UNIT 23: THE GLOBAL FINANCIAL CRISIS AND RBS

EXERCISE
Read A, which is about the global financial crisis of 2008 and the
experience of one British bank over the following ten years. Some clues
to help you fill the gaps are given below.

1) TAKE OVER: purchase a majority stake

2) COLLAPSED (closed due to insolvency)

3) RUN (a quick sequence of something)

4) BAILOUT (rescue from financial disaster)

5) RISKY (unsafe, a gamble)

6) LITIGATION (solving a dispute in court)

7) BRANCHES (local offices; not the HQ)

8) REDUNDANDT (no longer needed for work)

9) BONUSES (extra payments for hard work)

10) ROSE UP (went up; increased)

(A) In February 2018, the Royal Bank of Scotland (RBS) published its
annual results, marking the first time since the 2008 global financial
crisis that the bank had declared a distributable profit. Its well-
publicised problems date back to its participation in the ill-advised £49
billion take over of the Dutch bank ABN Amro in 2007, the largest deal
in banking history. However, the bank entered the record books once
again in 2008 when it declared losses of over f24 billion, the biggest
ever seen in UK corporate history.
The conduct of RBS prior to this catastrophe was in keeping with the
culture of excessive risk-taking by major financial institutions, such as
investment bank Lehman Brothers, which collapsed on 15 September
2008. This began what has been described as a 'financial earthquake' the
effects of which were felt around world. In the UK, this manifested
itself as a loss of public confidence in several high-street banks,
resulting in RBS customers, among others, withdrawing huge amounts
of cash in what is known as a 'run’ on a bank. In the UK, the
government responded with an ambitious rescue package, informally
known as a bailout of the banks. This involved the investment of £500
billion of public funds in buying up shares in unstable British banks,
£37 billion of which was invested in RBS, giving the government a 72%
stake. At the time, RBS share prices had fallen on the London Stock
Exchange by just over 50%, from 175p per share to around 85p.
A further nine years of losses followed, but in 2017 the bank declared a
profit of £752 million following a £7 billion loss in 2016. However, the
bank was still under investigation in the USA from the US Department
of Justice (Do), concerning the sale of financial products linked to risky
mortgages (mortgages' referring to loans taken out to buy property or
land) and this was regarded as likely to affect any future profits. So,
despite moving into profit, the bank did not resume the payment of
dividends to its shareholders and was expected to do so only once it had
reached an out-of-court settlement with the Do in order to avoid
expensive litigation.
RBS also faced disciplinary action from the European Union at this
time. The EU demanded the sale of 300 high-street branches of the
bank in a bid to increase competition, a decision which ultimately left
some rural British communities with only the option of online banking.
As a result of this, the bank had to make nearly 800 employees
redundant, which made it even more unpopular with the public as it
became apparent that these workers were unlikely to find work
elsewhere. The bank had a public image of supporting the so-called 'fat
cats' of banking, meaning those bankers who continued to take huge
annual bonuses while the public and the organisation's lower-paid
employees suffered the consequences.
 In May 2018, the bank announced that it had negotiated a $4.9billion
penalty with the DoJ, clearing the way for the UK government to sell its
72% stake in the bank. CEO Ross McEwan said "Our current
shareholders will be very pleased this deal is done. It does help the
government sell a cleaner bank". RBS shares rose up by 5.5% to 291.5p
in response to this news.

Definitions (refer back to the page opposite)

UNSTABLE not solid, not strong; could change

without warning
STAKE ownership; financial involvement
IN KEEPING WITH in conformity with; displaying the same
behaviour as
DISTRIBUTABLE available to be shared among a group of
people
BID attempt; try
FAT CATS extremely wealthy people with the
power to increase their own pay.
MANIFIESTED ITSELF made itself obvious or visible through a
particular action or occurrence.
PENALTY punishment for breaking the law.

EXERCISE
The 2008 financial crisis was partly due to certain banks lending money
to the 'sub-prime' mortgage market. The adjective 'sub-prime refers to
the credit rating of the borrower. These are borrowers who are not able
to obtain a conventional mortgage due to having a very poor credit
rating, and in the period leading up to 2008 they were seen as a new and
profitable market by certain banks. Lenders charged these borrowers a
higher than usual rate of interest because there was a much greater than
average risk of them defaulting on the loan. The high interest rate was
seen as compensation for the increased risk. In fact, many borrowers
were given what were referred to as NINJA loans - 'no income, no job,
no assets. These borrowers were often given the loan without the
requirement of having to put down a deposit.
The town of Stockton in California, population 260,000, became known
as the 'ground zero' of the 2008 financial crisis because it was the first
community where the number of borrowers defaulting on these risky
mortgages became apparent. It was for a time referred to as the
foreclosure capital of the USA, and in 2008, one in every twenty-five
houses was the subject of legal action by a bank as people became
unable to repay the agreed monthly amount. The crisis that first became
apparent in Stockton spread across the USA and eventually across much
of the developed world as people lost their homes or were trapped in
negative equity. 'Negative equity' is the term used to describe a person's
financial situation when the current value of his or her home is less than
the sum outstanding on his or her mortgage. The banks were left without
liquidity as a result. The subprime story and the role that commercial
banks played in it was later explained well in the 2015 movie 'The Big
Short'.
Many journalists visited Stockton in 2008 and published stories about
abandoned properties and the number of Estate Agents' boards
advertising houses for sale. Many houses had notices in their windows
stating "bank-owned - no trespassing". What they also reported on was
the effect of this on tenants who were renting their properties from
landlords who had taken out sub-prime mortgages. Many tenants were
up-to-date with their rent but had not realised that their landlord had
defaulted on the mortgage because they are not entitled to notice of
foreclosure. Many only found out when someone knocked on the door to
evict (desalojar) them from the house.