SCOTTISH PERSPECTIVE
Scotland’s daily forum for comment, analysis and new ideas
From the top of The Mound in Edinburgh, put out a flag: after more than eight years, the end of taxpayer support for Lloyds Banking Group is finally in sight.
This week, the government further reduced its shareholding, taking its stake down to just 5.95 per cent. And the sale of this remaining slice could be completed within months.
At long last, you may well feel. Back in the darkest depths of 2009, when it seemed the entire UK banking system was about to collapse, the government rescued Lloyds by taking a 43 per cent stake for more than £20 billion.
Since then, in a series of share sales, the state has so far recovered more than £18bn, helped also by special dividends to the Treasury. And it looks on track to recover all of the money.
Is this, then, the final chapter of the most ignominious period in banking history? A final closing of this financial Domesday Book?
Sadly, no. Many small firms were destroyed in the desperate efforts to curb the Bank of Scotland’s mismanaged commercial loan book. And Lloyds is fighting a £350 million court compensation claim by some 6,000 shareholders over the bank’s takeover of HBOS at the height of the crisis.
Investors argue that Lloyds and its directors failed to fully disclose the parlous state of HBOS’S finances in November 2008 when they sent the takeover document to shareholders. The state of HBOS’S finances was subsequently found to be even worse – at around £10bn – than previously thought, resulting in a further injection of £5.7bn of taxpayer funding in 2009.
Had investors known this, would they have backed a merger which required suspension of competition rules? Shareholders say their investments were hit to the tune of around £1 per share, which they want to claim back. As well as small investors, litigants include institutions such as thenational Farmers’ Union and the Royal Borough of Kensington and Chelsea.
Meanwhile, over at RBS, the bank which once boasted the biggest banking balance sheet in the world, losses continue to be reported, recovery of state support has not even begun and restoration to health still looks far distant.
Year after year since the rescue, the bank has been beset by colossal write-offs, fines and penalties, falling with almost monotonous regularity. Just when chief executive Ross Mcewan, the successor to Stephen Hester, looked to be within sight of a recovery to genuine profit, along came another hammer blow from the past, miring the group in further losses.
On top of penalties for payment protection insurance (PPI) mis-selling running into billions, the bank has had to pay out £6.4bn in misconduct charges and its traders cited in the Libor rigging scandals. The retail arm was assumed to be healthy. But the bank was also fined £56 million for an IT melt-down that locked customers out of their accounts.
And still the blood-letting continues. The bank, where the government continues to hold 73 per cent of the shares after the £45bn rescue in October 2008, has not reported a single full-year profit since. And in the first nine months of 2016, it lost £2.5bn – capped by a £469m deficit in the third quarter alone.
Now an even greater penalty looms. It is about to be hit by what could prove by far the biggest fine yet. It centres on the bank’s role in the mis-selling of risky US mortgages – the epicentre of the great crisis of 2008-9. The fine from the US department of justice (DOJ) could be as much as $10bn (£8.25bn) – and on some accounts even a $10bn figure would be greeted with relief.
The precedents do not look good. Deutsche Bank, which had a much smaller involvement in the US sub-prime mortgage market than RBS, sought to secure agreement around a figure of $5bn for its own settlement to put the continuing uncertainty behind it. But the DOJ responded with an eye-watering demand for $14bn – a sum equivalent to 85 per cent of the bank’s market value. The final settlement of $7.2bn was more than 40 per cent above Deutsche Bank’s initial estimate – and an ominous pointer to what might now be in store for RBS.
Some detect in all this a penal pursuit by the DOJ against foreign-owned banks. The dilemma for RBS now is whether to seek a modification of a US fine now reckoned by some to be “around the low teens of billions” (what a bleak contradiction in terms to conjure with) or follow the example of Barclays and fight it out in court: an option that could drag on, casting a blight over any hopes of even a modest return of taxpayer support for the forseeable future.
And on top of all this is the overhang of a lengthy legal battle by shareholders against RBS who insist they were misled over the £12bn rescue rights issue in the summer of 2008. It was the biggest rights issue of shares in UK history, which investors supported in the belief this would rally confidence and rescue the balance sheet. But the crisis intensified, RBS struggled to secure money market funding and the shares collapsed, destroying the savings of tens of thousands of small investors.
Five shareholder groups have been pursuing claims totalling around £4bn against the bank. RBS offered to pay £800m by way of an out-of-court settlement. But the legal battle continues.
So for small investors and the giant pension funds – many of whom were substantial holders of RBS shares – talk of “a final chapter” and the book now being closed on the banking debacle rings hollow. For all the stock market recovery to new all-time highs this week – scoring its ninth consecutive record, the longest such streak in history – shares in both Lloyds and RBS are still a pale shadow of what they once were. Shares in Lloyds are currently standing around 66p compared with 61p in the depths of the crisis in 2009 and upwards of 250p in 2008 before the crisis erupted.
Shares in RBS stand at 224p. But allowing for the one-for-ten consolidation in 2012, to allow for comparison, the adjusted share price of 22.4p is barely higher than it was at the time of the crisis. For investors, recovery talk is empty.
Finally, there are the less easily quantifiable but substantial losses by way of opportunity cost – what both banks might have achieved had the banking crisis not struck – and the loss to Scotland of the standing and prestige of two of the UK’S biggest banks. The reputation of Scotland’s capital as a global banking centre suffered an irreparable blow. We may celebrate the progress at Lloyds after eight long years. The fact that memories are as painful as ever – and a warning about vanity and excess at RBS and HBOS that will stand for generations – may ironically be the most lasting legacy of all.
We can cheer the end of taxpayer support at Lloyds, but don’t pretend the fiasco is all behind us now, says Bill Jamieson