Wednesday, October 15, 2008

Taxpayers Before Shareholders

Pity they didn't stick to boring old banking

So the banks have been whining to the government that the terms of their bail-out are too tough. In particular, they don't like the idea that they can pay no dividends to their other shareholders until they have repaid the taxpayers' preference shares (see previous blogs eg here and here).

Predictably enough, the government has immediately buckled. They've mumbled a "clarification" through their Mr Peston: contrary to the original announcements, they now say that banks can pay shareholder dividends after just a one-year moratorium.

That's not good enough. We taxpayers don't want to be investing in the banks at all. We're only doing it in extremis to avert a catastrophe - a catastrophe that would most assuredly wipe out all the banks' shareholders. In these circs, shareholders should be immensely grateful we are leaving them with as much as we'd already agreed - Tyler would have preferred a harsher Warren Buffett style settlement (see this blog).

Look, we've got nothing against bank shareholders: indeed, Tyler is one himself. But shares are risk assets. They're not like deposits and savings accounts. Shareholders should have no expectation of bail-out if disaster strikes.

And shareholders have enjoyed fantastic returns through the boom years. Here's a chart showing the 20-30% rates of return achieved on UK banks' equity over the golden decade (source: Bank of England's Financial Stability Report):

After a wonderful ride like that, bank shareholders would be well advised to keep their gobs shut - nasty people might start suggesting in future there should be special return-limiting bank taxes.

And in terms of the way the disaster was allowed to develop, shareholders are not innocent bystanders. They were the ones who appointed company boards comprising the reckless and the ignorant. Why didn't they insist on directors who knew what they were doing?

Take busted discredited HBOS. Its shareholders appointed a chairman - Lord Stevenson of Coddenham - who wasn't even a banker at all. In fact, his background was market research and management consultancy. Given that the chairman's key job is to keep reckless CEOs in check, WTF would such a man be a good choice to chair a bank? A bank that was getting increasingly enmeshed in God knows what high octane toxicity that even financial rocket scientists could no longer fathom.*

Taxpayers should not bail out shareholders. It's as simple as that.

Bank profits will return one day, and when they do, we want shareholders who've learned some lessons. We want them to realise they have a strong incentive to monitor the companies in which they invest. And to appoint properly qualified directors who understand risk as well as return.

PS How did a non-banker come to chair HBOS? Maybe this Guardian pen portrait gives some clues: "As a left-leaning peer and lifelong friend of Peter Mandelson, Lord Stevenson was tipped as a possible chairman of the BBC following the departure of Gavyn Davis in the wake of the Hutton report. His record of donating to the Labour party, and his description of himself as an "unreconstructed 1960s Guardian-reading liberal" probably won't have helped him land the BBC job. But there's no doubting the extent of his influence in business and within the political establishment. Lord Stevenson is currently chairman of the House of Lords appointments commission, responsible for choosing independent members of the reformed House of Lords. A former chairman of the Tate Gallery and chairman of Aldeburgh Productions, he also headed a government commission set up by Tony Blair to examine the role of information technology in schools." I think we get the picture (and for an extensive profile see here).


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