From bailout to sale: RBS’s traumatic seven years

The Chancellor has announced plans to start selling the Government’s stake in RBS - but how exactly did we get to this point?

Former RBS chief executive Fred Goodwin has so far endured no legal or regulatory sanction for the role he played in the near death of the bank (PA)

“The Government is not a permanent investor in UK banks. Its intention, over time, is to dispose of all the investments.”

So said the Treasury on 13 October 2008 as it unveiled an emergency plan to pump £37bn of taxpayers’ money into Lloyds, HBOS and Royal Bank of Scotland in order to stop the British banking sector, and the wider economy, going up in flames.

Back then, no one realised just how long “over time” would be. This week, seven years on, the disposal of the State’s share in the largest of those three, RBS, was finally announced by the Chancellor George Osborne.

It has been a rough ride, to put it mildly. The first official recapitalisation of RBS was actually carried out in December 2008, when the Labour government bought 2.3 billion shares, injecting around £15bn into the lender.

It wasn’t enough, though. The very next month the bank announced that losses for the year could be as high as £28bn – forcing the State to inject another £5bn into RBS in April 2009 to keep it solvent. Finally, the Government was forced to buy a further 5.1 billion shares for £25bn in December 2009. But Gordon Brown and Alistair Darling, then the prime minister and chancellor respectively, were determined not to nationalise RBS fully.

Labour brought in an investment banker and reputed turnaround specialist Stephen Hester in November 2008 to replace Fred “The Shred” Goodwin as chief executive (Getty Images)

So although that total injection of public funds took the government’s effective stake up to 80 per cent, the final tranche of shares was taken in non-voting “B shares”. And control of the taxpayer’s holding was handed to a nominally arm’s-length quango called UK Financial Investments.

The influence of ministers, however, has never been far from the boardroom. Labour brought in an investment banker and reputed turnaround specialist Stephen Hester in November 2008 to replace Fred “The Shred” Goodwin as chief executive. But as the losses continued to pile up and Mr Hester failed to push up the bank’s share price, his generous remuneration package drew widespread complaints. Public pressure in 2012 forced him to turn down a £1m bonus for that year.

That same summer, RBS suffered a massive systems failure that prevented millions of its customers from gaining access to their current accounts. RBS was ultimately fined £56m for management failings and the debacle prompted Mr Hester to relinquish his £1m bonus in 2013 too.

As the share price refused to move towards the State’s break-even price of 502p, the debate about what to do with RBS raged on. In March 2013 the outgoing Bank of England governor Mervyn King put his cards on the table. He told the Banking Standards Commission that he had been privately advising the Treasury since 2009 to break up RBS into a good bank and bad bank and push through a quick public sale of the good bank. Both the previous Labour government and the present Chancellor had rejected this advice, buying into Mr Hester’s claims that the bank, as presently configured, could be turned around successfully.

Mervyn King, former governor of the Bank of England, advised Osborne to overhaul RBS back in 2010 (Getty Images)

But he failed. And in June 2013 Mr Hester announced that he was leaving amid reports of a falling-out with Mr Osborne. In December he was replaced by a New Zealand-born retail banker, Ross McEwan. That signalled the final and belated retreat of RBS from its pretension to being an investment bank.

But the terrible publicity around the bank’s retail arm carried on coming. Lawrence Tomlinson, an entrepreneur-in-residence at the Department for Business, produced an incendiary report in November 2013 accusing RBS of, in effect, asset-stripping struggling small firms for profit. The bank strenuously denied the charges but some 270 small firms are still threatening legal action. In the meantime RBS, like the rest of the UK’s big banks, has been hit by massive fines for the rigging of interest rates by its traders. More fines are expected from US regulators.

Before this year’s election, Mr Osborne gave a frank interview in which he said he regretted not fully overhauling RBS back in 2010, as advised by Mervyn King. The Chancellor said he wanted to sell the bank “as quickly as we can”, though with the caveat: “I think people want to see they get their money back”

Yet at Mansion House on Wednesday he announced that he would start selling the bank in the coming months, with the price still well below the 502p that the Government would need to break even. If its stake is sold at the present 361p share price, the State would crystallise a paper loss of around £13bn.

Defending the decision, Mr Osborne cited bullish analysis from the investment bank Rothschild and also a favourable verdict on a quick sale from the Bank of England Governor Mark Carney.

But there has been opposition too. The Unite union has said the deal will “short-change the public”, while the New Economics Foundation (NEF) think-tank argues that the public interest would be better served if RBS were split up into a series of publicly owned regional banks with a mandate to support small business lending. “Returning RBS to the same structure that caused the crisis makes no sense,” argued Tony Greenham at the NEF. “The assumption that the bank should be returned to the private sector deserves greater scrutiny and debate.”

As shadow chancellor, Mr Osborne was critical of Labour’s response to the banking crisis. In January 2009 he complained of “a bailout whose size we still don’t know, whose details remain a mystery and whose ultimate cost to the people of Britain will only be known when this government has long gone”. Thanks to his fateful decision this week, we have a better idea of the ultimate public cost of bailing out RBS.