Calls for RBS toxic debt probe

Published on Saturday 21 March 2009 18:34

CALLS for a full investigation into the behaviour of senior Royal Bank of Scotland figures strengthened last night after it emerged traders were buying billions of pounds of toxic debt at the same time Sir Fred Goodwin said the bank did not deal in the sub-prime market.

The company's board has claimed it was not told about 34bn of sub-prime mortgages purchased by RBS in 2006 which led to the bank's near-collapse.

If it is discovered Goodwin kept information from the directors there could be legal consequences, but if the board was aware of the bank's high-risk strategy they could all be held responsible for its demise.

The bank had to be bailed out by the Government last year when the sub-prime market collapsed in America as millions of people failed to make payments on mortgages they had been given which they could not afford.

The company's sub-prime mortgages were largely bought by Citizens Bank, an American RBS subsidiary, in 2006. It took on 14bn of the toxic assets.

Months later, in April 2007, one of America's largest sub-prime lenders, New Century Financial, revealed it sold 2,000 toxic mortgages to another unit of the bank, RBS Greenwich Capital Financial Products.

At the same time Fremont General Corporation, another major sub-prime lender, announced it received $1bn of credit from RBS.

In total, RBS accumulated 34bn of sub-prime mortgages, including 20bn bought by the investment banking arm. It is thought RBS's system of annual cash bonuses encouraged traders to buy up the assets.

However, Goodwin repeatedly stated at the time that RBS "did not do sub-prime", and in the foreword to RBS's 2006 annual report he 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."

But in the summer of 2007, he admitted to the board that traders had in fact bought up billions of pounds of toxic mortgages. RBS started to announce losses toward the end of 2007, which culminated in a loss of 28bn last month, the largest in British corporate history. They were rescued by the Government in November last year, when they offered a 20bn package to take on the majority of the toxic assets.

The board of RBS claimed the mortgages were bought without its approval and it did not know about the problem until it was too late.

A former RBS board director said: "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."

If Goodwin, who took early retirement from the bank with a 17m pension, hid information about toxic assets from the board he could face legal action.

However, Scottish Liberal Democrat leader Tavish Scott said it was "difficult to imagine" that the board did not know what its executives were doing.

He said: "Gordon Brown's regulatory regime failed, the country knows that now. But for the former RBS board to wash its hands of any knowledge is unbelievable."

Scottish Tory finance spokesman Derek Brownlee called on the directors of RBS to take collective responsibility for the crisis, whether or not they knew about the acquisition of sub-prime mortgages.

He said: "If the board was not directly aware then there would be some sort of delegated process in place. But it would be very surprising if they did not know about such significant contracts being made in their name."

Goodwin was unavailable for comment but 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.

"This is despite the fact that we did not engage directly in sub-prime issuing."

A spokeswoman for the Financial Services Authority said: "As a matter of policy we would never comment on whether or not any investigation will be carried out."