A Deal of Trouble

The Times last updated at 12:01AM, June 12 2015

The government has a duty to secure the interests of taxpayers. It cannot predict the future course of share prices. These are the two big imponderables about the sale of the public stake in Royal Bank of Scotland (RBS). announced by George Osborne in his Mansion House speech this week. It is the right course, seven years after the bank had to be rescued, to begin to return it to the private sector. Yet this is no triumph of popular capitalism.

On current market prices, the government would record a £7 billion loss on the initial acquisition of RBS if its entire stake of 79 per cent were sold now. The government should be frank that the taxpayer has sustained a financial hit, that the original rescue in 2008 was botched, and that the reason for the timing of the sale is to cut losses, not to realise gains.

The taxpayer has suffered grievously in the saga of RBS. The first and fundamental reason is the hubris, arrogance and gross incompetence of the bank’s former management. During the global banking crisis of 2007 to 2009, RBS’s then chief executive Sir Fred Goodwin (since stripped of his knighthood) earned the sobriquet “the world’s worst banker”. It was apt on many grounds, most of all RBS’s cash acquisition in 2007 of part of ABN AMRO, the Dutch bank, for an inflated price. This deal caused RBS to report the biggest loss in British corporate history.

Second, while the Labour government was right and prompt in 2008 to recapitalise the banks in return for equity stakes, it hardly secured value for money. The rescue was necessary to stem financial panic. Yet the US government was likewise forced to rescue big financial institutions, notably Citigroup and Bank of America, and it drove a much harder bargain. The banks fully repaid American taxpayers. and also paid them billions of dollars in dividends. Why could the British government not have dictated better terms on behalf of the taxpayer, perhaps by demanding options to buy more shares at a fixed price?

The error was made, however. The commitment of £45 billion to RBS and £20 billion to Lloyds prevented a financial meltdown but, judged strictly as a financial investment, it has been a dud. The loss on the sale of the first tranche of RBS shares will be substantial, as the initial rescue amounted to £45 billion and the stake is worth £32 billion at current prices.

When to sell a public asset is a question that haunts Mr Osborne’s predecessor but one. Gordon Brown sold 55 per cent of Britain’s gold reserves between 1999 and 2002 at an average price of $275 per troy ounce. The gold price went on to peak at more than $1,900 an ounce. Mr Osborne will be aware of the risk of terrible timing. Yet it is a risk worth taking. RBS remains a weakened institution, which has posted seven straight annual losses. The government’s stake is so big that it can only be disposed of in successive tranches lest the sale depress the price. It should start the disposal now rather than wait for a certain share price level to be achieved (which it might not be).

The longer the government holds on to its stake, the greater is the risk that other policies, such as the inflation target and hence the level of interest rates, will be influenced by the interests of RBS. That has not happened, but the risk that it might is one reason why government should generally stay out of owning commercial enterprises. It is time to start getting out of this one.

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