Page 28 - RBS GRG F Teaching Note

The Bank’s ‘fire-sale’ Response

Create GRG as a ‘clearinghouse’ to extract, from supposedly

failing businesses, fees and fines, clawing back loans

secured against property and taking equity stakes in these

businesses before they were sold off.

“West Register, the bank could acquire their prime

properties at fire-sale prices, converting them

from risky loan exposures into owned assets that
the bank planned to sell off later for a capital gain.

And, by quarantining the properties in a network
of subsidiaries owned by West Register, the bank

substantially reduced the amount of capital it had

to freeze on its balance sheet as a regulatory

buffer against potential losses, freeing up extra

cash.”

In order to facilitate the necessary breach of covenant GRG

acted against business loans which were secured against

property, and most agreements contained a “loan-to-value”

covenant stipulating that the customer’s borrowing must

not exceed 70-80% of the value of their assets.

The fall in the value of properties after 2008 put customers

in breach of their loan-to-value (LTV) covenants and allowed

the bank to transfer them to GRG forcing them to sell or

repay their loans.

West Register thereby reduced the bank’s exposure to “non-

core” risky real estate loans whilst allowing it to acquire
cheaply, prime assets that it could then sell at a profit.