RBS Sale Explained; Why is the government selling Royal Bank of Scotland?
Bankers like risk.
Financial Crisis in a Nutshell: The US market had lent BIG amounts of dollar to people in risky subprime mortgages (given to people with bad credit ratings). Basically, they shouldn’t have risked so much.
When people started defaulting (failing to pay back money owed) on their mortgages, the banks, like Royal Bank of Scotland, should have been able to cover the losses with their capital (AKA savings). But they didn’t have enough saved. Bummer.
The Labour government decided to save Royal Bank of Scotland by buying up shares in the bank. This meant RBS was declared solvent (able to pay your own way) and was able to get emergency funding from the Bank of England to keep going.
RBS was now essentially publicly owned; the UK government owns around 80% of RBS shares. By pouring money into a bank bailout, they hoped to prevent the bank from failing; which would have led to job losses and depositors losing money. In total around £107.6 billion of taxpayer’s money was spent on sorting the banks out.
The government spent £46 billion buying shares in Royal Bank of Scotland. Now a report by independent financial advisers, Rothschild, states that now is the best time to have an RBS sale to start selling the shares.
The small print: because the values of the RBS shares have dropped since they were bought, the government is set to make a loss of £7 billion on the RBS sale.
But because the other banks the government have bailed out have done better; the government is actually set to make a profit of £14 billion. Eventually.
Even though the government is making a profit, they will still be £7 billion down after the RBS sale. So they’ve lost money from bailing out a bank which didn’t do the best job of keeping our money safe. That’s £7 billion which could have been spent on other things.
But as we said, the government is estimated to make a profit overall. So it could be a lot worse.
People have blamed the bankers for the financial crash, others have blamed the government for not putting enough regulation in place to stop this from happening.
Change is coming; we explored how the new rules mean HSBC is separating its high street branches from the investment side of the bank.
The Foreign Exchange Scandal: If you’re going to break the law, probably best not to email about it. Several big banks have been hit with record fines totalling $5.7 billion after it was revealed they had fixed the foreign exchange markets to make profit.
Foreign Exchange is the conversion of different currencies. Changing one countries money into another. The value of a country’s currency is determined by things like trade, investment and tourism and what’s going on in the country at the time (I.e. things like war tend to have a negative affect).
How other countries are doing also effect this. Most countries “float” their currency on the market against other countries – which basically means the value of their currency is affected by how well the other countries are doing and also by trading in the Foreign Exchange (Forex) Market.
Foreign Exchange is handled by big international banks. Traders buy and sell currencies on behalf of clients. Foreign exchange enables international trade and investment from one country to another.
E.g A car company from one country imports car parts from another country. The parts that are being bought, must be purchased in the currency of the country that the car parts belong to. Foreign exchange traders will assist the car company with the exchange. The international banks make money off of this exchange.
Their aim: Finish the day with more money than you started. As the value of currency continually rises and falls, if you are clever (and sometimes just plain lucky) currency traders make a lot of profit on these trades.
A group of traders decided they wanted to make even more money than usual and decided to play against the rules.
It is possible to “fix” the market in order to make a profit. This is illegal.
The market runs 24 hours a day so it’s very difficult to see how much things are worth at any given time. To make it easier to know the value of things a picture is taken of how the market is doing. Before the scandal this was done 30 seconds before and after 4PM and was known as the 4PM fix or fix window.
Traders can affect market prices but placing lots of orders just before the 4PM fix. More orders changes the price value as the demand for a particular product has risen.
If you know an event like this is going to happen you can place your own orders and sales earlier in the day and make a profit when the price changes later on. Buy it while it’s cheap and then drive the price up, for example.
However trades made on their own don’t really make much of a difference to the market as there’s so much going on – you need a rush of similar trades with many people working together.
And that’s what members of the banks did. In one case HSBC traders worked with three other firms to drive the sterling-dollar rate lower. For those that don’t speak City talk: that’s the difference in value between the Pound and the Dollar.
They used confidential information from their clients to manipulate the market, making HSBC a tidy profit of $162,000.
It’s probably worth saying – buying currency you know is going to rise is not illegal. This is called “front running” and is legal in the foreign exchange market because it was thought no single trader could affect the market enough to make a profit. But colluding (coming to a secret understanding) with others to make it happen definitely is illegal.
These emails have a nasty habit of coming back to haunt you.
The traders, who called themselves “the three musketeers”, “the players” and “the A team” sent a series of messages via email and online chat rooms after manipulating the markets:
“Loved that mate… worked lovely… pity we couldn’t get it below the 00”, “Hooray nice teamwork” and of course “If you ain’t cheating, you ain’t trying”
The banks involved in the scandal were JP Morgan, Barclays, Citigroup, RBS and UBS, just in case you were wondering.
The movements in the market are so small that if you’re exchanging money for a holiday you probably won’t notice what’s happened.
However that didn’t stop people getting very angry:
— Tim Fenton (@PompeyTim69) May 20, 2015
— HYDROPONOLOGY (@HydroponicsHUGE) May 20, 2015
As a result of the scandal the 4PM fix window is being extended to five minutes, rather than 30 seconds. This should in theory make it a lot harder for traders to try to fix the markets.
In this case the biggest losers were the banks who will plead guilty to criminal charges and face the hefty fine. Also some of the employees involved in the Forex Scandal are now being sacked. Despite the punishments, events like this don’t make the banks look good and many of the public are wondering “Will they ever learn?!”