In the second tale of woe from the banking sector in the last 24 hours – Merrill Lynch said yesterday that it plans to cut 4,000 jobs (about 10% of its workforce) – reports emerged last night that RBS was planning a huge rights issue to bolster its balance sheet. No word yet on exactly how much it will try to raise when it goes cap in hand to its investors, but estimates seems to range from £9bn to £12bn – which suggests it’s got a rather big hole to fill.
After shelling out a hefty €71bn on ABN Amro last year, it’s not surprising that the RBS piggy bank is running a little low on loose change. Banks have to keep a certain amount of cash in the coffers in proportion to the amount of risk they take – and on this measure, RBS is apparently in a worse position than any of its major rivals. So it won’t be surprising if it ends up being the first to launch a rights issue (and it almost certainly won’t be the last).
Still, it’s not all bad news – at least not for the majority of us. By tapping its shareholders for some extra cash, it means RBS can hopefully avoid relying on some kind of government bail-out, funded with our taxpayers’ money. The Treasury will no doubt be delighted if some of the other banks end up following suit – shareholders in the sector have made a lot of money in recent years, so voters might be pretty unhappy if we end up propping up their gains now.
On the other hand, it’s a bit of a screeching U-turn by RBS boss Sir Fred Goodwin, who’s spent the last few months insisting until he was blue in the face that the bank had no need to raise extra capital. If the bank is doing a rights issue (and it conspicuously failed to deny it in a statement last night), some commentators think it would be a fatal blow to his credibility. And he doesn’t have to look far to see what the consequences could be – over at French bank Societe Generale, Daniel Bouton has just been eased out of the chief executive role following the Jerome Kerviel scandal (although he’ll remain as chairman), to be replaced by Frédéric Oudéa.
Much now depends on RBS’s trading statement, which is due out next Wednesday, where the bank will reveal the true extent of its problems. If things turn out to be worse than expected, Fred the Shred (so-called for his legendary cost-cutting prowess) might end up getting a taste of his own blade...