Friday, August 29, 2008

A Royal Loss

The losses get steeper the write-downs get bigger as Royal Bank of Scotland releases earnings. After binging on subprime sweets during the credit bubble and consuming ABN AMRO, the Royal Bank is coughing up billions at a time:

Royal Bank of Scotland Group Plc reduced assets by about $208 billion in its investment bank this year because the company got “too big” and reported the first loss since going public 40 years ago.

The 5.9 billion pounds of writedowns it announced in April may be sufficient for the year, the bank said today in a statement.

The shrinking of Edinburgh-based RBS is a U-turn after it led two partners last year in the takeover of Amsterdam-based ABN Amro Holding NV. RBS, which paid $22 billion for its part in the biggest banking acquisition, became “too big in the context of the world changing,” Chief Executive Officer Fred Goodwin said today.

Yet Goodwin, whether a complacent co-conspirator or a lame patsy, maintains that purchase of AMRO was the right thing to do:

Goodwin said he has no regrets about the purchase. “We paid 10 billion pounds for a business that will produce over 2 billion euros a year,” he said.

That is an opinion, not a fact. Goodwin may as well expect to win the gold medal in gymnastics at the Olympics this year. No one is surprised at the results of the deal and the only ones with no regrets are the insiders who profited personally from commissions, stock options and grants.

Meanwhile, in the outside world… In addition to the £5.9B ($11.4B) in write-downs, the bank was burned by $2.84B in impairment charges despite issuing $24B in new shares in June and taking a mammoth £681M ($1.3B) first-half loss.

As well as the latest write-downs, the bank said its pro forma impairment losses — which cover customers that can’t repay debt — jumped by around 60% to 1.48 billion pounds from 936 million pounds.

This enormous loss was the second or third-largest loss in UK banking history, but it was the first time in the Royal Bank of Scotland’s 40 years in business that it failed to post a profit.

The future of the bank is up for grabs and RBS is far from determining it’s own fate. The bank now faces a brewing storm of alt-A defaults, a commercial real estate collapse, the auction rate security crisis and the inability of its own counter-parties to repay insurance. All of this is piled on top of the cresting wave of consumer credit.

A weakening economy has further exacerbated people’s ability to honor their payment obligations on mortgages, credit cards and other household loans, impacting the value of securities backed by such loans. Meanwhile, the protection bought against such value deterioration has lost much of its merit because companies that sell such protection, the monoline insurance companies, have seen their credit ratings slashed in recent months.

Prior to the credit crisis, the Royal Bank of Scotland had never lost a cent. The loss of hundreds of millions of pounds is a landmark on the road to bankruptcy should this go that far. It was once unthinkable to expect a loss from the bank, but from now on, further losses are all that can be reasonably anticipated.

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