To prove their position at the summit of the banking world, Sir Fred embarked on a audacious plan - to snaffle Dutch banking giant ABN Amro from under the nose of his greatest rival John Varley of Barclays. His rationale at the time seemed sound, ABN Amro had a massive global network that they had repeatedly failed to leverage. The plan succeeded and in late 2007 RBS, in partnership with Belgium banking giant Fortis and Spanish conglomerate Santander, bought the Global Banking division of ABN Amro in a record Euro 27bn deal (give or take). During the battle for control of ABN Amro, global credit markets began to display the warning signs of what has become the biggest single banking crisis in modern history. However Sir Fred (without the benefit of hindsight), ploughed head on, committed to doing the one deal that would cement his place in corporate history.
As markets deteriorated RBS now had two fights on their hands - one they shared with virtually every other global bank and one they had to deal with on their own - the integration of two huge entities. In spring 2008 Sir Fred went cap in hand back to his investors. He admitted that perhaps they had over extended themselves with the purchase of ABN and that now they would require another round of financing. Amongst his competitors, he was the first to do this, and at the time, it seemed like a shrewd move. They duly raised £15bn from their shareholders. This did not arrest the alarming decrease in the share price (now hovering around the £2:00 mark). This decline continued and in September 2008, RBS's share price went from £2 to £1 in a couple of days trading. A business that was once worth over £7:00 per share was now worth £2 - effectively less than the price it had paid for ABN. Sir Fred's position had become untenable. The governments bailout (another £20bn) all but nationalised The Royal Bank of Scotland.
Today RBS's share price stands at 11p - a market cap of £4.5bn. It announced potential losses for 2008 of a staggering £28bn - The largest loss in corporate history. There are calls for the total nationalisation of not just RBS, but the whole banking system. These are indeed unprecedented times.
But what lies ahead for RBS? Their share price at the moment effectively represents the massive sell off that occurred as a result of their announcement today. Traditionally this need not have represented the companies value (what their assets are worth). But with so much off balance sheet debt, that is clearly hugely challenging to accurately identify (let alone value) what are the shareholders to think?
The government have announced they intend to underwrite 'toxic' debt - effectively ring fencing the bad 'stuff' in the hope that confidence will be restored and that banks will continue to lend again. But exactly how much bad 'stuff' is there? If the banks don't know how can we expect the government to understand the scale of the problem. They are effectively underwriting a position that they have no real knowledge of. But what is the option? Let a bank go bankrupt? The knock-on effect would cripple, not just the banking world, but almost every business sector and market the world over. Small businesses would find themselves with no access to funds, Charities and local government would lose their money. Banking counter parties would lose out. Retail investors with mortgages would face uncertainty. The list goes on and on, but in truth, no-one really knows exactly what would happen if another major bank were to fail. What Gordon Brown is sure of, is that he is not going to let us find out. For this I applaud him.
