Monday, January 5, 2015

At Least We Don’t Own the Bank: The Ongoing Woes of RBS

At Least We Don’t Own the Bank:  The Ongoing Woes of RBS

Last Friday as many of us were recovering from a marathon of college football, The Times of London reported that the U.S. Federal Housing Finance Administration (FHFA) is seeking a £5 billion settlement with Royal Bank of Scotland (RBS) over the bank’s sale of $32 billion in mortgage-backed debt.[1]  I was drawn to this article because it serves as a reminder that the credit crisis of 2007-2008 is far from resolved.  In order to save RBS, the British government took an 80% stake in the bank, which it still holds.  While the US Treasury sold the last of its investments last December when it disposed of its remaining shares of Allied Financial, the U.K. is far from wrapping up its rescue efforts.

Thus we find ourselves in the strange situation where U.S. regulators are pressing for a settlement that will further delay the ability of the British government to extricate itself from its ownership of RBS.  Since the bank has only reserved £1.9 billion, a large settlement will hit shareholders, including U.K. taxpayers, particularly hard.  The bank had previously settled charges concerning the illegal setting of LIBOR and foreign exchange rates.

The executives who purchased, packaged, and resold the mortgage-backed securities are long gone.  The management and board that ran RBS when these activities occurred retired or were ousted years ago.  As a result, we are in the peculiar position where, albeit indirectly, the US government is seeking compensation from the British government.

Over the years, I focused on the conduct of U.S. banks, regulators, and politicians.  In recent weeks I decided to read yet another account about the credit bubble.  Having exhausted American genre, I turned to Ian Fraser’s book Shredded: Inside RBS: The Bank that Broke Britain (June 2014).    Mr. Fraser chronicles the same sorts of hubris and bad behavior that characterized the management of U.S. financial institutions.  He also documents similarly lax regulation and accommodative politicians that helped to inflate the credit bubble in the United States. 

What’s most striking about Mr. Fraser’s account and germane to the recent news about FHFA-RBS settlement discussions is the U.K.’s solution to the RBS fiasco.  With 80% of the stock, the British government owns and controls the bank.  However, successive governments have been reluctant to exercise that power, and as a result they’ve largely left it to RBS’s management to restructure the bank, alter its culture, and attend to its misdeeds. 

While the Troubled Asset Relief Program (TARP) was a flawed response to the financial crisis in the U.S., at least it didn’t leave our government stuck in the middle.  In the US, we largely left it to the banks to reform their ways and change their cultures.  Of course, our banks haven’t done much of either.  From Mr. Fraser’s telling, little has changed in the U.K.  At least in the U.S. we don’t own a huge bank that we’re not prepared to fix.


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