Court documents allege clashes inside RBS over 2008 toxic assets

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A Royal Bank of Scotland branch is seen in London

Royal Bank of Scotland (RBS.L) bosses avoided repricing billions of dollars of souring investments on the eve of the 2008 financial crisis for fear of endangering bonuses and a takeover bid for a rival, court documents allege. The claimants’ filings allege senior managers were warned by internal risk experts for more than six months that overvalued toxic debt, including subprime mortgage bonds, had left the bank dangerously exposed to a collapse in U.S. property prices. But some managers resisted the warnings, allege lawyers acting for RBS shareholders now seeking billions of pounds in compensation for losses suffered when the bank was bailed out in the 2008 crisis, according to the claimants’ “particulars of claim” and a witness statement seen by Reuters. In documents filed by lawyers acting for RBS, the bank rejects those allegations, and denies that it should have repriced assets more promptly or that it misled shareholders over its finances. The allegations, which focus on the months leading up to the 2008 crisis, are at the heart of a 4 billion pound lawsuit brought by thousands of RBS’s investors, which is due to start in the UK early next year. Documents seen by Reuters include the claimants’ particulars of claim and the bank’s defence. In the 1990s and 2000s, RBS had gone from being a small Scottish lender to a global banking giant, largely thanks to an aggressive expansion plan led by former chief executives George Mathewson and Fred Goodwin. In the summer of 2007, the bank stunned markets by leading a consortium of lenders in a 71 billion euro (62.08 billion pounds) takeover of Dutch bank ABN Amro just as worries about a massive U.S. credit bubble were gathering momentum. Little more than a year later, RBS became one of the biggest casualties of the turmoil that engulfed the industry. In 2008, the Edinburgh-based bank made a then record 12 billion pound cash call on investors. Just six months later, RBS – Britain’s largest corporate lender and home to hundreds of billions of pounds of customer deposits – required the first tranche of a UK government bailout that ended up costing 45.5 billion pounds. As a result, some shareholders, including some of Britain’s biggest institutional fund managers, lost more than 90 percent of their investments. They are now claiming they were misled about the state of the bank’s finances ahead of the 2008 cash call and are seeking compensation for their losses. A trial is scheduled to begin in London in March after the two sides failed in July to agree an out-of-court settlement. It could end up being one of the costliest cases in English legal history. RBS, which is still 70 percent owned by the British taxpayer, declined to comment for this article. But Chief Executive Ross McEwan said last month that the bank, while still pursuing settlement talks with some of the claimants, was ready to fight if the case reaches court. The bank has already booked billions of pounds of writedowns since 2008 and is facing a number of U.S. cases alleging mis-selling of mortgage bonds. It has provisioned $5.6 billion to settle these and other historic misconduct charges. Some analysts estimate the total eventual claims against the bank will outstrip RBS’s expectations.


The claimants’ particulars of claim and a witness statement seen by Reuters detail allegations regarding the bank’s behaviour in the months before its near-collapse; they allege there were significant disagreements between staff with responsibility for steering the lender through the worst banking crisis since the Great Depression. The issue of whether the bank deliberately decided against writing down the value of its troubled mortgage-backed bonds – and whether this decision caused misrepresentation of the bank’s financial health – is a key area of contention. The bank was one of the world’s leading sellers of mortgage-backed securities (MBS) and other asset-backed securities (ABS) in the mid-2000s. RBS Greenwich, a U.S. unit of the bank, underwrote $99 billion of U.S. sub-prime securities in the two years to the end of 2006, a volume surpassed only by Lehman Brothers, according to a separate set of U.S. court documents filed in the Southern District of New York in connection with a July 2015 action by RBS investors against the bank. According to the UK claimants’ court filings, senior RBS managers on both sides of the Atlantic clashed with risk analysts over how to value the bank’s exposure to distressed debt. Much of the risk was embedded in complex structured credit products called Collaterised Debt Obligations (CDOs). In September 2007, Victor Hong, a former risk manager for JP Morgan and Credit Suisse, was appointed head of fixed-income Independent Price Valuation (IPV) at RBS Greenwich. As a managing director of risk management, he was one of the most senior analysts responsible for assessing the market value of the unit’s fixed-income portfolio. Hong says that soon after he was appointed he complained to his bosses that these assets were troubled and needed to be marked down in value, according to his witness statement. Hong says he refused to sign off the IPV report for September 2007, alleging in his statement that the IPV function was “effectively a sham and was not independent at all.” Claimants’ lawyers told Reuters his testimony is likely to prove important in their case against the bank. The trial is expected to last six months and to hear from scores of witnesses. Hong’s witness statement alleges that analysis and research passed to senior RBS management from subordinate staff, including Hong, showed some other banks and dealers were marking down some ABS CDOs towards 25 cents in the dollar by October 29, 2007, while RBS senior management was recommending that ABS CDOs were marked at 75 cents in the dollar. Ultimately, the September 2007 report carried a disclaimer stating the bank had been unable to independently verify the value its $3.5 billion portfolio of super-senior ABS assets since July 31, 2007, “due to a lack of market liquidity and transparency.” In court documents for the defence, RBS says a lack of trading in such assets at the time made it difficult to pinpoint what the correct values were. Hong told lawyers for the claimants that his predecessor, Lauren Rieder, told him that the writedowns he and others were calling for would not be authorised by senior RBS management, according to the particulars of claim. The documents do not specify what level of writedown Hong wanted. In that conversation, Hong alleges in the particulars of claim, Rieder used words to the effect that he should “get comfortable” with signing off the September 2007 IPV report and the unchanged marks because to press for lower valuations would mess up “the bonuses.” In a message sent to Reuters via social media network LinkedIn, Rieder said the allegations against her were “totally false and completely made up.” She declined to comment further. Rieder is not expected to testify at the trial. According to the particulars of claim, Hong alleges that Bruce Jin, former head of Market Risk at RBS Greenwich Capital Markets, encouraged him to sign off the September 2007 valuation report, and that Jin said he would support Hong if anyone questioned the bank’s inability to revalue the assets. Jin told Reuters the conversation Hong describes never took place. Lawyers for RBS say in court documents that there is no truth in Hong’s claims and that Hong was told by at least one manager, identified in the documents as Carol Mathis, that the issue of how to value super-senior (SS) CDOs had been escalated to more senior management. Mathis was then the chief financial officer for RBS in North America. Emails sent by Reuters to Mathis via Digital Asset Holdings LLC, where she now serves as Chief Financial Officer, went unanswered. Hong, who also alleges that managers in London wanted to avoid writedowns because of RBS’s bid for ABN Amro, resigned in November 2007, less than two months after he had started at RBS. He blamed “persistent discrepancies between trader marks and analytical fair-market values” for making his job intolerable, according to his witness statement. Hong, who went on to work for the Federal Reserve Bank of New York, alleges that Jin told him he would receive a bonus at the end of March 2008 if he reconsidered his resignation, according to his witness statement. Jin told Reuters that such a conversation never took place. In a defence document filed at the court, RBS says that Rieder signed the September IPV report in place of Hong but denies her action was inappropriate, noting that Hong was a new recruit. In court documents RBS also denies Hong was improperly prevented from performing his IPV job. The bank says it was already considering changes to the valuation of some of the assets in question, and that some ABS CDOs were written down within a month of Hong’s departure. The bank denies that Hong conducted any substantive analysis of the value of RBS’s super-senior CDOs, alleging his research amounted predominantly to “unstructured provision of press reports, research notes and market information relating to the valuation of ABS CDOs held by other institutions.”


Former staff at RBS Greenwich, which is based in Connecticut, have told Reuters that UK-based management undermined their powers to reprice billions of dollars of distressed debt. While Jin, speaking out for the first time since leaving the bank, rejected Hong’s specific allegations against him, he told Reuters that RBS’s approach to valuing troubled assets at the time was too slow, given the market data then available. He said that senior UK managers influenced pricing decisions at RBS Greenwich. “Normally, if you have a trading book position, the desk has the ability to mark those positions, it is within their rights, and no other authority can take away that ability. But that happened at RBS,” he said. “You do not have another body, certainly not from another region, taking over the ability of a trader to mark their marks.” In court documents for its defence, RBS says it was appropriate for senior management to take part in discussions when it was hard to judge the value of distressed assets. Jin, who now works at the Japanese bank Nomura as head of market risk in New York, said he had been a “vocal” opponent of the alleged failure by RBS to respond to market conditions more quickly. He said he has so far declined to help lawyers acting for shareholders, and was reluctant to get involved in the legal case because he wanted to focus on his current role. A second source, who asked not to be named, said RBS Greenwich bosses were uncomfortable with the loss of authority over U.S marks but acquiesced to avoid clashes with more senior executives in Britain. “It was all being run out of London. It was entirely run out of there,” the source said. The claimants’ particulars of claim allege that Chris Kyle, the London-based chief financial officer of RBS’s investment bank, and Deloitte, the bank’s accountant, had suggested a batch of revised “fair value marks” on super-senior CDOs by April 2008. The heads of the investment bank, John Cameron and Brian Crowe, allegedly overruled them because they were unhappy with the writedowns these new marks would have triggered, according to the particulars of claim. Crowe told Reuters he could not remember whether such a conversation took place. Cameron did not respond to requests for comment by email and LinkedIn. Kyle and Deloitte declined to comment. In its defence document, RBS says it did discuss the valuations of these assets with Deloitte both before and after April 9, 2008. The defence document says that the values ultimately decided upon were higher than those first discussed with the accountancy firm. The bank denies that this supports shareholders’ claims that the bank knew these exposures had been “dramatically over-marked” since late 2007.

By Sinead Cruise and Andrew MacAskill | LONDON

Call for Scots unity over single market membership

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The Scottish government is to ask opposition parties to unite behind it while lobbying the UK government over single market membership post-Brexit. Economy Secretary Keith Brown will lead a debate at Holyrood on Tuesday seeking unanimous support for market access. He called the EU a “vital trading body” for Scotland, asking the UK to “explore all avenues to protect this access”. All opposition parties have voiced support for single market access at various points since the EU referendum. Holyrood’s Europe committee has already called for single market access to be a key priority in the Brexit negotiations, although the UK government has refused to give a “running commentary” on its negotiating position. Mr Brown will seek to reinforce this position by uniting Holyrood’s parties in Tuesday’s debate. He said: “I am asking the Scottish Parliament to show consensus on this issue, so we can unanimously call on the UK Government to explore all avenues to protect this access, rather than dragging Scotland out against our will.”

‘Serious threat’

He continued: “The EU is a vital trading body for Scotland. Cutting ties with the EU single market would seriously threaten Scotland’s attractiveness as a place to do business, remove several vital streams of funding, and endanger the security of jobs, businesses and services across the country. “That is why it is essential that this week our national Parliament sends as united a message as possible that Scotland must remain in the single market.” Scottish Conservative leader Ruth Davidson has previously pledged to argue for “the greatest amount of access to the single market” possible post-Brexit. Following a meeting at Downing Street in July, Ms Davidson said she had discussed the importance of the single market to Scottish business with Theresa May. She said: “We have to look at the particular context of places like Northern Ireland, Scotland and London, which voted to stay in [the EU] in quite large numbers, to get the best deal for all parts of the UK. “For me personally that means having the greatest amount of access to the single market. That’s what helps British business and Scottish business, so that’s the argument I’m going to continue to make.” However, she has also stated that while the European market is “very important”, “it is not as important as our own UK single market”, pointing to the much larger volume of trade Scotland does with the rest of the UK compared with the EU. Scottish Labour have vocally backed Scotland’s place in the single market, with Kezia Dugdale calling for “all options” to be explored to protect this, including a “federalised UK”.

The party drew up a “post-Brexit action plan” for Scotland’s economy, which underlined the importance of the European market to the financial services sector in particular. The Scottish Greens called for the single market to be reformed in the build-up to the EU referendum, but were committed backers of the Remain campaign. Since, the party’s Europe spokesman Ross Greer has called for “every avenue” to be explored “to keep Scotland in Europe”, including the possibility of Scottish independence. The Scottish Lib Dems are strongly pro-European, with leader Willie Rennie calling on members at the party’s autumn conference not to “give up on Europe”. However, the party withdrew its support from Nicola Sturgeon’s negotiating position with the UK after Mr Rennie said she was only interested in pursuing Scottish independence.


New Libor disclosures in court

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The Bank of England attended a meeting in which senior executives of major banks discussed inaccurate Libor rates, at the start of the credit crunch, according to an email cited in court.

The BoE warned the bankers not to discuss the meeting in public, according to the email. The email suggests the executives acknowledged Libor was inaccurately low and discussed raising it. Banks have been fined billions of pounds for manipulating Libor. The London Inter Bank Offered Rate – or Libor – is supposed to track the interest rates banks expect to pay to borrow funds from each other. Until recently, 16 banks publicly stated every day what interest rate they thought they could borrow at – and an average was taken – which in turn determined the cost of millions of mortgages and commercial loans. But it could be manipulated. Traders who had bet large sums on which way Libor would go could ask a favour of the staff stating each bank’s rates, tweaking the average up or down by a few hundredths of 1%. And during the credit crunch another, more serious form of manipulation took place, called “low-balling” – where banks under-stated by much larger sums what they were really paying to borrow money – to avoid looking like they were in trouble. The main banks say that senior executives were unaware of any Libor manipulation. In 2012 the Bank of England told MPs it did not know about allegations of low-balling until that year.

Internal email

At a preliminary hearing in litigation against Lloyds, lawyers for the claimant, Wingate Associates, a customer of the bank, referred to an internal Lloyds email which may shed new light on the nature of the discussions between the Bank of England and commercial banks. In the email, dated 15 August 2007, a Lloyds executive tells a senior colleague about a meeting he attended the previous day with the Bank of England’s Paul Tucker and senior bank executives from Barclays, RBS, HSBC and HBOS. At the meeting, the email says, bank executives agreed the Libor rates being submitted “do not reflect where we can borrow in decent size”. It adds that they agreed “there was a case for us fixing Libor considerably higher.” Lawyers for Wingate said it was their case that the day following, Libor went up to 6.75%, precisely as indicated would be a good idea in the report on that meeting. The proceedings continue.

By Andy Verity BBC economics correspondent


RBS Launches a New Complaints Process and Refund of Complex Fees

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RBS is today announcing, with the agreement of the FCA, a new complaints process, overseen by an Independent Third Party – Sir William Blackburne, a retired High Court Judge – and an automatic refund of complex fees paid by SME customers in GRG during the relevant period.

RBS is also responding to the FCA’s update on its review into the treatment of SME customers in the bank’s former , (GRG) between 2008 – 2013 and its summary of the Promontory Financial Group report. As the bank has acknowledged, in some areas, it could have done better for SME customers in GRG. Specifically, the bank could have managed the transition to GRG better and should have better explained to customers any changes to the prices or complex fees it was charging. The bank accepts that it did not always communicate as well or as clearly as it should have done. The bank also did not always handle customer complaints well. RBS notes that the FCA’s update confirms that no evidence was found that the bank artificially engineered a position to cause or facilitate the transfer of a customer to GRG or identified customers for transfer for inappropriate reasons and that all SME customers transferred to GRG were exhibiting clear signs of financial difficulty. The update makes clear that there were no cases where the purchase of a property by West Register alone gave rise to a financial loss to the customer and that there was no evidence of intent for West Register to purchase assets being formed prior to the transfer to GRG. It also states that, in a significant majority of cases, it was likely that RBS’s actions did not result in material financial distress to these customers.

As a result of the historical issues identified, RBS is taking two important steps for those SMEs in the UK and ROI that were customers in GRG during the period between 2008 – 2013. This activity is designed to address the bank’s failings. These proposals have been developed with the involvement of the FCA which agrees that these are appropriate steps for the bank to take. RBS will provide further details of the new complaints process on its website. The bank estimates the costs associated with the new complaints review process and the automatic refund of complex fees to be approximately £400m, to be provided in Q4 2016. This includes the operational costs of both the fee refund and the new complaints process, together with the refund of complex fees and additional estimated redress costs arising from the new complaints process.

It is important to remember that the period in question, between 2008 – 2013, was a very challenging time for the bank and its customers. In 2008, there was an unprecedented increase in SMEs falling into financial distress and the number moving into GRG increased by around 400%. RBS lost more than £2bn from lending to SME customers.  RBS continues to cooperate fully with the FCA and remains keen to understand, and learn lessons from, any conclusions that the FCA draws in its review.  It would not be appropriate to comment further on that review until those conclusions have been published. Ross McEwan, CEO of RBS said: “We have acknowledged for some time that mistakes were made. Some of our customers went through what was a traumatic and painful experience as a result of the crisis. I am very sorry that we did not provide the level of service and understanding we should have done. “Although the FCA review into the historical operation of GRG continues, we believe that now is the right time to deal with the areas where we accept some customers were let down in the past.  I am pleased that with the agreement of the FCA, we are able to announce a new complaints process overseen by Sir William Blackburne, alongside an automatic refund of complex fees paid by SME customers who were in GRG between 2008 – 2013. “The culture, structure and way RBS operates today is fundamentally different from the period under review. We have made significant changes to deal with the issues of the past, so that the bank can better support SME customers in financial difficulty whilst also protecting the bank’s capital.”




Spy agency GCHQ investigates Tesco Bank cyber theft amid fears it was ‘state sponsored’

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Tesco has enlisted the help of spy agency GCHQ to assist its investigation of what is the most serious cyber attack ever launched against a British bank. The supermarket giant contacted the National Cyber Security Centre (NCSC), a new part of GCHQ that tackles crime online and opened last month, after it learned of the theft at Tesco Bank at the weekend. The NCSC reports into GCHQ, the UK’s digital espionage agency, and has been providing “on-site assistance” to Tesco. It is working alongside the National Crime Agency to investigate the attack. Tesco Bank initially said on Monday that it had detected “online criminal activity” in 40,000 current accounts and that money was taken from half of them. Late on Tuesday, it clarified that 9,000 accounts had hit by “fraudulent transactions” and that it had reimbursed an estimated £2.5m to affected customers as a result.

The lender had been forced to suspend online transactions as it investigated the attack, which involved sums running into thousands of pounds being stolen from customers, but said last night that that normal service had now been resumed. Chris Philp, an MP on the Commons Treasury Select Committee (TSC), has suggested the theft could have been “state-sponsored”. The NCSC said it was “unaware of any wider threat to the UK banking sector connected with this incident”.

Andrew Bailey, the chief executive of City watchdog the Financial Conduct Authority, told the TSC today that the attack against the lender “looks unprecedented in the UK”. He said that “it’s too early to give you a comprehensive account of what the root causes are” but added that the hack “clearly appears to be in the debit card side of online banking as far as I can tell”.

The bank has a total of 136,000 current accounts and offers services, including insurance and mortgages, to almost eight million customers.


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