The CPS read with interest a piece that appeared in the Times on Monday, which suggested that the government is saying the cost of bailing out RBS and Lloyds has fallen thanks to the fees and taxes the banks have paid.
According to the article:
“Treasury officials are using calculations showing that the real cost was about 45p for RBS and 63p for Lloyds, and that they may try to reduce the numbers still further. The lower figures take into account the £5 billion paid collectively by RBS and Lloyds for the benefit of the Government’s giant insurance underwriting plan for their toxic loans — the Asset Protection Scheme. The figures also include the millions paid for the bank levy on their balance sheets.”
If true, this has several implications. Firstly, it suggests that the Treasury is looking to start the sale of shares relatively quickly and will be able to claim earlier that they have recovered the cost of the bailout.
At the same time, however, it would make the CPS bank reprivatisation plan (Give us our fair shares) even more attractive to both Treasury and the public. If the Treasury lowered its floor price according to its calculations, then it would likely lead to earlier sales by the public and would generate revenues more quickly for Treasury and at better value. While for the public, any increase in the share price above the 50p and 74p the government paid for RBS and Lloyds in the future would leave them with a significantly greater profit than before.
In essence, any government willingness to accept a lower price accentuates the overhang argument made in our paper. Market knowledge of the government’s intention to sell will likely make it difficult for the share price of RBS to break the 45p barrier, even though a consensus of analysts believe the true value to be slightly above 50p. Thus, it makes it difficult for the shares to be sold at value in a conventional privatisation. By distributing free to the public and setting a floor at 45p, the mechanism allows the government to get its bailout money back as shares are sold and it is the taxpayer that would obtain the extra benefit from the shares being sold at value post-distribution.