Labour’s banking loss with be Tories’ privatisation gain
The PM has saved the financial system but not his reputation as an investment manager. His bank rescue means a loss on both capital and revenue accounts.
Subscribing for preference shares in the troubled banks is profitable – the Treasury borrows at under 5 per cent and receives a 12 per cent coupon from the banks – but the bigger injection of ordinary shares is cash negative and has resulted in an immediate capital loss too.
To ensure that 12 per cent gets paid on the prefs the government has barred the banks from paying ordinary dividends. So on that sum the state borrows at 5 per cent and receives nothing in return. The coupon on HBoS’s £3bn of prefs will not cover the loss on the £8.5bn of ordinary shares nor the interest on Royal Bank of Scotland’s £5bn of prefs cover the cost of the £15bn of incomeless ordinaries.
And abolishing dividends until the prefs are repaid inevitably knocked the banks’ share prices – even when other stocks jumped at the rescue of the banking system.
So the government is buying new HBoS shares at 113.6p each when the market price immediately fell to 90p. It is paying 173.3p for Lloyds TSB shares that fell to 162p. That’s a £2bn loss before the chancellor even opens his chequebook.
Yet if the government repriced its refinancing it would buy these banks outright within no more than minimal compensation for existing shareholders. The HBoS and RBS capital injections are twice the stockmarket values of the banks.
Telling the banks to resume lending at 2007 levels will not help either: those were the levels that got the banks into trouble and they were achievable only by making loans to marginal customers. If those loans were unwise then they will be more so in this deteriorating economy.
More likely the state-owned banks will be overly cautious, depressing profits and holding down their share prices.
And shares in RBS and the combined Lloyds/HBoS will remain depressed for years because of the government’s stated intention to sell its stakes. The overhang of 60 per cent of the RBS equity of 40 per cent in its rival will be a real dampener.
But even if those stakes are sold at the £37bn cost of the bank rescue it will be a privatisation to beat those of the Thatcher years. Has any Tory government ever been left such a legacy of family silver to sell?
