Royal Bank of Scotland bankers joked about destroying the US housing market after making millions by trading loans that staff described as “total fucking garbage”, according to transcripts released as part of a $4.9bn (£3.8bn) settlement with US prosecutors. The US Department of Justice (DoJ) criticised RBS over its trade in residential mortgage backed securities (RMBS) – financial instruments underwritten by risky home loans that are cited as pivotal in the global banking crash. It said the bank made “false and misleading representations” to investors in order to sell more of the RMBS, which are forecast to result in losses of $55bn to investors. The bank made “hundreds of millions of dollars” from selling RMBS, the DoJ said, while disguising the risk they posed to investors. The DoJ said senior RBS executives “showed little regard for their misconduct and, internally, made light of it”.
The bank’s chief credit officer in the US referred to selling investors products backed by “total fucking garbage” loans with “fraud that was so rampant … and all random”. He added that “the loans are all disguised to, you know, look okay kind of … in a data file.”
In one exchange, as the extent of the contagion in the banking industry was becoming clear, RBS’ head trader received a call from a friend who said: “I’m sure your parents never imagined they’d raise a son who would destroy the housing market in the richest nation on the planet.” He responded: “I take exception to the word ‘destroy.’ I am more comfortable with ‘severely damage.’”
Another senior banker explained to a colleague that risky loans were the result of a broken mortgage industry that meant lenders were “raking in the money” and were incentivised to make as many loans as possible. Employees who might raise the alarm about the riskiness of such lending “don’t give a shit because they’re not getting paid”, he said.
By October 2007, as signs of stress began to show in the banking system, RBS’ chief credit officer wrote to colleagues expressing his true feelings about the burgeoning volume of subprime loans in the housing market. He said loans were being pushed by “every possible … style of scumbag”, adding that it was “like quasi-organised crime”. “Nobody seems to care,” he added.
The DoJ criticised RBS’ failure to do due diligence on the loans it was packaging, saying the bank feared it would lose out to rivals if it performed stricter tests. One analyst at the lender referred to the bank’s due diligence procedures as “just a bunch of bullshit”.
When the bank became concerned about the poor quality of loans and started imposing tighter due diligence, one senior banker complained, saying: “Oh, God. Does anyone want to make money around here any more?” RBS expected to make $20m from one deal that involved trading particularly risky loans, but faced resistance from the bank’s chief credit officer. A senior executive responded to the concerns by telling the bank’s head trader: “Please don’t fuckin’ blow this one. We need every dollar we can get our hands on.”
In September 2007, one trader referred to an appraisal of loans as giving “pretty shitty results”.
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