Discussions have been overly one-sided - shareholders / investors (mainly institutional) demand greater return over a short period of time, and constantly compare that to how well other organisations have performed. Banks which did not perform as well as their (in hindsight, excessive-risk taking) peers were punished and constantly benchmarked against their peers, some of which have collapsed spectacularly. Do shareholders really, genuinely believe that they are entitled to 20% compounded annual growth in their stock values when the cash rate is 5% - ie. 15% more return and not much more risk assumed? It's the relentless pursuit of ever higher returns with blatant disregard of risk by investors that have partly contributed to this. What we are seeing today isn't the doing of a particular group of people (CEO, regulators, politicians, etc), but a concerted global effort by everyone (mainly in the developed nations). At the root of this is, quite simply, greed. Greed, in everyone, from investors in real estate (with the illusion of ever-growing asset value, some even resort to explain why the prices can keep growing forever, using demographic shift to fit into what they observe) to the inland revenue / tax authorities / politicians (who are more than happy to see ever increasing tax revenues and lavish themselves with absurd amount of perks and remuneration), that has resulted in where we are today. I agree, the likes of Dick Fuld, Fred Goodwin and Chuck Prince, are to be blamed. If you were the investors that believed in excessive growth / return over your investment, and demanded it, you are to be blamed too.
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The World's Worst Banker?
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Massive commitment of capital to investment banking, trading in funky securities, and poor credit controls? Yes, yes, and yes. As this excellent Bloomberg postmortem notes, by June 2008, RBS had become Europe's largest lender. "Under Goodwin's tutelage, RBS also became Europe's biggest backer of leveraged buyouts," reporter Simon Clark notes. Goodwin also jacked up the bank's trading, "boosting derivatives assets 44 percent to 483 billion pounds in the first half of 2008," which was greater than the bank's net deposits. "Meanwhile, its reserves of Tier 1 capital, a measure of financial strength and the vital reserve set aside to cover losses, was the lowest among its U.K. rivals at the start of 2008." In other words, Goodwin designed a house that would teeter when the slightest ill wind began to blow.
Building an expensive, self-indulgent new headquarters building just in time for the collapse? Right-o. In 2006, RBS started construction on a huge new headquarters in Stamford, Conn., which would house its expanding U.S. investment banking and trading operations. The centerpiece of the 12-story, $500 million building is one of the largest trading floors in the world. It should be ready for occupancy (or, given recent job cuts, partial occupancy) next year.
Telling shareholders you don't need more capital, and then raising it—and then having that capital lose value rapidly? Yep. In February 2008, Goodwin said, "There are no plans for any inorganic capital raisings or anything of the sort." But in June, RBS sold 12.3 billion pounds (about $20 billion) in shares at 200 pence per share, which was a significant discount to the then-market price. By October, as this chart shows, the stock was slumping.
And finally: Dump problems on fellow citizens by messing things up so badly the bank has to be nationalized? Bingo. With the stock continuing to slip, RBS staged another rights offering, giving brutalized shareholders an opportunity to add to their sharply discounted holdings at a sharp discount—in this case at 65.5 pence per share. But shareholders passed, and the government last Friday had to step in as buyer of last resort, ponying up 20 billion pounds and assuming an ownership stake of about 60 percent. (The Guardian tells the grim tale.)
The result? RBS's stock (here's a two-year chart) has lost 91 percent of its value since March 2007 and retains value thanks only to massive government intervention. A job well-done, Sir Fred!
© 2008
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