RBS: the conundrum explained

Britain’s national debt is £1.1 trillion. The tax payers’ stake in the Royal Bank of Scotland (“RBS”) is currently worth (nominally – it is not realisable at the present time) £45 billion. If the Financial Services Authority (“FSA”) were auditing the books of UK Financial Investments (“UKFI”), which manages the Government’s shareholdings, it would probably require a reserve against its ‘going concern’ value. RBS is expected to announce full year losses of £5 billion. It is being forced to split its investment banking arm from the retail bank. The FSA are demanding even more capital making profitability more difficult.

The 82% stake in RBS held on behalf of the tax payer is becoming a millstone around the Coalition’s neck. The Treasury want to realise value (and reduce debt), the Department of Business, Innovation and Skills (Dr. Vince Cable) wants the banks to lend more money, the Finance for Funding scheme isn’t working, the FSA and the Bank of England want to eliminate systematic risk and the Conservatives are almost giving up on the winning of the next election.

It was George Bush who once gave the American people a tax refund of around £800 per citizen to make them feel better. Certain politicians are suggesting the stake should be given away as free shares which could equate to £1,000 per adult. The desperate Chancellor will probably consider anything as he absorbs the disgrace of the AAA downgrade.

If the shares are given away (either in part or in whole) it will be a hugely expensive operation. Many holdings will be immediately sold and the capital markets will ensure that the required underwriting will cost the Government a fortune. If the shares fall in value then UKIP might win the election. Quite how the RBS Board will feel about having thousands (perhaps millions) of shareholders is also an issue. It is a wild idea.

The concept of privatisation is also fraught with difficulties. The risk warning in the prospectus alone should keep UKLA in business for the next five years. The pricing will be nightmare and the City will demand billions of fees. An institutional (part) sale is possible but due diligence and pricing are two real problems. The Treasury will not like for one moment the City’s idea of value.

There is one other possibility. Why does not the Government buy the 18% of RBS it does not own, sack the Board and put a bomb up the other banks into supporting British industry. If we owe £1.1 trillion a few more billion can’t do much harm and a bank free of corporate governance and FSA pressure (the Government would be guaranteeing retail liabilities) could be dynamic.

It’s an idea that’s been around for many decades (the old TSB movement was once a favourite for nationalisation). It might be worth trying.

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