Bubbles, Boxes and Tragedy

There is an unfortunate, fatalistic thing with bubbles; it’s in their nature to expand until they meet their demise. The American housing bubble met its fate in late 2006. Our untouchable friends now found themselves in financial deep-water unable to make mortgage repayments, with rocketing interest rates. The sub-prime market was imploding, but surely RBS was safe, their hands were clean at least that’s what Sir Fred had assured the City.

With the US housing market in turmoil, you’d think caution would be the watch word but RBS wasn’t cowed by uncertainty, they were after all the Scots takeover tiger. RBS now had its eyes on a Dutch target, the poorly run, ABN Amro. In RBS’s corner were Spanish giant Santander and Fortis, facing them were Barclays.  Amid the usual mire of takeover controversy RBS staked 27 billion euros for their share in the world’s biggest bank takeover, but had eagerness blinded this hunter as they failed to carry out due diligence, would this prey be poisonous?

The financial jungle was about to become a very dangerous place. The doomed sub-prime liner was about to hit an ice-berg or should it be a rock, to be precise a Northern Rock. The British bank Northern Rock found itself the target of the dreaded bank run, with queues of depositors withdrawing funds. Fear stalked the markets. For RBS things were to get a whole lot worse. The clean hands of RBS were about to become very dirty.

In a shocking example of upside down thinking, the books of ABN Amro were about to be opened for the first time, following takeover. ABN Amro’s books turned out to be a proverbial Pandora’s Box, loaded with sub-prime investments which were becoming toxic, this prey really was poisonous.

The words of UBS banker John Cyran must have haunted Goodwin. Cyran had visions of the Greek tragedy contained in ABN’s books warning Goodwin “There is stuff in here we can’t even value.”  The sub-prime toxin was spread through the veins of RBS; losses became the word of the day. RBS’s Core Tier 1 capital ratio fell to risky depths of 4%.  The video below from Marketplace explains the significance of this measure to banking health. 

The Greek tragedy was playing out to its’ dramatic, tragic end. Would Goodwin act now, or would he continue to deny the need to raise new capital and force the bank to its knees?