Despite a £45 billion bailout of the bank, regulators will not punish ex-boss Sir Fred Goodwin.
On Monday, City regulator the Financial Services Authority (FSA) will at last release its long-awaiting report into the near-collapse in 2008 of Royal Bank of Scotland (LSE: RBS).
RBS = Reckless Bank Saved
The collapse of US investment bank Lehman Brothers in mid-September 2008 sent a financial shockwave rippling around the world. As a result, banks -- fearful of the next big bankruptcy -- simply stopped lending to each other.
With the worldwide inter-bank lending market frozen and savers rushing to withdraw their cash from banks, the entire UK banking system came under the most severe stress. In stepped Gordon Brown, pumping billions of pounds of taxpayers' cash into the banking system.
In total, the liquidity and solvency support provided by the government and the Bank of England came to an astonishing £1.5 trillion, including a £45 billion equity injection into RBS.
A Scottish time-bomb
At its peak, the RBS balance sheet was valued at around £2.5 trillion, making it the biggest bank in the world by assets. Clearly, this was a crazy concentration of risk. How did regulators allow a single Scottish bank to have liabilities two-thirds higher than the entire UK GDP (Gross Domestic Product, or total national output) of £1.5 trillion?
What's more, duped by bogus credit ratings, RBS had bought a mountain of AAA-rated assets which turned out to be nothing more than iffy US sub-prime mortgages which were defaulting at record rates. As a result of massive write-downs on toxic assets, the bank recorded the UK's largest-ever corporate loss: £24 billion in 2008.
Having repeatedly warned of reckless lending since the early Noughties, I was furious that taxpayers were forced to bail out banks engaging in such risky behaviour. So, where should we point the finger inside RBS?
Who's to blame?
Given that RBS abandoned all the rules of banking, and created a mountain of debt supported by a sliver of equity, who is to blame for this mad race for growth? Surely 20 takeovers in a single decade -- including the disastrous £49 billion acquisition of Dutch bank ABN Amro in October 2008 as the credit crunch raged -- was insanely risky?
According to the FSA's report into the rescue of RBS, due out on Monday, no single individual or group of managers at RBS is to blame. In other words, both ex-chief executive Sir Fred 'the Shred' Goodwin and ex-chairman Sir Tom McKillop have escaped blame.
What's more, after three years in the making, the FSA's report -- expected to run to between 450 and 500 pages -- will exonerate all RBS board directors and senior executives. Allegedly, the only individual to come in for direct criticism is Johnny Cameron, ex-head of investment banking.
In other words, the FSA found no evidence of fraud or dishonesty, only a string of bad decisions which culminated in the bank needing the biggest bailout in British history.
What the FSA has to say about the conduct of auditors, rating agencies and regulators (including itself) remains to be seen. Nevertheless, there was undoubtedly a massive failure to control the reckless expansion of our biggest banks in the Noughties.
Future sanctions required
Sadly, as many investors have found, incompetent and/or negligent directors are impossible to pursue through the courts. No matter how bone-headed or hare-brained their behaviour and decisions, they can escape disciplinary action if they claim to have acted 'in good faith'.
Clearly, tighter rules are required to prevent similar meltdowns in future. Indeed, it's likely that the FSA will call for new sanctions against directors of failed banks. In future, those found guilty of reckless or unprofessional behaviour could be banned from working at other financial institutions.
Also, the FSA wants new powers to veto takeovers that leave banks short of capital -- their precious lifeblood. After its successful takeover of ABN Amro, RBS had next to no capital, leaving it with no cash cushion as markets dived steeply. Hence, the FSA is sure to call for a greater focus on risk management by banks, rather than a slavish push for shareholder value.
In summary, RBS failed not because of fraud or deceit, but because of its aggressive management style, poor corporate governance and reckless, risk-taking culture. That will be no consolation to the 30 million of us that rescued it!
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