To avoid disaster, RBS’s global markets division - the failing part of RBS - should be closed so the state can focus on its investment elsewhere.
The demise of Leyland, a publicly owned car manufacturer, became a byword for the worst aspects of nationalisation policy in the 1970s; Cormac Hollingsworth looks at whether RBS is following suit
This morning in the FT, Stephen Hester told parliament to back off on taking on RBS or risk creating a new Leyland. But RBS share price is reflecting a £30 billion paper loss for the government.
It’s right that MPs are asking where the underperforming division are within RBS. After all, the mistake in Leyland was not closing the underperforming sections. RBS’s annual results this week suggest that there is merit to MPs’ concerns.
Indeed, there is even sign of a return of the bad old behaviour of RBS.
Sir Philip Hamilton told shareholders he is:
“Not philosophically opposed to big [pay] cheques provided it’s matched by big performance.”
But how much risk is the board allowing RBS to take to make those big trades? The answer is quite worrying.
It was a disastrous year for RBS’s global markets division, the part of the bank that does investment banking and blew up on subprime in 2008 causing the collapse of the bank. Whereas in 2009, global markets made £5.7 billion, this year it made only £1.5 billion.
Nevertheless, Hester still paid its staff a handsome £2.4 billion, only 15 per cent lower than in 2009, even though profits were down 73 per cent.
But the concern is that the bets are getting larger in the global markets division. They have grown by 22 per cent since 2009, but they’re clearly not creating profitability. Indeed, whereas in 2009 Global Markets represented a quarter of all the risk that RBS took, that has grown to a third.
And this is reflected in the share price. Of the £46 billion of equity that the government has invested in RBS, a huge £16 billion is now tied up in the underperforming global markets division. That is over half of the government’s paper loss on its investment.
There are lots of profitable parts to RBS. Since 2009, UK corporate division has grown profits by 25 per cent, and retail has grown profits by 869 per cent. In each of these divisions the bank has managed to reduce its risk by 10 per cent.
It’s perfectly reasonable for a shareholder to ask whether closing global markets would allow this equity to be released and returned to the government.
Indeed, MPs should take note of the signals from the market, not asides from management. When RBS announced closing sections of its global markets division in January, its share price rallied 5.5 per cent. Mr Hester is wrong: what creates a Leyland is government tolerance of failure.
• It isn’t “anti-business” to oppose high pay for mediocrity – Larissa Hansford, February 24th 2012
• Rewards for failure continue at the top of industry – Alex Hern, February 24th 2012
• The government has the power to stop Hester’s bonus, they just don’t want to – Ben Fox, January 27th 2012
• All in it together? RBS fat cat “in line for £7m payout”. Seven. Million – Shamik Das, January 27th 2012
• A word for 2012: Liquidation – Cormac Hollingsworth, January 4th 2012