Tell Nick Clegg to stuff his bank shares

Nick Clegg plans to give each of us hundreds of pounds worth of shares in RBS and Lloyds. It may seem like a generous offer, but don't be taken in by this cynical piece of popular capitalism, says Tom Bulford. Here's why this is a very bad idea.

Has Nick Clegg lost his mind?

His brainwave to give the Government's stakes in Lloyds Bank and RBS to you and me might sound good. But I think it's absolutely crazy. Far from encouraging a nation of active shareholders as Clegg reckons, it's more likely to do the exact opposite.

To start with, the practicalities of the scheme are bad enough, not that politicians ever pay much attention to such niceties. If it means creating another project for civil servants, another department that will go on for years administering a wretched little bit of political opportunism and this at a time when we cannot afford the civil service that we already have well, why should Nick Clegg care about that?

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This might look like a generous offer but take a closer look

That's a nice little present, you might suppose. And it's some compensation for having been forced to bail out the banks in the first place. But take a closer look.

What you find, in fact, is that this package will be worth nothing to you until the price of RBS and Lloyds reaches 50p and 74p respectively. Those are the prices that the Government paid for its stakes. If you sell above these prices then the Government gets the 50p and 74p and you get to keep the difference. What happens if you sell below these prices, or indeed if you would be allowed to, I have no idea.

There is major and obvious flaws in Clegg's argument. The implication is that taxpayers are better off if they are given these bank shares and allowed to keep any profits, rather than leaving them with the Government.

But any money that the Government has will (in theory at least) be used for the benefit of the tax payer. So it should not make any difference whether it is in the public purse or in our wallets. In fact, I would argue that it is better for the Government to keep the proceeds of any share sales and use them to pay off our horrific national debt. I'd much rather that happened than shelling them out so that tax payers can spend the cash on goods imported from China.

Politicians love the idea of popular capitalism'. On the whole they don't much like private shareholders. These are seen as either the idle rich or ruthless speculators. But they don't mind where everybody in the country is involved.

If you or I buy £10,000 worth of shares today and sell them tomorrow (which we might quite rationally do), the politicians think this is behaviour to be discouraged.

But if every Sid and Joan is given a few 100 quid's worth of shares then somehow that is a good thing. Oh, and by the way, all of the Sids and Joans might just troop along to the banks' AGMs and ask awkward questions about bankers' remuneration. The little man fights back! The downtrodden rise up and fight the greedy bankers! You get the idea.

There's a far better way for you to make money in stocks

Penny Sleuth

The fact is, even City analysts find it hard to understand how the banks make their money. For the average person the job is impossible. That makes an investment in banks just an act of faith and nothing more.

The way I see it, far too many people hold shares that have been dumped upon them. Maybe they have inherited them from an old aunt. Maybe they have been given them by their employer as a reward for their labours. Maybe they still hold those shares in BT and British Gas handed out by the government many years ago. Whatever. The point is that many of these people just don't know why they should own these shares at all.

Look, investing in shares is not a passive occupation. You cannot just hold any old share and expect that it will do you well. You need to at least try to identify shares that are worth holding, companies that are going somewhere and have a bright future.

Shares in RBS and Lloyds are about as unappealing as you can find. They defy analysis. They have an appalling track record. They are locked in a fiercely competitive industry. And, when they do make money, they find themselves pilloried by politicians and the general public alike.

I hope you know me by now. I live and breathe stock market investment. It has certainly worked for me over the years. But that is because I have managed to find some companies that are actually worth sticking my money into. Not because I have it parked in dysfunctional leviathans like RBS and Lloyds.

That's why I write to you in Penny Sleuth. I want investing to work for you too. That's why I tell you about interesting stocks and investment ideas I've seen. I want you to see the extraordinary range of companies out there for small investors.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.