As we understand it, our £37bn bank equity injection will be on significantly less favourable terms than Warren Buffett's deal with Goldman Sachs.
As BOM readers will know, for his $5bn, wily old Warren got preference shares paying a 10% pa dividend, plus warrants to buy Goldman equity at below the then prevailing Goldman stock price. He set the benchmark against which we non-financial-genius taxpayers can judge the deal Brown has got us.
So what have we got?
We are putting equity into RBS, HBOS, and Lloyds. The amounts vary, but in all three cases we are getting preference shares paying 12% pa - which is about the same as Warren's 10% once you take account of the difference between sterling and dollar bond yields. But we are not getting any warrants. Instead we are getting ordinary equity shares (well, strictly speaking, we are underwriting an issue of new shares which will be offered to private investors: we only get them to the extent that private investors don't buy... but in current circs how do you think that will play out?).
And the mix of funding is very heavily slanted towards ordinary equity rather than preference shares:
- RBS - £5bn in prefs; up to £15bn in ordinary equity
- HBOS - £3bn in prefs; up to £8.5bn in ordinary equity
- Lloyds - £1bn in prefs; up to £4.5bn in ordinary equity
Because with ordinary equity we do not rank ahead of existing shareholders in dividend distribution (we don't rank ahead of them in a bankruptcy either, but in current circs that's a bit academic since as we all now understand, outright bankruptcy would mean automatic nationalisation). We're getting no cushion - we're taking our chances right alongside existing shareholders.
And that also means our investment is fully exposed to any further downward move on the banks' share prices. Whereas Warren's warrants get all the benefit from an increase in the Goldman's share price, but little of the downside from a fall (ie they have the "asymmetric" pay-off of options).
Given where we've got to, we have always favoured recapitalisation rather than outright purchase of the banks' bad debts as envisaged in the Paulson Plan. But taxpayers would have much safer if Brown/Darling had followed the Buffett plan rather than committing to these huge outright equity purchases.