October 1st, 2012 (updated from July 6th, 2012) (revised October 8th, 2012)
Today, Royal Bank of Scotland chief executive Stephen Hester used a speech at the London School of Economics to call for a new “compact” between banks and society. With his industry engulfed in scandal and widely despised by customers and the general public, Hester said “the current level of negative feeling is, in my view, particularly unhealthy. We need to reach a new compact with society where banks are better at balancing the interests of everyone who depends upon them.”
We certainly do. But if this is Hester’s goal, he has a decidedly odd way of going about it. Under his leadership RBS has been shifting billions of pounds of commercial property assets from its banking book into its commercial property division, West Register. In the process, the bank has been destroying the livelihoods of many of its borrowers.
The juggling act suits the bank, which also owns NatWest, as it enables it to avoid crystallising losses on loans that can be decreed to have gone bad* and to transform liabilities into assets. This commercial real-estate hustle is central to Hester’s recovery program, enabling him to massage the RBS balance sheet and ultimately to flog off customer assets for much-needed cash.
The practicalities of the strategy are distasteful, though. They include reneging on lending agreements, arbitrarily changing the maturity and the interest rate on lending agreements, ‘losing’ and then ‘recreating’ loan agreements, lying about lending agreements, persuading friendly chartered surveyors (and in-house surveyors) to concoct fantasy valuations designed to help the bank, for example by putting customers in breach of loan-to-value agreements, bully-boy tactics, and other nefariousness and skulduggery.
One goal is to manufacture defaults*, to make it look as if a corporate or SME borrower is ‘in default’ or ‘breach of covenant’, so that the customer’s assets can be transferred into the bank’s vast repository for “distressed assets”, variously known as Specialised Lending Services, Global Restructuring Group (GRG) and West Register. Once they are there, the assets are seen as fair game by the Edinburgh-based bank. Both personal and business assets can be asset-stripped with impunity (see also my earlier blog: A short history of RBS’s Global Restructuring Group).
And, yes, some of the activity borders on the criminal. As one abused customer, Brechin-based hotelier Nigel Henderson, told RBS chairman Sir Philip Hampton at the bank’s 2011 annual general meeting:-
“the conduct of a significant number of employees in your bank would make even the most crooked, unscrupulous and despicable back street loan shark appear as a paragon of virtue. Yes, the jackboot culture is alive and kicking – literally as well as metaphorically within [Royal Bank of Scotland], despite your pious statements”
It seems that the UK authorities are — finally — waking up to the bank’s behaviour. The Times today reports that City of London Police have launched an investigation into RBS’s alleged ‘theft’ of a multimillion-pound hotel from its own borrowers. Investigations editor Dominic Kennedy reports:-
Detectives have requested interviews with bank executives in a case that shines a light on how RBS moved a fortune in clients’ assets into its own property division … RBS has bought £1 billion worth of its former borrowers’ property, but City of London Police is trying to establish whether a crime was committed when the Coniston, a four-star conference hotel in Sittingbourne, Kent, came into its ownership.
The previous owners, Chris Richardson and Innes “Ernie” Berntsen, were longstanding customers of NatWest, which is owned by RBS. The bank used them on a brochure boasting how it had provided a multimillion-pound package to redevelop an old hotel, but the pair now claim to have lost savings of £4 million.
In February 2010, four months before it was due to open, the property agent Savills valued the Coniston at £7.7 million on completion. Internal RBS documents suggest the bank estimated its value on opening would be even higher, exceeding £9 million. But nine days before the scheduled opening, the bank said that the business had run out of funds.
The hotel’s owners, described on internal bank papers as “excellent customers”, were perplexed. They understood that all lending had been agreed. The RBS Global Restructuring Group, which handles “problem lending situations”, wanted a further valuation. RBS-appointed valuers then put the hotel at “less than £2.5 million to £3 million”. Among those in a conference call where the valuation was given was a representative of West Register, the RBS property wing. The owners were not party to the call.
With no more cash available from RBS against an asset now so poorly valued, the hotel went into administration with a guide price of only £3.95 million. A member of staff at RBS Global Restructuring Group e-mailed the administrators: “Please keep me advised on the second highest bidder’s position.”
The bank is entitled, as a creditor, to be informed about offers for customers’ assets, although RBS insists that it erects “Chinese walls” to stop its property staff getting this sensitive information. The bank, which wins a third of its bids, won the Coniston by offering £4.24 million cash, beating the next best offer by just over £300,000.
The hoteliers complained to police under the Fraud Act because newly disclosed internal bank documents suggest that they still had funds available when RBS claimed that they had run out of cash. The bank says the documentation is a mistake.
RBS said the customers had “already articulated these allegations in High Court proceedings. NatWest and West Register are happy to co-operate with police inquiries.”
The Times published a separate analysis piece by Kennedy (Cashing in on property crash), which says that, in response to the property crash of 2007-09, the Royal Bank of Scotland set a strategy of seeking to acquire customer assets, presumably at knockdown prices. According to the newspaper, leaked papers confirm that in 2009 — after ex-British Land boss Hester had replaced Goodwin as chief executive — the bank developed a strategy involving taking possession of customer assets, especially their property assets, and secreting them into its West Register portmanteau. It probably made sense given Hester’s background in running one of the UK’s largest listed real-estate groups, but it is may also be state-subsidized kleptomania. The Times analysis piece states:-
The internal papers, dated May 2009, showed that the bank decided that it would need to “strengthen the level of resourcing available to support the buy-in activity”. West Register was to be used as the vehicle to buy the properties. Offices, retail and industrial premises, pubs, hotels, nursing homes, car dealerships and hospitals were to be considered.
I understand that Tayside Police and the Crown Office (Scotland’s equivalent to the Crown Prosecution Service) are looking into the bank’s alleged misappropriation of two hotels from former customer Nigel Henderson as part of the ongoing probe into RBS malpractice North of the border.
Cat McLean, a solicitor advocate from Edinburgh-based law firm MBM Commercial, has detailed how the bank used Machiavellian tactics to allegedly misappropriate the ownership of Charters in Sunningdale, Berkshire — which was used by the Duke and Duchess of Windsor (pictured right) — from the property’s owner, developer John Morris. Charters has been converted into several blocks of luxury flats, where the singer Sir Cliff Richard has an apartment.
However, RBS allegedly reneged on a pre-agreed facility to finance final construction works, which caused the contractors to go unpaid and to walk off site leading to £4m of fully deposited sales failing to complete. In February 2009 the bank placed the business in administration. Administrators PWC and the bank then turned down a £32m offer from Morris, backed by South African bank Investec, claiming it did not want to sell at a discount. However they later sold Charters to West Register for £16.2m. Morris claims this was one-third of its market value, adding this has been confirmed and supported via independent valuation.
Here is a piece I found on July 6th 2012 on the UK Business Property website…
Today West Register is selling, among other assets, 15 residences on Grosvenor Crescent, three years after seizing the properties from an insolvent developer and taking on the unfinished project. Having appointed the Duke of Westminster’s Grosvenor Estates to complete the pert finished project, RBS expects to get its money back finally, as it offers one of the 15 properties for £45 million, while the rest range down to £9 million.
“We are certainly looking to get all our money back,” said Aubrey Adams, head of property in the bank’s Global Restructuring Group (GRG) of which West Register is a subsidiary.
Adams is better known as the former boss of Savills, but is also on the boards of British Land and Max Property.
The West Register portfolio is a small part of RBS’s exposure to real estate and operates on a global basis. While the majority of the assets are UK-based, the West Register contains properties across Europe as well as in the US and Asia.
West Register was set up in 1991 to deal with that property downturn. Due to the length of time it takes to sell some of it’s more challenging properties it was still around when the next cycle hit.
RBS aims to eliminate its £83 billion non-core loan book by the end of 2013, Adams said some of the debt is so underwater the deadline may be missed.
There is no shortage of private equity funds for this distressed real estate, but the prices on offer would force further writedowns on RBS, which it is seeking to avoid by expert management from Adams and his staff.
“As we get further and further into the portfolio there will be a rump that’s harder and harder to sell and that’s an issue,” he said.
Fri, 6th Jul 2012
Bloomberg also wrote about the Grosvenor Crescent houses that West Register is flogging off through Savills (“RBS markets mansions to salvage $47bn in loans). The report states: “less than a mile from Buckingham Palace in London, among a row of 19th century luxury homes, RBS is seeking to recover some of the £30bn ($47 billion) of commercial property loans it got stuck with when borrowers defaulted.”
Adams, 62, who was chief executive of estate agents Savills from 1991 to 2008 and curiously shares his name with an American female porn star, joined RBS as head of property within Global Restructuring Group last November to oversee the defaulted commercial loans.
I could go on, for example by referring to the alleged conflicts of interest between Aubrey Adams’s role as head of property at GRG / West Register and his continuing roles as a non-executive director of British Land and as chairman of Nick Leslau’s Max Property group. But since this is likely to be the subject of a forthcoming TV documentary, I’d better hold my fire for now.
* In numerous cases property-rich borrowers claim RBS / NatWest tipped their companies into Global Restructuring Group and West Register unfairly, for example by arbitrarily changing the terms and conditions on loans and/or undervaluing their properties to make it look like the loans had become “unservicable” and/or covenants had been “breached”.
For more on the RBS’s commercial property shenanigans, please read:-
- BREAKING: Allegations of systemic fraud at RBS by John Ward
- RBS shows its true colours (Dec 2011),
- Have RBS and NatWest gone rogue (June 2012) a
- Accusations of “systemic institutionalised fraud” at RBS fall on deaf ears (June 2012)