how the world’s largest financial institution was nationalised after which reborn | USAEMALL.com

As he prepared to take the helm of Britain’s financial regulator in the summer of 2008, Adair Turner felt as though he had missed out. He was due to start at the Financial Services Authority shortly after the first run on a British bank in more than a century had culminated in the collapse of Northern Rock.

The 52-year-old technocrat assumed that crises of this magnitude were once-in-a-career events. But he would find himself dealing with a much more existential one a few months later: the global financial crisis that struck that autumn, triggering the near collapse of the country’s largest banks and perhaps the largest bailout in history.

“I remember saying to my wife that although I was really looking forward to it, I rather regretted the fact that I’d missed these events of crisis,” he said. “That tells you how little I understood about how bad the situation was.” 

It was only as Turner shared his first official dinner over wine from the Bank of England’s cellar with then-BoE governor Mervyn King that the penny dropped.

“Mervyn started the dinner by saying ‘Adair, this banking system is in complete crisis’,” recalls Turner. “As far as we know, this is the worst it’s been . . . since the first couple of days of the First World War and it requires not just marginal action case by case, but a systemic intervention.”

“From that next day we had to do very dramatic stuff,” Turner recalls.

Sixteen years, 7 months and 17 days after Gordon Brown’s New Labour government announced a bailout package that would give it equity stakes in Britain’s banks, a new Labour government on Friday returned its biggest beneficiary to private hands.

When taxpayers injected the first dose of a total £45.5bn of equity into the Royal Bank of Scotland in 2008, they were extending a lifeline to a bank with a balance sheet bigger than the UK economy.

The lender they are leaving behind is one transformed. No longer a Scottish beast with global ambitions, it is now a shrunken domestic high street bank that bears the scars of a cumbersome and resentful owner: the British state.

The full reprivatisation of RBS — now named NatWest — closes a painful chapter in British financial history. The state has recouped £10.5bn less than it put in. Where RBS in 2008 had a £2.2tn balance sheet, its successor now has just £710bn in assets — about £200bn less than domestic rival Lloyds Banking Group.

Beyond RBS, the shock of Britain’s bailouts transformed the country’s financial and political future. The crisis widened the UK’s deficit, triggered a period of austerity, hit productivity and fuelled a wave of populism. It also ushered in a new period of regulation that put protecting consumers first, even if it meant throttling the City of London.

This is the story of Britain’s bank bailout era — and how it finally came to an end.

“Sir Fred, if the opportunities available to you are so exciting and if everything is going so well at the bank, why has the share price fallen 35 per cent since you started speaking?” 

The loaded question was pressed at an investor meeting in a plush Marylebone hotel on October 7 2008. Time was running out. A global financial crisis was well under way. The wholesale funding markets that banks relied on for short term liquidity had dried up after the failure of US bank Lehman Brothers three weeks earlier. RBS had already posted a £691mn loss and taken £5.9bn worth of writedowns in the first half of the year. It was rumoured to be in talks with the government about a bailout. Yet when challenged by that investor on stage, chief executive Fred Goodwin appeared dumbfounded.

Until that day, the Scottish boss had done a better job of keeping up the facade that he had his bank under control. Goodwin’s notorious attention to detail still permeates Gogarburn, the 350,000 sq ft Edinburgh campus modelled partly on the streets of Florence which remains the bank’s headquarters.

It was his meticulousness that characterised RBS’s lauded £21bn takeover of NatWest eight years earlier too. Buying the London-based rival at a time when Scottish lenders were seen as vulnerable to English power-grabs allowed the young accountant to flip the script and forge his own myth. As he put Scotland at the epicentre of British banking, he was cementing his reputation as a banking wunderkind.

But Goodwin also had an insatiable appetite for growth. Part of what tipped the bank into meltdown was unquestionably a more widespread culture of excessive lending — notably in the US mortgage market — the systemic inadequate capitalisation of banks, and their over reliance on wholesale funding. However RBS also exhibited singular signs of hubris, disastrous governance and a culture of fear. 

“There were some better run banks and some badly run banks, and I’m afraid RBS was a disaster,” said Turner. Later autopsies of Goodwin’s legacy pointed to inadequate risk controls and a lack of banking expertise and independent oversight at board level.

The nail in the coffin was RBS’s purchase of Dutch bank ABN Amro’s investment bank at the top of the market in 2007. The £49bn deal — which remains one of the largest bank takeovers in history — significantly increased the bank’s exposure to toxic subprime mortgage loans at a time when distress in the market was already clear.

The largely cash purchase also ate into RBS’s capital buffers and left it undercapitalised when the crisis hit. As losses mounted, its share price tumbled: investors were losing confidence and RBS faced a liquidity crunch.

The world’s largest bank was on the brink of collapse.

In the summer of 2008 — around the same time that incoming FSA head Adair Turner felt he had just missed the storm — Labour minister Baroness Shriti Vadera had the opposite feeling.

Banks were desperately trying to raise capital to shore up their balance sheets. RBS had announced a £12bn capital raise earlier in the spring to reassure investors and soften the blow from mounting losses that followed its calamitous acquisition of ABN.

As she watched the country’s largest banks — including Barclays and HBOS — struggle to accept impairments and raise capital, the former UBS banker started to seriously consider the fact that their strategy might not succeed. Confidence in the sector had reached rock-bottom.

Her mind kept going back and forth to what might be required next. Everyone seemed afraid to say it. The taboo around state intervention finally broke one day as Vadera walked towards Whitehall through Trafalgar Square with the Treasury’s head of finance Tom Scholar.

“Are you thinking what I’m thinking?” she asked. “Depends on what you’re thinking,” he replied.

“I think it’s capital and they haven’t got any and it’s going to be us, isn’t it?”

The British state’s approach of buying huge equity stakes in the country’s largest banks contrasted with the US Treasury’s. The Troubled Asset Relief Program through which it very quickly bought preferred shares and positioned the US as a temporary lender of last resort more than a direct owner.

Days after the Trafalgar Square conversation, Vadera forwarded an email exchange to Gordon Brown. The subject line was “Is it capital?” The pair were dispatched to the Sotterley estate in Suffolk where Brown was holidaying with his family, and spent the rest of the summer drumming up a plan. There were few options and little time to save the economy from impending collapse.

The once far-fetched plan materialised over the first weekend of October 2008. The government held emergency talks with the chief executives of major banks, including Goodwin, as it offered to take a stake in his bank in exchange for emergency capital injections. By Monday, the talks were reported to the public. On Tuesday, the bank’s share price cratered. Less than a week later, the Treasury said it would inject an initial £20bn into the bank in exchange for a 60 per cent stake.

Brown had always been regarded as more left-wing than arch-centrist Tony Blair, who had handed over the leadership of the Labour party a little over a year earlier. Still, he had spent years sloughing off the taint of the previous Labour experiments in state ownership and taking a majority stake in a temple of capitalism came with uncomfortable socialist undertones.

This led to surreal debates. When the late chancellor Alistair Darling raised concerns that it might be inappropriate for the British state to sack Goodwin as a condition of the bailout, one onlooker recalls being bemused at the failure to grasp what was happening. “What are you talking about, worrying about being shadow director?” they thought. “You are going to effing own this thing!”

With a £2.2tn balance sheet, a failure of RBS would have caused chaos. On the weekend that led to the bailout, the fear was that people would “turn up with sledgehammers” to break into branches if the bank was not rescued by Monday, said Charles Randell, the Slaughter and May lawyer who advised the state on the bailout.

“The next steps would probably [have been] the emergency declaration of a bank holiday, so that banks were not obliged to open and settle and then, civil contingencies . . . sending the army to protect bank branches,” said Randell. “I don’t think we’ve ever seen on that scale, the consequences of a banking crisis.”

Paul Thwaite found out about the bailout like most other RBS employees did: on the 7am broadcast news. The Liverpudlian was then a middle manager in its business bank with about a decade’s service under his belt.

Shocked by “the enormity of the events” — and anxious about what they would mean for his colleagues in terms of job cuts, Thwaite consulted his parents and a mentor. He quickly made the decision to stay at the bank.

While keen to be part of the team that “put things right” for customers and employees, he was far from envisioning that he would end up as the chief executive to lead the bank to private ownership nearly two decades later.

The plan was never for the Treasury to hold its stake in RBS for almost 17 years. Lloyds — which received a £20.3bn bailout — was government-owned for less than a decade. In the US, the government exited their dealings with large bailed out banks within a couple of years. 

Former chair Sir Howard Davies, who left the bank last year said he “certainly expected when I took the job in 2015 that the government would be out well before I finished my term, and that wasn’t quite achieved”.

The Conservative-led government that took power in 2010 would have been the obvious candidate to return RBS to private sector ownership.

So steep was the decline in RBS’s shares however — sinking below half the average bailout price of 502p — that the Conservatives had little choice but to wait.

In 2015, chancellor George Osborne finally announced that the government would start selling down while admitting that British taxpayers would never make a positive return on the bailout. The bank was bleeding money, having posted a loss every year since the crisis. But Osborne considered the bank had stabilised enough, having exited the bulk of its riskier investment banking and international activities.

“It’s the right thing to do for British businesses and British taxpayers. Yes, we may get a lower price than Labour paid for it. But the longer we wait, the higher the price the whole economy will pay,” he told City grandees at that year’s Mansion House address.

British taxpayers would have to wait another decade to be shot of RBS.

Despite Darling’s initial concerns about government intervention, Goodwin was fired as a condition of the bailout, and Sir Stephen Hester handed the job of firefighting. His first task was to unwind the bank’s positions in so-called toxic assets: a vast store of soured derivatives. Under his leadership, the bank also started the process of spinning off Direct Line and Worldpay.

After Hester stepped down in 2013, New Zealander Ross McEwan led an even bigger downsizing of the former banking giant, focusing it on retail banking in the UK and Ireland and selling its US subsidiary Citizens.

“My strategy was to come out of pretty much all the countries we were in the world, and bring it back to the UK,” said McEwan. “We had the remnants of a lot of businesses we had to sell and at the same time, come out of 38 countries so it was a huge task.”

As the bank shrunk its balance sheet and endeavoured to turn itself into a profitable lender, it had to pay the price for the sins of its past.

One weight on the bank’s shares was the immense pressure from the US government over its role propping up the toxic mortgage-backed securities market that blew up the economy. It took a $4.9bn settlement with the US Department of Justice in 2018 to resolve the situation: a momentous event that Davies, the bank’s former chair, remembers as the “most expensive meeting” he ever attended.

“They had counsel, we had counsel, the Treasury had counsel, and the top US law firms always come mob-handed for this . . . I looked around the room and I thought, ‘What’s the hourly rate of this meeting?’”

The forced divestment of various businesses, required by the European Commission as a condition of approving the bailout, also proved expensive.

“We ended up having to sell a lot of very profitable businesses when we weren’t making money,” said McEwan. “We weren’t in a position to renegotiate.”

Particularly painful was the insistence it sell Williams & Glyn: a network of retail and small business branches. It was an impossible task. After years of trying to find a willing buyer for it then to carve out a bank that was in practice non-existent as a separate entity, management gave up.

“We ended up going to the European Commission and the commissioner and saying we just don’t believe we can do this,” said McEwan, who led the bank until 2019. “We were seriously damaging our own staff and trying to fulfil an obligation . . . that just proved to be ridiculous.”

The bank also had to win back the trust of the public after it had deeply hurt taxpayers. After McEwan, who had turned the bank profitable, left the bank, his successor Dame Alison Rose sought to revamp its image.

The makeover was needed and not just because of the bailout. A flurry of scandals had damaged the bank’s reputation even further, including the mis-selling of payment protection insurance (PPI), the mistreatment of SME customers the bank allegedly pushed to failure in order to squeeze profits from them, and the Libor-rigging scandal.

Rose rebranded the company to NatWest. It had run tests that showed customers were more likely to recommend NatWest as a bank than RBS, despite the two brands offering identical services. The RBS brand had become too toxic.

By rechristening it, Rose moved the bank’s symbolic centre of gravity back to London and in doing so drew a line under the heyday of Scottish banking that it had come to symbolise before the crash.

The bank consulted then First Minister Nicola Sturgeon before pushing through with the plans, and its executives pledged to keep the RBS brand running in Scotland as well as its Edinburgh headquarters. They faced minimal pushback from Scottish politicians.

“In some ways the collapse of RBS was so dramatic and so awful that RBS was damaging the brand of Scotland,” said Davies.

Throughout the transformative 17-year period of part-nationalisation, the bank’s relationship with the government — which neither side was particularly keen on — mostly worked smoothly. Former executives said their dealings with the Treasury were sparse. 

The bank was largely free to run itself. But with public ownership came an added layer of scrutiny and sensitivity from the British public around its affairs. When they did happen, interactions could be meaningful — particularly for the fate of chief executives.

One early point of tension was the need for government approval of executive pay. As British politicians were pushing shareholders of private companies to take a robust stance on pay, they too had to walk the talk. This came to a head when Hester agreed to waive his bonus of nearly £1mn worth of shares after an intense row with the government in 2012; he left the bank about 18 months later.

But the moment of peak friction was perhaps the summer of 2023, when the bank found itself once again in a political storm over right-wing politician Nigel Farage’s “debanking” by NatWest’s private bank, Coutts.

The bank insisted the decision to shed Farage as a client had been purely commercial — and Rose unintentionally misled a BBC journalist into writing a story that said as much. When Farage secured internal documents that suggested otherwise, the board, which initially backed Rose, reversed course hours after the government intervened.

Rose stepped down the next day. The bank’s first female chief executive — who had reborn it as NatWest with the expectation that she would restore it to private ownership — was its latest casualty.

NatWest’s return to fully private ownership will finally liberate its share price from the psychological fear of government meddling and the mechanical effect of a large, albeit steady, seller in the market.

Profitability has already improved significantly. Far from the £41bn annual loss it reported for 2008, the bank generated pre-tax profits of £6.2bn last year. Its return on tangible equity — a key measure of profitability — was 18.5 per cent at the end of March, higher than 12.6 per cent at rival Lloyds.

But the government sellout will be freeing in other ways too. The bank will be able to spend surplus cash more imaginatively than buying back shares from the government, for example through pursuing more substantial acquisitions — even if none would be on the scale of the mammoth ABN Amro deal.

Potential targets include two other crisis-era creations: Santander UK, which encompassed the nationalised Bradford & Bingley; or TSB, spun out of Lloyds as a condition of that bailout and since acquired by Spanish lender Sabadell.

NatWest has already had a quiet £11bn approach for Santander rebuffed, the Financial Times has previously reported. TSB is not for sale, though it is widely expected to be put on the block when a domestic tussle between Sabadell and rival BBVA is resolved.

Freed from Treasury oversight, NatWest’s chief executive is also set to receive a substantial pay bump. That may be more down to the removal of the crisis-era cap on bankers’ bonuses than the end of government ownership.

Still, last year, Thwaite was paid £4.9mn. At this year’s annual meeting, the bank’s shareholders approved a maximum package worth £7.8mn.

But while the lender formerly known as Royal Bank of Scotland is finally moving on from the crash, the spectre of its bailout lingers. UK productivity, which had been on the rise in the run-up to the financial crash, never recovered. The bailouts foreshadowed an era of austerity and a wave of populism characterised by a distrust of elites. 

“It was very corrosive politically,” said Turner. “The financial world was run by very clever people who were paid a lot because they were very clever, and then these very clever people go blow up the world and produce a massive recession . . . That is bound to be part of people mistrusting other people who shouldn’t be mistrusted at all.”

There were regulatory consequences too. The laissez-faire approach of the Financial Services Authority has been thrown out under its successors, the Financial Conduct Authority and Prudential Regulation Authority.

Ringfencing rules put in place to safeguard consumer deposits have stifled Britain’s homegrown investment banks: although Barclays still retains an investment bank, it is dwarfed by the likes of Goldman Sachs, JPMorgan and Morgan Stanley even on its home turf. Brexit has further diminished the City. Pro-consumer interpretation of car finance commission arrangements threatens to land the banks with billions of pounds more in compensation liabilities.

Nearly two decades after the crisis, some of the largest banks argue that the regulatory pendulum has swung too far. “Nobody wants to jeopardise financial stability or consumer protection, but I think those protections are in place, and current regulations run the risk of getting in the way of customer activity, which ultimately is about UK economic growth,” Thwaite told MPs earlier in May.

The pleadings have found political resonance. Boosting the financial sector is at the heart of Labour prime minister Sir Keir Starmer and chancellor Rachel Reeves’ bid to unlock growth.

“We protected the economy in a time of crisis nearly seventeen years ago, now we are focused on securing Britain’s future in a new era of global change,” said Reeves.

The experts who were in the room when the banking sector nearly collapsed recognise that banks are much better capitalised today than they were before the crisis. NatWest, for instance has a CET1 ratio of 13.8 per cent — compared with 4 per cent before the crisis. But they remain cautious about the dangers of deregulation.

“It is absolutely shocking to hear people talking about the stability of the graveyard when you’ve got a system that’s still levered 17 or 18 times and highly dependent on a continued investor confidence,” said Charles Randell, who after Slaughter and May went on to chair the Financial Conduct Authority.

Turner, who became one of the architects of the post-crisis regime, said that “the hope for rebuilding something after 2008 is that you’ve made something which is robust to the loss of institutional memory for two or three decades”.

“If you think you can do more than that, I think you’re deluding yourself. Human beings are just susceptible to stupidity.”