Last summer I attended an open day by RBS for A-Level students. It was an “insight day” to look at what it was like to work at their investment banking division. They paid the travel expenses and my naive self thought that investment banking was something I later wanted to work in – so I went to London for the day.
After arriving, I got chatting with a chap who had come down from Bradford. “They paid me train fare – 250 quid, put me int ‘otel overnight, and paid me for’ taxi.” That’s a lot of money, I thought, for just one person, for just a single day. At that point I pondered – if RBS were willing to spend that much on today, surely they must value it, think it is important, and make it really useful. But how wrong I was.
For the first half hour we had a “communications guru” who spent the best part of an hour telling us that smiling makes you come across as a nicer person. You don’t need to be Benedict Cumberbatch to work that out.
Then we had another woman who was awfully nice, and smiled a lot, but didn’t really tell us anything useful. She told us about RBS’ Moneysense program that would teach us how to make a budget at university. Surely if you did not know how to budget at university, you should not be later working with other people’s money in an investment bank. But no, not at RBS!
This was followed by tasks of minimal educational value – putting velcro-backed company logos onto a board with Retail Bank, Investment Bank, Hedge Fund and Building Society on it. A trip to the trading floor for literally 30 seconds (for informational security reasons) – before we were told about their wonderful “insight week” (more of the same), internships and other opportunities. At which point many of us just rolled our eyes.
The reason I mention this day is because it illustrates a culture in which money is thrown around left, right and centre for spurious purposes – regardless of the fact it is owned by the UK taxpayer. This approach may have been acceptable before the crisis – but they should not be so reckless with money now, given that without the UK government they would no longer exist.
In the context of the recent report by PIRC, a shareholder group who revealed that RBS have undeclared losses of £18 billion, it would seem RBS have been equally liberal with their accounting.
The problem with bank accounting is that – from an outsider’s perspective – it’s very easy to fudge the numbers. You can report your losses during one quarter, or announce them later. You can mark-to-market (record your assets at their real market prices) or not. What this means is the top brass at a bank can record large profits and consequently pay themselves huge bonuses, despite the reality of creating a big loss.
A little while later, losses have to be reported, the bank’s capital buffer is wiped out, and guess who will have to pay again? You guessed it – the taxpayer!
Many would argue that RBS should have been allowed to fail in the 2007/8 crisis – but it was propped up. Billions of pounds have been dispersed in bonuses whilst they have milked moral hazard mentality (tails we win, heads you lose) – leaving the bank to be little more than a decrepit shell.
In my humble opinion – RBS is taking took much risk and is willing to let the taxpayer take the hit when defaults on their loan books ultimately occur. In the meantime, they are paying out most of their (short term) “profits” out in bonuses. Therefore, I would recommend a short-selling of it with a stop-loss at 250p a share.
Granted, the shares have fallen 50% over the past year – they are not at their cheapest and a bit of volatility could make us hit the stop loss. However, with the saga of Europe rumbling on – I would argue they are already technically insolvent.