Osborne fires starting gun on Royal Bank of Scotland disposal

10th June, 2015

george-osborne-during-mansion-house-speechGeorge Osborne has confirmed that the UK government will start selling off its £32bn stake in the Royal Bank of Scotland at a loss, insisting any delay would be bad for the economy, taxpayers and bank.

Addressing the annual Mansion House dinner in the City of London, Osborne said: “It’s the right thing to do for British businesses and British taxpayers. Yes, we may get a lower price than Labour paid for it. But the longer we wait, the higher the price the whole economy will pay.”

The chancellor said he had received independent advice from the Bank of England and investment bankers Rothschilds which suggested it would be in taxpayers’ interests for the government to start selling down the government’s stake.

In a letter to Osborne dated 10 June, BoE governor Mark Carney said returning the bank to private ownership would “promote financial stability, a more competitive banking sector, and the interests of the wider economy” while avoiding “considerable net costs to taxpayers of further delaying the start of a sale”.

In its report to the Treasury, Rothschild said, in order to maximise value from the sale of the taxpayer’s stake, the government should commence an initial disposal of RBS shares as soon as possible, because:

* By starting to sell, the government will increase the free float of RBS shares which should in turn improve the marketability of the remainder of its shareholding

* By starting to sell, the government may bring further benefits to the bank and therefore to the taxpayer as shareholder by beginning the privatisation and sending a strong signal that RBS is on the road to recovery

* Market conditions for financial assets and bank shares are currently good”

Rothschild’s claimed that, were the government to sell all of its remaining stakes in Lloyds, RBS, Northern Rock and Bradford & Bingley at their share prices on 5th June 2015 – and taking into account fees and other proceeds the government has received from the banks as a result of the taxpayer’s support during the financial crisis (e.g. premiums for the Asset Protection Scheme) – taxpayers would get back over £14bn more than they put in.

Rothschild added that an estimated loss of £7.2bn to the taxpayer from RBS, in the event of the government selling its remaining shares in the bank in one go at the 5 June share price, would be offset by proceeds from other disposals, for example on shares in Lloyds. However that figure, to me at least, seems slightly disingenuous.

The first tranches of RBS shares are to be sold exclusively to institutional investors, but Osborne said he has not ruled out allowing retail investors to buy the bank’s shares later (though some might argue they already own these). The Chancellor said:

“The restructuring of RBS I announced here at the Mansion House two years ago, and the great work that Ross McEwan and his team have done since, has brought us to this decision point. I’m not interested in what’s easy – I’m interested in what’s right… There is no doubt that starting to sell the government’s stake in RBS is the right thing to do on both counts… Now is the time for RBS to rebuild itself as a commercial bank no longer reliant on the state, but serving the working people of Britain.”

Osborne turned a deaf ear to those, including the New Economics Foundation and Move Your Money UK, who oppose selling RBS back to City of London investors at a loss, believing it would make more sense for the bank to be broken up into a string of regional lenders.

Fionn Travers-Smith, spokesman for Move Your Money UK, said,

“After bailing out RBS for £45 billion and suffering the cuts to pay for it, the British public deserve better than a reckless firesale at knock-down rates… We should be using RBS to fix our broken banking system, not giving hand-outs to the people that caused the crisis in the first place.”

The chancellor also ignored what I revealed in the Sunday Herald last weekend — that many of the institutional investors which are currently suing RBS over its 2008 rights issue are either refusing or reluctant to buy any more shares. Some including Legal & General and the Universities Superannuation Scheme have made clear they have no desire to buy RBS shares until previous losses caused by alleged deception are made good.

Perhaps unsurprisingly Osborne made no reference to the damage that’s been wrought on the UK’s SME base by RBS as a result of its brutal maltreatment of thousands of otherwise viable business borrowers. The so called “vampire unit” scandal was last month revealed to be a direct consequence of UK regulatory and government policy.

At the same black-tie dinner, Bank of England governor, Mark Carney called time on what he called the “age of irresponsibility in finance”. Carney said:

We need real markets for sustainable prosperity. Not markets that collapse when there is a shock from abroad. Not markets where transactions occur in chat rooms. Not markets where no one appears accountable for anything. Real markets are professional and open, not informal and clubby.

Governor of the Bank of England Mark Carney at his Mansion House speechCarney blamed the City’s slide into what he called “ethical drift” (what others might call a criminogenic culture) on weak ‘soft’ infrastructure including codes of conduct that have largely atrophied; faulty ‘hard’ infrastructure such as interest rate and foreign exchange benchmarks that turned out to be readily manipulated; and weak banks whose light capital and heavy reliance on short-term funding created what the Canadian called “a tinder box”.

He accepted that central banks had played a part in these failings, having operated a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. Carney said:

“Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions.”

He said that, starting next year, in addition to senior managers of banks and insurers being held directly accountable for failures in their areas of responsibility under the government’s “senior managers regime”, the regime would be extended to other financial market participants including brokers, dealers and fund managers. This followed the conclusions of the central bank’s Fair and Effective Markets Review, led by Minouche Shafik, whose recommendation that maximum sentences for financial crime should be lengthened from seven years to ten Carney accepted.

Carney said that, if markets are to regain their social license, the public authorities and market participants must work together to reverse so-called “ethical drift”. He said he believes freer markets should promote better behaviour. “More expensive liquidity is a price worth paying for making the core of the system more robust. Removing public subsidies is absolutely necessary for real markets to exist.”

He concluded by saying:

“Our response to recent failings should be as ambitious as those of our predecessors to the Great Fire [of London]: renewed prosperity built on private markets and public market infrastructure. Let our legacy be the earthly equivalent of Wren’s ethereal genius, real markets so that the City can do what it does best: transact and innovate for the good of the people of the UK and the world.”

George Osborne’s speech in 60 seconds via Bloomberg

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