Blog 7.

How useful is a bank without money?

For this week’s blog I am going to be reflecting on the multimedia financial documentary RBS: Inside the bank that ran out of money. RBS (Royal Bank of Scotland) was founded in Edinburgh in 1727. It went on to become one of the biggest banks in the whole of Scotland (RBS, 2019).  Royal Bank of Scotland then went on to acquire many other banking organisations to grow their company, one of the most well-known names in the UK being Natwest.

What started of as a medium sized successful banking organisation slowly started to grow into the large corporation we know today, but the journey was not easy and all was around 2 hours away from going completely bankrupt on the 13^th of October 2008 (The Telegraph, 2011). As over 10 years has passed since the bailout of RBS from the UK government, does not mean that this event has been forgotten.

All issues seemed to begin when RBS gained a new chief executive Fred Goodwin. 

Goodwin was appointed CEO in 2001, from then onwards to 2008 he presided for the banks rapid rise to global prominence as one of the worlds largest company in case of assets. Goodwin was seen to be putting forward to method of cost cutting in every aspect of the organisation. Compared to former CEO Goodwin was seen to not care about the shareholders & stakeholders of Royal Bank of Scotland, only cared for his own bonuses and self-actualization from power within the organisation. Goodwin got himself quite a negative reputation in the organisation as morning meetings within head office becoming known as the morning beatings, these beatings being emotional and conducted by Goodwin.

The acquisition of Natwest by RBS wasn’t a straight forward deal, RBS had to compete with a fellow banking organisation for the company, this company being Barclays. Both firms were in battle for the takeover of Natwest as this would bring many benefits such as growth to both organisations.

Natwest had been facing some recent struggles within the financial sector, after countless attempts from NatWest to stop the takeover such as conducting a £3.5 billion share buyback, along with gaining credibility by appointing Lloyds TSB executive Gordon Pell to head its new banking operations. However, these attempts from NatWest to save the company didn’t work, shown as “NatWest finally gives up the struggle for independence and recommends its shareholders accept Royal Bank of Scotland's £21bn bid. One RBS adviser says: "It would have been more graceful of them to have accepted three days ago." (BBC News - Business, 2000).

But you may ask how would such a medium sized banking organisation like RBS be able to acquire such a large firm like Natwest?

In relation to this hostile takeover, a smaller company such as RBS can acquire a large organisation like Natwest as from the financial struggles that Natwest had been facing the share price had dropped significantly. The drop-in share price means that RBS was able to buy enough shares to take over ownership of the banking organisation Natwest. The Hostile takeover led to 18,000 job cuts, as stated in the financial documentary. RBS now had access to all of Natwest’s savings, they spent them on acquiring other businesses such as an insurance company and second hand car company. All companies that are acquired by RBS only increase the worth of the organisation of a whole by increasing their assets and overall company liquidity.

Royal Bank of Scotland now started their journey to acquire more companies to add to their ever-growing list of ownerships. The next substantially important company that RBS set their sights on was Charter One, mainly running in America. Expansion in America through the American organisation Citizens was one of RBS’s main goals, so the acquisition of Charter One was crucial. Charter One joining the RBS group would mean that CEO of Citizens Larry Fisher would be able to expand into Chicago and take advantage of all the growing opportunities in that geographical location. Charter One was bought for £5.8bn on May 4^th, 2004 (The Telegraph, 2011). In 2004 Natwest was announced as being one of the 5^th largest banking organisations worldwide, therefore only giving more signs to the shareholders of the company that the cost cutting, hostile acquisition process Fred Goodwin was putting into place was so far being successful.

However the next stage of the expansion for RBS did not run as smoothly as the transition of growth that occurred from all the previous companies acquisitions, I am going to critically evaluate the next sages for the demise of RBS in comparison to their share price during these events.

Beginning of April 2007 RBS entered a bidding war for Dutch bank ABM Armo, during this time the shares for the bank were £5.78. RBS then declared the takeover of ABN Armo “Unconditional”, this was the first issue for the company as just after they declared this the market value of assets for ABN Armo dropped significantly due to the ongoing credit crunch. Following April of 2008 RBS then declared that £12 billion rights issue to shore up its weak capital within the company, share price was £3. October 2008 a week after accepting the iconic multi-billion-pound bailout from the UK government to prevent the company’s collapse, this left the taxpayer as the majority shareholder with shares being 65 pence.

February 2009 RBS reported that they had lost an overall £24.1 billion in 2008 alone, this was the biggest loss in British history and government asked Sir Fred Goodwin to give up his £700,000 pension to put towards repayment to the government. Finally, prime minister at this time Gordon Brown pilled on the pressure for Sir Fred to apologise for the near collapse of the organisation, with shares now at 23.8 pence.

Figure 1 -

The awful management decisions that were made by Sir Fred Goodwin and Tom Mckillop caused uproar throughout the United Kingdom, shown as in figure 1 “Protesters target an RBS branch as the G20 heads of government gather in London while windows were smashed and a car damaged the previous month in an attack on Sir Fred's home.” (The Telegraph, 2011).

In conclusion the financial documentary RBS: Inside the bank that ran out of money was very eye opening, the events that occurred within the badly ran organisation could well have been avoided. As well as blaming the bank's management - led by Sir Fred Goodwin - the FSA also admits that the international rules for banks at the time were inadequate and insists that the takeover of ABN Amro in the autumn of 2007, that left the bank with too low capital levels, would not have taken place under new rules put in place since the banking crisis. (Bowers, 2011). The difference in share price from when Fred Goodwin was appointed CEO and when he left shows how the greed that he pressured into RBS to grow and acquire as many companies to help them expand only hindered the business.

Figure 2 - (Finance, 2019).

Figure two shows that under the running of RBS by Fred Goodwin from when he was appointed in 2000, he showed to the shareholders that he could make the organisation more profitable. The greed that the management of RBS gained as they grew as a company only led to them making decisions that were not thought out enough, such as the takeover of ABN Armo was not a decision that was taken seriously. If Goodwin and Mckillop had taken into account, the looming recession that had already shown signs of effecting many other companies in the financial industry they would of taken it more seriously that ABM Armo made their profits through Sub-prime loans. Even though RBS stated that they were not trading in sub-prime loans in anyway, this was a massive part of RBS making money in America. Management was forced to confirm they had been trading in Sub-prime loans eventually and this was a major contributor to the company nearly going bankrupt.

After investing so heavily in America I believe that RBS should have just stayed in the geographical areas that they started in, this is where they had loyal customers and shareholders, from doing this they could of kept their well established brand reputation and there would have been no devastation brought to the employees and shareholders from the greed of needing worldwide growth.  "The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?" Turner said. (Bowers, 2011)

References

BBC News - Business. (2000, February 10). NatWest takeover: a chronology. Retrieved from http://news.bbc.co.uk/1/hi/business/626198.stm

Bowers, J. T. (2011, December 12). RBS failure caused by 'multiple poor decision. Retrieved from The FSA criticised the 'light touch' regulation encouraged by the Labour government as it called for an overhaul of the rules: https://www.theguardian.com/global/2011/dec/12/royal-bank-of-scotland-fsa-report

Finance, Y. (2019, December 7). The Royal Bank of Scotland Group plc (RBS.L). Retrieved from https://uk.finance.yahoo.com/quote/RBS.L/history/

RBS. (2019, December 1). Our History . Retrieved from RBS Online: https://www.rbs.com/rbs/about/our-history.html

The Telegraph. (2011, December 12). RBS timeline: how it all went wrong. Retrieved from https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8363453/RBS-timeline-how-it-all-went-wrong.html