Mark in the Telegraph – The government must hold its nerve on bank stakes
March 7, 2013
Mark wrote this morning for the Daily Telegraph following the interventions by RBS Chief Executive, Stephen Hester, and Bank of England Governor, Sir Mervyn King, on the government’s shareholdings in British banks. The article can be read online , in pdf and is pasted below.
‘Fit for sale’ by the end of 2014. That is the latest timetable for the rehabilitation of RBS, according to its Chief Executive, Stephen Hester. In spite of his demonisation by the media, Hester deserves the highest praise for his turnaround of an essentially insolvent institution. Let’s not forget that RBS had posted Britain’s largest ever corporate loss less than five years ago.
Yet it is no secret that Hester would like to see the bank extricate itself from public ownership as soon as practicable. The Treasury must not submit to the temptation of a pre-election sell-off. ‘Fit for sale’, after all, is not the same as ‘ripe for sale’. Since the taxpayer currently sits on a £15bn loss for RBS alone, selling off the huge stakes that the taxpayer holds in RBS and Lloyds Banking Group ought instead to be further away than ever.
As 2011 dawned the UK government briefly sat on a small profit on the £66bn that had been spent acquiring 82% of RBS and 43% of Lloyds in those frantic few months after the collapse of Lehman Brothers in September 2008. Those halcyon days seem long-distant as the taxpayers’ holdings today are worth around one-quarter less than at the time of acquisition.
The Chancellor’s recent declaration that any UK bank failing to adhere to the Vickers safety regime runs the risk of being broken up, was an understandably uncompromising response to the Treasury Select Committee’s demand for an ‘electrified’ ringfence. Similarly, few would criticise the populist insistence that RBS will have to fund LIBOR (and presumably other future misselling) penalties from senior executive bonus pools. However, at a stroke the Treasury has in this way inadvertently imposed a permanent impairment to the value of the UK government’s stakes in the banking business.
Small wonder that coalition ministers of Liberal Democrat persuasion periodically have floated the idea that the least controversial way of divesting our collective interests in RBS and Lloyds might be in a share giveaway directly to the public. Whether Vince Cable’s most recent foray into this field is practicable is another matter – the real risk is that a break-up or a fully fledged nationalisation of RBS would in effect destroy the business. Nevertheless the fact that this route continues seriously to be contemplated reflects an increasing despair that the coalition will ever be in a position to sell any part of our huge financial interest at a profit.
Once upon a time the chief fear of City commentators was that the timetable for selling off our sizeable public share of RBS and especially Lloyds Banking Group would be driven more by the electoral timetable than by the desire to maximise taxpayer value. The squeeze in public spending and, more important still, on household budgets, may yet tempt the coalition to rush for whatever cash it can extract this side of May 2015. However, short of divesting small distinct divisions, if this necessitates selling at a substantial discount it should be resisted.
In fairness the Treasury also has to balance some other serious considerations. On the one hand for so long as two of the big four domestic banks remain so substantially in public hands it will be difficult for the underlying issues in the UK’s critical finance sector to be regarded as solved, rather than simply parked. Moreover, the continued deterioration in the public finances (the OBR has already revised the anticipated cumulative deficit for the parliament upwards by £212bn more than its November 2010 calculation) serves to make it ever more attractive that privatisation takes place sooner rather than later in order that the public coffers are boosted.
As we have seen, the persistent uncertainty surrounding the precise terms of banking reform (will it be a super-charged Vickers ringfence or a Sword of Damacles threat of total separation for future financial offenders?) almost certainly serves to depress further the value of our collective holdings in RBS/Lloyds. Until recently the most likely scenario was that the Treasury would seek in the final year or so of this parliament to start an aggressive programme of selling off specific divisions in these banks. No longer. The necessity that any such sale be designed to maximise proceeds all but rules out any 1980s-style privatisation public offering. The lack of public trust in the banks is such that any attempt to recreate the glory days of a ‘Sid-style’ public campaign would likely bring in considerably less revenue than a part-sale, for example, to a sovereign wealth fund.
What should trouble Conservatives is that five years on from the financial crisis, the UK’s largest financial institutions continue to operate in an unholy alliance with government. Even those institutions functioning without official state support have an implied guarantee and inevitability of survival which gives them a commercial advantage over any new competitors, whose entry to the financial services market is effectively barred.
Unfortunately much of this stems from the deals that were done by the last government back in the autumn of 2008. One of the curiosities of the global bank bailout process since that time has been the consensus that the bailout episode symbolised courageous, decisive government action at its best in providing an essential life-preserving shock to the domestic economy. As I have written before, however, I believe some serious strategic mistakes were made at that time that help to explain why there remains to this day an overriding sense that the bankers ‘got away with it’, with the taxpayer picking up the tab.
While the banks undoubtedly presented the government with a crisis on a huge scale, the Treasury was nevertheless in a position of enormous strength (as is any organisation about to spend such colossal sums of money), and should have recognised immediately that the status quo no longer existed. No options for golden goodbyes for the most discredited Chief Executives, no blind acceptance of unrealistic share valuations. Beyond the first priority of preventing systemic risk, Ministers should have asked, ‘How much money can we make out of this?’ and subsequently struck as good a deal for the taxpayer as possible. Moral hazard might then have been sewn into the heart of the regulatory system with recapitalisation a deeply unattractive last resort rather than an ultimate backstop and commercial advantage.
With the government driving a hard bargain, the fear of bailout would have served as a far better regulator of behaviour than reams of new laws and fresh bodies in place to police the system. If a better deal had been secured for the taxpayer, with year-by-year forecasts on the value of its stake, the debate on the future of banking might have been shaped entirely differently. Instead, there has been a sense that the biggest risk takers extricated themselves from the crisis scot-free, dumping taxpayers with rotten husks which appear to serve the needs of executives before taxpayers. In their impotence, politicians have tried to placate the public with a damaging PR campaign against the financial services sector and its employees, grandstanding on bonuses, cash/share splits and tax.
Nothing can change the original terms negotiated during those 2008 bailouts, but they really must hold lessons both for now and the future. Beware the vested interests or entrenched mindset of the expert. Be sure to exact terms in line with the risks taken. More important still, robustly and continually define the strategic objective in the general national interest.
As time – and new regulation – passes on we should not be surprised that RBS and Lloyds will now expend their energies keeping their political paymasters happy rather than reaching out to their consumers. This should not be the signal for a loss of nerve by the government. Far from it – it should redouble its efforts to maximise taxpayer value.