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Royal Bank of Scotland: Welcome to Nationalization

Posted by Larry Doyle on November 3, 2009 6:50 AM |

Why are companies, both financial and non-financial, hoarding cash? Having addressed that question yesterday in writing, Hoarding: ‘Cash Is King’, we did not have to wait long for hard evidence and billions of reasons for this hoarding phenomena. Let’s navigate across the pond.

What does a nationalized bank look like? Welcome to the Royal Bank of Scotland, the recipient of more government assistance than any other bank worldwide. With another 25.5 billion pounds of ‘bailout bonanza’ flowing into RBS today, the bank has now accepted 45.5 billion pounds of government assistance. In the process, the UK has an 85% ownership stake in this bank. If that is not the definition of nationalization, I don’t know what is.

Why does RBS need more government assistance? Continued losses on those dreaded toxic assets. Oh, you mean those toxic assets are still around? Where did you think they went? In addition to direct government assistance, RBS is receiving a government backstop in the form of insurance on 282  billion pounds of toxic assets.

Can this situation be contained to RBS or perhaps a few other financial institutions? We should not be so naive.

Recall that the IMF has projected global banking losses to ultimately reach $3.4 trillion. I addressed this reality in writing on September 30th, “When Is a $3.4 Trillion Loss Supposed to Be Good News?” To date, the global banking system has recognized approximately half that figure. The balance of the approximate $1.7 trillion in losses is embedded in a variety of loans, toxic assets, and assorted other financial detritus.

In the face of those projected losses, it should be no surprise that banks worldwide are hoarding cash. Aside from hoarding cash as best it can, what measures is RBS taking to stem the ongoing flow of red ink in its operations? Selling assets, cutting jobs, and capping compensation.

The Wall Street Journal provides details on these expected maneuvers in writing, RBS, Lloyds Diverge on U.K. Aid as They Unveil Plans:

The dramatic reshaping of RBS to ensure its viability and to meet EU guidelines on state aid will see the bank over the next four years sell off its insurance arm — probably through an initial public offering — and divest parts of its U.K. branch and corporate business, its global merchant services unit and its interest in commodities trading division RBS Sempra Commodities.

In addition, the government said that, as part of the accord, RBS and Lloyds would agree to pay no cash bonuses for 2009 to staff earning over £39,000. (LD’s edit, that equates to $63k)

This action to cap compensation and not pay bonuses will send a sobering chill across Wall Street and throughout the City as bankers come to appreciate the reality of government wages at a government owned institution.

Additionally, expectations are spreading that upwards of 25 thousands jobs may be cut at RBS.

Not pretty at all. European markets fell 2% on this news. Markets in the U.S. are expected to fall 1% at today’s opening.


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