Bank casino capitalism for all

Nick Clegg Nick Clegg has written to Chancellor George Osborne in support of the proposal

There is something slightly surreal about Nick Clegg lobbying the chancellor about the methodology for the big banks' privatisation via press briefings he's been conducting on a trip to Rio.

In response the Treasury isn't falling over itself to welcome the deputy prime minister's support for a plan to transfer the state's 83% of RBS and 41% of Lloyds into the hands of voters.

A source said that of course the Treasury is "happy to listen to ideas" but "the issue doesn't arise for now".

You can see why the Treasury might be underwhelmed, quite apart from its innate mistrust of anything emanating from another bit of government that encroaches on its perceived turf.

First, privatisation in any form feels a fairly remote prospect at the moment, with the future structure of British banking yet to be decided by the Treasury, subject to final recommendations from the Independent Commission on Banking in September.

Or to put it another way, it is difficult to embark on the disposal of RBS and Lloyds until we know how much more of Lloyds might be hived off by government fiat and how far the profitability of RBS could be reduced by the ring-fence expected to be erected around the retail activities of universal banks like it.

Second, a scheme to transfer direct ownership of shares in RBS and Lloyds from the state to 50 million adults on the National Insurance register probably requires the kind of massive IT project which the public sector has a history of bungling on a world-class scale.

That said, the recent management of the sale of Olympics tickets - where there were 22 million applications for 650 events at four different price points - suggests that the IT challenge would be the equivalent of climbing Everest in trainers and shorts rather than flying to Mars in a glider.

It is not just that there would need to be an electronic record of share ownership. But it would also have to be simple for the new owners - many of whom will never have used a stockbroker - to sell shares.

And there would have to be some kind of automated funds-sweeping mechanism, such that the proceeds are split between the relevant individual and the Exchequer - because the scheme as devised would allow you, me and the 49,999,998 other new bank proprietors to scoop only those profits that may be available after the Treasury has been repaid what it invested in RBS and Lloyds.

Or to put it another way, the 50 million owners of the shares would only be winners in the marvellous casino of bank-share capitalism after the Treasury has got back the £66bn it has injected in the two sprawling, still-bruised banks.

Give that l'etat c'est nous, the state is us, you might wonder why we as individuals should not keep the entire proceeds, including the £66bn.

But that would be to forget that the national debt has been increasing at an uncomfortably fast rate since the great crash of 2008. And it is therefore tricky for the Treasury to surrender to the household sector an asset equivalent in value to around 5% of GDP.

That is why the designer of the scheme, Portman Capital, is stressing that it believes the main argument for privatising in this unprecedented way is that it would actually maximise proceeds for the Exchequer, in the short term at least - which is not as paradoxical as it may seem.

The point is that there would be a conventional £15bn stock-market sale of shares and convertible securities (what Portman calls an "exchangeable bond") as part of the privatisation - which might be done at a better price than would otherwise be the case because the big investment institutions would only have access to a portion of the government's stake.

Second, Portman is suggesting a revenue-maximising capital gains tax wheeze: capital gains tax, with no exemptions or exceptions, would be payable on any profits from share sales made by the new individual shareholders, unless those shareholders paid back to the Treasury out of their own pockets their implied bit of the £66bn the Treasury put into Lloyds and RBS (you may have to read that sentence twice for it to make any kind of sense).

Or to put it another way, there would be an incentive on the recipients of the free shares to buy the Treasury out of what it is owed.

Which means - Portman believes - that the Treasury might well receive more than £20bn of the £66bn in the first year of privatisation. Which is probably more than it would receive via a conventional route of selling billions of pounds of shares at a time.

There are other pros and cons of this revolutionary form of privatisation, which I wrote about in March.

To boil it down, there is a resonance to the idea that because taxpayers rescued Lloyds and RBS, their boards should now report to all of us and be answerable to all of us.

And on the assumption that their respective share prices were to double over the next five years there could be a windfall per adult of around £1,000 a share.

That said, it is by no means certain that the UK's adult population would ever enjoy a penny of profit, since the share prices of RBS and Lloyds are currently well below the level required even for the Treasury to get its (our) £66bn back - and the banks are sailing into strong economic and regulatory headwinds.

So the question is whether the idea of RBS and Lloyds as the people's banks will take off - whether Mr Clegg can generate sufficient popular enthusiasm for the "bank-shares-for-all" plan such that the Conservative wing of the coalition decides to ignore the logistical complexities and embrace it.

As luck would have it, the designer of the technical details of the scheme, Michael O'Connor of Portman Capital, told Radio 4's Today Programme this morning that the original idea came from a Tory, Lord Saatchi, a couple of years ago. Or to put it another way, there is an opportunity for Mr Osborne and Mr Cameron to stick a Conservative badge on the bank shares scheme, if they feel like crossing fingers and toes and praying that it won't be the mother of all IT disasters.

Update, 14:57: In the 1980s, Margaret Thatcher's Conservative government was a global pioneer of privatisation when she sold Britain's nationalised telecoms, aviation and energy companies to stock market investors.

Interestingly the Lib Dem deputy prime minister, Nick Clegg, appears to wish to be her natural successor - because the kind of privatisation he is proposing for the Treasury's huge stakes in Lloyds and Royal Bank of Scotland would be revolutionary.

In no large economy anywhere in the world have shares in companies been distributed for free to a nation's entire adult population.

And although the plan may appeal to many, as taxpayers' reward for bailing out the reckless banks in the autumn of 2008, it would be a huge logistical challenge.

In IT terms, there would be an enormous task - to register all 50 million of the new owners of RBS and Lloyds, to make it easy for shares to be sold by the millions who've never owned shares in anything, to transfer money to the Treasury as and when the shares are sold to pay back the £66bn put into Lloyds and RBS by the state.

It is those technical obstacles which in part explain why the Treasury is being cautious about idea of giving bank shares to all.

And there is something else. Right now RBS's shares are 28% below the price needed if the state is going to be repaid the funds it put into that bank, and Lloyds shares are 38% below that breakeven level.

Or to put it another way, it is not immediately obvious that if the shares were transferred to us, they'd be worth anything.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 180.

    "If you want to be the slaves of banks and pay the cost of your own slavery, then let the banks create money…" Josiah Stamp, Governor of the Bank of England 1920. Google it

  • rate this

    Comment number 179.

    This stupid idea ise the most stupid that this stupid bunch of stupid people have stupidly come up with.
    The idiot is stupidly thinking of taking MY money and giving it away to someone who already has plenty. I was FORCED into funding these banks, and now I am being forced to watch my hard earned being given to the rich who can afford these cut priced shares. Another shaft in the *** for workers.

  • rate this

    Comment number 178.

    Council on Foreign Relations: -

    This outfit you need to read up about, it’s my view that the Greek issue is being steered by them.

    They control (at this time) just about all financial issues on the planet only threatened by the rise of the far eastern countries.

    They have infiltrated the media, governments, the judiciary and the law making process itself.

  • rate this

    Comment number 177.

    Just to be close to the facts. The biggest privatization that I know about was "voucher privatization" of the economy of former SU. It resulted in concentration of ownership of real assets within "top ten thousand" of society. The concentration of ownership took only about 5 years (so the IT headache might be very short). The consecutive redistribution within this upper crust another five.

  • rate this

    Comment number 176.

    #9 Sally Try Robert Skidelsky for a balanced view on who inherited what:

  • rate this

    Comment number 175.

    The banks can't buy back their own shares. They would have to spend £ billions which they HAVEN'T GOT. Even if they had, it would reduce their capitalisation, making them more vulnerable to a another crunch.
    There isn't 1 solution - we need many
    1. Split them into smaller banks
    2. Find a corporate buyer for sizeable chunks of them
    3. Sell assets - use THIS cash to buy back the shares.

  • rate this

    Comment number 174.

    168 You also have to consider that these state assets were also sold off at ridiculous discount levels which rather than return the investment made by the state in building them.
    Doubly daft was the ban on using the money gained from reinvesting which leaves us woefully short meaning housing is so expensive we have to earn ridiculous sums to afford it.

  • rate this

    Comment number 173.

    Some people are on benefits, and pay so little tax that they cannot be said to have bailed out the banks in any sense whatsoever. Why should they receive bank shares from this, equally with everyone else? Why not reimburse in proportion to cumulative taxes paid - i.e., pay directly back to the treasury? No need for another big government I.T. project disaster. No need for the administr. headaches.

  • rate this

    Comment number 172.

    Spending billions of pounds on administration and IT to give us back our own money sounds just like Gordon Brown's Tax Credit wheeze.

    Have we learnt nothing from Gordon's follies?

    Why doesn't the government just sell the shares on our behalf and use the money to lower a tax such as VAT that will benefit everyone?

    Why not just lower taxes and save

  • rate this

    Comment number 171.

    Private debt in THE problem - it was caused by deregulation and floatation of mutual building societies into banks, plus VAST expansion in home ownership. The debt must be reduced and the regulation restored. Handing oout bank shares is a pointess, wasteful exercise in NeoCon ideology - i.e. Clegg & Cameron's free market religious faith.

  • rate this

    Comment number 170.

    Strange; I thought that when the govermenet wanted to get in touch with us by either voting tax or another methord they could. why not just transfer the cost to one of these processes and let them issues the shares! Why make up problems that are not there?

  • rate this

    Comment number 169.

    And to think Clegg is part of the government.
    Keeps it going no less.

    And he comes up with this idea.

    Says it all really.

    Words fail me, so I will stop wasting my ti

  • rate this

    Comment number 168.

    #9 Sandy Winder - "Considering the way they bent the rules to encourage banks to lend to poor people, we would have been much better off today had we not had one."

    If you really want to delve into history why not look at the scything of the social housing stock by Thatcher that not only pushed house prices through the roof, it also forced millions of poorer people to borrow outside their means.

  • rate this

    Comment number 167.

    Thank you Clegg

    More weetale thewrapy for the wooling classes

  • rate this

    Comment number 166.

    EMPTY YOUR £shops before its too late and they become £10 shops

  • rate this

    Comment number 165.

    Thanks to QE even Tutankamens hang out with a loft window would now qualify for AAA rating

    Which means QE was first discoverd by Tut

    The Arabs also discovered O which we [our banks] turned into ow and then owe before oweyes oweyes oweyes bring out your dead ....for embaslming

  • rate this

    Comment number 164.

    What we should be doing is buying the remaining 17% of RBS and turning it into a 100% Nationalised Bank.

    It could be a model for the banking industry, setting sensible rates of interest for borrowers and savers, behaving ethically and sustainably, having sensible remuneration rates (max 20x the lowest paid employee) etc.

    Other banks would have to follow or die.

  • rate this

    Comment number 163.

    What an excellent idea from Mr Clegg - so he thinks that GIVING assets away will do the counrtries DEBT a power of good. What it would do is give the stockbrokers and those given the task of floating the stock BILLONS of taxpayers money. Lets face it Clegg's idea is another popular idea -it gets him votes. Lets get realistic - sell on the market if a profit is ever made and REDUCE our DEBTS

  • rate this

    Comment number 162.

    Cashinowe scrapitsallism a trojaaan horse on its last clegs cantering to the knaaackers yaaard via the reowe grand national

  • rate this

    Comment number 161.

    They should think things through clearly as you have done before they open their mouths.

    Look what waving a few pounds in front of somes' eyes did with our mutuals and the train wrecks which followed.

    The only benefit would be to pass these worthless bits of paper down the generations for they are the ones that will need it.should any profit ever materialise.


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