RBS to Pay $1 Billion in Settlement Over 2008 Fundraising

By Parth Parikh,
Money and Investing Writer

Eight years after the global financial meltdown, banks here and abroad are still feeling the reverberations and settling lawsuits over unethical practices.

The more recent settlement that has been reached is between the Royal Bank of Scotland (NYSE: RBS) and thee parties of investors for purchasing rights to the company without sufficient information.

Compared to past settlements where companies sold mortgage-backed securities to unknowing investors, RBS sold rights to their company, or the ability to purchase additional shares at a later date, to investors. After raising 12 billion British pounds in additional funds, the bank fell though and had to be bailed out by the British government, thus leaving investors with nothing.

On Monday, December 5, RBS released a statement saying that they have reached an agreement with three of the five parties of investors wanting their money back over the fundraising effort.

The settlement comes with an 800 million euro, or $1 billion US dollar, price tag and the three parties of investors represent 77 percent of the claims against the firm over the practice.

Back in 2008, The Royal Bank of Scotland was one of the international banks within the United Kingdom that took a severe hit from the Great Recession, with the bank losing 5.9 billion British pounds over bad credit positions.

As a way to recover the lost money, RBS started a fundraising effort by selling rights to their company to investors hoping to find a safe bank to invest in. The bank reached its goal of selling 12 billion British pounds and investors used the rights to either buy the company or sell those rights for an even higher price.

A month later, the British government announced that they would take a majority role in the bank, with hopes that the government could bring RBS back to normal day-to-day operations.

Upon reading the news, RBS’s stock price skyrocketed from $1.11 to $19.28 on the New York Stock Exchange, enticing holders of the rights to cash in and receive the profits from the jump in price.

On top of that, the British Treasury promised to inject funds into RBS and other banks so they have money to lend and can function as a normal bank in a time where no one was sure what banks would exist the next day and which would declare bankruptcy.

The string of positive news left investors with profits, until January of 2009 when RBS released their trading statements, letting the world know that they had suffered 8 billion British pounds worth of losses in their trading division and a loss of 20 billion British pounds in goodwill write-downs.

News of this report hurt the stock tremendously, plummeting the stock from $16.16 to $3.61 on the Stock Exchange in downtown Manhattan. Investors of the RBS stock saw their returns dwindle as they had been given rights to the company without knowing that they have been facing losses in many divisions.

The Royal Bank of Scotland still has 23 percent of investors still looking for compensation over the fundraiser and many other top US banks are facing lawsuits over the 2008 recession. It remains to be seen if there will be an official end to the Great Recession.

 

A version of this article appeared in the Tuesday, December 13th print edition.

Contact Parth at
parth.parikh@student.shu.edu

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