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Banking industry

RBS's Near Collapse: A Tale of Complex Loan Structures and Poor Decision-Making

Strategic Insights

— 1 min read

RBS's former head of investment banking division, Johnny Cameron, has admitted he did not fully understand the complexities of loan structures linked to US sub-prime mortgages, despite pushing his staff to aggressively pursue this area. The admission comes as part of an 18-month forensic investigation by the Financial Services Authority, which found that Cameron's division was responsible for the bank's near collapse due to poor decision-making. The investigation also highlighted the bank's ill-fated bid for ABN Amro in 2007, which was driven by the board's enthusiasm for a record-breaking deal without proper due diligence.

Key Takeaways:

  • Cameron admitted he did not fully understand complex loan structures linked to US sub-prime mortgages, despite pushing his staff to aggressively pursue this area.
  • The Financial Services Authority investigation found that Cameron's division was responsible for RBS's near collapse due to poor decision-making.
  • The investigation highlighted the bank's ill-fated bid for ABN Amro in 2007, which was driven by the board's enthusiasm for a record-breaking deal without proper due diligence.
  • The acquisition of part of ABN was identified as the single largest poor decision made by RBS, but there were a series of bad judgment calls at the bank.
  • Cameron's division was asked to grow revenues by 25% a year from 2007, requiring a 50% jump in CDOs (parcels of subprime loans sold on in tranches).
  • The market soured dramatically, and RBS was slow to respond, with Cameron admitting that "hedging" was not a viable option.
  • The bank made losses of £2.5bn linked to structured credit, including CDOs, for 2007 and 2008.
  • The RBS board was united in collective enthusiasm for the record-breaking bid, but were naively untroubled by the lack of due diligence.

Statistics:

  • £2.5bn: Losses made by RBS linked to structured credit, including CDOs, for 2007 and 2008.
  • £2.3bn: Losses made by RBS linked to monoline insurance for 2007 and 2008.
  • £1.4bn: Losses made by RBS linked to private equity financing for 2007 and 2008.
  • 25%: The targeted revenue growth rate for Cameron's division in 2007.
  • 50%: The required jump in CDOs to meet the revenue growth target.

Sources:

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  • Financial Services Authority report
  • "Financial Times", "RBS's near collapse due to poor decision-making, says FSA" (no date)

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