If RBS’s board is not held to account, it could become a new Leyland


 

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.

RBS-LeylandIt’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.

See also:

It isn’t “anti-business” to oppose high pay for mediocrity - Larissa Hansford, February 24th 2012

Rewards for failure continue at the top of industryAlex Hern, February 24th 2012

The government has the power to stop Hester’s bonus, they just don’t want toBen Fox, January 27th 2012

All in it together? RBS fat cat “in line for £7m payout”. Seven. MillionShamik Das, January 27th 2012

A word for 2012: Liquidation - Cormac Hollingsworth, January 4th 2012

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  • Anonymous

    But RBS share price is reflecting a £30 billion paper loss for the government.

    ==========

    There are two inputs into that loss.

    1. The current share price
    2. The price the idiot paid for the shares in the first place.

  • http://twitter.com/UKFInotFFP UKFInotFFP

    UK Financial Investments are supposed to hold the board to account. Think they are doing a good job? If not, please sign Government epetition “UKFI not Fit For Purpose” at http://epetitions.direct.gov.uk/petitions/28557

  • Anonymous

    LMC was created in 1968 by the merger of British Motor Holdings (BMH) and Leyland Motor Corporation (LMC),[5] encouraged by Tony Benn as chairman of the Industrial Reorganisation Committee created by the Wilson Government (Wikipedia)

    ————–

    Government created and government failure.

    British Leyland (now called MG Rover) went bankrupt in 2005. In the end most of the original jobs were lost and the only saving grace was that the job losses were spread over 10 years instead of occuring all at once. The cost was $16.5 billion US$ (in today’s dollars).

    That’s the cost of governments getting involved. That price is still being paid via taxation and reduced services.

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  • Whyworktoday

    What matters more than senior directors pay packages is the pay of the retail counter clerks. This is not only low pay, but is rising by about 1% only.

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  • Mr. Sensible

    If the bonuses announced yesterday are not a reward for failure, I don’t know what is…

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  • Mike Giles.

    I bought Barclays at 53p and sold at373p. I have RBS at 19p and will sell at 120p. within 3 years.

  • Pingback: No, really, RBS and Lloyds are being bailed out by the EU | Left Foot Forward

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