REGULATING BIG BANKS?

Demonstrators protest outside the Goldman Sachs building in New York, - a national protest against major U.S. banks calling on Congress to take action on banking reform.
Are governments really getting to grips with financial reform? Or, are they being stymied or diverted by myopic bankers? One of the successes of responses by states to the credit crunch crisis has been the almost measure for measure coordination of responses between the USA and the UK. When it comes to weight in world banking and finance the UK alongside USA at the top of the totem pole wholly disproportionate to the relative size of their underlying economies. Last Thursday, Obama called for the biggest regulatory crackdown on banks since the 1930s (when Glass-Steagal separated traditional banking from investment banking), proposing strict limits on the size of financial institutions (none to have more than 10% of the US market) and a ban on proprietary trading (speculation by the banks for their own profit and not on behalf of customers) and therefore also no banks to have internal hedge funds. If enacted by Congress, Mr. Obama’s proposals could force Wall Street names like JPMorgan Chase and Goldman Sachs to spin off their huge hedge fund and private equity operations and stop making trading bets with their own money, or de-register as deposit-taking banks. In the UK Adair Turner, head of the FSA (regulator) and others have coat-trailed similar ideas. New, unspecified controls on liability risk ar also envisaged – this would catch up with the UK where tough new rules are enacted and will be followed shortly by the EU. Banks will have to prove their liability management systems and hold reserves of high quality that may add 30% to banks’ capital reserves. The liability risk rules extend to non-banks. Commercial and investment banks are to be prevented from growing so large as to anytime again pose a systemic risk.
This last intention is a deeply flawed hope. The network risks of a bank causing a systemic crisis such as Lehman Brothers or WaMu, or HBoS in the UK, may be triggered at far lower than 10% market share. Moreover, the problems of one bank if not caused by a technical operational failure but due to changes in the economic environment are bound to be common to all banks. Banks that were seen to survive with less need of Government support did not do so because they were inviolate to the problems – it was relative, and the equity investors and short-sellers only had so much appetite to dump the banks – it was a matter not of all skittles being liable to fall but merely which fell first. Any of the big banks could have been first – there was a certain amount of luck and bad timing so that, if we think of the credit crunch as a fire fight some banks took the bullets aimed at all of them. Those first in line to be shot were those who had to go to market to refresh their funding gap finance before the others in the worst months of 2008.
G20, UK and USA reform proposals represent an intelligent shift to look at the liabilities side of banks’ balance sheets, previously ignored in Basel II regulation. The popularly phrased idea however of building up reserves in good years to cushion the lean years is flawed. The credit crunch + recession is wiping out banks’ capital by 200% gross (before recoveries and continuing internal capital generation). Therefore even if banks had double the reserves they had in 2006 they would still be in crisis!
At this stage, the primary focus is on banks, but double-default risk (part of Basel II Pillar II) remains an issue in respect of the capacity and role of insurers in underwriting banks’ risks. Insurers are competent to cope with single failures, but not when a whole banking sector faces capital wipe-out, and a 90% wipe-out is normal in for a normal recession (one not preceded by highly borrowed banks failing to turn over their medium term debts as these became due).
In Europe there is a broadly based approach where Solvency II for insurers is almost identical to basel II for banks. The USA must attempt this also - a wide-front approach that applies to non-banks and insurers in much the same way as applying to banks. In fact this is now implicit in the global IFRS accounting standard,
Restoring the New Deal era Glass-Steagall Act’s complete separation of investment and commercial banking activities is argued by banks and their supportive economists in Wall Street firms as not the right direction to go in because it does not solve the “too big to fail or cause systemic crisis” problem. Whether separation is necessary or desirable, the argument does not hold water. The essence of Glass Steagal was to make commercial banks solely dependent on the economy and not put large amounts of their capital (retained earnings) at risk supporting investment speculation fuelled by banks’ borrowing their bets from others. Banks necessarily have to hold deposits with each other. They have to provide liquidity to markets either directly or by lending as they do to prime brokers and other markets traders. Glass Steagal merely ensured that banks’ speculation in markets for themselves was at one remove. The collateral they hold from borrowers also means they have many ways of participating in customers’ businesses.
What could be limited is the practice of wrapping up loanbooks and securitizing them for sale as bonds. This enabled the banks to push the growth of their loanbooks faster than the rate at which they attract deposits. When government borrowing is low and therefore private savings rates are also low (they are exact counterparts in ratio to GDP) then banks are forced into relatively low growth as they see it. In effect therefore, the restrictions being proposed are for big banks to only grow at the rate of the economy plus inflation. Big German and Japanese banks have traditionally used bonds indirectly (not directly) backed by loanbooks, and big US banks too that did not have extensive retails networks. There are other options; structured finance is extremely flexible and creative. Therefore this is not a genie that can be pushed back into Aladdin’s lamp. More vital is to try and ensure that banks’ lending profiles are less driven by where they feel they can get biggest profit returns and more by risk diversifying across the whole economy. When mortgage lending is 20 times greater than lending to small firms something is wrong!
Some bank economists argue for lower capital requirements coupled with greater restrictions on securitization, for which read wholesale borrowing, as opposed to higher capital requirements and liquidity risk controls - the direction of new regulations. They object to the new regulatory attention to the
liability side (deposits and borrowing) of the balance sheet. But it is this side where the credit crunch happened! They want regulation to do what it was doing before – only focusing on the asset side of the balance sheet (credit risk of loans and market risk of investments ). Governments made the banks pay insurance premia to them to insure all deposits. This was a classic confidence restorative. But, it was the loss of confidence by lenders to banks that caused the credit crunch, and not the credit risk defaults by mortgage and other borrowers – those could be coped with. What could not be coped with was sudden technical insolvency when banks could not get their liabilities to balance their assets.
What made big banks not too big to fail was not their balance sheet size; it was the size of the funding gaps that had burgeoned between deposits and loans, so that a third or more of liabilities could b short to medium term borrowings. Capital was then wiped out too, not by credit risk losses but by market risk writedowns and massive equity falls in the stock markets.
With that in mind, many activities of the banks need to be capped, banned, taxed and/or substantially re-regulated.
One idea canvassed in the USA is for government to continue to guarantee all banks’ depositors and bondholders, not just to the present $250,000 deposit ceiling but totally. With banks funded without limit by government-insured deposits and loans from the central bank, discipline should entirely focus on the asset side. This may work, but it does mean that bondholders should not expect yields above those on government paper. This may by itself limit the ability of banks to over-borrow. If not, then caps are required on how much banks can borrow as a % of their assets. Such discipline must include limiting banks to assets deemed ‘legal’ by the regulators and restrictions on off-balance sheet activities (mainly derivatives including credit derivatives. That will limit leverage-financing to non-banks who have relied on credit derivatives to emulate the liquidity of interbank money markets. Money markets would themselves deflate in size as interest rate futures and other plays become less justifiable.
There is a mistaken argument about enforcing higher capital ratios that is commonly subscribed to by banks. That is that capital ratios going higher act functionally like a tax to restrict the banks’ ability to lend, and thereby raise the returns demanded from the borrower. This is simplistic. What really happens is that banks have to retain more earnings and in the first instance withdraw a lot of own-capital presently committed to proprietary trading and apply that to capital reserves and vest these in money market funds or directly in government stocks.
Given that banks have capital committed to proprietary trading that could be recovered for capital reserves, then higher capital ratios (built up over a reasonable period) should not restrict traditional lending even if it does raise the common cost of funds for banks, which can effectively be passed onto household and business borrowers i.e. onto consumers, i.e. marginally higher borrowing rates or narrower net interest income to the banks. The result will also be lower dividends for bank share investors. In the decade before the credit crunch bank profits and shareholder gains were double the average for stock markets. There is therefore some grounds for actions to restrict this. A related question is how higher capital ratios can also be gamed via risk accounting scams – but that’s for the regulators to sort through in fine detail.
Banks are set up and supported by government for the benefit of the economy. Consequently, banks should be prohibited from engaging in secondary market trading – this is a compelling view, why, because it serves no public purpose and may result in severe social costs in the case of regulatory and supervisory lapses. Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets – the idea of a return to traditional banking.
But another key objective is to ensure via financial reform that markets remain liquid and deep. This means relying on a large number of smaller institutions carrying on traditional banking activities including trading in the markets, rather than having these activities concentrated in the hands of a small number of dominant highly capitalized global institutions. Truth is that generally in the major markets no players have over 5% when looking at all data properly single-counted. But that is enough to move the markets. We need to renew our studies of the quality of markets and bring over-the-counter trading back onto regulated exchanges – ideally banning algorithmic automated trading, many of the games that go on, and ending much of the anonymity of automated central order books and balance this with direct contact between buyers and sellers but via the exchanges. In regard to proprietary trading, hedge funds, private equity operations, and other pools of unregulated funds should be allowed to continue to operate. But they should be allowed to fail when their bets go bad. What is needed is a protected and closely regulated large core of the financial markets for those who do not want excessive risks.
In the USA, the top 4 banks (BofA, Citi, JPMorgan-Chase, and Wells Fargo) hold half of the country’s deposit base. In the UK, 5 banks (HSBC, LBG, Barclays, RBS, Santander) hold 75%. But these %’ages do not translate into wholesale markets which are not national but global! Banks seeking to grow beyond their borders have veered back and forth between doing so by buying retail networks or more investment banking capacity, sometimes both. The major consequence of thirty years of financial deregulation is that it has rewarded destructive competition in domestic banking rather than constructive competition, with big banks getting bigger, and domestic banking more concentrated, so as to finance big banks’ ability to seek bigger shares of global markets, where they all have a long way to go. Arguably, an acerbic view, is that regulation has so far rewarded banks who grew their market shares by any means without any consideration for others (especially the financial well-being of borrowers or the general economy), and it punishes financiers who refused to resort to unprofessional underwriting practices even if it meant a drastic reduction of their market share. The time has come to construct regulation which rewards the latter (usually smaller banks practicing traditional ethics) and punish the former.

BoA-M-L = LTSB-HBoS

Not exactly a palindrome, but a bull in a palindromic situation. BofA is to "pay $425m over toxic assets" as the FT words it; in fact of course this is an FDIC/Federal Reserve/US Treasury TARF scheme that starts just like a repo swap in the BoE/HM Treasury APS scheme, where LBG has agreement to repo swap £245bn or thereabouts (and RBS £325bn or so).
In the APS case there are delays while waiting for EC scheme & case approval, which everyone who looks into it assumes will come with requirements on LBG to restructure in alignment with Competition advice (the very same that was by-passed by an Act of Parliament to permit the Lloyds TSB takeover of HBoS). The US integrated multi-state regulatory supervisory system does not need to wait on a higher authority to validate the real economic value and competition issues involved.
In the US equivalent of the UK scheme, there is unlike in the UK case a speedy transition to the exit door marked TARF whereby US authorities provide soft loans to another financial institution or a groups of them, maybe hedge funds, to buy the impaired assets on soft (relatively risk-free) terms. Bank of America agreed late last night, after hurried discussion to dot and cross the terms, to pay $425m to federal regulators thereby to extricate itself from an agreement struck last December with federal authorities (involving probable repayment of protection subsidy) and to protect the bank from any further asset writedowns on $118bn worth of toxic assets, most of which came from Merrill Lynch (echoes of LBG's claim that most of its impaired assets come from HBoS). The terms 'toxic' and 'impaired' relate to assets that have fallen below book value, but can also mean simply assets that have an immediate downside of too high a risk weighting so that the amount of capital reserve required to support them (in addition to liability funding) costs more than the possible medium term upside.
By getting rid of $118bn toxics saves on the same again in liability funding at say 8% ($9bn) plus say $15bn in capital reserve. Then the other saves about $22bn in capital and perhaps another $100bn in liability funding = total of $53bn or 12.5% of the total assets. Assuming a 20% discount plus 5% fee means $80bn p/l writedown against net gain of $47bn = $33bn (new world according to GAAP), but gaining $319bn (less $45bn payback) in treasury bills at half the rate of funding gap funding worth say $10bn plus perhaps $10bn in annual net interest gain & fees from new business growth; net result = $-13bn + say 20% return on $21bn capital refershment = final cost of $7bn year 1 and $10bn profit year 2.
What do the authorities get? They get to expand the balance sheet by $319bn with enough head-room to issue the soft loan (more T-bills), which with roll-over after a year to keep everything off-federal budget, and then net $60bn profit + $45bn pay back over 2 years. The hedge funds or whoever contribute say $60bn and get a 30% return over 2 years of $20bn. Nice - everyone makes money including the taxpayers whenever the net proceeds are taken on budget, probably not in deficit reduction where the amount could pay for a month of Medicare etc., but by reducing the Federal debt by 1.5%.
The decision to pay the money to the US Treasury, the Fed and FDIC brings an end to one of BofA’s financial entanglements when it was aided to take over Merril-Lynch and lets the bank pay back $45bn in funds to TARP, freeing it to pay what bonuses it likes to top execs - maybe?
Just like when UK Government, Brown, Darling, Vadera & Mandelson acceded to, or actively encouraged, Blank & Daniels of Lloyds TSB to takeover HBoS, so had Paulson, & Bernanke enticed, encouraged or gone along with, Lewis & Thain to proceed with the BoA takeover of M-L. What no-one cared to worry about was that this scuppered attempts to save Lehman Bros. a year ago last week about which many are agreed was the funeral pyre worst moment of the Credit Crunch, a fire that consumed the independence of many firms, not least the two big Scottish banks. UK government stands to make considerably more out of its stakes in RBS & LBG than US federal authorities will make out of BoA-M-L, some of which it may book quite soon.
In the US case, the September 13th takeover was sweetened by a loan of $20bn in T-bills, on top of the $25bn already earmarked for BofA and Merrill, to make sure the transaction was consummated, plus a guarantee over $118bn worth of troubled assets (troubled = impaired = toxic = regulatory capital burden = writedown risks).
BofA, however, never formally signed a contract for the ringfence protection and in May decided against entering into the asset insurance programme. For the last quarter, the bank has been in negotiations with FDIC to determine fair value of the perceived insurance provided by the guarantee. That delay should have saved the bank maybe another $1bn or so in premiums?
Meanwhile in another part of the dark forest, the SEC says it is considering adding charges to its lawsuit against BofA for allegedly failing to give investors details on executive bonuses. The SEC’s statement that it would “vigorously” pursue the charges against BofA came after a federal judge refused to agree to a proposed settlement between the regulator and the bank. Whether the current deal gets BoA out from under that is unclear? In a scathing ruling only last week, the judge said the settlement made no sense unless the SEC identified the individuals who allegedly made false or misleading statements.
Separately, BofA on Monday named Charles Holliday, former chief executive of DuPont (also famous for its Du Pont ratios that formed the basis of Credit Risk Agency models, by the way, that have been such a massive bugbear on the credit crunch decades later, though no fault of Du Pont), as a director, furthering its effort to overhaul its board. The arrival of Mr Holliday means that six new outside directors have joined BofA’s board since the April 29 annual meeting, when shareholders voted to strip Mr Lewis of the additional role of chairman. Similar musical chairs have been played at RBS and LBG - more support for my prediction a year ago that by the end of this whole shenanigans no key executives in charge of the big banks before the Credit Crunch will still be in their seats by the end of it!

Trust versus Confidence?

an ATOMISER of the traditional kind.
Andy Haldane, the Bank of England’s head of financial stability, says enduring recovery depends on trust being restored to the financial system, and called for smaller and more diverse banks, and a return to mutuality. This may be a bit of a slap to the FSA for placing high hurdles in the path of a couple of dozen or so new banks seeking to form in UK o register branches or subsidiaries in the UK. Many banks want to do more to gather in retail deposits and the UK is a good place for that including the UK’s liabilities guarantee regime. Haldane attributes the slump in economy & credit in the financial system to a loss of trust between banks and households, among banks and between banks and investors over the past two years. “Loss of confidence” is perhaps a soft phrase for disdain, hatred and deep suspicion. “It is lack of trust – and hence credit – that may shape the recovery. Based on past evidence . . . we might anticipate a protracted period of repair,” he told his business audience in Leeds.
Recovery from past recessions in the UK, trust and credit for non-financial companies recovered well once the economy had started to grow. Actually there was always usually a 6 month delay before banks started to expand credit and trust in recovery. In the immediate future, Haldane accepts that trust in the financial sector has been substituted for by govrnment guarantees (insurance paid for by the banks) plus state intervention measures. He says, “Extending public sector credit on this scale relies on the deep pockets and prudence of our grandchildren. It can be no more than a stop-gap – a temporary bridge – until private sector trust can be restored.” I take issue with this. I expct the government’s measures to be highly profitable for taxpayers. Moreover, the vast bulk (let’s say all of it) is in fact off-budget (swapping short term treasuries for bank assets after large discount + fees) and therefore not involving taxpayers’ money. Taxpayers are exposed only via the fiscal deficit, hich I expect the profit on bank aid to recover at least 40% of.
He also called on banks to seek to rebuild trust in their activities without regulatory intervention, by insisting that banking should not be commoditised like car manufacture, and pressed the case for smaller, more local banks, pursuing diverse strategies. An examination of FDIC data on US 8,400 small banks may put this idea into perspective; just parcelling risk out ino smallest chunks (like how Lloyds of London disperses underwriting risk). Haldane says,
“If large-scale processing of loans risks economising on the collection of information, there might even be diseconomies of scale in banking. . . Within the space of a decade, banks went from monogamy to speed-dating and that big was not best.” He called for a return to greater mutuality in financial services to prevent shareholders pressing for too much risk-taking in the knowledge that taxpayers would stand behind losses. This is an attack on the FSA for having encouraged de-mutualisation on the basis that the market knows best how to value banks, and ensures banks can raise capital – a fine idea in mico-prudential terms, but not much good in a macro-prudential crisis. “I am happy to say that reports of the death of the building society sector are greatly exaggerated. Indeed, mutuality may do a better job of aligning stakeholder incentives than some alternative forms of corporate governance”, i.e. better than shareholders, but begs the question how do stakeholders or shareholders actually challnge excutive boards. Company La needs major changes in shareholder voting process and information rights and similarly in mutual society member comparable rights.
Alongside banks rebuilding trust in their own abilities, he said that a return of credit – which comes from the Latin word for trust – would also be helped by strict new regulations aiming to strengthen banks’ financial resources, their ability to spot and deal with severe risk including in their governance.
He argues that new regulations are unlikely to be the answer alone. “One reason why regulation might not be the whole answer is that trust in financial regulation is itself one of the casualties of crisis.” I think this is defeatist. The new Basel II Accord (FSA and CEBS responsibility at law) has hardly touched down. We need to give it more time to discharge all of its responsibilities onto the banks. Haldane says there is a difference between confidence, which he said had returned to the business world, and trust, “an altogether different animal”. “Moral compasses take rather longer to self-correct than magnetic ones. This has implications for the path of recovery in the period ahead.”
Lord Turner has had as much, in fact much moe to say recently, and thereby restored some trust in the FSA’s efficacy. The Bank of England by denigrating he role of regulation does not look as if it wants to embrace the FSA’s role and thereby end the UK’s tripartite regulatory system.

Restoring the reputation of Scotland’s banks

from the FT by Brian Groom and Andrew Bolger
August 8 2009 01:41
First they called themselves The Voodoo Club, a group of 20 disgruntled members of Scotland’s financial community who held a wake last January in The Voodoo Rooms, a fashionable bar/restaurant in Edinburgh. It was for their nation’s two largest banks, The Royal Bank of Scotland and Bank of Scotland, which had collapsed into the arms of the government as a result of the credit crisis.
“Scotland has a few icons: tourism, whisky, but also financial probity – and that icon has been smashed,” says Peter de Vink, a veteran corporate financier who is a leading member of the group. Many Scots who invested their savings in the banks’ shares have lost much of what they had, he says. The name did not stick: the word “voodoo” got caught in e-mail spam filters. So now the group – many of whom had been involved in a failed legal challenge to prevent HBOS, of which Bank of Scotland was part, being taken over by Lloyds TSB – has been reconstituted as the 50-member Scottish Banking Renaissance, lobbying to restore the independence and reputation of the banks.
The anger remains palpable. De Vink says: “Our two banks fell foul of the pressure to seek scale. This happened over 10 years and the directors failed to ask the correct questions. The whole boards should be called to book. It should not just be shoved under the carpet, because what has happened is an utter disaster.”
Although feelings are still raw, however, Scotland’s appetite for recriminations may finally be waning. The financial community is doing its utmost to put the catastrophe behind it. Much is at stake because Scotland is far more than a banking centre. It also has substantial operations in life assurance and pensions, investment management and asset servicing, which, although affected by recession, are in a much healthier state than the banks. After London, Edinburgh is the UK’s biggest financial centre – and it is the fourth largest in Europe in terms of equity assets under management. There are also substantial concentrations in Glasgow and other cities. In seven years to early 2007, Scotland’s financial services grew by 60 per cent – more than four times faster than the overall Scottish economy and outstripping the UK financial industry, which grew by 47% in the same period.
Apart from creating the prospect of redundancies, the banks’ collapse has political ramifications. Scotland’s minority nationalist administration, which has run the devolved government since 2007, had hoped to hold a referendum on independence next year. Alex Salmond, first minister, saw Scotland’s destiny as part of an “arc of prosperity” of small, independent countries stretching from Ireland to Iceland. Those countries’ problems, coupled with the UK taxpayer’s bail-out of RBS and Lloyds Banking Group (including HBOS), are among the factors making it unlikely that referendum will now be held.
A deeper hurt, though, is the damage done to Scotland’s pride as a land of prudence, where a considered view is taken, away from the hurly-burly of London and New York – a place where you can trust the professionals with your money. That reputation, based on notions of caution and Calvinist honesty, was built over 300 years by a financial industry that arose amid catastrophe. The Bank of Scotland was founded in 1695 to fund Scottish commerce – just before the Darien scheme (Scotland’s effort to set up a trading empire in what is now Panama), which ended in failure with many losing their lives and the nation losing one-third of its wealth. That led to the Act of Union with England in 1707 and indirectly also to the foundation of the Royal Bank in 1727.
Over the succeeding centuries Scots pioneered many familiar features of the financial world, such as the overdraft, branch banking, payment of interest on deposits and savings banks. Investment trusts were pioneered in the 1870s by Robert Fleming of Dundee. Scots financed 19th-century land purchases and railways in north America. “It was a Scot, William Paterson, who started the Bank of England. All five Canadian banks were started by Scots and all five are still standing high,” says de Vink.
Much of the blame for the banks’ collapse has been heaped on two Scots – Sir Fred Goodwin, RBS’s ousted chief executive, and Peter Cummings, HBOS’s former head of corporate lending, who lost £7bn by pouring money into property development when others were drawing back. (Although Sir James Crosby, HBOS’s Yorkshire-born former chief executive, and his successor, Andy Hornby, also took a lot of flak.) Goodwin and Cummings are both examples of what Scots call the “lad o’ pairts” – young men who made their way by talent rather than social position. Both came from modest backgrounds in the once-industrial west of Scotland, both went to state schools and both worked their way up. Cummings started by making tea and sweeping the floor in the Bank of Scotland’s local branch at 18. Thus has this tragedy dented another cherished Scottish myth. To add to these misfortunes, Dunfermline Building Society was taken over in March after a mad burst of commercial lending just as the market turned. The society, founded in 1869, was regarded as a historic pillar of the financial establishment and some of Scotland’s best-known business leaders have sat on its board.
All these events have brought pain. It is etched on the face of Sir George Mathewson, who stood down as chairman of RBS in 2006, but is still a highly respected figure who chairs Salmond’s council of economic advisers. He and Sir Peter Burt, former chief executive of Bank of Scotland, made an unsuccessful proposal in November to take over the running of HBOS as an alternative to a Lloyds TSB takeover. Mathewson masterminded RBS’s takeover of NatWest in 2000, still widely regarded as a good deal in spite of criticism of the bank’s subsequent expansion. Now he seems torn between criticising what happened under Goodwin, his chosen successor, and pointing to extenuating factors. “I am not an apologist and I think it’s a tragedy as to what’s happened to RBS,” he says. “I have seen an institution that I thought would outlive me for many, many years collapse.” With hindsight, he says, it was a mistake that RBS bought part of ABN Amro – it was so full of bad assets that “if they had got it for nothing it would still have been a disaster”.
One of the most hurtful things was discovering how far RBS had strayed from its culture of caution in investment banking. “When this sort of exposure first came out at Citibank, I thought, well, RBS will be put in a really strong position because they won’t have these. The amount of the exposure just shocked and amazed me,” Mathewson adds. He feels he could not have seen the tragedy coming, even though critics allege that failure to rein in Goodwin during his time as chairman sowed the seeds of RBS’s downfall. Yet he says there were “many other people to blame” than Goodwin and insists RBS’s problem was shared by the whole western world.
“Barclays are just as guilty as RBS, in fact more so,” he says. “John Varley [chief executive] and Bob Diamond [president] were gagging to buy it [ABN Amro]. They were prepared to give up the Barclays name to buy it. That was after they had been inside the bank for six weeks on a friendly due-diligence deal. They were going to buy all of it, not one-third. They must wake up every morning and say, ‘thank God for Fred Goodwin’. I would also like to say 94 per cent of the [RBS] shareholders voted for it.”
Like Mathewson, Burt believes that when he left Bank of Scotland it was in good shape: the deal he engineered in 2001 to merge with Halifax had created a credible future for the bank. With a small Scottish retail base, it was becoming over-dependent on wholesale funding and would have been “mopped up” if it had not merged, he says. Instead, there was a combination of Halifax’s mortgage and retail deposit base with Bank of Scotland’s expertise in corporate and specialist lending.“I retired in January 2003 and I thought it was still a well balanced business. But they seemed to go off the rails. They seemed to drive faster and faster over the next five years,” he says. For him, it felt like “one of those teenage parties where the parents go out and find the house has been trashed”.
Both Burt and Mathewson now fear for the future of Scottish banking. Burt suggests it will now revert for several years to the excessive caution of its past, and that Scotland will see a damaging loss of senior jobs as control of Lloyds is exerted from the south. “In the case of RBS, maybe a third of them will go. In the case of HBOS, how many will be left – 10 per cent?” RBS is expected eventually to regain its independence as the government sells off its stakes in the banks, but views are divided about the chances of Bank of Scotland ever re-emerging from Lloyds as an independent, Scotland-based entity. Last autumn, Sir Peter Burt (former chief executive BOS) and Sir George Mathewson put forward a package to run an independent HBOS – and lead it away from Lloyds TSB, its state-sponsored suitor. Eventually, though, the government’s wishes prevailed and Burt now fears a damaging loss of senior jobs from Scotland.
Archie Kane, representative for Scotland on the Lloyds board and its executive director of insurance, attempts to dispel the anxieties. From his Edinburgh base, Kane is now running an insurance empire with the biggest customer base in the UK, including the enlarged bank’s general insurance businesses, Scottish Widows and Clerical Medical – the life office acquired with HBOS. Kane is concerned that Scots are exaggerating the damage done to their financial institutions, and stresses that Scotland’s life assurers and fund managers have come through the financial crisis “rather well”. “Some of the institutions may be reshaped and may have a different focus, but that is the same if you were in New York or London or Frankfurt … We have to keep reminding ourselves that this is a global crisis – and it is not something we could have opted out of in Scotland,” he says.
Sir Angus Grossart, chairman of merchant bank Noble Grossart, says posterity will tell whether the damage done to Scotland’s reputation is long-term. “There has been a remarkable resilience over the 40 years I have been involved, through many ups and downs. If you have any sense of history, you see that the test is not really to avoid adversity but how you come through it.” There have been crises in the past. In 1772 several Scottish banking houses failed after the Ayr Bank collapsed. The City of Glasgow Bank failed in 1878, leaving many people penniless. In recent times, the City of London’s secondary banking crisis in 1973 had echoes in Scotland, and later some banks that financed North Sea exploration were burned by fluctuations in the oil price. But there has been nothing quite like what has just happened. Grossart thinks the crisis could prove cathartic. “We are approaching the time of classic opportunity for those who have a bit of courage and who are good and well-backed. You have to see these things in terms of a Darwinian cycle of evolution,” he says.
Politicians and business leaders have seized with alacrity on “green shoots” – a decision, for example, by Tesco to site the headquarters for its planned full-service retail bank in Edinburgh, adding more than 200 jobs to the 250 already working at its finance office in the city. It cannot have escaped notice, however, that Tesco hopes to capitalise on public disenchantment with the established banks, not least RBS and HBOS. One recent start-up is Nucleus, a company that aims to shake up the life assurance industry by allowing clients to choose financial products from a technological “wrap platform”. It employs 24 in Edinburgh. The downturn has put back its break-even point to later this year or beyond, but David Ferguson, chief executive, says the damage to Scotland’s reputation has not affected the company because it does not sell itself as a Scottish brand. He thinks others in large organisations might take the entrepreneurial route if they find their careers blunted by the crisis. “They are going to say ‘do I really want to hang around here another five or 10 years while this all sorts out, or can I invest my intellect elsewhere?’,” he suggests.
The non-banking giants of Scottish finance are at pains to distance themselves from the banks’ humiliation. “There may be a rebalancing [of the financial sector] towards the life side and asset managers as against the banks, which had come through very strongly,” says Otto Thoresen, who heads the Edinburgh-based UK arm of Aegon, a Dutch life assurer. “But I feel the sector would be none the worse for that.” Willie Watt, chief executive of Martin Currie, one of Edinburgh’s most successful fund managers, says: “I don’t think the man in the street is equating the problems that RBS and HBOS had with Scottishness – I’d be very worried if they did, but I haven’t felt that.”
The Scottish reputation for prudence, argues Owen Kelly – chief executive of Scottish Financial Enterprise, which promotes the industry – “still resonates in markets like China, where you are looking at a lot of wealth hopefully to be put under management by people with the kind of historical perspective that perhaps is valued more now than before”. Some take comfort from the fact that Scotland missed out on the hedge fund and private equity boom and thus avoided the downturn in those sectors. That can be seen as reinforcing the conservative Scottish approach, although, as Kelly points out, it was not a “consciously chosen strength”. He adds: “If you had asked two or three years ago ‘would you like that [the hedge fund industry] to be in Scotland?’, I am sure I would have said yes.”
Perhaps the most hopeful sign for Scotland comes from the experience of Sir Sandy Crombie, chief executive of Standard Life, who helped save the Edinburgh-based life assurer from a near-death experience five years ago. He sees parallels between the banking crisis and the tougher solvency regime imposed on UK life offices after the dotcom bubble burst. Crombie was parachuted into the role of chief executive of Standard Life in 2004 after it clashed with the City regulator over its solvency. The crisis forced the company to drop its long-held opposition to demutualisation, review its products, cut policyholders’ bonuses and slash its bloated cost base. The workforce has subsequently been cut from 15,000 to just over 10,000. Reputations have “undoubtedly” been affected by the banking crisis that engulfed RBS and HBOS, says Crombie, “but it is not as if what has happened here is isolated and confined to Scotland, and I think the swift action of the government has ensured that the patients have been kept alive. My experience with Standard Life is that sentiment can be made to move on quite quickly.” Crombie has now joined the RBS board as senior independent director.
Scotland, meanwhile, waits to see how deeply the crisis will damage its economy. Until recently, the recession was felt less severely there than in other parts of the UK, but unemployment is now rising rapidly. Margo MacDonald, independent member of the Scottish parliament for Edinburgh, says: “When the banks were seen to have stumbled, I think it did affect the sense of well-being in the city. It was palpable before that. People felt confident. They were more aspirational. They had finally accepted the fact that we were a European capital, albeit a small one.” MacDonald, a former leading figure in the Scottish National party, believes, however, that there is no going back to Scotland’s past subservience to the Westminster parliament. Whereas once there was a feeling that “big things” such as financial and economic management should be left to “big London”, people “don’t think like that any more”. She says faith in London has been severely dented by issues such as the scandal over MPs’ expenses and the government’s decision to take part in the Iraq war. “There is a greater appreciation of the subtleties of sovereignty in a global economy,” she says, arguing that Scotland should exert influence as part of a group including the UK, Ireland and offshore islands around their coasts.
Salmond may not have the majority to hold his referendum but, if Labour does badly in the UK general election due by next spring, the SNP is likely to benefit. A lot of Scots seem comfortable with a nationalist-led devolved government asserting Scotland’s rights even if they do not want full independence. As for Edinburgh, MacDonald thinks it could be healthy for the capital to become less dependent on financial services and exert its strengths in education, research and life sciences. Few expect the financial sector to revert quickly to the heady growth of recent years. They will expect future expansion to be built on more secure foundations.
Brian Groom is the FT’s business, regional and employment editor.
Andrew Bolger is the FT’s Scotland correspondent

HM Treasury Banking Reform

http://www.hm-treasury.gov.uk/d/reforming_financial_markets080709.pdf
published 8 July 2009
08 July 2009
This document sets out for discussion and comment over the Summer, the UK Government’s view of causes of the financial crisis (world economy hit by the worst global economic downturn for 60 years)in terms of:
- actions taken to restore financial stability; and
- further reforms to strengthen the financial system.
The document lists the main causes of the crisis:-
- failures of market discipline (corp. governance, risk mgt, remuneration policy) (for my discussion see also www.bankingeconomics.blogspot.com)
- banks, boards, investors did not fully know complexities of their own businesses;
- regulators and central banks failed to fully account for excessive risks taken by firms, and inadequately understood system-wide risk; and
- failure of regulations to respond to changes in fin. mkts. increasing complexity and systemic risk, or
- failure read the trends of systemic risks build up during economic upswings.
In my view these are working assumptions more than proven causes. Regulations were in place but not fully implemented; Basel II was too late to make a big difference. It takes years for the culture around new regulations to mature, especially the requirements to correlate banking with the wider economy. The warning signs of asset bubbles and systemic risk were available to those willing to look for and spot them. The problem was more that bankers did not have to accept sound advice and cogent warnings delivered by regulators and central banks. The stability reviews published alongside general financial sector statistics were read by relatively very few people. Banks were being managed at the top by directors lacking comprehensive understanding and training about the totality of banking. Warnings were too sophisticated and academically (or 'intellectually') expressed. Central bankers have presumed banks possess more risk management and liquidity management sensitivety and than top bankers have been willing to tolerate or take seriously, especially maco-prudential banking economics.
The report defines the UK Government-led efforts, at home and abroad, "to respond to the immediate challenges of the financial crisis by restoring stability, and reforming banking regulation." Actions to reform banking regulation include the Banking Act 2009; Turner Review of financial regulation; and Walker Review of Corporate Governance of UK Banking Industry. This statement ignores the more important contribution to G20 and EU joint initiatives as also expressed in the following graphic: As set out in this paper there are a number of core issues that the Government's regulatory reform must respond to:
- strengthening UK’s regulatory institutional framework, so that it is better equipped to deal with all firms and globally interconnected markets and firms;
- supervising high impact firms seen as “too big to fail”;
- identifying and managing systemic risk across financial markets and over time;
- working with international partners for global responses to the financial crisis.
The idea here is more thoroughly improved market discipline and improved supervisory focus on major firms. A huge problem with the objective is that 'market discipline' is generally poorly defined, especially in the context of systemic risks where all major firms are feeding asset bubbles.
The document says Governments around the world have acted decisively to support their financial systems. This is variously true, but generally correct. Insolvency and liquidity risk management reuire considerably more detailed work than made explicit in global standards and risk accounting frameworks. The Treasury report says of support for financial systems that this "has been necessary to protect depositors , ensure that banks lend to the economy and restore financial stability".
This is so, but it is not at all clear yet that banks are living up to their side of the bargain with governments to maintain lending or actively doing whatever is needed to restore financial stability. Individual banks are not acting to mitigate and cure systemic risk problems; they are too focused on saving themselves only.
The report states the usual general abstraction that "Government remains firmly committed to ensuring that the UK financial services market remains competitive and fair for consumers, who, faced by the events of the global financial crisis, need additional support and protection. The Paper brings forward proposals to support consumers and bolster competition."
It is not at all clear what is truly meant by competition and competitiveness, and it is doubtful that the government itself knows what it means either, just sounds good. Financial services firms do more trading and collaborative ventures with each other than they directly compete with each other. While there are many areas where banks compete such as for investment fund, high net worth and corporate finance mandates, there are just as powerful business activities where they collaborate or co-conspire, and this is also reflected in a myriad of cross-shareholdings.
The media barely registered the Treasury Report and have been fixated on the issue of structural reform of the so-called tripartite national regulatory system. Banking regulation is more complex than this since it includes international dimensions. But the Treasury Report sets out the remit of a Financial Stability Council. This effectively should provide a turret to focus on systemic risk and especially on the financial sector's impacts on the UK economy. maintaining credit flow to the economy and diversified credit risk across the economy are emphasised repeatedly. The banks are to become more cyclically-minded while at the same time more resilient in order to maintain credit to the economy through the worst of cyclical downturns. What is not clearly enunicated are the dimensions of this and there is not statement of the counter-cyclical role of government finance and spending that operates with or without the collaborations of banks! The Treasury paper has I believe also missed the opportunity to clearly enunciate and provide scale and macro-model results for what the government measures, both fiscal stance and financial infusions, are expected to achieve. There is a failure to express adequately the basis whereby the proportionality of the government's measures was determined.

IMF PREDICTS $200bn MORE UK BANK LOSSES

UK’s banks have written off only a third of the losses they ultimately face, according to the IMF yesterday. It says bank lenders need at least $125bn in additional capital to rebuild their balance sheets, by which it means their capital reserves. A more comprehensive view of "rebuilding 'balance sheets'" will, among other restructuring, require five times as much as the $125bn spoken of in new (replacement or roll-over) wholesale funding, but that aspect, central to the 'credit crunch' seems to be below the IMF radar. It is of course being supplied by the Bank of England's Asset Protection Scheme, 'son of SLS'(working with HM Treasury's DMO and UKFI Limited).
UK banks have already written off $110bn on complex debt securities and other assets, but the IMF estimates they face another $200bn in losses over the next two years as loans to companies and consumers go sour. I wonder if the IMF is looking only at UK banks' domestic assets or their total global assets. In either case £100bn a year for 2 years is scarecely a concern given the asset losses and share losses and the scale of Bank of England and HM Treasury long term support already of over £800bn in asset swaps alone, plus about £70bn capital and well over £1tn capacity in liquidity window support.
In addition, the IMF calculates to return them to the stronger capital ratios common in the mid-1990s, that capital infusion would have to be doubled to $250bn. But, as other analysts point out that the IMF’s capital calculations are based on a crude ratio of tangible common equity to total assets. This measure ignores preference shares and other hybrid instruments, and makes no allowance for the relative riskiness of different assets. The IMF's calculation are in no way superior to what journalists can find out easily for themselves and certainly not adding anything to the much fuller data available from the Bank of England Stability Reviews.
As in the US with the FDIC/Geithner stress-tests of the top 19 banks, there are stress-tests of UK banks’ balance sheets demanded and informed by the FSA. It wants to know the impacts that can be forecast on Tier One 'core capital'. On this question, the FSA recently concluded Barclays does not need further capital. Analysts also question the IMF’s prediction that banks’ profits, before bad debts, will fall by between a third and a half in the coming 2 years, when in recent weeks, big banks in Europe and the United States have all reported better-than-expected results, helped by improved margins on trading and lending in traditional banking. This shows that banks have the capacity to internally generate sufficient capital, given sufficient time to do, to absorb much, perhaps most, of rising loan losses. Assuming that government measures have staunched credit crunch losses by replenishing capital reserves and byproviding funding gap finance when the private sector won't, then the remaining losses are more normel recession losses that the banks should be quite capable in various ways of absorbing. These ways include cost cuts, selling off non-core businesses, and re-focusing on net interest income from traditional banking. What they must not do is accelerate foreclosures and deleveraging so that they add to the depth and length of recession. Governments are aware of this risk and have the whip hand to insist the banks maintain lending levels. UKFI Ltd. now 'owns' almost $4tn of UK commercial banking assets. Furthermore technically the banks majority owned by the government are now technically outside regulatory rules on capital reserves and being guaranteed by government are incapable of being technically insolvent.
This is an aspect the IMF does not like, despite advising that governments must now accept nationalisation of banks if necessary. It says that capital for the world's banks need should ideally come from private investors, but given their reluctance, governments should be prepared to inject more common equity into institutions and even nationalise them where necessary. The word 'ideally' is questionable in the sphere of financing the banks' funding gaps. If banks are going to break the bounds of the transmission mnechanism as conventionally understood, they are heading for a credit boom economy. Therefore, it may be only right that the funding gap to facilitate credit-led growth should generate fee and interest rate profits for taxpayers and have some degree of government economic policy control.

RBS CITIZENS BANK and GREENWICH CAPITAL

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?