Cue hysterical outrage. The UK government is selling the first slice of its majority shareholding in the state-owned bank RBS and there is anger from some politicians who should know better and on social media from people furious that the sale is taking place at a “loss”.
The row is utterly absurd, although not surprising considering how myth-making seems to be preferred over economic reality when the British are discussing markets.
RBS is much smaller than the giant that was rescued in 2008. The taxpayer did not “invest” £45.2bn in RBS in 2008 and 2009. It pumped in those billions to stop the world’s biggest bank (which RBS was briefly) collapsing. The government’s fear in October 2008 was that the cash machines wouldn’t work, that a domino effect would take out other banks and that the payment system would cease to function within a few days.
It wasn’t an investment in RBS. It was an emergency bailout of a bank with a balance sheet, total assets (meaning loans etc), of around £2 trillion, a sum bigger than the UK economy.
Now, it is going to be difficult to sell for the following reasons. RBS is – despite the best efforts of the staff and management since 2008 – a knackered bank.
It has huge potential legal liabilities outstanding in the UK and in the US dating from the Goodwin era. Investors who lost out in the rights issue in 2008 (when RBS raised capital in the Spring before disaster struck) are taking the bank to court in London seeking billions in compensation. In the US, the bank faces the fallout from its involvement in selling products such as CDOs that contained debt originating in sub-prime US housing. Again, that could end up costing RBS billions.
Meanwhile, the legacy of a failed IT system (patched together by Fred Goodwin and his team as the bank bought over other units and integrated them on the cheap, to please shareholders) has caused years of problems and breakdowns for customers.
The RBS brand is synonymous with epic disaster. And I stress, again, that this is not the fault of the vast majority of the staff who have worked hard, through wave upon wave of redundancies. They and their managers are wrestling with a bank that has proved incredibly difficult to fix because it was too big and had lent far too much money in Gordon Brown’s mad boom.
Potential investors know all this. Lloyds, with fewer problems, and no investment bank legacy, is much more attractive to investors. Which makes it easier to sell. This is how markets work. There is a queue for stuff that people want, which raises the price.
The government can’t say any of this, of course. It is the owner of RBS trying to sell, so ministers must put the best possible gloss on matters and try to get away the first chunk and hope that if the investors get a bit of a bargain this time they will come back with more capital to invest later.
Critics who ask why the government won’t wait are missing the point. It is almost seven years since the peak of the financial crisis and soon it will be a decade since those momentous events. The experiment of the government owning a crippled bank has not been a success. RBS has faced political interference that has hobbled the management, while politicians love bashing the banks (because they are even less popular than politicians and journalists.) RBS is stuck in a corporatist trap, the opportunity having been missed years ago to break it up. This waiting can’t go on, or if it does the taxpayer will be stuck with a struggling bank for the next decade with the possibility of an exit diminishing.
The government, sensibly, wants to get the process moving, so that new investors can bring fresh capital and fresh thinking to bear. That means trying to attract investors, who are not, on the whole, stupid.