An interview with Ed Balls by Sam Coates in the Times yesterday discussed the potential for some sort of distribution of RBS shares to the public. As regular readers of this blog will know, this is something we have advocated since 2011. A précis of our precise proposal can be found here – and today I’ve written for City AM on how a popular re-privatisation mechanism could provide common ground for the Coalition parties (at a time when it appears in short supply in other areas).
In the interview, Ed Balls comes out strongly against any sort of distribution of the RBS shares to the public at “no upfront cost”. Although he makes clear in his interview that his objection to a distribution is not profoundly philosophical, he instead identifies the problem of recognising a loss in the public finances as his key concern. He is quoted as saying:
“A giveaway or a loss-making firesale at the current share price would add billions to the national debt at a time when poor economic growth already means borrowing isn’t coming down. It’s no wonder Treasury officials are alarmed at the idea because George Osborne is playing a dangerous game here. If he once again puts politics before economics he risks leaving a huge hole in the public finances.”
Now, it’s unclear from the interview which precise proposal Ed Balls is attacking. It is certainly true, for example, that if the Government were to simply give the shares away for free (with no conditions attached), then a loss would be crystallised in the public finances. This would also be the case if the shares were sold in a public offering at a significant discount.
But this line of argument more broadly conflates two key questions: 1) should the Government expect to recoup the full amount to break-even when re-privatising? 2) given the price that the Government is willing to accept, what would be the best way to reprivatize in order to get maximum possible value for the taxpayer?
The answer to the first question (the price that the government is willing to accept recouping) is essentially a political decision. The Government has set 407p as the break-even price for its 84% stake in RBS, but the shares are currently trading at only about 336p. Ed Balls implies that he wants to recoup the initial investment. But it is unclear, ultimately, that this would be compatible with obtaining the full value of the shares. Suppose, for example, that the stock market really took off but the political interference and heavy hand of the government reduced the share price from what it otherwise would have been. Then although the shares might one day exceed 407p, allowing the government to recoup its initial outlay in a conventional privatisation, the taxpayer might not obtain full value for the shares. Given the size of the government’s holding, it is also likely to take a long time for the complete reprivatisation to occur, given the shares will have to be sold in tranches to avoid flooding the market.
This is linked to the second question. The key behind our proposal is that it is flexible to whatever price the government is willing to set as the floor price. The effect on the public finances is therefore the same as a placing at the floor price, as the taxpayer only receives the profit above this level, with HMT receiving the balance along with the proceeds from the concurrent institutional placings. This may well mean a loss from the amount originally paid, but would be after consideration by the government of the effect of new regulation on the value of RBS, the effect of political interference on the banks value, and considering that the public would get to keep any profit above the floor.
The key thing to consider in Ed Balls’ opposition is therefore this: what is his counterfactual? If there was a way to re-privatise, get full value for the taxpayer and get the banks back into the private sector without a huge share overhang then great! But does Ed Balls have that solution? Does it exist? And if not, what is the best way to get banks back into the private sector without creating this huge overhang, and whilst at the same time allowing taxpayers to profit from any upside given the risk they have undertaken?
We believe our idea is the only solution marrying these competing tensions: to maximize taxpayer value, to get the banks back owned privately ASAP, and to entail an inclusive a distribution as possible.
Below I set out some other FAQ about our share proposal. It’s worth noting that most of the questions people bring up would be valid if we were suggesting a simple free distribution of certificated shares, analogous to the vouchers given away in Russia.
However there are two aspects of our proposal that allay these fears:
The ‘Floor price’
The individual taxpayer only receives the profit above a set level ‘the floor price’, with HMT receiving the balance. This guarantees that HMT receives proceeds equivalent to a placing at the floor price. In addition, the distribution is only part of the solution, with a concurrent placing to institutions, which generates higher upfront receipts for HMT.
The shares are not given away in a certificated form, but rather are held in nominee accounts on behalf of the individual taxpayers (which is the standard form of share ownership since the advent of the CREST settlement system). Upon sale the net profit above the floor is paid to the taxpayer with the balance paid to HMT – guaranteeing 100% collection and compliance. Shares can only be moved out of nominee accounts if the floor price is paid to HMT.
1. How on earth could anybody run a shareholder base of 35m people?
The Halifax floated on 2 June 1997. Over 7.5 million customers of the Society became shareholders of the new bank, which was successfully run until its takeover by Bank of Scotland in 2001. Improvements in IT and market technology (such as nominee accounts, online broking and dematerialised shares amongst others) make this substantially easier now than then!
2. How could votes be counted at AGM and where could you hold it?
Shares are held in nominee accounts – (taxpayer) shareholders would not be able to attend AGMs unless they had paid the floor price. Where (taxpayer) shareholders express an opinion these would be put forward through proxy votes in the usual manner.
Consequently the AGM could be held in its usual venue!
3. Everybody in the country would have to open a brokerage account, obeying know your customer and money laundering rules
There are no cash transfers until sale and no opportunity for money laundering. The shares are held in restricted nominee accounts, which would be created upon registration. It may be possible for retail brokers to have the opportunity to upgrade these accounts into full brokerage accounts but this is not a requirement.
4. Putting so many shares in issue at once would cause a massive overhang, causing the price to plunge.
The floor price would be set close to the market price. No-one would be able to sell below this level and the market would realize this. Consequently there is no overhang and the shares will be stable or will rise.
5. The low price with millions of inexperienced investors would open a huge opportunity for unscrupulous hedge funds
The floor price needs to be paid before shares can be transferred. This protects inexperienced investors from unscrupulous hedge funds and means there is no opportunity for creating Russian style oligarchs!
6. Millions of dividend cheques and proxy forms would go missing every year
Proxies and dividends will all be held at the nominee account level. The default will be for transactions to take place electronically. This contrasts with the Halifax demutualization where 7.5 million account holders received shares in a largely pre-digital age!
7. And what about millions share certificates which will end up mislaid or stuck in probate?
There are no share certificates. As is the norm post CREST, shares will be held in dematerialized form in nominee accounts.
8. Who would appoint directors? And supposing there was a rights issue or Class 1 transaction?
Shareholders will appoint directors. Where (taxpayer) shareholders express an opinion these would be put forward through proxy votes in the usual manner.
Holdings where the (taxpayer) shareholders do not express an opinion would be voted alongside other institutional holdings in the same ratio, guaranteeing a quorum for votes on Class I transactions.
As with all retail offerings, we would not expect the recipients to subscribe in large numbers. As there would be no retail selling below the floor price, obtaining underwriting for a rights issue is improved, and the rights can then be sold to institutional investors, for the benefit of both company and retail shareholders.