Banking crisis: 'Everyone is carrying on … the atmosphere's bizarrely positive'

FOR most employees of Scotland's banks, last weekend was a welcome respite from days spent fervently and helplessly monitoring the ever-diminishing share prices of the once-robust institutions they serve.

The silence was shattered on Monday morning when they were awoken in their Edinburgh suburbs and City penthouses to the chilling news that those banks were, at least in their current form, no more.

Driving in to the global headquarters of RBS and HBOS, which have been an integral thread of the Scottish capital's fabric, their car radios sounded the death knell. The UK government was stepping in. The once-proud institutions with their enviable reputations had been forced into a humiliating bail-out by the taxpayer.

"We only found out at the same time as everyone else – with the Monday morning resignations," said one banker with RBS. "There had been speculation a week before, in the press, but that was really speculation. It was really getting up and seeing it on the news."

At Gogarburn, where on a bridge into Edinburgh the steel motif of the Royal Bank stakes an insolent claim to the city, confusion hung in the air. Autumn leaves blew around the massive self-contained village, which the Queen had opened in September sunshine just three years ago.

Last night, 36 hours on, the fear remained at its highest among older employees. Having worked for decades to build up shares, they could see their dream of retirement receding.

And with the confusion came contempt. Sir Fred Goodwin, the chief executive made notorious by his job cuts and audacious acquisitions, had once enjoyed the support of his staff. But he lost this when he lost control of their livelihoods.

However, others felt he was a safer bet. They feared that Stephen Hester, Abbey's finance director in the run up to its takeover, had been brought in to guide RBS along a similar course. A few miles away, where the HBOS headquarters on the Mound has gazed down on the bustle of Princes Street since 1806, the mood was similar.

But while at RBS there has been no clear talk of job cuts, HBOS staff said they had been asked to volunteer for redundancies. The group employs about 72,000 people.

And from those bases where the decisions were made that led – ultimately and perhaps unforeseeably – to their downfall, ripples began to reverberate into the lives of every citizen.

Holding shares in the institutions has been a badge of honour for small investors in Scotland, proud to hold a humble portfolio which says something about their national identity.

Now those investors face having the value of those holdings, already greatly diminished, reduced further.

Professor Emeritus Patricia Fraser, of Aberdeen University's business school, said: "HBOS and RBS shareholders have been hit for the last 18 months to two years. Even in the last month – RBS was 215p on 17 September and it's now at 70p. When you are hit like that you just have to sit, and the stability should help in the medium-term and long-term investment. The ones hit most are the ones who need money now."

She said that as part of the wider bank deal, the institutions had been ordered to increase their capital with or without government assistance.

If they had gone to the markets, there would have been more dilution, as all shares would have been ordinary as opposed to some preference.

Matthew Sinclair, a policy analyst at the TaxPayers' Alliance, said: "Shareholders will be frustrated that their shares in banks will be diluted, however, if the injection of taxpayers' money helps the sector to recover then they will be quids in."

But for those who have a more arms-length association with the bank, whether in terms of deposits or loans, experts have cautiously welcomed the arrangement which instils in the banks the duty to lend. Andy Willox, Federation of Small Businesses' Scottish policy convener, said: "At this time more than ever, with cash-flow concerns beginning to emerge, small businesses need fair access to flexible finance at competitive rates.

"So, measures to ensure that small firms can access 2007 levels of finance, if only from certain banks, seem to make sense."

The Council of Mortgage Lenders also believes that if the recapitalisations do what they are supposed to – shore up confidence and get markets moving again – money will filter down the system."

Prof Fraser said: "Banks are desperate for cash from us as well as from the government. In my opinion, that will continue, at least in the short term."

Within RBS and HBOS, staff are dealing with these changes as taxpayers, bank customers and employees.

Last night, some of the wounds at Gogarburn had been salved to some extent. Managers had addressed the confusion with conference calls and briefings. "The message has come clearly from the top that the 60 per cent bail-out is going to happen," said one worker.

"Everyone is carrying on. It does affect bits of the business here and there but everyone is pulling together and the atmosphere is bizarrely positive."

One London RBS employee said: "The bank is still very much standing. From a credit perspective, it's a lot stronger."

"Obviously there is big uncertainty – and everyone is talking about it – but people live with uncertainty every day."


QUESTIONS THAT NEED ANSWERED

1. Why were the recapitalisation proposals for Lloyds TSB and HBOS not considered and presented separately?

2. Why was there a presumption in favour of a Lloyds TSB takeover – particularly when shareholders of both banks have not yet had an opportunity to vote on it?

3. Why should the government be supporting a solution that stands to trigger many more job losses than those already necessary?

4. Why have assurances not been sought on the retention on the retention of key functions in Scotland?

5. What protection will there be for bank customers and consumers as a result of loss of competition across the UK, and particularly in Scotland?

6. Has the government considered alternative options for HBOS? Why could the group not be supported like RBS and given the opportunity to trade out of its current difficulties over the next three years?