if it was Zimbawe, then of course we'd call it printing money. It is now inevitable that the printing presses will be cranking away within weeks - problem is that once you sart printing, it's effectively impossible to stop. Only the IMF can pull the plug on printing and once they're finished in Ukraine, Iceland, Ireland etc, then I'm sure team GB will get a visit from them.
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Comment number 3.
At 19th Jan 2009, kaybraes wrote:Throwing cash at the banks in an effort to get them to support failing companies with loans at non profitable rates seems like pie in the sky. If these businesses cannot sell product profitably now, there is little chance of them doing so when the situation worsens, as it will. Remember the customers these companies must sell to are also suffering from the same cashflow problems, and unless someone is baling them out, they cannot buy, or will not be in a position to service their debts either. It looks more like a cynical attempt by the government to appear to be " doing something " rather than doing something effective, in the half hearted hope of conning the electorate into giving them another term in office. I suspect Brown and his cohorts believe they are now engaged in damage limitation campaigns on the party's behalf, rather than on behalf of the country or the economy, knowing full well that they are on the way out, and someone else will have to repair the damage. Brown's call to the banks to come clean on debt levels, rings hollow from someone who cannot or will not tell the people of Britain exactly how much debt has now been accrued in their name.
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Comment number 4.
At 19th Jan 2009, roanheads wrote:the price of failure
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Comment number 5.
At 19th Jan 2009, Wee-Scamp wrote:RBS is a member of the arc of incompetence which includes the Treasury, No 10 Downing Strasse and the City of London.
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Comment number 6.
At 20th Jan 2009, Straeh wrote:Can Fred The Shreds Knighthood be revoked, because "sorry' doesn't cut it.
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Comment number 7.
At 20th Jan 2009, pattymkirkwood wrote:Douglas: When will Gordon Brown "come clean" and admit he has manoeuvered the UK into the worst place economically of ALL the developed countries in the world?
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Comment number 8.
At 20th Jan 2009, redrobb wrote:All those Knighthoods / House Of Lords Honours, MBE's and whatever else may have been dished out for the past decade to the Finance Captains of Industry should be immediatly recalled (not forgetting over inflated bonus / salaries). See what happens when you let BIG Business run their own house, but do you know what? they all know their as safe as houses with money in the bank, offshore I mean!
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Comment number 9.
At 20th Jan 2009, HunkieDunkie wrote:Douglas
Do you think for one minute that the Annual Accounts will be any more reliable than those of the recent past?
Seriously, the answer must be 'no'.
What we have here is akin to NuLabur spin. Half-truths, smoke and mirrors...
Half truth: well the 'spin' went along the lines that this was a US 'sub-prime' WMD. Well, ok there were 'issues' there, but what you really have at the heart of the matter as far as RBSG is concerned was a 'securitisation' bonanza... Build the mortgage book, parcel the debt, sell it on, and use the Capital to again 'build the mortgage book, parcel the debt, sell it on, use the Capital.... and so it developed at an ever more frenzied pace... over a 20 year period...
All the day to day accounting rested with the Bank.
It was clear (surely it must have been....) that the original mortgages were being repaid... through sale of property, remortgage activity, etc... over 3-5 - 7 years virtually every mortgage was repaid, but the 'Securitised Debt Paper' was never cancelled... The Capital sum was never redeemed, but rather the sum merely serviced...
Hence, when as had to happen, repayment/ refunding/ rescheduling was declined, there was no prospect of honouring the paper...
Now, as to the extent of this 'Securitised' paper doing the rounds and not yet realised... for if it were there would andd now could be no 'winners'... say, UK lending £2Trillion - say... RBSG as 5th biggest Bank in the World £500Bn, say two thirds of Securitised debt is 'worthless' - then halve it and round it - £200Bn still to disclose...
UK is 'bust'... Gordo shouts at RBSG... The Pound is worthless... We cannot repay Sovereign Funded Debt...
80% of RBSG assets (lending) is non UK based? Agreed/ accepted?
Any defaulcation outside the UK results in a reduction of x 10 in available Credit for UK based business - so £1Bn bad debt means a reduction of £10Bn Credit to UK PLC...
Unless I have read the statement incorrectly £7-8Bn loss not 'floated' does not include exposures by ABN... The worst is yet to come... By far...
Accounts can tell anything (refer to RBSG statements when raising £12Bn Rights Issue) - these, I believe, any reasonable man would now find derisory with the benefit of hindsight... Too late, the shares are as worthless today as those of First National back in the 70's Lifeboat Operation... It took 30 years before their shares were worth any more than 10p...
The Great Gordo has His hands all over this fiasco...
For 10 years He stood at the despatch box and mesmerised the masses with his blizzard of relentless statistics and ultimately bleak sophistry... We stood back and lapped it up...
The First Bank bail-out was not thought through... simply look at how the Markets re-acted to His every move... Taxpayers have only once before been 'had' to this extent - the sale of our Gold Reserves
The son of the manse now operates his 'puppets' in RBSG... His sweaty palmprints are all over this debacle... there is little (or should that be no) liklihood that meaningful Accounts will be submitted by the Board this time round...
NuLabur - hope you enjoyed the ride!
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Comment number 10.
At 2nd Feb 2009, dennisjunior1 wrote:Douglas:
Those remarks fully true about a Royal writedown and about throwing everything into the numbers...
~Dennis Junior~
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