This week the government announced that it is close to selling a big stake in RBS to the biggest sovereign wealth fund in the world. The deal, we learned, could see up to a third of the government's stake sold at almost half the price it paid for it in 2008.
You could almost hear the howls of disapproval.
Why should the government sell our stake at a near 50% loss? Why now?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Well I have another question for you: why are you surprised?
This sale, if it goes through, would be just the latest in a long history of disastrous investments by the British government.These people areentirely hopeless at making investment decisions.
In fact, I say we just sell the damned thing. Because if it holds on much longer, the government could actually end up poisoning RBS.
These guys are the muppets!
So we could be selling some of our stake for a near 50% loss. Well, as it happens, that's the value of the stock today... we've already made that loss whether we care to admit it or not.
The bigger question is why on earth did we, the taxpayer, buy in at such a terrible price?
I mean, the government (and yes, I know this was the last lot) bought into this bank pretty close to the bottom of the market back in 2008. And still it's managed to make a loss! Crikey, at the same time Abu Dhabi, which is now circling RBS, bought into Barclays and made near on 100%...
And I seem to remember a certain Mr Buffett buying into Goldman Sachs around the same time. He made a killing. Not only did he buy stock on the cheap, he also negotiated warrants to buy more stock at those incredibly low prices.
And what did our government do?
I'll tell you. Instead of extracting a decent in-price, it rolled over and made the biggest Muppet deal of the century (well, maybe a close second to dumping our gold at the bottom of the market!).
It was practically the only investor willing to invest in this unwieldy bank and pull it back from the brink and still it got robbed. Instead of making RBS bondholders share some of the pain, it just pumped in the money buying equity, of all things. If the intention was to safeguard taxpayer money, then why not make it a fully securitised loan?
As equity holders, the government had to up its stake even further when the inevitable rights issue came along. Result? The government now owns 82% of this junk.
Talk about muppets!
What should the government do now?
In the wake of this announcement, certain members of the Labour party (who negotiated this deal, after all) have campaigned for the deal to be called off. Shadow financial secretary to the Treasury, Chris Leslie, remarked that it is absolutely crucial that the taxpayer recovers their investment in the failed bank, blaming the chancellor, George Osborne, for the rushed sell-off of Northern Rock which left the UK taxpayer taking a loss in the hundreds of millions of pounds.
But I say, sell the darned thing. It's likely to end up better for all concerned. The losses on these deals have already been taken. And while it was better for the government to bail out the banks than face the consequences of a collapse, that doesn't mean we should hold on to the investment. That's just a gamble that we may get out money back.
No, there are several reasons why it could be a good idea to start to wind down our RBS position.
This is a political bargain
The press argues that the government wants to get rid of RBS because of the perennial embarrassment of banker bonuses. Every time the bonus round comes up, it's going to face the same sordid barrage about our bank' paying bankers' fantastic salaries.
But it's more than that. Practically every time I read about businesses going bust (or with debt problems), it seems that either RBS or Lloyds (or both) is at the head of the queue as a major creditor. And it's embarrassing for the government to have a state-owned bank forcing bankruptcies.
No doubt politicians want many of these loans rolled over and businesses to remain in business - the old 'extend and pretend' scenario. Nobody wants to face up to reality. But ultimately, this is bad for banks at this rate it's going to take decades for this recession to play out.
And it's not just dealings with corporations causing embarrassment for the government. Every time our banks screw us for higher mortgage rates, overdraft rates and fees, a collective blush rushes over the face of our politicians.
Imagine what goes on behind the scenes...
Politician: "Hey, you were supposed to be helping us out here. What on earth are you doing screwing our voters for more cash?"
Banker: "You told us to build up our capital base. We need to make money! Everyone else in the industry is raising prices... you want us to get screwed instead?"
Take the loss now and then cross your fingers
I say get rid. The media story making the rounds talks about dumping between 10% and 33% of RBS. And that'll be good for the bank, good for the politicians and ultimately it's probably good for us. It'll give RBS the freedom to get on with the job of winding down much of the bad business done during the boom. And while I'm not saying it should foreclose immediately on all dodgy-looking loans, it does need to make a start.
And just suppose we hit another banking crisis (which I certainly don't rule out), then as a major shareholder in RBS, the government may be forced to stump up cash again.
At least with wider ownership we can ask others to put their hand in their pocket too.
This looks like plain sense to me. Cut the political exposure, cut the financial exposure and hope (yes it's just hope) that the stock does go up. Who knows we might even break even on our residual investment!
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is a regulated product issued by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. https://www.fsa.gov.uk/register/home.do
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
State pension errors: DWP urged to check for mistakes among divorced peopleFormer pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
