Do politicians never learn? In 1977, James Callaghan’s Labour government formed British Shipbuilder, a state-owned firm that grouped together the old Scottish shipyards of Govan with the equally historic yards of the northeast. It was a doomed attempt to save an industry in terminal decline through state control and massive subsidy.
Now, another once-great Scottish industry has been taken into state-ownership. Royal Bank of Scotland (RBS) launches bond issues rather than ocean liners. But the extra £25bn the British taxpayer has just pumped in to it is no more likely to revive the firm than the millions poured into the shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank in administration.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth-largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto. While doing so, it payed scant attention to basic banking good-sense, such as whether its funding was secure, or whether its customers were ever likely to pay back the money they’d borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen and ATMs closed. The risk wasn’t worth taking. Last week, the government rescued RBS all over again, giving the bank another £25bn, and taking its stake to 84%. But there’s a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures. But RBS is still bleeding red ink. It lost £3.3bn in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5bn for the quarter. Meanwhile, another £282bn in risky assets are insured by the government. How much more bad news is still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2trn, or around one and a half times Britain’s entire GDP. The potential losses are still horrifying.
But it’s not these results that are worrying so much as the five- to ten-year outlook. It is impossible to feel confident about the future of RBS. It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and in Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and will suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than e2bn have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s huge balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people who the rival banks don’t want – a recipe for certain decline. Even worse, RBS now looks set to fall under political control. It won’t be guided by commercial decisions about what suits its skills and its shareholders – only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up firms in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Aero-engine manufacturer Rolls-Royce was rescued by the government and prospered in the long-term. But that’s just about the only example. It would be far better to place the bank in administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that state of affairs ending happily.