British Banks Still Feeling the Financial Freeze
RBS Loses an Unprecedented 70% of its Value in Eight Hours
Jan 20, 2009
Perhaps it wasn’t an economic meltdown on the scale of the one that saw out the wintry months of 2008, but a decided chill settled on London’s FTSE this week as a quartet of British banks saw their stock market prices plummet. Barclays, HSBC, Lloyds and the Royal Bank of Scotland all suffered considerable losses, with the latter’s share price falling so precipitously that Prime Minister Gordon Brown proposed a further injection of tax payer’s money - a move that takes the country’s interest in the bank to 70%. Unnerved investors, however, are yet to be convinced of the bank's viability.
Sir Goodwin & Leonid Blavatnik
The Scottish bank has suffered the most keenly during the financial downturn in large part due to the questionable decision-making of its previous CEO, Sir Francis Goodwin. Goodwin - who resigned in October 2008 - oversaw a number of investment turkeys, the most egregious of which - a loan of £2.5 billion to the Russian oligarch and chemical magnate Leonid Blavatnik - has substantially contributed to the current parlous state of the lender. The Blavatnik loan - issued by RSB's Dutch subsidiary ABN Amro - was written of after one of Blavatnik's business partners went bust.
This meant that the bank - then valued at £75 billion - went from riding the crest of the wave a year before to hitting the breakers three months ago. Sir Goodwin subsequently lost his job and the British tax-payer was left holding the baby to the tune of £32 billion (a 58% stake in the bank). To add insult to injury, the Dutch bank has proven itself to be a dud on a scale the Blavatnik affair might have forewarned a more circumspect industry. In 2008, RBS was forced to announce that it had paid around £20 billion over the odds for the Dutch concern.
RSB Still Ailing
It comes as no surprise, then, that the Goverment's influx of cash has proved not to be the financial fillip the PM expected and the bank’s valuation has fallen even more dramatically since to a mere £4.5 billion. That it lost 70% of its overall value in an eight hour selling spree this week is more proof – if any were needed – that the government faces a Sisyphean task of un-muddying the bank’s name and increasing confidence in the credit market.
Labour MPs Call For Bank's Nationalisation
The piecemeal nationalisation of the bank has irked some MPs from the PM’s own party who are now demanding the Treasury take over the institution lock stock and barrel. Some are even calling for the entire industry to be nationalised. While MPs on the other side of the political divide cite this most recent failure as more evidence of the government’s financial fumblings. George Osborne, the shadow Chancellor, viewed the PM’s cash injection in a dim light, claiming the new cash was more good money after bad – citing the 17 billion of government spending that has disappeared from the sector since last October.
Gordon Brown Has a Plan
However, PM Gordon Brown hoped to kill two political birds with one stone by rolling out the mantra that is by now familiar to the British public: The problem’s provenance lies beyond the British Isles and principally at the feet of ”a few irresponsible bankers” who, together with the American sub-prime debacle, have blighted the financial landscape. A scenario that - according to the PM - calls not for a root-and-branch overhaul - such as blanket nationalisation - but, rather, a course of good husbandry and prudence.
Indeed, he hopes that a mix of the old-fashioned carrot and stick will provide the requisite economic stimulus. Chancellor Alistair Darling has already announced that the government will - at a price - underwrite the banks' "toxic debts". He also intends to stimulate lending by guaranteeing £50 billion of RBS's mortgage backed securities and by swelling the Bank of England's coffers in the hope that it can invest the cash fruitfully in the private sector.
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