Sir Fred Goodwin death watch: Part 1

The biggest bank in the world is Royal Bank of Scotland.

Double-take. Hold your breath. Think that John Hempton has lost his mind.

A mere ten years ago RBS was a regional Scottish bank. Then Sir Fred Goodwin came along. He almost never saw an acquisition he did not like.

And now RBS is the biggest bank in the world.

It is not the largest market cap in the world.

It is not the largest shareholder equity in the world.

But it is by far the biggest bank in the world by assets. By assets – the total assets (meaning loans and other things) on the balance sheet is the real test of how big and important a bank is. Big banks lend more and get their fingers in more pies (and borrow more) and thus have big balance sheets.

At year end – translated to USD at year end exchange rates – RBS total balance sheet footings were USD3.8 trillion. Citigroup – a mere bagatelle – was “only” USD2.2 trillion. 

The putative Japanese giant (MUFJ) was only USD1.9 trillion.
Admittedly RBS consolidated the interests of Santander and Fortis in the ABN Amro acquisition – but even net of those minorities RBS remains the biggest balance sheet in the world.

So what?

The so-what is obvious.

In times of a credit crisis – when seemingly safe AAA rated assets are defaulting – big balance sheets are likely to have big problems.

They do – and the stock price is telling you. RBS stock is startlingly weak. The company however seem to believe everything is fine – and only miniscule charges have been taken.
The management of RBS are delusional. Utterly delusional. They are sitting on big losses. They are wilfully blind. The CEO should be sacked for cause – and denied his retirement benefits.

The board is ineffective and unable to control the charismatic CEO. They should also resign.

The Bronte Capital Blog plan

This blog is going to detail little bits of RBS’s accounts – spelling out just how delusional the management team is. A death watch for Sir Fred Goodwin – the worst CEO of any big bank anywhere.

Delusion part 1: RBS’s US Home Equity Line of Credit (HELOC) Business

RBS has done about 100 acquisitions in the USA. The most important of these was Charter One Financial - for about 12 billion in cash. It will be a surprise to most readers - but RBS is the 11th biggest bank in the USA. The statutory accounts of RBS Citizens can be found on the FFIEC site for the top 50 bank holding companies. Follow this link:

Click here: FFIEC top 50 bank holding companies

Lurking in RBS Citizens is a home-equity line of credit business. This was largely acquired with Charter One. Charter One aggressively opened banks in under-served neighbourhoods - garnering previously unbanked or lightly banked clients. Those neigbourhoods were unbanked for a reason. They weren't exactly rich.

The bank orginated (and still originates) HELOCs out of those branches. It has (and you will need to follow the statutory filings to their source data at the FDIC) 11.0 billion of mortgages secured by second liens and 9.3 billion of HELOCs (as at year end 2007).

They are still originating them and to date their provisions against them are trivial. The management still think this is good business.

This is however arguably one of the worst HELOC businesses out there. It was aquired with Charter One.

I will play a game with you. Lets follow this link and buy some houses.

Click here: Real estate search Toledo Ohio

In Toledo the houses don't cost much.

Now lets look where RBS is originating the loans. Here is a Google Map of the location of Charter One branches in Toledo.

The overlap gets worse when you follow individual houses for sale under $1000 and the location of Charter One branches that originate HELOCs.

Am I being unfair picking Toledo? After all Toledo is where the bankrupt auto parts company (Dana) has its operations.

Not really - I could pick Akron or outer Cincinnati, or Detroit or any other city that Charter One was big in.

So where is RBS on all this?

Answer: delusional. They have taken no charges and all the goodwill from the Charter One acquisition remains on RBS's balance sheet unimpaired.

But worse than delusional. The head of RBS's US business (Larry Fish) wrote an editorial in the Washington Post in December 2007 in defence of subprime lending. Here is the link:

Larry Fish defending subprime lending in the Washington Post in December 2007 - ie after it all blew up

You work out what planet he is on. It is hardly the same one as me.

And Fish is no lightweight. He is an executive direcctor on the board of the biggest bank in the world - the parent board.

Summary: It is time to sack the lot of them


Disclosure: RBS is big, problematic and cheap. I am neither short nor long. Because it is so big and so cheap it looks a little like buying Citigroup in 1992. I would prefer be long than short. However with this delusional management team in place – I am just watching (and blogging) from the sidelines.