The Royal Bank of Scotland (RBS) has legal battles all over it like a bad rash. It had to go to the government hospital for sick banks and now it's caught MRSA (Massive Regulatory & Statutory Arraignments). There are six class action on behalf of US shareholders and a handful of fund managements and institutional investors also suing the bank including in the UK. Municipals with statutory obligations have surely no choice but to sue, especially given the latest information. All suits are based on isuuing knowingly misleading statements and witholding information from shareholders and the markets. Now, following the scoop in yesterday's Daily Telegraph these cases are looking a lot sharper and the L-word is not permissable, 'they told lies'. If ex-CEO Fred Goodwin gets to keep the £2.5m of the signed for £16m pension pot he has drawn already, then there can be little doubt it will all 9and more) go to defence legal teams. Likewise, Larry Fish possibly and his $24m pension pot, ex-CEO of Citizens Bank (US 6th or 8th biggest bank), a fully-owned RBS subsidiary. Statutory prosecution of bank execs in the UK would be a step forward. Ireland has already changed the law to allow the police to investigate Anglo-Irish Bank. But for RBS the main prosecutions may be in the USA, where we can surmise that Sir Fred is unlikely to travel to willingly. In the USA, already 2-300 bankers have been arrested and charged by the FBI. The main charge is saying one thing in private and the opposite in public, equivalent and comparable to 'insider trading'. The Telegraph article puts all this is into sharpest focus, headline, RBS traders hid toxic debt. Billions of pounds of “toxic” sub-prime mortgages were bought by Royal Bank of Scotland traders in a spree that was not disclosed to the bank’s board.
At first this sounds just like UBS where the structured products division trading and investing in over-valued securitisations and placing total return assets (buying toxic ABS 'income' and all the risk, but not the underlying instrument) into their pension customers investment account, which was in my opinion criminally inappropriate, and who then refused to expose their accounts to the board, or like Fortis where toxic assets were not, or could not, be properly accounted for in the bank's general ledger, or Bradford & Bingley where the execs deployed the excuse that they just didn't know because the accounting system didn't tell them! But the RBS case now goes further than that! One of the major issues in the credit crunch has been how quickly shareholders and markets disbelieved banks audited accounts. This is extremely serious both for the public companies involved and for the big 4 audit firms. Why did the auditors not forensically spot the truth of asset qualities? Their defence is that there are limits to how deeply they can investigate and their purview does not extend beyond 1 year solvency or to risk statements (Basel II Pillar III etc.) In RBS case the balance sheet expanded from £1.8tn to £2.4tn while fees to the auditor Deloitte grew from £31.4 million to £58.8 million. In 2007 Sir Fred was obsessed with buying ABN AMRO and part of that was an obsession to buy the bank's structured products holdings! On both RBS in America's toxic purchases and that of ABN AMRO the bank has had in each case write-down losses of at least £10 billions! And RBS didn't even manage to get hold of AAB's fabulous modern art collection!
Fortis Bank, one of RBS's partners was equally purblind, perhaps Barclays also, so there may be some defense in numbers there? But, now we have a wholly different context where all-powerful governments call the shots. The UK Government first injected £20bn into RBS and provided over £1tn in additional support through loan and deposit guarantees, including guaranteeing the US balance sheet, and maybe £50bn into the SLS, and now, with new management in place under the impressive Stephen Hester, has most recently taken £325bn of somewhat impaired, or possibly quite toxic', assets into the Bank of England's APS (after a steep haircut of probably 25% in exchange for a BoE cheque kept on deposit at the BoE) plus another £12bn or so in fees taken as shares. £800m of this support has gone in to top up the RBS pension scheme that is £1.9bn under-reserved, a heady context for the issue of Sir Fred's and Larry Fish's golden-goodby pension bonuses!
In raking-over the charred remains of the banking crisis, there is also much now being proposed for beefing up the power of non-execs and ensuring they challenge the executive and truly represent shareholders interests and oversee regulatory compliance and listen confidentially to whistleblowers. The latest RBS story also goes there by informing us that the non-execs were misled. That is something I think can be questioned, however. How is it possible they were blind to what RBS Greenwich Capital states proudly on its website (in the past and even still today about being a top player in sub-prime securitisations), or that there was a reason why 6 top managers were resigned at RBS GC in 2007, and how this cannot square with fred goodwin claiming he did not understand the fall in market value of Asset Backed securitisations (ABS) until early 2008 (a full year after the start of the crisis and more than 6 months during which ABS bonds risk gradings had been falling of the cliff once Moody's announced how flawed its risk-grading models had been)!The telegraph story says, "Sir Fred Goodwin is under pressure to disclose what he knew of the sub-prime trading. Traders received multi-million pound bonuses after acquiring more than £30 billion of sub-prime assets during early 2007. Following these purchases the bank “didn’t stand a chance” of surviving unaided, one board director told this newspaper. The sub-prime assets are being blamed for causing the bank’s near collapse last year.
Last month RBS posted a loss of £28 billion – the largest in British corporate history...Sir Fred Goodwin, the former chief executive of RBS, is this weekend under pressure to disclose what he knew of the sub-prime trading. He repeatedly put out statements to the City saying that RBS “don’t do sub-prime” even though traders were buying the sub-prime assets. RBS board directors suspect he may have acted negligently. British taxpayers are being forced to underwrite the toxic loans bought undisclosed by executives working for RBS subsidiaries in America. In a series of interviews with RBS board directors and other senior insiders at the bank, The Daily Telegraph has discovered: Sir Fred did not tell the RBS board about the multi-billion pound decision to start buying sub-prime mortgages from other banks. RBS began buying up about £34 billion of sub-prime assets that US banks were offloading. RBS was unable to sell the assets on as planned, leading to the taxpayer bail-out. The system of annual cash bonuses encouraged bankers to buy up the assets with insufficient regard to the risks involved... Sir Fred told the RBS directors’ board in 2006 that the bank would not be moving into sub-prime mortgage lending... two senior RBS directors have claimed that the information provided by Sir Fred did not reveal the whole picture.
It is claimed that the former chief executive later disclosed that the bank had built up a multi-billion pound exposure to sub-prime mortgages during this period. Sir Fred is under pressure to disclose whether he sanctioned the hidden deals or whether he too was unaware of the strategy... A former RBS board director claimed: “Sir Fred told the board that the bank was not exposed to sub-prime. Only a year later did he inform the other directors that the bank had, in fact, built up a multi-billion pound exposure.” Another board director claimed: “Citizens Bank [a subsidiary of RBS in America] went and bought up packages of sub-prime mortgages. They didn’t go to the board for approval. That was a mistake. “People at Citizens were severely reprimanded for their actions, the board did not know. As soon as we knew, it was disclosed but it’s pretty stupid in retrospect. I don’t know whether Fred knew about the sub-prime deals.”
The disclosure raises serious questions over Sir Fred’s role in the decision-making process. The RBS board is legally responsible for scrutinising key decisions made by executives at the bank. If it is established that key information was not disclosed this could have legal consequences. The Financial Services Authority is this weekend under pressure to launch a full investigation ... The SEC.. has already launched an investigation into RBS’s involvement in the sub-prime market...Vince Cable, the Liberal Democrats’ Treasury spokesman, said last night: “It is very clear from the evidence that there was a major failure of corporate governance at RBS. We need a proper investigation into whether negligence was involved in the decision to build up all these toxic assets. The lack of criminal investigation in this country compared to America is very striking.” The Daily Telegraph has been told by several RBS executives that internal controls on the risks being taken by the bank were not adequate... During a board meeting in the summer of 2006, Sir Fred was asked by fellow directors whether the bank had any plans to move into the sub-prime market. He told the board that the bank would not move into sub-prime and that, as a result, “RBS is better placed than our competitors”. In the foreword to RBS’s 2006 annual report, published in April 2007, Sir Fred wrote: “Sound control of risk is fundamental to the Group’s business... Central to this is our long-standing aversion to sub-prime lending, wherever we do business.” However, RBS insiders acknowledge that these statements may not have revealed the full picture. On April 13 2007, New Century Financial, one of America’s largest sub-prime lenders which was facing bankruptcy, disclosed in a Delaware court that it had agreed to sell... sub-prime mortgages to ...RBS Greenwich Capital Financial Products. Another major US sub-prime lender, Fremont General Corporation, had a $1 billion line of credit extended to it by RBS around this time. Citizens Bank, RBS subsidiary, began buying up existing sub-prime mortgages from other banks from late 2006 – allegedly without seeking approval from the RBS board. It is claimed that it was not until the summer of 2007, as Northern Rock was facing meltdown, that Sir Fred told the board that RBS had, in fact, built up a substantial sub-prime exposure.
Its investment banking division had some £20 billion of sub-prime assets. Citizens Bank had about £14 billion worth of sub-prime exposure. By the end of 2007, RBS was beginning to announce losses – or write-downs – on the value of sub-prime assets that had been secretly amassed. The majority of the bank is now owned by the Government. Last night, Sir Fred declined to comment as he is bound by a confidentiality agreement. A spokesman for RBS said: “The reality is that, like many others, RBS was heavily exposed to problems in sub prime markets via its own operations and those inherited from ABN AMRO. This is despite the fact that we did not engage directly in sub prime issuing. The Board was in possession of full information and the details provided to the market in all financial reporting reflected the Group’s honestly held opinion at the time.’’ What we have from this is that the board knew well from early 2007 that sub-prime securitised assets needed to be stringently avoided. When Sir Fred told the Treasury Committee House of Commons board of enquiry that he did not appreciate the dangers until early 2008, how can he square this. Can it be that he and other exec directors were misled by RBS Greenwich Capital (RBS-GC) and Citizens Bank?
Do the directors never read their own web-sites? RBS-GC made it banner-headline clear for years on its website, "We are an industry leader in the U.S. Treasury, agency and mortgage-backed securities markets, and in providing real estate and asset-backed financing." It is hard to be sure, but I reckon RBS-GC arranged and underwrote at least $1 trillion of securitisations, much of it of low quality. Market share and fees were pursued at the expense of quality and liquidity risk.
Even today, under a picture of a leopard leaping over a chasm, in the RBS main website, the bit for Corporate and Institutional structured products, we read "... our structured credit online toolkit can help you to make the most of the structured credit derivatives market". 
The brochureware continues, "A streamlined, one-stop shop online solution, the toolkit delivers quality and transparency of workflow from start to end of the process, enabling you to pursue opportunities and efficiencies in credit risk.The toolkit delivers:Comparisons between credits/ Historical data and spread variation plotting / Spread analysis capabilities / Portfolio simulation/ Benefit from our structuring and distribution across a wide range of structured credit products from cash and synthetic CDOs to structured notes and exotic credit derivative products, including first to default baskets." Where was that toolkit when the board needed to us it for its own portfolio speculations in 2006, 2007 and 2008?
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