RBS cuts 3,500 investment banking jobsT)

A branch of the Royal Bank of Scotland is pictured in London, on August 5, 2011.

STORY HIGHLIGHTS

• Royal Bank of Scotland is to cut an additional 3,500 jobs
• It has already announced 2,000 investment banking job cuts as it shrinks its risky operations
• The investment bank will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000

(Financial Times) -- Royal Bank of Scotland is to cut an additional 3,500 jobs as the state-controlled bank rapidly shrinks its investment banking activities in response to the worsening economic outlook and wide ranging reforms of the banking sector due to take effect before the end of the decade.

Stephen Hester, chief executive, on Thursday outlined plans to restructure RBS' wholesaling or investment banking operations into two divisions and withdraw from activities such as cash equity broking and merger and acquisition advisory work that were aggressively expanded by former disgraced chief executive Sir Fred Goodwin.

Risk weighted assets, under Basel III regulatory definitions, will be shrunk to £150bn from £225bn under the restruring plan.

The bank will continue to operate in the fixed income and debt raising markets where it has a strong position but reduce its dependence on wholesale funding markets which have frozen up in the last three years.

Since taking over in 2009, Mr Hester has shrunk RBS's balance sheet by £600bn following the disastrous acquisition of Dutch bank ABN Amro in 2008 by Sir Fred, which forced the bank to seek a government bail-out.

It has already announced 2,000 investment banking job cuts as part of Mr Hester's attempts to shrink the highly profitable but risky operations and focus on lending to corporate and institutional clients.

The investment bank, which will be restructured into a markets division and an international banking unit, will have 13,400 staff within a year, down from the end of September 2011 number of nearly 19,000.

However, people close to the bank have said that the staff numbers could fall to below below 10,000 in a worse case scenario.

The two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12 per cent, in the medium term.

The unprofitable cash equities, corporate broking, equity capital markets, and mergers and acquisitions businesses will be closed or sold.

"Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall," Mr Hester said in a statement.

The investment bank has been RBS's growth engine in the last three years, producing an average return on equity of 19 per cent, but Mr Hester made clear on Thursday the bank had to respond to the challenges thrown up by the current economic crisis.

But pressure mounted on the bank just before Christmas, when George Osborne, chancellor, said the bank, which is 83 per cent-owned by the government, should "scale back [its] risky activities".

The government has also accepted proposals from the Vickers commission, which was set up following the financial crisis and recommended splitting investment banking activities and retail banking operations in the UK's leading banks by 2019.

Shares in RBS were 9 per cent higher at 23.75p in morning London trading.

Thinking big in space

AS A small boy Paul Allen, the co-founder of Microsoft, dreamed of going into space. He even tried to launch the hollow aluminium arm of a chair, stuffed with propellant, into orbit. It didn't work out. But his latest adventure in space travel—a joint venture with Burt Rutan, a famous designer of aircraft—looks more promising. Earlier this month, the two of them said they will build an air-launched orbital delivery system. To do this, Paul Allen’s company Stratolaunch Systems will have to build the world’s largest aeroplane.

The Stratolaunch, as the plane will be called, will be big. Really, really big. It will have six engines, a wingspan of 117 metres (385 feet) and weigh about 544 tonnes. (The wingspan of Boeing's 747 is around half that of the Stratolaunch.) Taking off will require 3.6km of runway, and the aircraft will launch its rocket—a shortened version of the Falcon 9 rocket, built by another private space firm called SpaceX—at around 9,100 metres. The whole contraption will be able to put about 6 tonnes of payload into low-earth orbit.

The idea is to offer a cheaper way of getting medium-sized payloads into orbit, and the system is designed to fill a niche that Boeing's Delta 2 rocket once served. Former NASA administrator, Mike Griffin, who now sits on the board of Stratolaunch, says that besides delivering cargo to the International Space Station, the Stratolaunch will tap a thriving market for launching small to middling communications satellites. There are also other customers in the form of NASA and the Department of Defense. Ultimately, however, Mr Allen wants to see the system launch humans into space.

Of course the obvious question is why not launch the rocket directly from the ground in the first place? It turns out that land-based rocket launches are greatly restricted by irritations such as where one’s rocket pad is, and what the weather is like. Air launch, by contrast, makes orbital access to space much more flexible, a particular bonus for military applications. There will also be a small efficiency gain from launching the rocket from above much of the Earth’s atmosphere. Mr Allen is being cautious about saying how much money he will put into the venture. All he will admit is that an effort of this size requires an "order of magnitude" more money than he invested into a previous collaboration with Mr Rutan, SpaceShipOne. This cost Mr Allen $25m. 

Meanwhile, Mr Rutan’s company, Scaled Composites in Mojave, will be doing what it is best at: scaling composites. It will be super-sizing its existing White Knight aeroplane, which can carry rockets—such as SpaceShipOne—of suborbital flight. Other components for the Stratolaunch will be scavenged from second-hand 747s. Mr Rutan plans to start work as soon as he has a hanger large enough to build the giant airframe. The current schedule foresees test flights in 2015, and an initial launch by 2016. But the spaceflight business is hard and unforgiving, and the schedule is likely to slip. Mr Rutan has come a long way since he built his first plane, the dinky two-seater VariViggen, in 1972. With its 6-metre wingspan, he would be able to fit 20 along the Stratolaunch.