When the government poured billions into rescuing Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) from its own mismanagement, people were inflamed.
Why on earth should money from honest taxpayers be used to prop up the greedy fat cats of banking when they had it coming?
It’s a good question, but was it really as simple as throwing good money after bad?
Crunch!
When crunch time came in October 2008 and it was apparent that we were in the midst of a full-blown banking crisis, RBS announced that it was heading for a massive loss for the year — trading losses were large, but would be overshadowed by write-downs due to the bank’s inept record of overpriced and overstretched takeovers.
(Ex-Sir) Fred Goodwin, who had overseen the debacle, handed in his resignation — and it was enthusiastically accepted.
In the end, RBS recorded the UK’s biggest ever corporate loss, of an eye-watering £24.1bn.
The result, as we know, is that the government stepped in, originally intending to take a stake of around 58%. With subsequent further intervention and the conversion of some investments to ordinary shares, taxpayers today own 81% of Royal Bank of Scotland.
How much did it cost?
According to the latest National Audit Office figures, the cost of RBS shares has totaled £46bn — there’s a further £8bn promised as a contingency plan should RBS’s Core Tier 1 capital ratio fall below 5%, but that’s not looking likely now.
What do we have to show for it?
As of close of play on 13 March, the total market capitalisation of Royal Bank of Scotland stood at £18.7bn, putting the value of our 81% share of it at £15.1bn. That’s a loss of almost exactly two-thirds, or 67% — it’s no wonder private capital was not forthcoming to rescue the failing and flailing bank.
Will we ever get it back?
Despite the disaster in the relatively short term, I think the eventual outcome will be comfortable.
RBS is some way behind fellow struggler Lloyds Banking Group when it comes to recovery — while Lloyds managed its first pre-tax profit since the crisis in 2013, RBS still made a loss to the tune of £8.2bn.
Jam soon
But there’s a profit forecast for 2014, and I expect we’ll see a better share price performance over the next two or three years. With Lloyds, our investment is already around the breakeven point, and with a few more years behind us it should become clear that bailing out the two of them made better financial sense than letting them go bust.
