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The Arrogance And Ignorance Of The Masters Of The Universe

Dec 12 • Market Commentaries • 3123 Views • Comments Off on The Arrogance And Ignorance Of The Masters Of The Universe

As the UK’s FSA finally released their report on the downfall of RBS in the early hours of this morning many readers will be catapulted back to the days of 2008-2009 when the globe’s financial structure and system appeared to wobble on it’s axis.

Despite the credit crunch (as it was termed) being temporarily fixed by adding trillions of new liquidity to the system, the temporary reprieve experienced as the system found a new normal underpinned by zirp (zero interest rate policy), has proved to be short lived.

The main ‘culprits’ at the time, the USA and its investment banks, simply bought their way our of recession; two percent of growth for an increase of the debt ceiling from $9.986 trillion to $15.6 trillion inside two years is spectacularly bad governance. The reason the mainstream media doesn’t constantly fixate on this issue is simple; the numbers are so big they’ve lost any relationship and relevance to commentators and the general public alike.

The 50.7% increase in the national debt is barely mentioned in the run up to the USA general election as most candidates for the republican nomination know the problem is so insoluble why tackle it, if in doing so their individual status and that of their donors and benefactors will be put at risk?

Drip by drip the information that came our way, in relation to the mismanagement of risk by the investment banks pre the collapse, was truly jaw dropping and as the FSA reveal today none were more culpable than RBS.

In an excellent documentary on the UK’s BBC network aired last week the incompetence, arrogance and ignorance of the RBS senior management was exposed for all to see. The fact that the purchase of the dreadful bank ABN Amro went ahead without due diligence left many speechless.

When questioned at an investors’ conference as to the wisdom of the recent purchase of ABN Amro the former CEO, Fred Goodwin, actually stated it was unnecessary to conduct a separate audit or prescribe full due diligence on ABN as “due diligence light” had been conducted recently and given it was a bank in his opinion it was constantly subject to strict governance criteria.

He and his board had become that drunk on the banking world kool aid, that detached from reality whilst breathing the rarified atmosphere in the ivory in their towers, that a circa £46 billion purchase was regarded in the same way currency traders would ‘go long on the loonie’..

RBS had committed to use circa £46 billion to purchase a bank, with many analysts suggesting it had huge exposure to the sub prime market, and yet no diligence was entered into. Goodwin was being paid a commission based on performance, if he simply ‘bought in’ extra turnover and profit he was rewarded handsomely, his motivation was that basic.


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As the BBC documentary moved on to further investor and shareholder meetings we watched senior management become increasingly ragged as they moved ‘off script’ attempting to justify their purchase, or avoid the questions on the exposure RBS had to the sub prime market in the USA.Their rabid expansion plan had been engineered through seemingly blind acquisitions in the USA. The individual senior management appeared utterly clueless as to how the acquisitions were structured and what genuine asset quality lurked in every portfolio.

The FSA report states that Royal Bank of Scotland gambled with its purchase of Dutch bank ABN Amro and was dragged to the brink of collapse three years ago by poor management decisions and flawed regulation and supervision. The long awaited report running to 452 pages also criticised former British Prime Minister Gordon Brown for encouraging “light touch” regulation, as well as RBS’s weak capital and funding.

“The decision to make a bid of the scale of ABN Amro on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble. The multiple poor decisions that RBS made suggest that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions.” – FSA.

Under former Chief Executive Fred Goodwin RBS came within hours of running out of cash in October 2008 and was only saved by a 45-billion pound taxpayer bailout.The report blamed the failure of RBS on six factors: weak capital, over-reliance on risky short-term wholesale funding, doubts about its underlying asset quality, substantial losses in credit trading activities, its gamble on ABN Amro and the overall systemic crisis, leaving relatively weak banks vulnerable.

Under the new global Basel III definition of capital, RBS would have had a common equity Tier 1 ratio of 2 percent, compared to a requirement for large and complex banks to hold 9.5 percent under new rules coming in. The bailout has left the UK government owning 83 percent of RBS. The taxpayer is sitting on a 25 billion pound paper loss on that investment (together with the exposure) and appears unlikely to be able to start selling shares any time soon.

“Taxpayers should never have had to rescue RBS. As we build the new RBS, we are learning the lessons of the past and working to regain the trust of the public. Our new leadership has made significant progress in making the bank safer and more focused on the needs of its customers.” – RBS Chairman Philip Hampton.

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