Pressure was mounting on Sir Fred Goodwin to resign as chief executive of Royal Bank of Scotland (RBS) last night as the bank prepares to tap the Government’s £500 billion rescue fund (see Commentary, facing page).

The Government is thought to be reluctant to consent to RBS’s participation in the bailout unless the chief executive relinquishes his role. Ministers are anxious that they are not seen to be forcing the hand of the RBS board. Asked about Sir Fred’s position, Alistair Darling, the Chancellor, said management changes at RBS were not the business of the Government.

But ministers believe that it would be politically unacceptable for the man who led RBS to the brink of failure to continue running the bank with public money. Sir Fred has been blamed for RBS’s financial woes after he pushed through a €71 billion consortium bid for ABN Amro last year. This hit the bank’s Tier 1 capital, forcing the bank to raise £12 billion in a rights issue.

The Government announced a plan yesterday to allow banks to boost their capital by selling up to £50 billion of preference shares to the Government.

RBS denied yesterday that Sir Fred, or Sir Tom McKillop, the chairman of the bank, was about to be ousted. “We have been uniquely focused on working with the Government and the other banks to bring stability to the system,” the bank said. “Management changes have not been a feature of these discussions.”

Stephen Hester, chief executive of British Land, who was appointed to the RBS board as a nonexecutive director recently, is seen as a top contender to replace Sir Fred. Sir Philip Hampton, chairman of J Sainsbury and former finance director of Lloyds TSB, is considered a candidate to replace Sir Tom.

Meanwhile, bank shareholders were cheering last night as a side deal to give the Government a chance to share in the benefit of the £50 billion bailout appeared to have been quietly dropped. The Government will not now receive warrants – options giving it the right to buy bank shares at a low, preagreed price – as part of the plan, a measure that would have diluted ordinary shareholdings.

Keith Skeoch, the chief executive of Standard Life Investments, which owns billions of pounds of bank shares, was pleased that ordinary shareholders did not appear to have been disadvantaged by any dilutive arrangement. He said: “We welcome particularly the fact that the announced package shows a willingness by the authorities to work with market mechanisms in a manner that appears to respect the capital structure.”

One banking source confirmed that warrants or some other kind of “equity kicker” had been on the table at one point in secret negotiations that began ten days ago. However, that aspect of the arrangement had disappeared by Tuesday night and the deal was watered down so that banks were obliged to sell the Government only plain-vanilla preference shares or permanent interest-bearing shares.

Although the Treasury insisted last night that the preference shares in some cases could be convertible into common stock, allowing the Government to share in any recovery, at least one bank chief executive was adamant that no such feature had been discussed. Another senior banker said that it was still not clear.

The TaxPayers’ Alliance denounced the structure of the bailout, saying: “We are concerned that, if things go well and there is a profit, it stays with the banks. If things go badly, it falls on taxpayers’ shoulders.”

Now, if the bailout succeeds, the banks will be obliged to pay only a fixed rate of interest of perhaps 10 per cent on the preference shares, according to one senior banker.

It was not clear whether the Government would receive a premium payment from the banks when they were in a position to redeem the preference shares. The Treasury announcement left ministers with some opportunity to tighten the details.

Henry Paulson, the US Treasury Secretary, last night said US companies will continue to collapse in the near future while reassuring investors that Washington is moving swiftly to implement the $700 billion bailout for US banks. He said: “Patience is needed because the turmoil will not end quickly and significant challenges remain ahead. Neither passage of this new law nor the implementation of these initiatives will bring an end to immediate difficulties.”

Share out

Preference or preferred shares normally entitle a holder to a prior claim on any dividend paid by the company before payment is made on ordinary shares. They do not normally come with voting rights but carry more rights in the event of a liquidation

Permanent interest-bearing shares are shares that pay a fixed rate of interest

Warrant, a security entitling holders to a common share or shares at a fixed price, known as the strike price, in the future. The strike price is normally higher than the level of the current common share price

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