Voices from the Occupation - RBS: How to Rob a Bank
Voices from the Occupation
RBS: How to Rob a Bank
On 7th
October 2008, The Royal Bank of Scotland, at the time the world’s
largest bank measured in assets, failed. The UK government made the
choice to inject £45 billion of public money into the Bank and
effectively nationalise it to avoid what was predicted to be global
financial armageddon. This week, the Financial Services Authority
(havin been pressured by the Treasury Select Committee) issued a report
condemning bad practise at RBS, and poor oversight by itself, for this
enormous failure and tax payer loss. However, no further action will be
taken against any of those responsible. This article tells the RBS
story and shines light on the hypocrisy and double standards
demonstrated in this case.
The Glory Days
The
RBS story is achingly familiar to anyone with any knowledge with the
Iceland story. Relatively small, parochial safe bank in Scotland
decides to become a bigger player by taking more risk - and it all goes
badly wrong. Dating back to the 18th Century, the bank started with £111,347
and focussed on printing bank notes. Over time it developed a personal
and corporate banking business, and grew south of the border through
the 19th century. During the 20th century post war period,
Royal Bank of Scotland began to grow in earnest, purchasing railways,
insurance companies (latterly to become Direct Line) and moving into
North America and Europe through mergers and acquisitions. In the
beginning of the 21st century, having successfully avoided
various takeover attempts by Standard Chartered and HSBC in the late
90’s, RBS continued its business of becoming the biggest boy in the
playground – by buying NatWest Bank, an enormous player in the UK market, vulnerable after a failed attempt at global dominance.
AGM after AGM passed by through the noughties with incredible and gleeful reports of the successful ‘organic growth’
of RBS. However, organic growth is supposed to refer to growth by
extending customer base, sales and capital. This was not the RBS
model. RBS grew in two inorganic ways; 1) by a series of acquisitions
through the 90’s and noughties and 2) by the astonishing growth of its
Global Markets (investment) division, under the chairmanship of Johnny
Cameron.
In February 2005,
RBS posted pre tax profits of £6.9bn, a rise of 14% after buying US
bank Charter One and US credit card company the People’s Bank. In 2006,
they were up £9.2bn, or 16%. In both years, Johnny Cameron’s high risk
investment arm, busily brokering the Collateral Debt Obligations and
Credit Default Swap derivatives, rose 18% and 20% respectively. In
plain English, the RBS balance sheet was falsely inflated to a serious
degree, by the carving up and repackaging of subprime lending – then
rated as AAA, the highest possible credit rating by the crony credit
ratings agencies such as Standard and Poor’s, Moody’s and Fitch.
RBS
(as other banks and insurers later to fail such as HBOS, Lehman
Brothers, Bear Stearns and AIG) were making enormous paper based profits
on the backs of fraudulent lending practices – and turning this debt
into real personal profit by paying themselves sky high wages, bonuses
and dividends. In short, raping their companies for personal gain.
The Slippery Slope – A Crash Course in Denial
Time
was called on these fraudulent practices in 2007 when the US subprime
mortgage holders began to be unable to repay their mortgages, kicking
off a chain reaction of default across the global financial system.
Despite
the turmoil in the markets, RBS decided to pursue a hostile takeover of
Dutch bank ABN AMRO. The bank was colossal, badly managed and worth
practically nothing due to its enormous quantum of toxic assets, its
books were full of the devious derivative instruments which had sunk so
spectacularly on the back of the US mortgage crisis.
In
light of the bank failures, the spreading contagion, the blanket media
coverage and the FSA predictions of worse to come, one might think that
ahead of a £49bn acquisition, Fred Goodwin and the rest of the RBS board
would be exercising due diligence to the highest degree. Surely they
would want a clear understanding of the ABN AMRO books, in order to know
exactly what they were buying.
No.
In fact, when questioned, Fred Goodwin repeatedly referred to the
absence of need to undertake normal levels of due diligence. In fact,
he stated that a mere “due diligence light”
was all that was required. In short, the board had no idea that they
were paying £49bn for worthless assets. But they should have.
In late 2007,
just months before they turned to their shareholders for a bailout
prior to the British taxpayer, RBS posted a £10bn pre tax profit and
throughout the AGM crowed of their ability to weather out the storm.
Asked directly, Chief Executive Fred Goodwin stated that RBS were not
involved in the specialist investment instruments responsible for the US
crisis. Asked about the ABN AMRO deal, he stated that RBS would see
"better financial returns than we expected".
In
reality, RBS was months away from failure. It was enormously exposed
to the collapsing network of toxic debts, it had massively increased
this exposure through the ABN AMRO purchase and due to its disastrous
decision to buy ABN AMRO in cash, its cash reserves were too depleted to
cover its commitments as borrowing dried up.
By June 2008,
despite making almost £6bn of write offs (losses as those bad debts
went toxic) and required to raise a life saving £12bn from the largest
rights issue in banking history, RBS remained upbeat in the next AGM,
predicting ‘satisfactory’ profits. However, by autumn, even Fred
Goodwin couldn’t pretend any longer, and the Bank finally hit the skids
with its funding crisis. Several bailouts commenced totalling £45bn of
tax payer money going to shore up RBS.
FSA Report Findings and the Great Getaway
The
FSA report reveals not only the actions above, but the fact that
throughout the UK Financial Services Authority itself failed in its task
of due diligence and oversight. RBS were not prevented from
undertaking any of the so called irresponsible activity which resulted
in this spectacular collapse, with the British public footing the bill.
Meanwhile,
Fred Goodwin retired on a £300k plus per annum pension. No one from
RBS was sacked, and none of the bonuses received throughout this
colossal fraud have been returned to the public purse to support the
cleanup operation.
Although
the FSA itself is to be scrapped, none of the board of oversight
committees responsible for this failure will be held to account in any
other way.
In short, the report says that no enforcement action will be taken, apparently as technically no laws have been broken.
The
next steps, according to the report will be greater oversight prudence
as the role returns to the Bank of England. This is particularly
interesting given that many members of the board of the FSA are in fact
either previous of current members of the Bank of England anyway. In
fact, the two chief drafters of the report – Director of Internal Audit Rosemary Hilary, and Head of Retail Enforcement William Amos are two such people.
So,
the person responsible for the failure in audit, and the decision NOT
to take enforcement action are free to make the same decisions again in
future.
One Rule for Them, Quite Another for Us
This
report simply supports the case that there is in fact a two tier legal
system operating not only in the UK but around the world. For the
public, when you commit a crime, you get arrested, you go to court, and
you go to jail. In the financial services industry, the media, or
politics – you get paid off, you attend an inquiry, you get at worst a
slap on the wrist, a fine and you are free to go.
When the Blair government took us to war in Iraq, resulting in the deaths of over a million Iraqis people, on a false premise - The Chilcot Inquiry. When the scientist responsible for bringing the fraud to our attention, Dr David Kelly, dies in mysterious circumstances – The Hutton Inquiry.
When a media monolith, namely Murdoch’s News Corp Empire engage in mass
invasion of privacy with the support of the London Metropolitan Police –
The Leveson Inquiry.
One after the other, a sea of inquiries, costing further millions of
public money and resulting in not a single prosecution. It is enough,
we are told, that ‘mistakes were made’, and ‘lessons learned’.
Every
time, we are supposed to accept that no personal accountability is
required. We are told to accept that these people - whose quest for
personal super wealthends in heinous outcomes at our expense - are
untouchable.
Ironically,
Lord Adair Turner, Chairman of the Financial Services Authority, in his
book ‘Just Capital – A New Liberal Economy’, sets out a new idea for a
liberal economy. He states in the final chapter, that the ideal would
be ‘redistributive market liberalism’. However, in his role with the
FSA, including responsibility for this report, the redistribution goes
one way, and that is from the public, to the private. From the pockets
of the tax payer, to the offshore tax havens of the investment bankers,
CEOs and traders.
This
does nothing to encourage any kind of change in behaviour. In fact it
is incentivising the same fraudulent, kleptocratic corporate activity.
Meanwhile, the majority of the planet suffer the consequences and feel
powerless in the face of it.
To
all those in jail for murder, you just didn’t kill enough people. To
those in jail for fraud, you just didn’t steal enough money. To those
in jail for tax evasion, you just didn’t owe enough tax. If you had,
you would have been called to an Inquiry and freed to carry on as usual.
Meanwhile,
those of us footing the bill are becoming increasingly contained and
squeezed. The government is certainly making us pay for the crisis.
Firstly,
in continuing the wealth redistribution: public sector job losses and
pension stripping, together with welfare cuts to the most vulnerable in
our society and the privatisation by stealth of our public services
through Private Finance Initiatives.
Secondly,
by ever increasing legal and policing changes to make peaceful protest
of these changes illegal and impossible. The insidious Civil Contingencies Act
makes it possible for the British PM to declare martial law without
recourse to parliament. Whlie on the streets, police are using greater
militaristic approaches to policing protests. There has been a notable
rise in kettling (trapping protesters within a human wall of police),
the use and extension of police officers trained to use rubber bullets,
the purchase of water cannon, and most outlandish – the UK police are to
test a laser which temporarily blinds protesters, in the aim to use it next summer in the case of a repeat of the this year’s riots.
Enough
is enough, it is time for us to stand together and announce this
corrupt system redundant. It is no way to live, it is no way to treat
people; it is morally, intellectually and actually bankrupt.
The good news is, you are not alone. We have it in our gift to create a
world that works for everyone. So, as the Scriptonite header reads –
don’t get angry, get involved. Your outrage is not enough; your
intellectual energy is required. Help your schools, your hospitals,
your universities, your courts, your families and yourselves by taking
part in the global conversation for ‘what’s next?’ Occupy Everywhere.