RBS sale: Fred Goodwin, the £45bn bailout and years of losses

The biggest bank bailout in history led to a massive restructuring that, even seven years on, is far from complete

It was, as Stephen Hester described it, the biggest financial time bomb in history and it needed to be defused. When Hester took over as chief executive of Royal Bank of Scotland in October 2008, and as £45bn of taxpayer money was being pumped in to the business, the once proud Edinburgh-based bank was on the brink of an implosion that could have brought down the UK economy with it.

Its assets were £2.2tn – more than double the size of the economy – and it was running out of cash. Alistair Darling, the chancellor at the time, has described how he was told one day in early October 2008, at the depths of the crisis, that RBS had enough money to keep operating for two or three hours.

Unlike the queues that formed outside Northern Rock branches a year before, this was a less visible bank run: major banks and companies were withdrawing money from RBS at a ruinous pace. It ended in the biggest bank bailout in history and a massive restructuring that, even seven years on, is far from complete.

The hubristic growth that ultimately toppled RBS took place over a 10-year period. The takeover of NatWest, a languishing UK high street bank in 2000, had turned RBS from a big player in Edinburgh to one that shot to prominence in the UK. A series of acquisitions of banks in the US had given it a strong presence in North America, and then the fight for control of Dutch bank ABN Amro had expanded its reach into investment banking and propelled RBS on to the global stage.

It was the latter deal, just as the credit crunch was gripping financial markets in 2007, that also helped bring down RBS. The report into what went wrong at RBS, published in 2011, said there not been enough due diligence into the takeover.

The report also cited a string of other reasons, including “underlying deficiencies in RBS management, governance and culture,” as well as its wafer-thin capital ratios.

At its worst point, the core capital ratio – a measure of a bank’s financial strength – of RBS was sliced to 4%. As a result of the taxpayer bailout and a dramatic reduction in the size of the bank, that capital ratio now stands at around 12%.

The global ambitions pursued by Fred Goodwin – stripped of his knighthood in 2012 – have now been abandoned. Goodwin had planted an RBS flag in more than 50 countries. Hester kept 38 of the international outposts before he was forced out in 2013. His successor, Ross McEwan, has set a target for RBS to be based in 13 countries in the next four years.

One of the casualties is Stamford, the US headquarters that Goodwin signed off just before he was pushed out. It was the symbol of his global ambition for the bank, which had already moved to a £350m mini-village in the Gogarburn campus headquarters at the edge of Edinburgh airport. Stamford housed one of the biggest trading floors in the world, bigger than any of the US investment banks when it opened just as the bailout was taking place.

But in April this year the bank took a £227m hit as it wrote down the value of the building, whose empty floors are now just as symbolic of the latest restructuring being undertaken by McEwan. The investment bank, once the powerhouse of RBS, is being wound down by McEwan. As many as four out of five jobs – around 14,000 – are expected to be gone from the investment bank as the retrenchment takes place over the next four years. The division employed 24,000 before the bailout.

In total, 90,000 jobs have gone since the bailout, although the workforce still stands at 110,000. With the international focus abandoned, around 80% of the bank’s revenue is now generated inside the UK, compared with less than 50% at the time taxpayers stepped in.

The UK high street, rather than Wall Street, is now being primed as the engine for growth, although McEwan would be the first to admit that there is still more to be done. The bank is yet to report an annual profit. The record £24bn of losses reported for 2008 has been followed by annual losses every year since. Once those losses are totted up, RBS has lost more money than the £45bn pumped in by taxpayers, including spending £10bn on fines and compensation to clean up misdeeds from the past.

The share price also tells the story. At its peak in February 2007 the shares changed hands at more than £60 in a market pumped up by its global ambitions. In the depths of the crisis in January 2009 they dived to just above £1 and now change hands at closer to £3.40. The first share sale leaves the taxpayer nursing multimillion pound losses as the 79% stake in the bank was bought at an average price of £5.02. Investment bankers at Rothschild have told George Osborne that that there is little immediate chance of the shares ever getting back to that level, never mind the heady pre-crisis peaks.


Jill Treanor

The GuardianTramp

Related Content

Article image
Fred Goodwin: FSA's history of concern over 'assertive' management style
FSA's report into the collapse of Royal Bank of Scotland showed the chief executive's dominance was cited as far back as 2003

Jill Treanor

12, Dec, 2011 @7:39 AM

Article image
RBS could rob us of the chance to see Fred Goodwin grilled in court | Nils Pratley
The case would give valuable insight into the biggest failure in UK banking history – but now the bank is attempting to settle

Nils Pratley

22, May, 2017 @6:57 PM

Article image
Philip Hampton: reluctant banker who became acceptable face of an industry
Royal Bank of Scotland chairman has developed a reputation for plain speaking but would rather not have a reputation at all

Jill Treanor

03, Dec, 2010 @6:59 AM

Article image
Fred Goodwin escapes sanction for taking RBS to the brink of collapse
FSA poised to conclude 17-month investigation into crisis at RBS without taking sanctions against any individual director

Jill Treanor

01, Dec, 2010 @10:00 PM

Article image
Fred Goodwin pension row: 90% of RBS shareholders vote against pay report
Investors vent their fury at the bank's collapse and 'cataclysmic failure' Sir Fred Goodwin's £16m pension by voting down the remuneration report

Jill Treanor

03, Apr, 2009 @3:07 PM

Article image
Tory MPs call for more knighted bankers to get Fred Goodwin treatment
Senior Tories say former Lloyds TSB chair Sir Victor Blank and ex-HBOS chief Sir James Crosby should also lose knighthoods

Nicholas Watt, chief political correspondent

01, Feb, 2012 @7:02 PM

Article image
With a ban on bonuses, Fred Goodwin could even have kept his knighthood | Simon Jenkins

Simon Jenkins: Even bankers want the bonus culture outlawed. It's a conspiracy to extract money from firms that properly belongs to others

Simon Jenkins

31, Jan, 2012 @9:00 PM

Article image
RBS boss admits 'chastening' year as losses breach £5bn
Losses at Royal Bank of Scotland widen but Stephen Hester says the privatisation of the bailed-out bank is getting closer

Jill Treanor, City editor

28, Feb, 2013 @10:27 PM

Fred Goodwin netted £10k extra a year for one month's work

Annual report shows the former Royal Bank of Scotland chief executive boosted his pension from £693,000 to £703,000 for working one month beyond the financial year

Jill Treanor

09, Mar, 2009 @3:28 PM

Article image
Ex-RBS boss Fred Goodwin returns to spotlight in £520m court battle
Controversial banker will be forced to publicly account for bank’s £45bn bailout in case brought by 9,000 shareholders

Jill Treanor

19, May, 2017 @1:42 PM