‘Goodwill Impairment Charge’ - RBS comes up with another wonderful euphemism!

What the hell is a ‘goodwill impairment charge’? No, you read it right, a goodwill impairment charge!

Just in case you have never heard of this singular phenomenon, let me quote from an RBS statement released today on Yahoo!

“…Royal Bank of Scotland unveiled the biggest loss in British corporate history on Monday, overshadowing a second government bailout for the sector and sending its shares reeling to a 23-year low.

RBS said it would report a 2008 loss of up to 28 billion pounds, driven largely by a goodwill impairment charge of 15 to 20 billion pounds related to its acquisition of parts of Dutch rival ABN AMRO in 2007.

Excluding goodwill impairment, the bank said in a statement it expects a full-year loss of 7 to 8 billion pounds…”

Oh well, that’s ok then, that’s perfectly acceptable. It makes everything alright now, doesn’t it!

I mean they only really made a loss of between 7-8 billion pounds, and that they blamed on ‘…challenging credit and market conditions in the fourth quarter of 2008…’ so they can’t be held liable for that, either.

I mean, hello, whatever! Didn’t they know there was a banking crisis in September 2008, then? I mean, how do you lose between 7-8 billion pounds in just 3 months, particularly when you must have already been extremely worried about your diminishing ‘goodwill impairment’ at ABN Amro! I mean, you would think that someone inside RBS would have said, ‘…hey guys, let’s try and keep the other losses down to a minimum, shall we…’

So, to get back to the goodwill impairment thingy then!

What can this possibly mean, what course of action is this phrase meant to cover up?

If you look it up in a dictionary, this is what you get.

“…An intangible asset above and beyond the concrete value of a business or asset. For example, the value of a business’s good name and customer relationships. Goodwill is listed as an asset on a company’s balance sheet and must be amortized over its reasonable life, which can’t exceed 40 years. If a large corporation purchased a small business for $25 million, but its actual value is determined to be $35 million, goodwill is valued at $10 million...’

So, this must mean that whatever value for goodwill ABN Amro quoted on their balance sheet at the time of acquisition in 2007, turned out to be ‘impaired’ by the end of 2008. When such an impairment turns out to be worth between 15 to 20 billion pounds ( oh come on, let’s not be picky about greater accuracy, what’s the odd 5 billion pounds between shareholders these days), you have got to start wondering whether or not there just might have been the slightest miscalculation of the worth ABN Amro placed on themselves at the time of the deal!

It was only in February of 2008 that RBS cemented the ABN deal. Some city commentators thought then that their deal would be ‘challenging’. Christopher Wheeler of Bear Stearns was quoted as saying; “…For Royal Bank of Scotland it looks more of a challenge, especially as it is acquiring the business most affected by the recent market turbulence…”

But Sir Fred Goodwin, the chief executive of RBS, said, “We are happy we bought what we thought we bought.”

For God’s sake, what did he think he had bought? RBS went on to say that it had come across no nasty shocks after its joint acquisition of ABN Amro and expected to squeeze more synergies from the deal than it originally pencilled in.

There were “no eureka moments or silver bullets” but many cost savings such as a 20 per cent cut in ABN's stationery bill and savings in shared computer software. “There are a lot of areas where it just goes ching, ching, ching, ching, ching,” Sir Fred said.

Well, there it is, ching, ching, ching, as Sir Fred said. Of course, he is no longer at RBS to have to face the cameras and the music any more, and explain why ching, ching, ching, now sounds like doh! doh! doh! The BBC website describes his period at RBS thus;

“…He was instrumental in turning RBS from a cosy, comfortable regional bank into one of the world’s biggest. He was also instrumental in sowing the seeds that have led to RBS being bailed out by the taxpayer. He paid too much for ABN Amro – a lion’s share of the £48bn cost to the consortium taking over the Dutch bank – and, by failing to achieve a better balance between capital and assets, left RBS under-capitalised and vulnerable to a banking crisis that has needed Government intervention. “He has run the bank far too close to the bone,” said one long-time RBS pundit…”

If I were an RBS shareholder, which thank God I am not, I think I might be asking whether there was a proper asset value due diligence enquiry undertaken prior to the purchase of ABN Amro, and whether, in their anxiety to beat Barclays to the deal and to stamp their machismo on the banking market, the Board of RBS were reckless as to whether the representations made by the Dutch Bank as to the worth of their goodwill, were really genuine or not. However, if they did fail to make the proper investigations, I think I would start to wonder how much their pension funds are worth!