RBS: How the mighty have fallen

News of the cuts came on the darkest day in the bank's history, during which 9 billion was wiped off its value as its share price plunged by 66 per cent.

The collapse of the share price followed the announcement by RBS of a 28 billion loss for 2008 – the biggest single loss in UK corporate history, which prompted Gordon Brown, the Prime Minister, to voice his anger about the bank's decision-making.

By the end of a traumatic day's trading, RBS shares were worth a mere 11.6p, raising the prospect of full nationalisation.

The bank has now lost its position as Scotland's biggest company.

The order to cut costs, given by the bank's new chief executive, Stephen Hester, is the latest hammer-blow to staff at the group, already laid low by the fall-out from its foreign expansion and now set to be 70 per cent owned by the government.

Mr Hester confirmed claims from sources that the swingeing cost-cutting plan has been decided upon, but he denied all the cuts would be achieved by job losses.

He said: "In terms of our total cost base, that (the figures] is accurate. That's not nearly the same as saying jobs. We have many, many items of cost.

"There is no business on earth today that isn't threatened by the global downturn and isn't having to look at its costs. There is no reason why banks should be treated as a special case. All businesses have to look after their costs."

Earlier in the day, Mr Hester told a teleconference that RBS had to "adjust to the new set of realities in our markets".

"That means that we and all other banks have to cut our costs, and obviously that does involve jobs," he said.

RBS currently has a workforce of 170,000 worldwide, compared with 226,000 in November 2007, the last available figure.

The collapse in its value means it has lost the title of Scotland's biggest company to Scottish and Southern Energy.

The full extent of RBS's losses prompted Mr Brown to voice his anger about the bank's decision-making, in particular its international investments "that were clearly wrong investments".

He said: "Today's write-off by the Royal Bank of Scotland is for irresponsible losses accumulated in American subprime markets that partly derive from the acquisition of the Dutch bank ABN Amro."

Asked about the record losses racked up by RBS, Mr Brown said: "I'm angry about what happened at the Royal Bank of Scotland."

However, the Prime Minister refused to say whether action should be taken against Sir Fred Goodwin, the former chief executive and architect of the disastrous foreign acquisitions.

The Financial Services Authority declined to comment. But the regulator can take action, including imposing fines on financial businesses and individuals deemed not to have had "adequate systems and controls".

However, analysts said they felt it was unlikely Sir Fred would face action for the gung-ho expansionary strategy, including a string of US acquisitions.

Yesterday's profits and writedowns bombshell led analysts to warn RBS shares could end up as an all-but-worthless penny-stock. The bank said a review of the value of past acquisitions would result in a non-cash loss of between 15 billion and 20 billion. This is mainly related to its purchase of part of ABN Amro in 2007.

RBS said it expected core losses of between 7 billion and 8 billion as a result of stormy credit and market conditions in the last three months of 2008. The projected losses mark a 38 billion decline in performance since last year, when it posted a 10 billion profit.

After RBS's shares closed down 23.1p at 11.6p, Simon Willis, a banking analyst at NCB stockbrokers, said: "There is now a highly likely prospect of full nationalisation (of the bank]. I think the shares could fall to a value of 0-10p, with shareholders getting all but nothing."

Keith Bowman, of the broker Hargreaves Lansdown, warned the latest bail-out was far from guaranteed to succeed.

"Should these measures fail, a further ratcheting up of bank-sector nationalisation in order to force lending would appear to be the next step, a conclusion seen as beyond all possibility just 12 months ago," he said.

Roger Lawson, of the UK Shareholders Association, which represents private investors, said: "We deplore this creeping nationalisation by the government. The RBS share price has fallen so badly because it is clear the government is not going to pay any attention to shareholder interests whatsoever."

Mr Hester, who took over after the ousting of Sir Fred, avoided ruling out full nationalisation. He said: "Clearly, the future is uncertain in lots of respects, and that must be one of them."

However, he said nationalisation was not the preferred route of the bank or the government.

Mr Hester did not criticise his predecessor by name, but he said the bank under previous management was "over-optimistic".

RBS also said the government was to increase its stake in the bank from 58 per cent to a probable 70 per cent after the Treasury agreed to replace 5 billion of preference shares with new ordinary stock.

Shareholders will be able to apply for new shares at a fixed price of 31.75 pence, representing an 8.5 per cent discount on Friday's closing share price. The government picks up the shares if investors don't, however, as in the bail-out last autumn. The new shares are expected to be left with the taxpayer.

Mr Hester said the move would remove the annual cost of preference share dividends to the Treasury of 600 million. But he said it was too early to say whether any money would be free for the restoration of dividends to ordinary shareholders.

The government stressed it was putting no new money into RBS, just converting preference shares into ordinary shares.

Mr Hester also warned that difficult trading would continue. In the fourth quarter, a single loan to the Dutch chemicals giant LyondellBasell Industries cost RBS some 1 billion.

Possible cost-cutting areas included property occupancy and sponsorships, including Formula 1 motor racing.

Meanwhile, some believe the RBS brand has been damaged by its association with so-called "toxic assets".

Peter Lyall, of the corporate communications consultancy Fifth Ring in Aberdeen, said: "Those in the financial community will have had their prejudices confirmed, that Goodwin flew too close too the sun. That will damage the brand.

"If it was fully nationalised, it would also affect the RBS brand because it could be a case of 'is it a discredited brand being run by a discredited government?'"

RBS's slashed share price is likely to lead to downgradings by credit-rating agencies, making it more difficult for the bank to raise working capital.

It could also mean suppliers enforcing stricter terms for their services to RBS, given concerns on whether they would be paid.

One analyst said: "People could decide not to tender to do work for RBS."

The finger of blame may point at Sir Fred, but don't forget the unquestioning supporting cast who helped steer this once-great institution on to the rocks

HOW could it happen? With the final stock market collapse of RBS yesterday, it just did.

To parody Oscar Wilde, to lose one bank is unfortunate; to lose two is catastrophic – for Scotland, its capital, its economy and its reputation.

Eighteen months ago Royal Bank of Scotland was our biggest company – and one of the top five banks in the world.

Today that global bank is in ruins. Its shares have crashed to just 12p and its market capitalisation is barely 5 billion. More than 50 billion of stock market worth has gone up in smoke. Even since the "rescue" rights issue of last April, when shares in RBS were offered at the then "bargain" price of 200p and all but 4 per cent subscribed for, investors have suffered a calamitous plunge of 94 per cent.

The bank that barely yesterday was the toast of Scotland and could do no wrong is set to turn in the largest loss ever reported by a British public company: trading losses of some 7 billion and up to 20 billion in writing off goodwill on the disastrous purchase of Dutch bank giant ABN Amro.

How convenient it is to heap all the blame on the departed chief executive Sir Fred Goodwin – the banker-cum-hero who collected more gongs and awards at these interminable business dinners than any other Scottish business figure.

And how easy to vent our rage at not one but two government rescues so badly bungled that, far from rallying investor confidence, they have worked to destroy it totally.

In truth, the collapse of RBS has many fathers. And it deserves a searching examination, not just of the conduct of one man but of the many experts and advisers and consultants and analysts who cheered Goodwin every step of the way, who urged on every acquisition, who talked of the "transformational qualities" of the ABN deal and who gathered round the chalice of aggrandisement like knights at the Holy Grail.

RBS was advised on this disastrously mispriced and mistimed acquisition by the top drawer of accountants, lawyers and investment bankers. They included Merrill Lynch International, lawyers Linklaters in the City of London and Sherman Sterling in New York, and of course, the accountants Deloitte & Touche who vouched for that RBS profit forecast at the time of the offer.

Lest it be blurred in the memory, the US sub-prime debacle was already impacting on global markets well before this deal was put before RBS shareholders for their approval. Indeed, shares in RBS had fallen by some 25 per cent by early September – overtaking the fall suffered by rival HBOS. The worry centred, not just on RBS's direct exposure to the US mortgage market but on ABN itself and in particular its exposure to US Asset Backed Commercial Paper conduits where fear of involvement in residential mortgage-backed securities had brought near-seizure to the market.

ABN had exposure through a conduit called Amstelm Funding, which had the second largest market share of 7.4 per cent.

Was this is an esoteric, barely known little fact, known only to a few insiders in America? Not at all. It was reported in The Scotsman on 10 September, in an article recommending that RBS should think again about this bid. It made this comment: "There comes a point at which RBS should be less concerned about 'face' than the loss of shareholder value. This is a point on which the non-executive directors need to be vigilant."

RBS could then have invoked a force majeure clause that would allow it to walk away from the bid or substantially lower the terms.

But this suggestion got short shrift. This, we were told, was putting a few measly pence ahead of a transformational acquisition that in years to come would be hailed as a quantum leap to greatness.

And what did the non-executive directors do? After all, we had just been through a decade of tortuous hand-wringing and reform in the City about the need to beef up independent non-executive directors to keep chief executives in check. There was the Cadbury Code and the Greenbury rules, or was it the other way round?

And RBS did not lack for "big hitter" independent non-executive directors. It had nine. They included Peter Sutherland, former EU Competition Commissioner and chairman of BP; Sir Steve Robson, former senior Treasury civil servant; Colin Buchan, big cheese at UBS Warburg; Bill Friedrich, corporate lawyer with Sherman Sterling; Jim Cowie, another civil servant from within the European Commission; Archie Hunter, Scottish senior partner of KPMG; Joe MacHale, ex JP Morgan; Australian Bob Scott and Janis Kong, executive chairman of Heathrow Airport and director of VisitBritain.

Here was a group of many talents, but largely from companies and backgrounds that had bought in heavily and uncritically to the global bank ideology. It is impossible to say what doubts they may have expressed in the boardroom. But publicly, at any rate, the entire board was behind the bid and it was recommended unanimously to the shareholders.

Did they know of the problems with ABN in America? Indeed, if The Scotsman could report on it, why were such concerns not taken up by them, or indeed by any of the bank's internal audit and risk committees and a stand made for a force majeure break as markets plunged around them?

Today the bank is in ruins. So, too, are the reputations of those who pushed it over the brink.

Bill Jamieson

Logo linked with top sports events

THE Royal Bank of Scotland logo is proudly borne on the marquees and advertising literature of the most glamorous and exciting sporting and arts events across the world.

It has become synonymous with the Six Nations rugby championship, to which the bank lends its name. In Formula One racing, RBS is a major sponsor of the AT&T Williams team. NatWest, owned by RBS, is a big player in cricket, sponsoring a variety of top-class tournaments for both men and women.

The racing legend Sir Jackie Stewart, golfers Jack Nicklaus, Paula Creamer and Luke Donald, and equestrian champion Zara Phillips are just a few of the many high-profile "ambassadors" for the RBS brand.

RBS is also one of the main sponsors for the Scottish tennis ace Andy Murray, as well as his brother, Jamie. So the revelation by the bank's new chief executive, Stephen Hester, that its costs are going to be cut by 10 to 20 per cent will be met with some consternation.

RBS is a mainstay of flagship events at the Edinburgh Festival. As recently as last week, the firm confirmed it would continue to sponsor both street entertainment on the Royal Mile during the Festival Fringe and the Edinburgh Military Tattoo.

The bank's sponsorship of the Edinburgh International Book Festival is said to be in the low six figures.

RBS declined to comment on its sponsorship plans for 2010 or put a sum on its total sponsorship. Catherine Lockerbie, the book festival's director, said: "RBS has put very significant sums of money into sport and culture to the great benefit of everybody who partakes of those activities. It's understandable that in the current climate they have to seek to make savings."

Allyson Stewart-Allen, the director of International Marketing Partners, said: "The events most at risk from sponsorship cuts are the smaller, community-based events. It would be utterly foolish to cut funding from Six Nations."

Emily Pykett