Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, is understood to be close to resigning as part of the rescue deal being put together to raise £10bn from either the Government or the private sector.
Shares in RBS crashed to a new low of 71p on Friday as the Edinburgh-based bank struggled to persuade existing shareholders to sign up to a new fundraising on the back of a £12bn rights issue earlier in the year.
Leaks from non-executive directors on the RBS board last week added fuel to rumours that Sir Fred could be axed and replaced by Stephen Hester, the chief executive of British Land, who joined the board as a non-executive three months ago.
Officially, RBS maintains that Sir Fred, who took home a basic salary of £1.2m last year, will stay on as chief executive. However, sources now say he is prepared to go if it eases the bank's recapitalisation. One City fund manager with a stake in RBS said: "Sir Fred is a dead man walking. The old Scottish mafia has kept him in his seat too long. The sooner he goes the better."
Banking shares came under pressure again on Friday despite the bailout news as analysts challenged the idea that investors want to throw new money after bad. There was also discontent among City institutions over the handling of the No 10-led £500bn bailout. The UK's biggest investor, Legal & General, was frozen out of the discussions and is lobbying for the maintenance of pre-emption rights – which guarantee that existing shareholders can buy the new shares – as part of the recapitalisation. "The devil will be in the detail," said one leading institutional investor. "Until the markets get clarity on the plan, equity markets will continue to suffer a bumpy ride."
Peter Montagnon, the head of the Association of British Insurers, said: "We understand that there will be dilution for shareholders. But what we want to know is whether there will be pre-emption rights." He added that most big funds were fully supportive of the plan but were eager to see it executed so that confidence can be restored in the markets which recorded their biggest falls ever last week.
The Treasury, which announced the plans last Wednesday, is due to flesh out the details this week. Britain's big banks have a combined stock market value today of less than £45bn – last year, RBS was worth more than £60bn on its own. None of the eight eligible banks have yet said whether they will take part in the first £25bn recapitalisation which will bring their capital adequacy ratios up to levels that will likely kick start lending in the inter-bank market. RBS and HBOS, which is being taken-over by rival LloydsTSB, are the most need to shore up their capital bases. RBS is said to be considering issuing ordinary shares to the Government rather than the expected preference shares, although this will lead to a big dilution to existing shareholders. This is because ordinary shares count as core one capital, a key measure of a bank's financial strength.
On Friday, Barclays sought to distance itself from the bailout plan saying it was in discussions with private investors, including a number of sovereign wealth funds. But a source close to Barclays said: "Nothing is set in stone for Barclays yet." The deciding factor will be the interest charged by the Government. "At, say 12 per cent, it probably wouldn't be worth it. But if it's set at 9 per cent, that's cheaper than Barclays typical cost of capital so it would probably participate. If it's cheap enough it'd want the whole damn lot."