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“Government completes exit from NatWest,” screamed the headline in a British government press release on May 30th. “Final share sale ends nearly 17 years of public ownership.” It was more of a symbolic moment than anything else because it bookended a sorry episode that began with the bank’s dramatic emergency state bailout at the time of the Global Financial Crisis ( GFC ).
But while NatWest has returned to private hands, the wreckage of those crisis years is still visible. Europe continues to be littered with the bleached bones of failed banks that had to be rescued during those tumultuous years. I’ve compiled a list at the end of bank stakes still held by European governments. Several other distressed banks, of course, were either taken over or are buried in Boot Hill.
The rescue of Royal Bank of Scotland ( RBS ), since renamed NatWest, became a poster child for the excesses that at one and the same time helped cause and intensified the deepening GFC. The British government injected a total of £45.5 billion of UK taxpayers’ money into RBS in 2008 and 2009 – around US$70 billion using exchange rates of the time – for a peak holding of 84.4%.
The story has been told countless times so no need to repeat it here. I pause only to mention ( in case you’d forgotten ) that RBS’s ill-fated tripartite acquisition of ABN Amro – at the time the 25th biggest bank in the world – in partnership with Fortis and Santander, which led to the demise of both RBS and Fortis, was the brainchild of M&A adviser Andrea Orcel, now UniCredit’s CEO, who is pushing ahead today with some takeover bids of his own.
RBS’s dramatic swing from a £7.3 billion statutory profit in 2007 to an eye-watering loss of over £24 billion in 2008 aptly illustrated the scale of the catastrophe. The rest, as they say, is history. But a very current question is whether taxpayers realized any return from the capital they injected into the banks. That’s a loaded question.
Value for money?
There’s been a huge focus since the GFC on this question of whether taxpayers received value for money or some sort of return for their largesse. I think it’s the wrong question.
Over 17 years, the British government recouped a little over £35 billion via three RBS accelerated bookbuilds, five directed share buybacks, a share trading plan, dividends, and various fees. That crystallized a £10.5 billion loss to taxpayers in cash terms. That’s a lot and there will be a backlash.
But realizing value by turning a profit was not a consideration at the time nor should it be a determinant of value now. Amortized over 17 years, it can be argued that by preventing the financial Armageddon of the GFC from becoming even more apocalyptic, it was a modest price to pay. Same story with the then Lloyds TSB, into which the government had to inject £20 billion of capital for a 43% stake following the state-directed acquisition by Lloyds of the deeply distressed Halifax Bank of Scotland ( HBOS ).
The government reported that total proceeds from share sales and dividends with regard to Lloyds Bank was £900 million more than it had paid for the shares. The National Audit Office ( NAO ) noted in a report that that number excluded the government’s financing costs and that if financing costs were included, the government was estimated to have suffered a loss of between £3.2 billion and £5.9 billion, depending on the financing rate used. Again, that strikes me as a fair price for stability over years of state stewardship.
The NAO report into Lloyds acknowledged that the deficit “must be seen in the context of ensuring financial stability and protecting the wider economy”. Just like the government press release announcing its exit from NatWest on May 30th noted that the alternative to a bailout would have been a collapse with far greater economic costs and social consequences. I’d say that’s a reasonable assertion.
Seeking global superstardom
Bear in mind that the shrunken, restructured NatWest of today is a top 40, top 50 bank by size, but RBS was one of the top five banks in the world in the mid-2000s, having acquired the bigger National Westminster Bank ( NatWest ) in 2000, and then built a large commercial and investment banking footprint in the US and elsewhere through serial acquisition. At one point, RBS had a 10% stake in Bank of China.
And the NatWest that RBS acquired was the same NatWest that in the 1990s had also harboured ambitions to become the biggest bank in the world and had rapidly closed a succession of acquisitions to get there. Given its size, a collapse of RBS in 2008 would have had global repercussions.
In the heat of the GFC, governments were rightly more focused on regaining financial stability than figuring out whether they would make a future profit. Don’t forget that as well as RBS and Lloyds, the British government also had to rescue a bunch of reasonably-sized domestic retail banks: Northern Rock, Alliance & Leicester, Bradford & Bingley, and Britannia Building Society.
Concerted, immediate action rightly took precedence over a ponderous guesstimate of potential future value.
European banks still in state hands
As I mentioned at the top, European governments are still shareholders in a string of bailed-out banks:
The legacies of the GFC and the subsequent euro sovereign crisis are very much still with us. Let’s see where we will be at the 20th anniversary.
