It's the new market model Comrade
In case you'd somehow forgotten, we taxpayers are forced mega-investors in a number of banks.
Our two biggest holdings are RBS and Lloyds. In the case of RBS, we own 84% of the equity, and in the case of Lloyds, 41%.
These holdings cost us a total of £65.8bn - £45.5bn for RBS, and £20.3bn for Lloyds (not forgetting that we have also agreed to pump a further £8bn into RBS should they need it, giving us an overall potential exposure of £74bn - see this blog).
Now, this afternoon Tyler attended a fascinating roundtable discussion organised by Public Finance magazine. And the first issue on the table was how to get the best value for taxpayers from these stakes.
So what do you think? Sell, hold, or do something else?
Well, here's what Tyler thinks. To maximise taxpayer value we should get started on a sales programme soonest. The price of bank stocks has recovered hugely since the pit of the crisis, and with official interest rates close to zero, right now banks are once again steamingly profitable. Over the last 12 months, Barclays shares are up 140%, and the broader financial sector has roughly doubled. And both are now above their levels before the Lehman collapse.
And our holdings?
Hmm... not quite so good. In fact, despite the roaring bull market, we are still underwater on both Lloyds and RBS. In fact, at today's prices, our combined stake is only worth £57bn - £8bn down on what we paid.
Well how can that be, you exclaim. Surely we bought in at rock bottom fire sale prices - we must have shared the market ride since then.
Unfortunately not. True, there's been some modest appreciation since the absolute pit, but our banks have been held back. Partly, that's because the market knows we're going to sell at some stage. But more fundamentally, it's because the market doesn't like the message it gets from our politicos on the future of these banks.
In particular, it worries that politicos will stop RBS and Lloyds paying to attract and retain talent (which is why RBS is widely thought to be haemorrhaging key players), and also that politicos will direct lending activities.
And this afternoon's discussion was an interesting illustration of why the markets are right to be concerned. Because in arguing that continued political control is eroding taxpayer value, Tyler found himself in a minority of one.
The consensus view around the table was that HMG should balance getting a good price for our stocks against two other objectives: the need to increase competition in the banking sector, and the need to increase lending to "desirable" borrowers.
So we needed to think in terms of breaking up our banks in order to increase the number of competing providers in the market, and getting our banks to lend more liberally in order to improve the overall flow of credit to business. Tyler's view of maximising taxpayer value was felt to be far too narrow.
Fine. But let's just remember a couple of unfortunate facts:
- Increased competition should be good for consumers, but almost certainly not for bank shareholders. And if we break up our banks without changing the competition rules for everyone else, we ain't going to get much of price.
- Governments are rubbish at picking winners. If we insist on our banks lending more to "desirable" borrowers, the banks will lose more from defaults. A recent government study of experience with the Small Firms Loan Guarantee Scheme noted that the two-year default rate was between 25% and 45% - a disaster in commercial terms (and see this blog).
But speaking as a taxpayer, Tyler would far rather use the money to pay off some of that horrendous debt.
(And also, there's no economic reason to wait until our shares have broken even against our purchase price. Bygones are bygones, and we should focus on getting the best price attainable now).
PS If you've got an hour or eight, you really should read yesterday's Treasury Select Committee report - Too important to fail. True, it doesn't come to any definite conclusions on what we should do about the risks posed by overlarge banks, but it is an excellent overview of the issues.