Congratulations Sir Fred. Even in the ignominy of defeat you’re still hitting them for six. A record loss of GBP28 billion sets the new standard for others to rise to the challenge to beat. But wait, there’s more. The GBP28 is only for FYE 2008. Wait, as 2009 unfolds there will be more, much more.
That’s the funny thing about banks’, it’s called leverage. For every loan extended, capital adequacy requirements demand you set aside some small portion of capital to fund it and then a great swag of debt to make up the balance. So when you extend billions in credit facilities to individual customers or groups you in aggregate are lending money which is not (capital) yours to lend; it’s borrowed. So the banking industry by it’s nature is highly leveraged in stark contrast say to a utility which is traditionally hardly leveraged at all. A lot of what RBS has provided for as non-performing loans in 2008 is probably just the tip of the iceberg and as the economy continues it’s decent into recession and beyond (yes, I am forecasting a severe downturn and even a depression by some clinical definition or other…), more and more of the RBS portfolio of “assets” will turn bad and MUST be recognized (IAS 39) for what they are; bad loans.
So RBS is now about 68% owned by the UK Treasury, after the conversion of the pref shares to ordinary stock, what was the point of the 14% interest anyway? RBS can’t afford to pay that! RBS shares are trading today (19.01.2009) at 11p! I expect that during the course of the first half of 09, that there will be “no alternative” but to nationalize RBS to save it from it’s previous management indiscretions.
RBS in and of itself might have survived had Sir Fred not gone mad and overpaid for ABN AMRO at the peak of the market. There were many signs, but none of them read. The market cap of ABN AMRO was about USD40 billion at it’s peak and some said it was too much while others said it was too little. Paying USD 100 billion and thereby RBS breaking another record for the “largest” acqusition is another major Goodwin milestone. AND, not just overpaying for this “asset” but paying CASH to boot! Most pundits would have argued for a share purchase or some blend of (mostly) shares and maybe (if necessary) some cash. After all, what are the former shareholders going to do with their cash but re-invest it and maybe even in RBS!
Amongst all the equine ordure evident in the hostile takeover of ABN AMRO is the serendipitous event of LaSalle, being the main banking asset of ABN AMRO North America. Sir Fred desperately wanted this domestic US banking unit to integrate with RBS’ existing US business units yielding more scale and the opportunity to ’shred’ the costs further, enhancing the efficiency ratio. Blessed, as a final act of defiance, ABN AMRO sold this to Bank of America for USD 20 billion cash. The outcome of this is that the mountain of non-performing loans in LaSalle are now resident firmly with Bank of America rather than further enhancing the decline of RBS (even further?) from grace. In effect, the RBS balance sheet was augmented with USD 20 billion in cash rather than another (probable) USD 200 billion of non-performing USD loans.
ABN AMRO had been applying “window dressing” to it’s results already for some years and Groenink was anxious to sell it or merge it to mask the rot setting in from the inside. You can hide a lot in a merger as was done when ABN acquired AMRO Bank in 1991. The rot at the time was in AMRO Bank and the merger process effectively concealed and massaged the merged mass for some years as the two were integrated. Groenink came from the AMRO side of the bank so maybe that tells you something. The “willing partner” this time was engineered to be Barclays with whom Groenink was hatching a plot to “do it again”. RBS in it’s infinite wisdom wanted it all and wanted it NOW. Alas, the only one who came out on top here was Emilio Botin of Santander who took Brazil (and integrated it with Santander’s existing Brazil business units) and Antonveneta which Santander promptly sold for an immediate profit. The combined result of the RBS acquisition (along with it’s partners; Santander and Fortis) was to bring down Fortis and bring down itself. The mess for Fortis and RBS is not over and continues to bubble away in the steamy caldron as more and more rot is evidenced as the economies of Europe continue on their downward spiral of recession and depression. Oh what a tangled web we weave….
RBS is in good company but no one else quite so elegantly coming apart at the seams. Lloyds will too in time be nationalized as there is plenty of rot in there too, mostly from HBOS but a goodly portion of it’s own brew too. Barclays have also failed to fully recognize the extent of it’s “mark-to-market losses”. Desperate to protect their outrageous salaries and bonuses Varley and Diamond are determined to try to keep Barclays out of the hands of the UK Treasury and have “sold the farm” (well 31% of it…) to Arab investors at a very high cost indeed to remain independent. I doubt this will succeed because the Arab investors won’t continue to put good money after bad and as MORE and more capital is needed in Barclays to comply with (silly old) Basel and Basel II, then Barclays will have little choice but to go, cap in hand to Darling to beg for capital. Varley and Diamond will be tossed on the scrap heap; mountain of failed bankers as some sanity must prevail in the long run.
HSBC too is not exempt from contempt. While the funding of the bank has been for the most part, it’s main strength, it too has made some fundamental errors of judgment some of which they remain in denial. Mostly the failure to recognize the extent of the domestic USA businesses and the (hope) and expectation that they can “ride out the storm” and come out unscathed. THIS is very ambitious indeed as there is a cancer growing in HSBC and it’s root is in the USA and specifically in Household Finance Corporation. Broadly, HFC, Marine Midland and Republic are all having their problems but collectively, I doubt even the might of HSBC worldwide can conceal the extent of the growing cancer and being in denial, they seem to refuse to take remedial action that many of their institutional shareholders are demanding. Maybe the rest of HSBC can absorb the rot in the USA operations but it would be much better to “cut it out” and start fresh but that move would require capital too and WHERE these days, in this market is there fresh capital? THEY do not want to go cap in hand to the UK Treasury begging for money. They are after all, HSBC. This stubbornness evident in the management may well bring them undone in the long run. It depends on how deep and how long the recession runs and whether HSBC has the strength to indeed, ‘ride it out’. We remain very skeptical that they can do this because we expect the recession to be a depression and as it spreads worldwide, one is better to be prepared for it rather than it be a “surprise”.
The funny thing about the banking business is that what you do today is not felt fully for some years ahead due to the characteristic lead-lag time in recognizing profits and losses. What you are reaping today, was sown for the most part many years ago. When you extend credit, the error was made extending it, not years later when it fully and finally “goes bad”. However, the banking industry reports quarterly in a business that typically has much longer cycles for profit and losses so that it is almost meaningless to report too frequently. But then would the shareholders be happy with less frequent reporting? Forward looking statements are dangerous things but still you are obligated to make them and disclaimers too. Maybe executive remuneration should reflect the profit cycle rather than the reporting cycle, meaning that any bonuses to executive management should be “pooled” and only 10% of the pool paid out in any one year. This means executive management must think LONG term, none of this quarterly management of profits nonsense so prevalent today. But then such a “pooled” bonus scheme would make management more accountable and we wouldn’t want that now would we?
So, again we extend our hearty congratulations to Sir Fred. Your shining star now truly tarnished. Reputation totally gone but valiant to the end, you have fallen on your sword and banking being what it is, there is much more to come. Watch this space.
Posted by vulpine 
Posted by vulpine 
Posted by vulpine 