Who Will Save U.K. From Royal Bank of Scotland?: Jonathan Weil

This is just brilliant: A U.K. government adviser issued a scathing report on the business practices of Royal Bank of Scotland Plc. And now the government-controlled bank has hired a law firm to conduct its own investigation of itself, while the U.K. government prepares to investigate the bank even further.

Meanwhile, in the U.S., JPMorgan Chase & Co.'s general counsel, Stephen Cutler, took part in a panel discussion last Friday in which he criticized the U.S. government for all the penalties and investigations it has leveled against his bank. "At what point does this stop?" he said.

At least when it comes to JPMorgan, the U.S. government isn't gazing at its own navel. Once JPMorgan repaid the Treasury Department's Troubled Asset Relief Program in 2009, the separation between regulators and the regulated was restored. At a handful of other lenders, such as Ally Financial Inc. -- which a few years ago became a poster child for foreclosure abuses -- the U.S. government continues to own controlling stakes. And, of course, we still have Fannie Mae and Freddie Mac, now in their sixth year of operating under government conservatorship.

By and large, though, the bank bailouts in the U.S. have been repaid. We no longer have the untenable problems that arise whenever the sovereign is charged with enforcing the law at private-sector companies that count the government as a large shareholder. We still have the problem of regulatory capture and weak-kneed prosecutors. But at least the biggest banks and the government aren't one and the same anymore.

As for the U.K. government, its bank holdings still include an 81 percent stake in Royal Bank of Scotland. The report on RBS by Lawrence Tomlinson, an adviser to business secretary Vince Cable, alleges that RBS has forced viable companies into default so it could take over their properties at fire-sale prices and boost the bank's profits.

"The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets," the report said. "During the process businesses are completely in the dark as to what is happening around them until it is too late. Most worryingly, the businesses affected are often perfectly viable and but for the action of the bank, would have been able to positively contribute to UK growth."

Cable passed on Tomlinson's findings to the U.K.'s Financial Conduct Authority. RBS, meanwhile, hired the law firm Clifford Chance LLP to investigate whether the findings are true. Really, though, what's the difference between a bank investigating itself and the bank's owner investigating the bank? The remarkable part here is that an arm of the U.K. government ever commissioned Tomlinson's report in the first place.

It has been more than five years since RBS took its taxpayer bailout. It's hard enough for governments to keep systemically dangerous financial institutions in check. Entrenched government ownership makes that mission almost impossible. Companies such as Ally aside, at least in the U.S. we're getting closer to the day when there is the appearance of a separation between the two sides again.

RBS was saved by the British people. They should be asking: Who will save them from RBS?

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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