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.