RBS Goes Sybil

Good bank / Bad bank

The Royal Bank of Scotland (RBS) is to be split into a “good bank” and “bad bank” in a dramatic rescue restructuring in which assets worth several hundred billion pounds will be put up for sale.

Stephen Hester, RBS chief executive, will outline the plans this week as he unveils Britain’s biggest-ever corporate loss of up to £28 billion. He will cut costs by more than £1 billion a year, a move expected to lead to the loss of about 20,000 jobs, more than half of which will be in Britain.

Large parts of the group’s investment-banking business will be earmarked for sale or closed down. Its Asian operations and retail operations across central and eastern Europe will also be sold off.

All these operations will be bundled together in a “bad bank” inside the group, which will report its figures separately.

RBS will also place at least £200 billion of toxic assets into the government’s asset-protection scheme, a controversial insurance scheme designed to protect banks against further losses.

Billionaire investor Wilbur Ross leads a pack of vulture funds that are talking to the bank and the government about buying some of the bad loans, although it is unlikely a deal will be agreed in time for Thursday’s results. Virgin Money, Sir Richard Branson’s mortgage business, is another possible buyer.

The “good bank” will comprise retail and commercial banking in Britain, America and a handful of other countries where RBS has a significant presence.

A similar break-up deal is planned for Northern Rock, under a government initiative to kick-start lending into the economy. The government is expected to inject between £5 billion and £10 billion of new funding into Northern Rock as part of the deal.

The asset sell-off will be one of the biggest ever seen, and will lead to a substantial reduction of the bank’s £1 trillion balance sheet.

The £1 billion cost-cutting plan relates to the businesses being retained.

The group still employs more than 180,000 people around the world, including 100,000 in Britain. RBS has already cut more than 12,000 jobs in the past year.

This week’s results are expected to confirm a loss of between £7 billion and £8 billion, and a further write-down of up to £20 billion on its acquisition of the Dutch bank ABN Amro.

The £8 billion of credit losses suffered by the bank can be traced back to just 500 people, according to banking sources. About 80% of those responsible for the losses have already left the company, sources say.

Jay Levine, former head of RBS’s American investment-banking operations, who led the bank’s charge into sub-prime loans, left in late 2007 – after receiving close to £40m in pay and bonuses over three years.

Market sources believe the bank has made profits of several billion pounds through trading in the foreign-exchange markets, both in its operations in London and in its RBS Greenwich division in America.

The bank is also offering loans to staff who had been expecting cash awards. They will be allowed to use the stored-up bonuses as collateral on their loans.

Billions more to prop up lenders

A further £500 billion of taxpayers’ money is to be pumped into the banks through a slew of initiatives to be announced this week.

The Bank of England will launch its so-called “quantitative-easing” plan, in which at least £100 billion will be spent on buying bonds and gilts from Britain’s banks. The final figure could climb much higher, according to economists.

The government will also launch its controversial asset-protection scheme, which is expected to protect at least £400 billion of “toxic” loans with a taxpayers’ guarantee.

Royal Bank of Scotland is expected to place at least £200 billion of assets into the insurance scheme, although negotiations on the final figure are continuing this weekend.

Lloyds Banking Group, which will unveil losses of more than £10 billion this week, is also in negotiations to use the scheme. Analysts believe the bank could place about £200 billion of assets into it.

The moves coincide with the launch in America of President Barack Obama’s new bank “stress-test” plan, also expected this week.