FOR Royal Bank of Scotland investors still clinging to their shares in the hope of recovery, the past week has been especially gruesome.
Years of patience, far from being rewarded, have turned into yet more setbacks and betrayal.
Should shareholders now throw in the sponge – if they have not already done so? Or should they continue to hold?
As if the imposition of fines by UK and United States regulators totalling £390 million over evidence of Libor manipulation was not enough, Business Secretary Vince Cable has called for shares in the 81 per cent state-owned RBS to be given away – to those very taxpayers who already own them. You can always rely on a politician to make a munificent gesture with gifts – of our own property.
One of the saddest features of the whole RBS debacle has been the way in which shareholders have been treated. They have become a forgotten army, lost to view as gigantic fines and scandals have followed the share price collapse.
The date seared in their memory is 22 April, 2008, when the bank called upon them for £12 billion by way of a deeply-discounted rights issue. Of course, it wasn’t so much the date that lives in infamy. It was the price: 200p a share and the board’s assurances that came with this call.
The shares then began a deep and relentless descent. To be added to the thousands of private investors hit by this collapse were the tens of thousands of RBS branch staff who stored up their small allocation of shares each year to what they thought would be their pension savings. Almost all of those savings have been wiped out.
Would an immediate Cable-style return to the private sector be to their benefit? Shares in RBS today stand at 339.1p (or 33.9p before the one-for-ten re-basing last year). They have fared quite well – relative to 2009-10 levels – over the past 12 months, rising by some 18 per cent.
There are some 70.3 billion RBS shares outstanding. A free issue of shares could involve the distribution of 100 shares per head across the UK, worth around £340.
The immediate advantage would be that the UK government would be shot of responsibility for the bank and its toxic loan book – other than maintaining regulatory and prudential oversight. Others champion an early return for reasons ranging from equity to greater accountability.
There are, however, formidable obstacles to such a solution. It is questionable whether many would wish to retain the shares and how an immediate stampede to sell the shares back for cash could be avoided. The buyers would be overseas investors, pension funds and long-term insurance companies. More accountability – or just back to the future?
There are bigger problems. For such a share distribution to have credibility, major issues have to be resolved. First, there needs to be clarity on the corporate structure of RBS. Would there be two separate entities – RBS retail and RBS investment bank? If the giveaway is for shares in an umbrella company, with investment banking internally ring-fenced from retail operations, how would this be policed and governed? Would the main board need another supervisory body above it, charged with ensuring that the ring-fence was, in effect, electrified? What of the capital requirements of these operations and how could “crowding out” by one half over the other be avoided?
Then there are the legacy consequences of the Libor and PPI mis-selling scandals. RBS could face hefty litigation from US pension funds and municipalities and criminal proceedings in the UK.
Future shareholders will need to know of the final provisions for PPI mis-selling and also provisioning for any instances of commodity market manipulation.
A new regime will need to be in place for remuneration of senior staff – a purging of the toxic bonus structure and its replacement by a remuneration system that attracts talent while avoiding bonus greed and reward for unethical practices and failure that have so infuriated the public.
Arguably most problematic of all is how an RBS returned to the private sector would deal with its toxic loan book and non-core assets.
Chief executive Stephen Hester has already sold some £500m of these, but there is still a long way to go.
Finally, there is the strategic plan for the bank – what it would do that would be different to and better than, its competitors?
All these need to be resolved whichever route is taken for a return to the private sector. As it is, the legacy of that £12bn rights issue will long linger in investor memories. But trust is the asset that RBS most needs to rebuild. Holding on rather than a quick “good riddance” sale would offer the best prospect for a return of value to those shareholdings and for taxpayer support to be repaid without grievous loss.
However, investors will need to be even more patient than they have already shown. There is no short-cut to any restoration of value here. For what, after all, would be the value of shares in a bank that was not fully cleansed of the failures of the past decade?