Given media reports over the weekend that the Government is considering how to re-privatise RBS, Head of Economic Research Ryan Bourne outlines why the proposal put forward by the CPS last year is still the least bad way for the UK Government to put the shares back into the private sector. The original Pointmaker advancing this proposal was ‘Give us our fair shares’, published in May 2011. This blog post is intended to be an introduction to the idea.
When boom turned to bust in 2008, the UK Government felt the need to stabilise the financial system by purchasing £65 billion worth of shares in two of the largest banks in the world – RBS and Lloyds. This wasn’t an ordinary investment decision where you buy shares with a view to making a profit. The government of the day thought the possibility of RBS and Lloyds failing would have caused huge economic damage and a financial meltdown. They considered bail-outs a necessity, not a desirable outcome.
Since then the banks have been reigned in. Successive scandals following the original crisis have led to a tightening of regulation. But this framework has consequences for the share prices, making it likely we will now not recover our initial investment for a long-time.
It’s clear, however, that the status quo is not desirable. Political interference looms over the institutions and in waiting for our share values to go back up to recoup the initial investment, it’s clear we’d be waiting a very long time.
Five years on then, people (including those at the Treasury, it seems) are starting to question what the future of the semi-nationalised banks should be.
Some have suggested we should buy up the rest of the shares in RBS, for example, and operate it as a nationalised bank. This would be disastrous. Fully nationalised industries have proven extremely inefficient in the past, whilst the bank would become a vehicle for political pet projects and lending decisions. The effect on the public finances of having the bank’s liabilities permanently on the national balance sheet would also be a significant risk.
Others have suggested simply giving the shares away for free – no string attached. Russia tried something like that with its voucher privatisation: many people all sell their shares quickly and various oligarchs get rich.
But a conventional privatisation of the shares wouldn’t be so easy either. Given the scale of shares the Government would be selling on the market, and the knowledge that potential buyers have of how much the Government paid for them, it seems unlikely the Government would be able to get best value for the taxpayer. When someone knows you are a seller, and have so many shares to sell, it is a buyer’s market!
There’s a political problem here as well. It seems likely that the shares will be worth more once the banks are out of public control. As the share price rises after the re-privatisation, it will be big market participants, rather than taxpayers, who will benefit from the upside of the shares, in the same way that those who Gordon Brown sold our gold to have benefited from its price increase since then.
At the CPS, we’ve been trying to think of a way round these economic and political problems. We believe that governments should not be in the business of running banks. But any re-privatisation must meet two objectives: to get as much of the initial investment back into the Treasury coffers as possible and to enable taxpayers, who bore the risk of bailing out the banks, to benefit in any upside to the share price.
We think we have come up with a solution.
Each person on the National Insurance register would get the opportunity to obtain shares in RBS and Lloyds at zero cost. These shares would be distributed to them, and would become the property of the individual to trade as they wished. But the Government would set a price which would go back to the Treasury when the shares are sold. This would be called the floor price.
So, for example, if you were given RBS shares with a floor price of 35p and sold them for 40p, you would get to keep the 5p profit and the Treasury would get 35p back when you sold them. Over time, as the shares are sold by individuals, the Treasury would then get money back which it could use to pay down debt.
This method has three main advantages:
Some might say there’s a fourth advantage: Margaret Thatcher’s dream of wider share ownership would be realised quickly.
When we tell people about this idea, two criticisms usually come back.
First, people say: “this would mean the Treasury would not be in control of when they recoup the initial investment.” We’d reply that the Treasury is aiming to get the best value back for taxpayers on selling the shares, and that this can’t be achieved through selling large tranches in a conventional privatisation.
Others say: “This is too complicated and cumbersome a method.” We’d reply that given technology today, this is less difficult than the bold privatisations undertaken in the 1980s and early 1990s, much of which were handled on paper at a time where there was no internet, no online trading and no big data systems.
When the government bought the stakes in the banks, every single taxpayer in the country took on the risk of not getting their money back. Under this system, it wouldn’t just be the financial institutions and those that can afford it that would benefit from any recovery in the banks fortunes.
We believe this solution marries economic rationale with political desirability. This would be the most inclusive program of share ownership in the world. We really would all be in it together.
Buying the shares at the height of the crisis was an unprecedented move by the last government. What we need now is an equally innovative and bold move to get our money back in the fairest way possible. Recent media reports suggest the Treasury is exploring the options – we believe that the policy we have worked on presents a popular least-bad way to achieve their goals.
Ryan Bourne has previously addressed criticism of the idea here http://www.cps.org.uk/blog/q/date/2011/06/25/responding-to-criticisms-of-bank-reprivatisation-proposals/.