BuzzFeed and BBC Newsnight, building on the work of Ian Fraser in his book Shredded, who have been dogging the fraudulent activities of the Royal Bank of Scotland, have documented how a RBS loan workout unit, the Global Restructuring Group systematically seized assets from small business customers, including deliberately forcing them into bankruptcy, with the cooperation of senior levels of the bank. The opener:
The Royal Bank of Scotland killed or crippled thousands of businesses during the recession as a result of a deliberate plan to add billions of pounds to its balance sheet, according to a leaked cache of thousands of secret documents.
In the UK, bankruptcy means liquidation, and RBS would use its control over the auction process to make sure it would pick up assets at bargain prices and dispose of them for a tidy profit. Here are the main charges, from BuzzFeed’s overview:
- RBS managers encouraged employees to hunt for ways to boost their bonuses by forcing customers into loan restructuring in order to extract heavy fees as part of a profit drive nicknamed “Project Dash for Cash”.
- Firms that had never missed a loan payment were pushed into GRG under the bank’s secret policies for reasons that had nothing to do with financial distress, including for telling RBS they wanted to leave the bank, falling out with managers, or threatening to sue over mistreatment.
- Once in GRG, firms were hit with crippling fees, fines, and interest rate hikes that could run into seven figures, helping to net the restructuring unit a profit of more than a billion pounds in a single year.
- Contrary to claims by the bank, there were no Chinese walls between GRG and West Register bosses, who sat together on both the controlling committee that held sway over which businesses were transferred into the restructuring unit and the property acquisition committee that signed off the bank’s bids for their distressed assets. Auditors repeatedly warned about perceived conflicts of interest in GRG.
- The property division, which amassed assets worth £3.3 billion during the crisis, was passed information that was not available to other bidders when it wanted to acquire properties from businesses in GRG. In contrast to what RBS executives told parliament, properties could be sold to West Register without being advertised on the open market.
- Staff were told to conceal conflicts of interest from customers when demanding cheap shares in their businesses or stakes in their properties.
I’ve never seen such a cynical, large scale exercise in orchestrated pilfering at a regulated financial institution before. GRG dealt with over 16,000 companies, and the article states it put thousands of them under, many of them for profit rather than out of necessity. I strongly urge you to read the entire article in full.
Even in the mortgage crisis, where banks put millions of people into foreclosure when in many cases, mortgage modifications would have kept them in their home and reduced losses for investors, servicers nevertheless foreclosed because servicing agreements paid them to foreclose, not to modify mortgages. To them, what happened to the house was of no interest, as demonstrated by the fact that servicers regularly neglected foreclosed properties. For them, it was just collateral damage.
Mind you, these allegations aren’t new. In 2013, Lawrence Tomlinson provided the Treasury Select Committee with his report on how banks handled small businesses in the wake of the crisis. The bulk of his document described “very concerning patterns of behaviour leading to the destruction of good and viable UK businesses” by RBS. This in turn led RBS to go on the defensive, including hiring “Magic Circle” law firm Clifford Chance to issue a clean bill of health. Even that was sus, with the Treasury Select Committee questioning the narrow focus of the report and Clifford Chance’s conflicts of interest
What allowed this abuse to occur? The breakdown in controls (assuming this was a breakdown, as opposed to supervision theater) was the exact same one that we called out at Wells Fargo and JP Morgan in its London Whale scandal. The audit function, which is tasked with making sure that profit centers don’t run roughshod over laws, regulations, and accounting rules, reported to the head of GRG, as opposed to the most senior levels of the bank. This was the most glaring control failure, but far from the only one. Again from BuzzFeed:
The white-haired restructuring boss [Derek Sach] emerges from the documents as an all-powerful puppet master, simultaneously heading the management committee that held sway over which businesses were transferred into GRG, the West Register committees that decided which assets the property division should acquire, the asset purchase committees that signed off its major bids, and the risk and audit committee that scrutinised the restructuring division’s work. Repeated warnings from RBS’s external auditors about the “reputational risk” arising from this apparent conflict of interest were ignored.
Should we be surprised to learn that Sach comes our of private equity?
RBS has tried justifying its actions by arguing the losses on its total small business portfolio exceeded its recoveries though the asset-stripping operations at GRG, as if that somehow proved that it has not moved healthy businesses into GRG for the sole purpose of pilfering them. The article notes:
A cornerstone of RBS’s denial that it systematically destroyed small businesses has been the insistence that it had no reason to push good customers into difficulty. But the files reveal how government pressure to reduce its loan exposures, coupled with the opportunity to raid the cash, equity, and assets of businesses going under, gave the bank a powerful incentive to pull the plug on thousands of its customers.
The government and regulators pushed RBS to achieve three main goals after the bailout. First, they pressed the bank to reduce its exposure to property loans, which were a main cause of the financial crisis. Then they required RBS to increase its capital reserves as a buffer against losses. Finally, they pushed for the bank to make more money overall, so that it could increase its lending to new businesses to aid the economic recovery, and so the government could sell its ownership stake at a profit. RBS devised a strategy to do just that.
The plan – which bosses told staff the government had “endorsed and agreed” – was to offload tens of billions of pounds’ worth of business loans that the bank had deemed “non-core”. It was widely hailed as an essential move to shore up the bank’s finances after the crash and protect the taxpayer’s investment.
But the RBS Files now reveal GRG played a central role in the delivery of that plan, acting as a clearinghouse for many of those “non-core” businesses as the bank pushed them towards the exit door: generating bumper revenues by extracting massive fees and fines, clawing back loans secured against property, seizing chunks of their equity, and offloading their assets. Through West Register, the bank could acquire their prime properties at fire-sale prices, converting them from risky loan exposures into owned assets that the bank planned to sell off later for a capital gain. And, by quarantining the properties in a network of subsidiaries owned by West Register, the bank substantially reduced the amount of capital it had to freeze on its balance sheet as a regulatory buffer against potential losses, freeing up extra cash.
And if a customer sued the bank, transfer to GRG was mandatory.
Again, I suggest you read the entire story, which is an amazing job of reporting. It describes the origins of the looting strategy in 2009, and how the bank used often bogus internal appraisals to take the position that customers had breached covenants of property loan agreements to force them to take new loans with punitive terms. It also includes detailed accounts of how GRG destroyed successful companies but people’s lives.
RBS would have succeeded in burying this appalling tale if it weren’t for a whistleblower throwing documents to the press that provided compelling evidence of RBS’s staggering theft. If you are in the UK, I hope you will call or write your MP and demand that action be taken against the relevant RBS executives, most importantly Derek Sach. This story, in combination with the revelations of Wells Fargo’s abuse of retail customers , confirms what foreclosure victims have long known: no one is safe if he stands between banksters and their profits.