No quick sale of RBS and Lloyds
UK Financial Investments' first annual report, which has just been published, captures the idiosyncratic and perhaps surprising relationship between the government and the two giant banks rescued by taxpayers, Royal Bank of Scotland and Lloyds Banking Group.
As is implied by the data in the report, these two - or rather Royal Bank of Scotland and HBOS, which was bought by Lloyds - escaped full nationalisation only by the very fine skin of their teeth.
By the time the Treasury's scheme to insure them against losses on £585bn of their loans - what's known as the Asset Protection Scheme or APS - is put into effect, taxpayers are likely to own 84% of Royal Bank and 62% of Lloyds.
These banks belong to us, to taxpayers. And the monetary value of our investment in this duo is huge, though putting a precise number on it isn't easy - in that the losses we'll incur on the insurance scheme or APS should be seen as a de facto investment, and we won't know the scale of that for years.
If the losses turned out to be no greater than the insurance fees paid in shares by the banks, than taxpayers' total capital at risk could be "as little" as £53.5bn.
But if RBS's and Lloyds' lending and investment portfolio turns out to be considerably worse than feared, well then we might have to realise a staggering £100bn from the sale of our holdings in the two banks in order to get our money back.
The only thing that can be safely concluded is that taxpayers have invested a colossal and unprecedented sum in keeping these banks alive.
The annual report puts it like this:
"Following the issue of B shares in connection with the Asset Protection Scheme, the value of the UKFI-managed investments in these banks will be around £60bn at current market prices".
And, for the avoidance of doubt, if we sold at £60bn we would be selling at a loss - because the market value of taxpayers' initial stake in the two banks is about £11bn less than we paid for those first holdings.
In other words, there's going to be an absolutely enormous asset to sell, as and when these stakes are privatised.
Now what's really striking is how little influence the government wants over these banks in return for the unprecedented support that taxpayers have provided to them.
Yes, the two banks have promised to make more credit available to UK businesses and households, as a condition of transferring potential losses to the public sector under the APS.
Monitoring that the banks honour those lending agreements is a responsibility for the Treasury, not for UKFI.
But apart that lending tit for insurance tat - whose scale is not sufficient to make good the perceived credit deficiency in the UK - these banks have not become explicit instruments of government policy.
Some would say that having been more-or-less nationalised, the duty of the government is now to turn them into directly controlled credit-creation machines, an alternative perhaps to the less predictable initiative to ease lending conditions which goes by the name of quantitative easing.
However, the chancellor and prime minister have set up UKFI with an explicit mandate to make sure that doesn't happen.
UKFI's overarching objective, as explicitly agreed by government is to "develop and execute an investment strategy for disposing of the investments in an orderly and active way through sale, redemption, buy-back or other means".
And in order to do that, it and the government believe that the banks have to remain autonomous commercial entities, and not tools of macro-economic policy.
This is how UKFI chief executive, John Kingman, puts it in the annual report:
"We operate like any other active and engaged shareholder, on a commercial basis and at arm's-length from government...We work closely with our investee banks, for example through strengthening their boards.
Our investee banks continue to be separate economic units with independent powers of decision and, in particular, will continue to have their own independent boards and management teams, determining their own strategies and commercial policies".
So page after page of the annual report is about three things:
• how the government will not micro-manage the banks;
• how UKFI will attempt to help the banks improve the quality of their boards, their governance and risk controls (there'll be a lot more on this in a government-sponsored report by Sir David Walker to be published on Thursday);
• and how UKFI intends to flog those enormous holdings in the banks.
Here's the paradox.
As the annual report makes clear, flogging perhaps £100bn of stock in Lloyds and RBS - which is what the holdings may easily be worth in a couple of year - can't be done overnight.
That's just too big a mouthful for investors to swallow quickly.
How can I be certain? Well in the entire history of Europe, there have only been three occasions when banks (or indeed any companies) have sold shares worth more than £10bn to commercial investors in a single exercise (they were the share sales by HSBC, RBS and UBS all carried out in 2008 and 2009).
Which is not to say that the RBS and Lloyds stakes can't be flogged, but just that it could take quite a few years.
Now that'll be quite a few years during which protests aren't likely to subside that the banks aren't doing their civic duty of supporting the economy.
So UKFI's role as the human shield of the independence of RBS and Lloyds may become increasingly fraught.
Update, 10:18 AM: My favourite bit of the UKFI report is its stern warning to the City that it won't give highly profitable mandates to sell its stakes in the big banks to any investment bank it regards as leaky. It says:
"we need to be especially careful that our dealings with intermediaries - including our selection processes for investment banking advisers - do not create undue risks of leaking our intentions to the market".
There will be no "pre-soundings" of investor appetite, it says.
Crikey. Them investment bankers won't like the idea of flogging this stuff into a market that hasn't been "conditioned".
Update, 10:50 AM: Perhaps the most striking disclosure in the report is that the annual remuneration of UKFI's chief executive, John Kingman, is £143,000.
Of course, that's a lot of money by almost all standards - but not, of course, by the standards of those he employs to run Royal Bank and Lloyds.
Their annual remuneration, including incentives, is as much as 20 times as great.
It's also about half as much as the remuneration of some local authority chief executives.
Since Kingman is arguably the most powerful individual in the British banking scene, perhaps his pay will set the new norm for the industry.
If it does, he'll be barred from the City for life.