Heads are likely to roll at Royal Bank of Scotland over market misdeeds, but will it be enough to shoot a couple of deputies?
Stephen Hester, chief executive of Royal Bank of Scotland, has been saying for months that the unveiling of the bank’s Libor misdeeds, plus the imposition of a hefty fine, will be a “difficult” moment. The hour approaches – it could be next week – and it looks worse than difficult. Hester and his chairman, Sir Philip Hampton, could face the bank’s biggest post-bailout crisis.
There are two problems. First, the size of the fine, which is rumoured to be a lot more than the £290m Barclays paid. This wouldn’t matter if the cash was travelling on a roundabout between the 82% state-owned bank and the Treasury. But it isn’t. The Americans, in their usual way, will want about four-fifths of the spoils. If the fine is £500m, UK taxpayers would, in effect, be dispatching almost £400m to US taxpayers to pay for the sins of a few errant bankers.
Few UK taxpayers, one suspects, will sympathise with Hester and Hampton’s proposed solution. If the rumour is correct, they will take £150m out of this year’s bonus pool – but argue that £200m or so of bonuses must still be paid to reward senior staff. It’s a familiar line: we must hold our noses on pay because RBS’s investment bank has clocked up £11bn in profit in three years and thereby prevented a second state-funded rescue. That pragmatic view has prevailed in the past, but its success this time may hinge on the second factor.
Not all the manipulation of Libor, the key interest rate at the heart of the financial system, took place under Fred Goodwin’s discredited regime. Some of it happened as late as 2010, assuming reports are correct. Hester arrived in November 2008, so he would have to explain why he and senior colleagues did not spot actions that could represent fraud. Clearly, there is no suggestion they knew about the dishonesty, or failed to act promptly when they did. It is why they did not know earlier that matters.
The details will be crucial. Hester was fighting fires in 2009 and 2010 and could not be everywhere. But, in those years, are we talking about the actions of a few renegade traders and rate-submitters or a subculture that was entrenched but undetected? The latter would be highly damaging, even for an overworked officer class.
Heads may be offered. John Hourican and Peter Nielsen, senior executives in the investment bank, are in the frame – again, not on grounds on wrongdoing but because somebody has to take responsibility for the lack of proper controls. But is it really satisfactory to shoot a couple of deputies? The normal rule is that the buck stops in the boardroom on the big stuff – and the Libor scandal is certainly big.
The government will not want to lose Hester, and neither should we: it would hard to find a replacement. But boardroom accountability matters. Hampton, a £750,000-a-year chairman since early 2009, has run a board packed with big-name non-executive directors. Archie Hunter, a former KPMG senior partner, headed the audit committee until his departure in April 2010. A risk committee was established only in late-2009 under Philip Scott. The comings and goings complicate matters, but the point remains. If – and this is an important if – the Libor abuses were still rife in 2010, are directors past and present going to wash their hands of the affair? That would not be credible.
As Tom Albanese departed Rio Tinto this week, leaving regrets and impairment charges, it was a shock to realise the firm is the second-best stock market perfomer since 2007 among London’s big four miners. That date, by the way, is chosen to do Albanese no favours: it is six months before the first calamity, the $38bn top-of-the-market acquisition of Alcan.
How could Xstrata and Anglo American not beat blunder-prone Rio in a six-year race? Well, the former, like Rio, was caught at the bottom of the commodity market in 2009 with too much debt and was obliged to tap its shareholders for cash.
The latter’s tale is one of strife in platinum in South Africa and a value-destroying expedition into iron ore in the Brazilian jungle, among other troubles. BHP Billiton, the biggest and most diversified of the top miners (and thus, according to theory, a relative plodder), has won the race with ease.
It was so much easier in the pre-2007 days when, in a climate of rising metal and iron ore prices, every toppy-looking acquisition turned into a bargain and every boardroom could congratulate itself on its genius. In reality, boom time in China and the hangover from starvation levels of investment in mines in the 1990s were doing half the work.
Booms are there to be exploited, of course – and Xstrata’s 12-year return is good, and Rio’s shares, thanks to the miracle of iron ore prices, are still 50% higher than they were at the start of 2007. But the role of management is also not to squander the riches by overdosing on debt, especially in an industry prone to price reversals. As the saying goes, never confuse genius with a bull market.
The “Amazon problem”, as it is being called after the failures of HMV, Jessops and Blockbuster, is more complicated than corporation tax. Yes, the company has located its European headquarters in Luxembourg to exploit tax advantages in a manner that offends any commonsense definition of where the economic activity takes place.
But Amazon also benefits from shareholders who have been happy to run with thin gross- profit margins for years in the hope that market dominance will follow. Then there are business rates, the source of shopkeepers’ loudest complaints. Too high and they rise with RPI, is the grumble. But Amazon can hardly be accused of dodging a property-based charge – it just is an internet retailer.
But the net effect of the advantages enjoyed by the Amazon model is that the high street is under real threat. Market purists see creative destruction. OK, there have always been retailing failures – it is a dynamic industry and some laggards were probably doomed anyway. But the idea that the destruction is taking place on a level playing field is nonsense.
There’s nothing anybody can do about Amazon shareholders’ choice of strategy; in another context, long-term investment might be applauded. But the complaints about business rates are reasonable. The retail marketplace has shifted but the rating system was designed for a pre-internet age. Left unchecked, the plot is going only one way: fewer choices for consumers and, in the end, lower revenues for government, especially if the Amazon monster is still in Luxembourg on the day its management decides to turn on the profits.
Financial story of the week was the extraordinary tale of confidence trickster Achilleas Kallakis and his sidekick Alex Williams, who persuaded banks, primarily Allied Irish Bank and Bank of Scotland, to lend £750m to buy Mayfair and Knightsbridge properties and fund the conversion of a ferry into a luxury super-yacht. Judge Andrew Goymer’s comments are worthy of repetition:
“While I do not equate the position of the banks with that of a car owner of householder who forgets to secure his house or car and becomes victim of theft, the banks do bear some degree of responsibility for what happened.”
You bet. Opening a bank account has been a trial by bureaucracy for years. But three-quarters of a billion for property speculation in the boom years … it’s yours.