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Rbs Was Getting Help 'before It Was Rescued By The Government'

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Stricken Royal Bank of Scotland was on state life support even before last year’s government rescue was announced, it was claimed yesterday.

The Edinburgh lender was receiving help from the Bank of England for several days before the Treasury launched its October banking bailout.

A spokesperson for RBS declined to comment on the allegations.

But the claims highlight the desperate state of Britain’s financial system during the dark weeks following the September 2008 crash of Lehman Brothers.

And they add to evidence of the extraordinary fragility of RBS under disgraced former chief Sir Fred Goodwin.

Some £20billion of taxpayer money was poured into RBS as the Treasury grappled to prop the stricken lender up.

Another £17billion was pumped into Lloyds and Halifax Bank of Scotland, the beleaguered lender that was forged in a controversial September 2008 rescue.

The state support packages, which led to large taxpayer stakes being built up in the twin banking giants, were sealed in a frantic set of meetings over the weekend of October 11, 2008.

But a report in the Observer newspaper said the Bank of England had been providing liquidity to RBS since the previous Tuesday.

This was necessary because private financial institutions had lost faith in the Scottish lender’s finances and so were refusing to lend.

RBS was therefore depositing assets at the Bank of England in exchange for vital funding to allow it to continue with day-to-day operations.

Ultimately, if the government had not acted the country’s entire banking system could have shut down. Branches would have had to close and cashpoints would have been switched off.

The dire state of the country’s financial system helps explain calls for urgent reform at Saturday’s G20 meetings.

Ministers agreed that outright disaster has now been averted, with US Treasury Secretary Tim Geithner declaring government intervention had pulled the economy ‘back from the edge of the abyss.’

But ministers said there is a danger of complacency setting in now that the worst of the banking crisis is past.

‘I do think that with every week and month that things get better and the crisis recedes, there is a risk’ that momentum could fade, said Mr Geithner.

‘If you wait until the memory of the crisis has faded and people have forgotten how bad it was, it is going to be more complicated. The forces of resistance, understandably, will have more time to mobilise.’

The G20 agreed that global restrictions on bonus payments are needed, and banks will be required to hold much bigger capital buffers. But reaching global consensus on the details of this is proving very difficult.

In the meanwhile there are signs of a ‘business as usual’ attitude returning to the City, as investment banking profits swell on the back of taxpayer guarantees.

Chancellor Alistair Darling said on Saturday: ‘Every single banker has to realize that whether or not they received assistance they would not be here were it not for the efforts made by the countries, underwritten by the taxpayer.’

Thank god it's all been fixed with taxpayer money.

No wonder Brown/Darling are panicking, clearly RBS is one huge liability.

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Sir Fred Goodwin went white and silent. The terms of the government's plan to rescue the British banking system from systemic collapse were being spelled out, and for the chief executive of the Royal Bank of Scotland it was the equivalent of the unconditional surrender by a defeated power at the end of a lightning war.

At 7am next day, Goodwin was told, the government was buying shares in the Edinburgh-based bank that would leave the group under taxpayer control. The 50-year-old Scotsman would be left without a job - but, as it transpired, with a hefty pension pot.

When he had recovered the gift of speech, Goodwin described the events of Sunday 12 October 2008 as a "drive-by shooting". Lord Myners, one week into his job as Gordon Brown's City minister, was the man holding the gun. An old adversary of Goodwin's from their days together at NatWest, Myners knew that the RBS boss was out of ammunition.

Since the previous Tuesday, RBS had been on "life support" from the Bank of England, according to government sources, ensuring that it received the funds it needed to keep doing business. Goodwin's time was up. With both RBS and HBOS in desperate financial condition, the regulators knew that neither bank could open for business on Monday without a deal being struck.

"HBOS and RBS would not have survived without government intervention. The FSA knew we could not have allowed them to open their doors on the Monday morning without a solution," said Hector Sants, chief executive of the Financial Services Authority. In the circumstances, millions of customers unable to use hole-in-the-wall cash machines was unthinkable. Four weeks had passed since the collapse of US financial firm Lehman Brothers and, as far as the UK authorities were concerned, the impact of that bankruptcy had been to turn a crisis in a specific category of mortgage banks into something systemic.

"What had happened up until Lehman failed was that a specific model had failed. Demutualised building societies had formed a new category of specialised lending banks funded by securitisation. That group of mortgage banks had failed, but the contagion had not fatally affected the core traditional British banks," said Sants.

But that changed after 15 September, the day Lehman filed for Chapter 11 protection. The FSA was already collecting data from the big UK clearers at least once a day, sometimes more regularly. The Treasury had been monitoring the financial health of the big UK clearing banks on a day-by-day basis all summer, following the nationalisation of Northern Rock in the spring, and knew that HBOS - the biggest of the so-called mortgage banks - was having trouble raising funds in the wholesale money markets.

Then, at the start of September, the sense of crisis deepened as Alistair Darling watched his American counterpart, Hank Paulson, effectively nationalise the two biggest US mortgage providers, Freddie Mac and Fannie Mae. While this made the refusal of the US authorities to intervene in Lehman more surprising, there was no time for UK regulators to dwell on the decision. Sants rang all the chief executives of the major banks on the day Lehman fell. Goodwin was one of them and knew that the pressure was building.

Andy Hornby, chief executive of HBOS, had been the first bank boss to feel the heat. Within 48 hours of Lehman's collapse, the government had cleared the way for Lloyds TSB to swallow up HBOS, owner of Halifax, by waiving competition rules that would ordinarily have prevented the move. The enlarged bank was to dominate mortgages and current accounts, with market shares of more than 30%. "After Lehman Brothers went down, the search was on for who else was in trouble," one government source said. "HBOS was an obvious target."

Darling was acutely aware of the competition issues involved in securing a Lloyds-HBOS marriage, but the chancellor decided they were dwarfed by the threat that a failed HBOS would pose to the entire banking system.

Even before the collapse of Lehman, the FSA had held discussions with every obvious bidder for HBOS - Santander, HSBC and Lloyds, which had already been interested in the bank but were deterred by the competition issues. The regulators were not going to force a takeover and wanted a willing partner. Lloyds was ready to conduct a deal.

But if ministers thought that finding a white knight (or a black horse) to salvage HBOS would be the turning point of the crisis, they were mistaken.

In the week Lehman collapsed, the Bush administration propped up insurance giant AIG. As the days passed, European banks came under pressure. Dutch Belgian finance group Fortis was on the brink. The Icelandic banking system crashed and, barely a fortnight after the collapse of Lehman Brothers, Treasury civil servants were burning the midnight oil again to save Bradford & Bingley, Britain's leading buy-to-let lender. The nationalisation of B&B was announced on Monday 29 October, the first day of the Conservative party conference in Birmingham. That evening, the speech by shadow chancellor George Osborne was overshadowed when Congress rejected Paulson's $750bn plan to buy up toxic assets from the US banks. Predictably, shares on Wall Street collapsed.

By this stage, it was clear to the Treasury that piecemeal solutions were pointless. Since the early autumn, plans for a general recapitalisation of the banks were being worked up by the Treasury, the Bank of England and the FSA. Myners and Treasury mandarins John Kingman and Tom Scholar were involved, along with Baroness Vadera and an array of bankers from big City firms and with lawyers from Slaughter & May.

Naguib Kheraj, a veteran dealmaker and ex-Barclays banker, was just a day into his new job as chief executive of JP Morgan Cazenoze when his help was prevailed upon, along with David Soanes and Robin Budenberg, big names at Swiss bank UBS. Sir John Gieve, the deputy governor from the Bank of England responsible for financial stability, and Sants were also in key roles.

The work was supposed to be conducted in the utmost secrecy but it leaked out in an interview with Osborne. The Treasury believes that Bank of England governor Mervyn King had let the cat out of the bag in a private briefing, although the shadow chancellor has always denied this. "King talked too much," one source insisted.

For Darling, the leak was unfortunate. He was due to give a statement to the Commons and was not ready to go public. The lack of detail triggered a sharp loss of confidence in the banking sector. Darling, who promised to do "whatever it takes", was not ready to give details of what the government was planning, but his hand was forced when the bland statement to the Commons on its return from recess sent the markets into fresh turmoil. Other countries in Europe - Ireland in particular - were making explicit promises to guarantee all bank deposits. Darling made no similar pledge.

With the crisis deepening at RBS and HBOS, the bank bosses were summoned to the Treasury on Tuesday 7 October to receive an outline of the government's plan to inject £50bn to bolster the banks' capital cushions. Darling, realising that he was in for a long night, rang one of his favourite restaurants, Gandhi's in Kennington, south London, to order £245 worth of rice, karahi lamb, tandoori chicken, vegetable curry and aloo gobi.

But seven banks and one building society were lukewarm about the need to raise so much cash. The assembled bankers went into a huddle. One of the officials who was present said that they insisted there was only a shortfall of £25bn, and even at this late stage were reluctant to admit they needed cash.

By the end of the week this looked like a blatant case of denial. But reputations were at stake and, as one senior government source said: "It was humiliating for them to admit they had their foot on the accelerator when they went over the cliff."

More at the link.

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