Royal Bank of Scotland Could Post Country's Largest Loss Ever - January 19, 2009

With the markets closed in observance of the Martin Luther King holiday, much of the financial news came from across the pond today. In a statement released in the UK, the country’s Prime Minister, Gordon Brown, confirmed earlier today that the Finance Department is offering to insure banks against any pending defaulted loans.

For the country’s commitment to their banks, the Treasury would insist that the banks make themselves more accessible to British businesses and homeowners for loans as the British economy continues to feel the pinch of the global recession.

Back in October, England’s Treasury Dept. infused more than 37 million pounds ($55B) to help sustain operations in Britain’s banks. However, those funds have done little to offset the enormous impact of the world’s financial collapse.

“Good businesses must have access to credit, jobs should not be lost needlessly," Brown announced earlier this morning. "It is because of this that we are taking the action to expand lending."

As part of the proposed plan, Brown suggests that the mortgage industry should be offered some 50 million pounds ($74B) in funds to create a pool of capital in order to have the BOE, Bank of England, back loans for potential homeowners.

England’s financial woes have taken many of their cues from their troubles counterparts here in America. Following recent quarterly disasters from banking giants Citigroup Inc. (C), and Bank of America Corp. (BAC), both of which reported multi-billion dollar losses in their past earnings release, had to hit up the government for cash in exchange for corporate stock in order to curtail further mega-losses.

Today’s announcement from the British government comes the same day that the country’s largest bank, and corporation for that matter, the Royal Bank of Scotland (RBS) reported that the company is in the midst of taking more than 28 billion pounds ($41.3B) in write-downs for the year.

In relation to the proposed infusion of capital by the BOE, the bank announced that due to the massive losses accrued by RBS, they would exchange some 5 billion pounds ($7.4B) worth of preferred shares to common stock. The recent action would increase the government’s position within the company from 58% to nearly 70%.

The British government, in conjunction with the UK Financial Investments (UKFI), is supporting RBS in order to help stabilize the financial system along with providing protection for those patrons who continue to place their savings, their deposits and their trust into RBS.

Looking into the future, the UKFI will maintain proper management of the government’s position within the company, and develop an exit strategy from RBS, as the British government is not a permanent investor in the bank.

The majority of RBS’ losses stemmed from their unprofitable acquisition of Dutch bank ABN Amro last year before the financial downturn reared its ugly head. Last year, partnered with Banco Santander, RBS purchased the bank for 70.6 billion Euros ($92.6B).

Due to the lack-luster purchase, the losses that RBS is incurring has forced the company to take a goodwill impairment charge between 15 billion ($22B) and 20 billion pounds ($29.2B) on their balance sheet. RBS is also looking to take an 8 billion pound ($11.7B) loss on credit-related assets in regards to subprime loans.

"I think that everyone around the world has been caught out by the scale of the market disruption and the recession, and the damage that does to big banks. We are the latest one to be showing that," The head of RBS, Stephen Hester, told the BBC that there were lessons to be learned for the bank. "But what is clear is that although the losses that RBS is feeling are felt by many banks around the world, we did make the situation worse for ourselves by expanding at the wrong time."

By midday in trading on the London Stock Exchange, shares of RBS were down more than 65%. Coming off their highs of 603 pence ($9) per share in 2007, the stock has plummeted more than 98% to trade at 12 pence ($0.18) today.

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