Privatising the banks will be harder than buying them
Future years will be dictated by the cost of paying for rescuing the financial system. They will also be dominated by governments’ attempts to sell its stakes in two enormous banks. Perhaps the two are connected.
Like the 1980s, the 2010s will be a decade of privatisation. But while it may well again be a Tory government selling off the family silver nationalised by a Labour predecessor, the Thatcher sales will look easy compared with the banking sale.
The Treasury now owns four banks - Lloyds (LON:LLOY) and Royal Bank of Scotland (LON:RBS) plus Northern Rock and Bradford & Bingley. The latter two are relative tiddlers and might be disposed of in a trade sale – possibly to one of those Scottish giants.
But the size alone of Lloyds and Royal will make these sales unique. If the Treasury is to break-even on its investment, nevermind make a profit, it needs to sell them for a combined £80bn or so. The final tranche of BT raised only £5bn in 1993 and the biggest privatization, a £7bn tranche of BP, turned into a nightmare in 1987 when markets collapsed and the Bank of England had to step in with a buy-back floor.
So, assuming RBS and Lloyds are kept as quoted vehicles rather than sold to some foreign bidder (if there was a foreign bank capable of buying) there will need to be a series of equity offerings that could last for years. The three BT sales were spread over none years, for instance: with the first bank sales not even on the agenda, it could be the 2020s before the last publicly-owned shares are sold.
But while BT had to fit into a timetable and compete for investors’ cash with water and electricity companies plus airlines and aviation groups, RBS and Lloyds are in the same business as well as the same boat.
Past privatisations have been monopolies rather than majority stakes in quoted companies. The banks sales will thus be secondary stockmarket offerings rather than IPOs - initial primary offerings. That makes the share sales much more difficult, as that BP offer proved.
Further, past privatisations have been of non-competing businesses. Cable & Wireless was an international phone company while BT operated in the UK, for instance; BAE made planes while Rolls-Royce made engines; Britoil and BP operated at different ends of the oil spectrum.
With Lloyds and RBS the government is selling rivals and cannot allow the float of one to compete with the other. There is no need to sell them simultaneously but selling them competitively will be complicated. We could have a decade of alternating tranches of the two banks being placed or offered to the public.
That looks like lots of work for whichever investment banks are still in business in the next decade but a nightmare for the Treasury. But selling those bank stakes well is the only hope there is of reducing the debt burden for bailing them out. Ministers will need a good privatisation to cut the extra taxes we will all be paying.
