RBS: How the mighty have fallen

ROYAL Bank of Scotland's top executives have been ordered to slash costs by 10 to 20 per cent across the board, triggering fresh fears of massive job losses at the struggling banking giant.

News of the cuts came on the darkest day in the bank's history, during which £9 billion was wiped off its value as its share price plunged by 66 per cent.

The collapse of the share price followed the announcement by RBS of a £28 billion loss for 2008 – the biggest single loss in UK corporate history, which prompted Gordon Brown, the Prime Minister, to voice his anger about the bank's decision-making.

By the end of a traumatic day's trading, RBS shares were worth a mere 11.6p, raising the prospect of full nationalisation.

The bank has now lost its position as Scotland's biggest company.

The order to cut costs, given by the bank's new chief executive, Stephen Hester, is the latest hammer-blow to staff at the group, already laid low by the fall-out from its foreign expansion and now set to be 70 per cent owned by the government.

Mr Hester confirmed claims from sources that the swingeing cost-cutting plan has been decided upon, but he denied all the cuts would be achieved by job losses.

He said: "In terms of our total cost base, that (the figures] is accurate. That's not nearly the same as saying jobs. We have many, many items of cost.

"There is no business on earth today that isn't threatened by the global downturn and isn't having to look at its costs. There is no reason why banks should be treated as a special case. All businesses have to look after their costs."

Earlier in the day, Mr Hester told a teleconference that RBS had to "adjust to the new set of realities in our markets".

"That means that we and all other banks have to cut our costs, and obviously that does involve jobs," he said.

RBS currently has a workforce of 170,000 worldwide, compared with 226,000 in November 2007, the last available figure.

The collapse in its value means it has lost the title of Scotland's biggest company to Scottish and Southern Energy.

The full extent of RBS's losses prompted Mr Brown to voice his anger about the bank's decision-making, in particular its international investments "that were clearly wrong investments".

He said: "Today's write-off by the Royal Bank of Scotland is for irresponsible losses accumulated in American subprime markets that partly derive from the acquisition of the Dutch bank ABN Amro."

Asked about the record losses racked up by RBS, Mr Brown said: "I'm angry about what happened at the Royal Bank of Scotland."

However, the Prime Minister refused to say whether action should be taken against Sir Fred Goodwin, the former chief executive and architect of the disastrous foreign acquisitions.

The Financial Services Authority declined to comment. But the regulator can take action, including imposing fines on financial businesses and individuals deemed not to have had "adequate systems and controls".

However, analysts said they felt it was unlikely Sir Fred would face action for the gung-ho expansionary strategy, including a string of US acquisitions.

Yesterday's profits and writedowns bombshell led analysts to warn RBS shares could end up as an all-but-worthless penny-stock. The bank said a review of the value of past acquisitions would result in a non-cash loss of between £15 billion and £20 billion. This is mainly related to its purchase of part of ABN Amro in 2007.

RBS said it expected core losses of between £7 billion and £8 billion as a result of stormy credit and market conditions in the last three months of 2008. The projected losses mark a £38 billion decline in performance since last year, when it posted a £10 billion profit.

After RBS's shares closed down 23.1p at 11.6p, Simon Willis, a banking analyst at NCB stockbrokers, said: "There is now a highly likely prospect of full nationalisation (of the bank]. I think the shares could fall to a value of 0-10p, with shareholders getting all but nothing."

Keith Bowman, of the broker Hargreaves Lansdown, warned the latest bail-out was far from guaranteed to succeed.

"Should these measures fail, a further ratcheting up of bank-sector nationalisation in order to force lending would appear to be the next step, a conclusion seen as beyond all possibility just 12 months ago," he said.

Roger Lawson, of the UK Shareholders Association, which represents private investors, said: "We deplore this creeping nationalisation by the government. The RBS share price has fallen so badly because it is clear the government is not going to pay any attention to shareholder interests whatsoever."

Mr Hester, who took over after the ousting of Sir Fred, avoided ruling out full nationalisation. He said: "Clearly, the future is uncertain in lots of respects, and that must be one of them."

However, he said nationalisation was not the preferred route of the bank or the government.

Mr Hester did not criticise his predecessor by name, but he said the bank under previous management was "over-optimistic".

RBS also said the government was to increase its stake in the bank from 58 per cent to a probable 70 per cent after the Treasury agreed to replace £5 billion of preference shares with new ordinary stock.

Shareholders will be able to apply for new shares at a fixed price of 31.75 pence, representing an 8.5 per cent discount on Friday's closing share price. The government picks up the shares if investors don't, however, as in the bail-out last autumn. The new shares are expected to be left with the taxpayer.

Mr Hester said the move would remove the annual cost of preference share dividends to the Treasury of £600 million. But he said it was too early to say whether any money would be free for the restoration of dividends to ordinary shareholders.

The government stressed it was putting no new money into RBS, just converting preference shares into ordinary shares.

Mr Hester also warned that difficult trading would continue. In the fourth quarter, a single loan to the Dutch chemicals giant LyondellBasell Industries cost RBS some £1 billion.

Possible cost-cutting areas included property occupancy and sponsorships, including Formula 1 motor racing.

Meanwhile, some believe the RBS brand has been damaged by its association with so-called "toxic assets".

Peter Lyall, of the corporate communications consultancy Fifth Ring in Aberdeen, said: "Those in the financial community will have had their prejudices confirmed, that Goodwin flew too close too the sun. That will damage the brand.

"If it was fully nationalised, it would also affect the RBS brand because it could be a case of 'is it a discredited brand being run by a discredited government?'"

RBS's slashed share price is likely to lead to downgradings by credit-rating agencies, making it more difficult for the bank to raise working capital.

It could also mean suppliers enforcing stricter terms for their services to RBS, given concerns on whether they would be paid.

One analyst said: "People could decide not to tender to do work for RBS."

The finger of blame may point at Sir Fred, but don't forget the unquestioning supporting cast who helped steer this once-great institution on to the rocks

HOW could it happen? With the final stock market collapse of RBS yesterday, it just did.

To parody Oscar Wilde, to lose one bank is unfortunate; to lose two is catastrophic – for Scotland, its capital, its economy and its reputation.

Eighteen months ago Royal Bank of Scotland was our biggest company – and one of the top five banks in the world.

Today that global bank is in ruins. Its shares have crashed to just 12p and its market capitalisation is barely £5 billion. More than £50 billion of stock market worth has gone up in smoke. Even since the "rescue" rights issue of last April, when shares in RBS were offered at the then "bargain" price of 200p and all but 4 per cent subscribed for, investors have suffered a calamitous plunge of 94 per cent.

The bank that barely yesterday was the toast of Scotland and could do no wrong is set to turn in the largest loss ever reported by a British public company: trading losses of some £7 billion and up to £20 billion in writing off goodwill on the disastrous purchase of Dutch bank giant ABN Amro.

How convenient it is to heap all the blame on the departed chief executive Sir Fred Goodwin – the banker-cum-hero who collected more gongs and awards at these interminable business dinners than any other Scottish business figure.

And how easy to vent our rage at not one but two government rescues so badly bungled that, far from rallying investor confidence, they have worked to destroy it totally.

In truth, the collapse of RBS has many fathers. And it deserves a searching examination, not just of the conduct of one man but of the many experts and advisers and consultants and analysts who cheered Goodwin every step of the way, who urged on every acquisition, who talked of the "transformational qualities" of the ABN deal and who gathered round the chalice of aggrandisement like knights at the Holy Grail.

RBS was advised on this disastrously mispriced and mistimed acquisition by the top drawer of accountants, lawyers and investment bankers. They included Merrill Lynch International, lawyers Linklaters in the City of London and Sherman Sterling in New York, and of course, the accountants Deloitte