Osborne admits he made bad bet on RBS casino bank

GEORGE Osborne has finally admitted he was wrong about RBS.

The Chancellor allowed himself to be persuaded by former chief executive Stephen Hester that the best way for the Government to get its money back was by gambling on big returns from the buccaneers at RBS’s investment bank.

Osborne, pictured – who wants to offload the Government stake in RBS as quickly as possible after the election – now acknowledges in an interview with the FT that it was a grave error.

The current chief executive, Ross McEwan, whose £1.85m rewards for last year were revealed yesterday, is on a mission to shrink the casino arm, now known internally as CIB, or Corporate and Institutional Banking.

This will soon be a mere shadow of what it was in the glory days. McEwan is pruning its activities to ‘ build a stronger, safer and more sustainable business’ that will focus on the UK and Western European customers.

There will be trading and distribution platforms in the UK, the US and Singapore and it will concentrate on debt financing, risk management in currency and interest rates and payments and trade services.

Operations will be cut back to just 13 countries compared with 38 at the end of last year and some 14,000 jobs mainly in the US and Asia are expected to go.

McEwen is reduc- ing risks and shrinking the balance sheet, with ‘risk-weighted assets’ – the amount of capital, assessed on the basis of the riskiness of loans – targeted to reduce by 60pc to around £40bn by the end of 2019.

Part of the impetus for this is that RBS needs to conform with new rules insisting casino banking must be ring-fenced from ordinary High Street operations.

But the l ender, which f i rst became embroiled in investment banking through its takeover of NatWest at the turn of the millennium, has never seemed to have a fully coherent strategy. In the years following the RBS (down 3.2p to 376.1p) acquisition, the old NatWest investment banking business boomed – along with competitors – with profits hitting nearly £4bn in 2006. The seeds of f uture difficulty were being sown, however, as the bank’s Americabased Greenwich division delved into sub-prime mortgages in the US. Fred Goodwin’s acquisition of Dutch bank ABN Amro on the eve of the credit crunch deepened the exposure to investment banki ng at t he worst possible moment.

At its zenith, the balance sheet of what was then called GBM (global banking and markets) was more than £1 trillion – and for every £100 of exposure, it was reckoned to have just £1 of capital.

Hester’s strategy was to bet on that high octane business to come up with the money to repay the Government bailout – a high risk route that risked losing focus on ordinary UK customers and led to anger at multi- million bonuses for traders.

At first, it seemed Hester was right, but performance soon fell to earth. Hester, along with his top investment banker John Hourican, left the building. Now Ross McEwan, George Osborne, and taxpayers are still picking up the pieces.