A quick summary of Jacques Cailloux’s thinking on the Euro sovereign debt downgrades — Caillou being chief european economist at RBS…
The market implications of the ratings review are worse than a whole downgrade of the region owing to the increased political wrangling, questions on the EFSF/ESM firewall and the fact that flight to quality still has somewhere to go. Germany comes out as a clear winner and will have its position at the negotiating table strengthened even further. The French downgrade will complicate future negotiations around fiscal integration and comes at a delicate time domestically. The loss of the AAA is likely to be politicised in the run up of the upcoming general elections and could lead to an increase in popular support for fringe parties. Read more
Alex Salmond looks smug as a bug right now. His popularity in the Scottish polls is approaching that of Nicolai Ceausescu when he was running Romania. He should be careful what he wishes for. His pick’n’mix approach to Scottish independence plays straight to the xenophobic basic instinct of the complaining Scot, but when it comes to the details, things are likely to get very awkward.
The biggest asset at stake here is North Sea oil, still valuable after all these years. The SNP likes to draw an east-west line through Berwick on Tweed, which puts about 90 per cent of the reserves in Scotland. However, the line of the existing boundary follows the Tweed in a north-easterly direction. Project it into the North Sea, and Scotland’s share drops below 60 per cent. That could spell the difference between solvency and permanent austerity for Scotland, so it’s unlikely that the two sides will easily agree. Read more
Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outllook and wide ranging reforms of the banking sector due to take effect before the end of the decade, the FT reports. Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS’ wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin. Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan. The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years. Since taking over in 2009, Mr Hester has shrunk RBS’s balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out. Read more
End of era, etc…
1. We will restructure our existing GBM and GTS Divisions: Read more
RBS will announce on Thursday it is shedding another 3,000 to 4,000, the WSJ says, citing a person familiar with the matter. It will announce that it has hired investment bank Lazard to advise it on the sale of parts of its investment-banking business, including brokerage Hoare Govett. RBS plans to sell or close all of its cash-equities businesses, but retain some corporate banking operations, such as deposit-taking, hedging, foreign exchange and limited corporate advisory services for large clients.
Royal Bank of Scotland is determined to press ahead with plans to pay out promised bonuses to investment bank boss John Hourican and other top staff, says the FT. The newspaper reported on Monday that RBS investment banking boss Mr Hourican is in line for a £4m payout under the terms of a deferred grant of shares from 2009, further escalating tensions with the government. The grant comes as RBS’s investment bank – like many others – is struggling to make money, with thousands of jobs set to be axed. Citing people close to the plan, the newspaper says about 5,000 job cuts were likely to be outlined, although 2,000 of those were implemented in the fourth quarter of last year, and unnamed senior bankers say that number could rise further, possibly to as much as 10,000 over the next two years in a worst-case scenario, if RBS is unable to sell certain businesses as planned and is forced to close them down. Bloomberg says other investment banks are considering effective pay freezes for junior bankers, with Credit Suisse likely to suspend the industry-wide practice of raising pay automatically each year for analysts, associates and vice presidents in the investment-banking division, according to a person with direct knowledge of the decision. The report cites a person briefed on JPMorgan’s plans as saying that company doesn’t intend to alter its practices but may change course if other firms do so. Read more
UK banks are rapidly withdrawing from far-flung overseas businesses and other divisions considered superfluous to their strategies, says the FT. Lloyds Banking Group has appointed Rothschild to help sell its Middle East operations as part of its previously stated intention to rein in its lossmaking international division. Lloyds has only one branch in the United Arab Emirates – in Dubai – but manages about £1bn ($1.5bn) of assets across the region, including a slice of the expat community and local retail and commercial customers. RBS, meanwhile, is hoping to step up its withdrawal from non-core businesses with the long-awaited sale of its aircraft leasing business for $7bn to $8bn. China Development Bank and Sumitomo Mitsui Financial Group are the leading bidders although Wells Fargo is also still in the running.
So even Royal Dutch Shell has decided that the oil business is hard enough, without running a life assurance scheme for employees on the side. There is now not a single company in the FTSE100 index which offers a final salary pension scheme to new employees. This is the unintended consequence of well-meaning governments piling obligations onto the schemes, while moving them up the batting order of corporate creditors.
Thus, in little more than a generation, a system which allowed most businesses to look after long-serving employees in retirement has been destroyed. There will be wailing and gnashing of teeth, especially since Shell’s decision is a cold commercial one, rather than a necessary part of a survival plan. Yet we shouldn’t get too upset. The old system never worked as well as its advocates now claim. Long-serving employees become addicted to final-salary schemes, unable to leave because no new employer can afford to match their accrued benefits. In a world where companies’ life expectancy can be less than that of their employees, this makes no sense. Read more
As many as 10,000 bankers at Royal Bank of Scotland face the prospect of losing their jobs, reports the FT, as the state-owned UK bank draws up detailed plans to retreat from investment banking. The job cuts – combined with an expected £1bn-2bn of restructuring costs – are the worst-case scenario in plans being considered by Stephen Hester, RBS’s chief executive, who finally accepted in November that the investment bank that has propped up the group’s profits since he arrived in the job three years ago, has outlived its usefulness. The cuts are expected to focus on RBS’s equities business and the newspaper says one person familiar with the bank’s plan said it was preparing to exit the cash equities business entirely and may also withdraw from equity derivatives, M&A advisory and shrink its structured credit and interest rates business. Société Générale also announced that it was considering cutting about 1,580 jobs at its corporate and investment bank, about 10 per cent of the unit’s total staff, reports the FT. The announcement follows a management shake-up at the bank late last month which saw the replacement of the investment bank’s former head, Michel Peretie, and is the latest in a series of job cut announcements by French banks. The job losses will include 880 voluntary departures in France, where most of the division’s employees are based, and 700 job cuts in other countries, a spokesman said. Read more
As many as 10,000 bankers at Royal Bank of Scotland face the prospect of losing their jobs, reports the FT, as the state-owned UK bank draws up detailed plans to retreat from investment banking. The job cuts – combined with an expected £1bn-2bn of restructuring costs – are the worst-case scenario in plans being considered by Stephen Hester, RBS’s chief executive, who finally accepted in November that the investment bank that has propped up the group’s profits since he arrived in the job three years ago, has outlived its usefulness. The cuts are expected to focus on RBS’s equities business and the newspaper says one person familiar with the bank’s plan said it was preparing to exit the cash equities business entirely and may also withdraw from equity derivatives, M&A advisory and shrink its structured credit and interest rates business. Read more
Breaking pre-market news on Thursday,
- International Airlines Group signs binding agreement to buy BMI for £172.5m — statement. Read more
George Osborne has called time on Royal Bank of Scotland’s ambitions to be a force in global investment banking, as the chancellor backed sweeping reforms to ensure taxpayers never again have to rescue the banks, reports the FT. In an attempt to fend off criticism that the government had watered down measures proposed by Sir John Vickers, he told the state-backed bank to return to its roots as a UK-focused lender. The comments came as Mr Osborne pledged to implement the proposals put forward in September by Sir John’s Independent Commission on Banking, with few compromises. But in a sign that the government had succumbed to threats from HSBC that it could leave the UK if regulatory costs rose too high, Mr Osborne said banks could avoid tough capital rules on their international operations as long as they did not pose a risk to British taxpayers. Mr Osborne said the reforms would cost the UK between £800m and £1.8bn in lost economic output each year, but that this would be more than offset by an annual gain of £9.5bn from the “reduction in the likelihood or impact of future financial crises”, reports the Telegraph. Read more
RBS and Blackstone are set to complete a deal in which the bank will hand over control of £1.4bn of distressed property loans to the US private equity group, reports the FT, citing people involved. The move to offload the loans into a Blackstone-managed fund was likely to be completed Monday night. It represents the largest such disposal of UK commercial property debt and would end a sale process that has lasted 18 months. It also marks a watershed for RBS as the government-controlled bank looks to disentangle its legacy of profligate lending made before the financial crisis.
The government will accept “in full” Sir John Vickers’ report proposing an overhaul of Britain’s banks, said Vince Cable, business secretary, the FT reports. The coalition will give its formal response to the report by Sir John’s Independent Commission on Banking on Monday, endorsing plans to split big banks and place separate retail operations behind a high capital wall. Mr Cable said he had reached a “common view” with George Osborne, chancellor, that the changes would be put into law before the planned 2015 election. Meanwhile, Nick Clegg, deputy prime minister, will today articulate “the anger that people feel at the bonuses still flowing to bankers”, promising to use the government’s controlling stake at RBS and Lloyds Banking Group to ensure restraint. Read more
It’s the middle of 2007. Executives at RBS are joining the dots about how even super senior tranches of CDOs offer scant protection in the face of a tsunami of subprime defaults.
A structure which would become commonly understood by many, had some that should have been in the know scratching their heads. Given that CDO structures seem to be the answer to everything these days, it beggars belief that the captains of the industry had trouble grasping the problem. Read more
Hostile bank takeovers should be outlawed as part of a package of reforms needed to avoid a repeat of the catastrophic failings at RBS, the chairman of the Financial Services Authority has urged after releasing a long-delayed report into the the bank’s collapse. “[They] should either be completely banned or the regulator should have the power to block them,” Lord Turner told the FT. The report itself recommends that to ensure against a similar disaster, UK laws be changed to allow directors at failed banks to be automatically banned, fined and stripped of their remuneration. Read more
Alternative title: The bull that got away.
Everyone else has got it in the neck for the failure of RBS, so it’s only right that we remember those who masterminded the disastrous acquisition of ABN Amro. Read more
…we don’t like carrying more capital than we need to. You’ve heard me before on the subject of building up war chests and carrying; that’s not the way we would wish to operate at all.
At end-2006 and end-2007 respectively, RBS published tier 1 capital ratios of 7.5% and 7.3% of RWAs, and total capital ratios of 11.7% and 11.2%… Read more
As S&P decides whether to downgrade Germany and the five other triple-A members of the eurozone, RBS considers who would be hardest hit by the move other than President Sarkozy and his re-election hopes.
The answer, predictably enough, is the EFSF and its successor… Read more
Britain’s financial regulator has called for UK laws to be changed to ban and fine executives of failed banks, in its 500-page report into the 2008 collapse of RBS, the FT reports. The FSA’s review focused on the bank’s disastrous acquisition of ABN Amro in 2007, at the time the biggest banking takeover ever. RBS required a $71bn taxpayer rescue a year later. The FSA blamed “multiple poor decisions” for the ABN Amro debacle, the WSJ says, though conceded that it did not do enough to make RBS raise capital in early 2008, adds Bloomberg. Read more
The FSA’s report into the failure of RBS is out.
Scroll down/expand for the six key factors highlighted in the press release, or click the image to get to the landing page for the full report. Read more
Ah, the Stability and Growth Pact. You remember. Joining the SGP, members promised fiscal restraint, and in return were allowed to junk their soggy old currencies for a Deutschemark with a suntan. They all promised to keep the gap between revenue and spending to below 3 per cent of GDP, or if they weren’t quite there, they’d get there jolly soon, and never mind if they had to invent the numbers to do so.
So, your starter for 10: which country was the first to exceed the 3 per cent limit? No, not Greece, Italy, Spain, Portugal or Ireland, but Germany. Oddly, there were no calls for austerity measures in Berlin. A decade on, and the game’s up. Fiscal continence in the periphery is a distant dream, so to save the euro we’re promised the European Stability Mechanism and a new “fiscal compact”, which looks like the SGP, but without the growth or stability. Read more
Breaking pre-market news on Friday,
- BNP unveils new management team — statement and statement. Read more
Wednesday’s central bank intervention is impressive in its symbolism but unlikely to do much more than buy eurozone leaders a few days.
RBS’ US rates team has provided a useful analysis of the move. The immediate background to the intervention, according to the strategists, is that European institutions have been having trouble funding in the US repo market so have turned to the currency markets instead — buying USD then reversing the transaction three or so months later. Hence the recent stress in the currency basis swap markets. Read more
Royal Bank of Scotland was penalised $1.9m on Tuesday, after it placed below-market prices in an auction among 13 credit default swap dealers, reports the FT. The auction was held to ascertain the value of debt issued by Dynegy, which recently filed for bankruptcy. RBS was assessed the charge after its offer price on $5m of Dynegy bonds was 31.5 basis points or 31.5 cents on the dollar for the debt. Other banks provided offer prices ranging from 69.63bp to 72bp, according to the results published on CreditFixings.com, a website run by Creditex and Markit Group, who administered the auction on behalf of the International Swaps and Derivatives Association. Read more
Royal Bank of Scotland will pay $52m to settle allegations that it financed, purchased and securitised subprime home loans that were “presumptively unfair” under Massachusetts law, the FT reports. The state announced on Monday the bulk of the money will go to reduce mortgage debts for borrowers whose loans were bundled into securities by a unit of RBS formerly known as Greenwich Capital Financial Products. RBS said it was pleased to have resolved the matter. Martha Coakley, Massachusetts attorney-general, reached a $60m agreement with Goldman Sachs in 2009 and a $102m settlement with Morgan Stanley last year. Ms Coakley is still investigating other banks’ securitisation practices between 2005 and 2007. Read more
Some good news for the battered UK banking sector?
HM Treasury is going to announce special liquidity measures to help Lloyds, Barclays and RBS get through a funding hump in the first quarter of next year. Read more
From the FT:
Bank stocks are seen as a “dumb” place for investors to put their money, according to the head of part-nationalised Royal Bank of Scotland. Read more
It’s all going wrong at
The Headless Horse Lloyds Banking Group.
Very wrong. Read more
When you’re short of money, the odd £747m always comes in useful, but it doesn’t go far these days. It’s enough to finance the UK state spending machine for about nine hours. The government had spent more than the proceeds from the sale of Northern Rock before it could read the reaction to it in Friday’s papers.
The sale is almost irrelevant to the future of British banking. The price isn’t bad, in the circumstances, even if the taxpayers have lost nearly half the money we put in to rescue the Crock in the first place. But it speaks volumes about value in the rest of the sector. Read more