GEORGE Osborne admits that he regrets not forcing the issue of more radically slashing taxpayer-backed Royal Bank of Scotland’s investment banking arm in 2010, about 18 months after the bank’s £45 billion state bailout. The public admission will not have former RBS boss Stephen Hester scratching his head.
It was an open secret that the Chancellor and Hester disagreed deeply about what the then chief executive saw as the investment bank’s continuing value to a badly listing RBS, and Osborne thought was a distraction from reshaping the business as a conventional British lending bank.
Treasury spinners briefed that the Chancellor wanted Hester to move faster in cutting back, if not entirely pulling the plug on, the investment bank division, stuffed with toxic assets from the acquisition of ABN Amro in 2007 that was the catalyst for RBS’s failure.
Osborne’s political antennae were also chafed by the public relations damage to the coalition government caused by the provocative investment banking bonuses at an institution that had cost the taxpayer billions and come within hours of not being able to dispense money from automated teller machines.
Hester agreed that it was politic – in every sense – to row back on the riskier aspects of so-called “casino banking”, such as M&A work, proprietary trading etc, amid such political pressure. But he stubbornly believed the big, if lumpy, earnings the division occasionally contributed to the parent were very useful as he tried to repair a ravaged RBS balance sheet.
He is said to have told his political master privately and repeatedly that it would be myopic to take too big an axe to the business; that the group remained a successful top-three player in areas like forex, bonds etc, and that it would be cutting off its nose to spite its face to exit totally, or even too fast. However, when an immovable corporate object meets an irresistible political force the way to bet is clear, and Hester was ousted in 2013 to be replaced by Ross McEwan, a conventional retail banker more to Osborne’s taste.
McEwan announced a step-change in the further shrinking of the investment bank recently, with many thousands of jobs expected to go, activities run down and lots of countries exited. At the end of the process the division will be a shadow of what it was under Fred Goodwin.
Events and political regrets move on. But it should be noted that, despite disagreeing with Osborne, Hester was hardly dilatory in the way he cleaned up the rest of RBS’s bloated balance sheet.
Loads of businesses were sold off, from equities and fund management to commodities trading and aviation leasing. This meant making difficult decisions involving tens of thousands of redundancies. Ironically, the Chancellor’s investment banking sparring partner created the cleaner financial and operating platform for McEwan to address RBS’s core retail banking offer – Osborne’s top priority.
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