RBS faces $13bn bill to settle mortgage bond claims

ROYAL Bank of Scotland may have to pay as much as $13 billion (£8.3bn) to settle US legal claims that the bank misled investors in mortgage-backed securities, according to documents filed in an American court.
Ross McEwan. Picture: PARoss McEwan. Picture: PA
Ross McEwan. Picture: PA

The size of the potential settlement could make it more difficult for Chancellor George Osborne to proceed with his recently announced plan to start selling down the taxpayer’s 78 per cent stake in RBS in the coming months, City sources said yesterday.

The estimate was made in a filing by Philippe Selendy, a lawyer with corporate litigation specialists Quinn Emanuel, which has brought the case for the US Federal Housing Finance Agency and is based upon a previous judgment in a separate case involving the Scottish bank.

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Japanese bank Nomura and RBS were ordered last month to pay a total $806 million for making false statements in selling mortgage-backed securities to Fannie Mae and Freddie Mac in the States.

The estimate of the potential financial damage to RBS from the latest legal action is significantly above previous City consensus estimates of about $5bn, although some brokers had pencilled in a potential hit of up to $9bn.

RBS has so far earmarked $3bn to deal with the claims, which relate to the sale of about $32bn of mortgage-backed debt in the US.

One banking analyst said yesterday: “The $13bn figure, if proved true, would be a major hit for RBS. And it might prove problematic for the Treasury in trying to sell down the taxpayer’s investment in the bank.

“But it does look on the high side compared with what most brokers were expecting, and seems based on an extrapolation of the separate Nomura/RBS action.”

In a note to clients yesterday, analysts at Berenberg said: “This would be a significant impact on RBS but this is a cross reference from the current RBS/Nomura case and each case has to be judged on the underlying MBS [mortgage backed securities] in question.”

The Chancellor indicated recently that the government might consider selling down the state’s stake in RBS even if it meant taking a loss.

The government has already sold more than half of its original holding in fellow taxpayer rescued bank Lloyds, from more than 40 per cent down to less than 16 per cent.

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RBS’s underlying profitability has been improving in the past few years but it is still making significant losses at the statutory pre-tax level.

Group chief executive Ross McEwan has also warned shareholders that despite progress in making the group “stronger and simpler” after its near-collapse under Fred Goodwin, there were still likely to be “bumps in the road” in terms of regulatory action and litigation related to cases of admitted and alleged misconduct.

RBS was fined £402m last November by UK and US regulators over attempted foreign exchange rate manipulation.

In 2013 the bank was fined £390m by UK and US regulators for its part in the rigging of Libor, the rate at which banks lend to each other and used to underpin trillions of dollars worth of daily banking transactions.

The European Commission levied a separate Libor fine of £325m on RBS, while last November the UK’s Financial Conduct Authority and Prudential Regulation Authority fined it over a major IT failure in 2012 when many customers could not access their accounts.