The worst legacy in finance
DURING the frenzied period after the financial crisis, a reader plaintively wrote asking whether he would ever see his money back on his investment in Royal Bank of Scotland shares. The reply pointed out that under the terms of the Financial Services Act it wasn’t possible to offer individual financial advice.
Nevertheless, it should be noted that because the Government had injected £45bn of taxpayers money into RBS for a stake of 80pc of the shares, existing investors would be hugely diluted and that my family, as holders of RBS stock, wouldn’t expect to see a return to any kind of normality for at least a decade.
What is becoming absolutely clear is that hoping to recover the investment by 2018 was far too optimistic a forecast, and one wonders if the owner of NatWest, Coutts and Williams & Glyn’s can ever be made whole again. Indeed, without wishing to sound like the frighteningly Leftist leader of the Labour Party Jeremy Corbyn, perhaps it’s time for the Government to rethink. It could make an offer for the outstanding shares, sell off what assets it can, create a government supported small business bank and put the rest of the enterprise into run-off as it has for the more problematic parts of the Northern Rock.
It may not be the right thing for shareholders but could be better for the country.
Just how much of a struggle RBS’s chief executive Ross McEwan is having is demonstrated by the high costs and failure to create a challenger bank from the 300 or so branches of Williams & Glynn.
There can be fewer worse legacies in finance than that of pre-crisis chief executive Fred Goodwin.
The worst of it was that Goodwin believed that he could go on a global spending spree without properly rebuilding and updating the IT systems.
As almost everyone involved in banking and financial services now realises, the key to the future in a digital economy are durable and flexible systems. RBS simply has found the cost of carving out the Williams & Glynn’s systems, in the way that Lloyds did for TSB, too prohibitive to make sense.
The underlying business continues to be dogged by the past. Payment protection insurance (PPI) will not now be closed down until 2018. RBS is still in the firing line from the US Department of Justice over the creation and sales of deeply flawed residential mortgage-backed securities (RMBS). And the outcome of legal challenges and costs related to its GRG recovery arm is still not fully quantified.
If all this were not enough, the Bank of England’s 50pc bank rate cut to 0.25pc is likely to be unhelpful despite the ‘people’s QE’ facility which has been put in place to mitigate the squeeze on bank margins.
The lower the interest rates the harder it becomes to build capital and to take RBS to higher ground in terms of safety.
Among the UK banks, RBS shares have been the laggard falling 40pc this year ahead of the latest £2.05bn half-year loss and a disturbing 8pc more since. For RBS recovery is the mirage in the desert. Hopefully New Zealander McEwan has the grit and staying power to see the job through. Fed up NOT much Brexit impact for the American economy. Latest jobs data shows 255,000 jobs were created in July, far more that is needed to soak up arriving migrants. At this postconvention stage of the presidential election that ought to bolster the Democratic candidate Hillary Clinton, given her party has control of the White House.
As fascinating is the fact that average hourly earnings are on the up at 0.3pc last month and 2.6pc at an annualised rate in the second quarter.
With jobs still being created despite a jobless rate down to 4.8pc and earnings rising, the cry of making American great again, coming from Donald Trump’s headquarters may start to seem a little hollow even in hard pressed blue-collar states.
A consequence of the data is that we may soon be in the highly unusual situation of British bank rates and the US federal funds rate moving in opposite directions. The big question is whether Federal Reserve chairman Janet Yellen (a Democrat) will be prepared to push through a rate rise before the US goes to the polls in November.
If so that could be another factor weighing down on sterling. Rising sun HERE is an arresting figure. Chief executives in Japan are as cheap as chips, earning on average $1m (£763,000) a year.
Bit of a contrast with our own plutocrats who on average earned £4.964m in 2014, a figure climbing to well above £5m, according to data to be released shortly by the High Pay Centre.
As for Softbank president Nikesh Arora, he is the exception to Japanese parsimony, picking up $300m (£229m) in pay over the last two years.
Makes eye-watering, multi-million cash outs for ARM bosses look frugal.