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Ryan McQueeney

Why Royal Bank of Scotland's Scheme is Much Worse than Wells Fargo


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Let’s make one thing clear: Wells Fargo’s (WFC - Analyst Report) fraudulent account-opening scandal was bad. The company’s response, including its CEO’s apathetic testimony in front of Congress, was nothing short of a national embarrassment.

Would you believe me if I said that the Wells Fargo scandal pales in comparison to the shocking story developing around the Royal Bank of Scotland (RBS - Snapshot Report) ?

You better.

According to a set of leaked files uncovered in a recent Buzzfeed report, RBS staffers were allegedly instructed to knowingly steer healthy businesses towards the bank’s troubled-business unit, the Global Restructuring Group (GRG).

The GRG profited on these businesses by deliberately hitting them with massive fees and interest-rate hikes, before scooping up their assets at fire-sale prices.

And unlike the Wells Fargo scandal, the available evidence suggests that this was a top-to-bottom scheme.

“RBS managers encouraged employees to hunt for ways to boost their bonuses by forcing customers into loan restructuring in order to extract heavy fees as part of a profit drive nicknamed ‘Project Dash for Cash,’” the Buzzfeed News report says.

Through a series of leaked internal emails and documents, the Buzzfeed report revealed this detail and many more, including information on firms that never missed a loan payment being pushed into the GRG; the bank’s property division being passed details that were not available to other bidders when it wanted to acquire assets from GRG businesses; and staff being told to conceal conflicts of interest from customers.

In short, the company documents appear to show that RBS staff at nearly every level were privy to the business-crushing techniques the company employed to force small businesses to the GRG. The files also reveal that 16,000 firms were pushed into the restructuring unit following the financial crash. This includes care homes, farms, and children’s centers.

The Buzzfeed leaks even include executives sending managers “target lists” of loans secured against properties to be used to find potential clients to force into costlier loans.

The BBC spoke to Andi Gibbs, a British architect that was caught up in the GRG scheme. Gibbs claims that RBS told him moving to the restructuring unit would “effectively create financial security.”

“What I’ve always held on to is that I know what I’m doing,” said a teary-eyed Gibbs. “The bank actually secured the failure of this business just by the failure of their actions, absolutely.”

So, what’s the worst part about all of this? The Royal Bank of Scotland is 73% taxpayer-owned. After the financial disaster of 2008, the UK government set up a holding company that bailed out the bank and still holds a majority of the company.

Yes, the Wells Fargo scandal was bad.

But just across the pond, a government-owned bank appears to have deliberately run small businesses into the ground in an effort to turn a profit. Now that’s definitely not good.

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RBS currently has a Zacks Rank #2 (Buy) but this ranking is based solely on earnings estimate revisions. The impact from the Buzzfeed leaks remains uncertain, and it has yet to lead to analysts slashing their outlook for RBS stock. Be on the lookout for that in the future, but in the meantime, note that RBS has a weak fundamental position already, including an overall grade of ‘D’.

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