David Cameron is still prime minister. George Osborne is chancellor. We are years away from the horrors of the Russia-Ukraine war and the Covid pandemic. Brexit is barely a glint in Eurosceptics’ eyes.
It is 2013 and, five years on from the height of the global financial crisis, the UK government is still struggling to work out how to extricate itself from the giant shareholdings it holds in the country’s biggest banks, following the huge 2008 bailouts.
Thorniest of all is the vast stake in RBS — 84 per cent at its peak — that it received in exchange for its £45.5bn rescue of the Scottish lender, the world’s biggest bank bailout.
Enter Policy Exchange, the Treasury’s favourite think-tank, and a plan — adapted from an earlier idea from Portman Capital and the Liberal Democrats — to distribute the shares to the UK population in one fell swoop.
The distribution would be free to any adult who registered but would rely on a warrant-like structure that would only be worth money to recipients if the share price rose above a floor price; when the instrument was sold that floor value would be passed to the Treasury and any upside retained by the individual.
The idea was considered, but dismissed, as too complicated and potentially value destructive for taxpayers. A decade on, there are good reasons to think again.
The most obvious is necessity. RBS, now rebranded as NatWest, is still 41.5 per cent owned by the Treasury. Since 2013, the stock has on average traded at barely half the average price of the bailout. Eight years after the government began its drip-drip strategy of selling off small amounts of RBS stock to institutional investors, and supporting share buybacks, it has offloaded less than half the stake, and crystallised large losses in the process.
(The Treasury’s interest in NatWest is recorded in the government accounts and the financial assessment of the Office for Budget Responsibility. Based on the bank’s total market capitalisation today of about £25bn, the stake is worth a little over £10bn, though after financing costs the Exchequer is down a net £32bn.)
But the logic of sticking to an original desire to recover the initial investment, or as close to it as possible, is unrealistic — the asset was almost certainly overvalued at the time of the bailout; the bank has been deliberately shrunk over the past decade and a half; and the operating environment for banks like NatWest has never returned to the boom times of the pre-2008 years. So valuations for NatWest’s peers remain permanently reduced.
That said, the bank seems to be in better health than for many years. Despite a challenging economy, it recently reported a 49 per cent increase in pre-tax profit for the first quarter of the year, beating forecasts. It is time the government — and those that hold it to account, such as the National Audit Office — accept that the baseline bailout price is no longer a relevant metric and that other value-for-money criteria should be prioritised.
This is all a long way from Cameron’s stated desire a decade ago of selling the stake “as fast as possible” and for a high price. Having failed to do so is politically awkward — for the state to own a bank, even partially, is not a good Tory look.
The selldown to date has been painfully slow: there has been a narrow focus on selling at prices that bear comparison with the bailout valuation and a fear of doing damage to the value of the remaining shareholding if the market is flooded with too much stock too fast.
This means that a mass distribution all at once is the only way to exit the position in the short term. A standard Thatcherite sell-off is one option; lower risk, though more complicated, would be the distribution plan, using a smart structure to minimise price volatility.
A related reason to pursue a mass sell-off strategy is the real, perceived or prospective risk of ongoing political interference in the running of the bank.
Even under a supposedly non-interventionist Tory administration there have been instances, whether in relation to bonus distributions or business strategy. There may be sound reasons to think that some water companies, utilities or rail services — many launched as part of Margaret Thatcher’s 1980s economic reforms — have performed poorly post-privatisation and may be better off in public hands. But the business of banking — inherently risky and commercially minded — is a bad fit for government ownership.
In addition to the logical and political arguments, there would be technical benefits to exiting quickly. The very fact of the Treasury’s ownership of a 41.5 per cent stake is a vicious-circle “overhang”: the market knows it will be sold at some point, flooding supply, so it subdues the value of the stock in the meantime. Distributing via a warrant structure would mitigate this risk because there would be no incentive for an individual to sell until the price rose above the floor.
At the same time, a distribution would trigger another technical benefit for the stock. Large shareholdings such as those owned by governments are typically disregarded by institutional investors’ index weightings. As soon as the government’s NatWest stock became part of the “free float”, it would boost demand dramatically. According to Policy Exchange’s 2013 calculations, index funds would have needed to buy shares equivalent to nearly half of the government’s then stake.
Prime minister Rishi Sunak and chancellor Jeremy Hunt have rightly prioritised steadiness in the wake of the alarming leadership of Liz Truss and Kwasi Kwarteng. But they also talk frequently about the need for economic dynamism, in particular how the City of London and the UK’s equity culture could be bolstered.
One effect of Thatcher’s 1980s privatisations, which in large part were targeted at customers and staff, was to boost retail shareholder numbers in the UK — from about 3mn to 10mn over the course of the decade, according to the World Trade Organization.
Reliable data on how numbers have evolved since is hard to come by, but it seems generally to have ebbed and flowed in line with economic prosperity. It dipped sharply after the 2008 financial crisis.
More recently it has grown a little again as a new generation of investors have bet on “meme” stocks (though that trend — which echoed the fashion for trading cryptocurrencies — has little to do with backing the fortunes of corporate Britain over the long term). Recent polling from finance group Wesleyan suggests the tally of retail shareholders has stagnated at a little over 7mn.
What better way to achieve the important mission of reviving a tired equity culture than to use a reprivatisation of NatWest as a means to launch a new, improved 2020s version of the Thatcher-era sell-offs and the share-owning democracy they fostered?
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