So Business Secretary Lord Mandelson is planning to turn the Post Office into a ‘people’s bank’ — to add to the taxpayers’ portfolio that includes most of Royal Bank of Scotland, the biggest stake in Lloyds Banking Group, the rejuvenated Northern Rock, the rump of Bradford & Bingley, and dear old National Savings & Investments. Of the eight retail banks in the FTSE-100 when the credit crunch first squeezed, the government now effectively controls five; of the rest, Alliance & Leicester was swallowed by Santander, and only HSBC and Barclays remain independent.
When Lloyds TSB unveiled its merger with HBOS last September the Office of Fair Trading announced it would investigate to see whether the deal should be referred to the Competition Commission. However, ministers immediately made clear that the rescue had their blessing and would be fast-tracked under the Enterprise Act to avoid scrutiny. Shortly after that, the Treasury revealed the refinancing that gave it shares in both banks and made it the majority owner of RBS.
The OFT has said nothing about this additional concentration of banking ownership — not even when the Chancellor raised the target for National Savings’s contribution to public finances for the current fiscal year from £4 billion to £11 billion, or when he did a U-turn on Northern Rock and switched it from run-down mode back to robust lending. Don’t expect Mandelson’s expansion of the Post Office to be mauled by the competition regulators either: it may seem ridiculous if all these state banks compete against each other for savings or loans, yet curbing the rivalry would be a gross abuse of monopoly power.
Normally the public could rely on the lack of joined-up government to ensure that any one nationalised bank operates independently of the others, but on this occasion the Treasury has set up a company specifically to hold Lloyds, RBS, Northern Rock and the Bradford & Bingley mortgage business. For once, the state’s left hand will know what the right hand is doing — which makes it all the more important to operate these banks at arm’s length.
The new company, UK Financial Investments, has a civil servant as its chief executive, but its Whitehall directors will be outnumbered by board members independent of the state. Sainsbury’s chairman Sir Philip Hampton was made chair of the UKFI board in November. It was a nice irony for a man fired as Lloyds TSB’s finance director five years ago by chief executive Eric Daniels for opposing plans to increase its dividend. The UKFI appointment meant Daniels, now forced to suspend dividends entirely, had Hampton as his biggest shareholder. Yet by January, Hampton had quit UKFI to chair Royal Bank of Scotland instead, theoretically to compete with his old bank and all other state savings and loan organisations.
Now Hampton and Daniels both find themselves reporting to acting UKFI chairman Glen Moreno — who is also chairman of Pearson, owner of the Financial Times where UKFI’s chief executive and the Treasury’s second permanent secretary, John Kingman, was once a junior journalist.
Kingman insists his job is not to manage the state banks but to manage the state’s shares in the banks. With those shares worth considerably less than the Treasury paid for them, his fund-management track record has got off to a poor start, not least because — despite claiming not to be managing the banks — the state has imposed conditions that hold them back and depress their shares. These conditions include the bar on Lloyds’ and RBS’s dividends, restraint on executive pay and demands that they maintain mortgage and small-business loan availability at pre-crunch levels. Hampton’s switch to RBS, to be followed by other UKFI appointments at the quoted banks, questions further just how arm’s length is the relationship between the Treasury and the banks it rescued.
But if Kingman has to reconcile how the state can control so many banks yet still allow them to compete, he — or probably some successor, a decade or more hence — must also juggle the banks’ competing claims to escape the Treasury’s clutches. If, as ministers claim, these bank investments will one day be realised at a profit to the taxpayer, then selling them will mean a privatisation programme that makes the 1980s look like a car-boot sale.
Including the equity injection into Northern Rock, taxpayers have invested more than £40 billion in the banks so far. There may be some hope of offloading Bradford & Bingley and Northern Rock in multi-billion pound trade sales, but Lloyds and RBS are very large quoted companies and placing equity on that scale is unprecedented. The only reason the government owns stakes in those banks is because investors shunned the shares when offered them; at some point Kingman and his team have to persuade the Square Mile to pay more for the shares than the price it refused to pay last year.
A cash takeover of one of the banks would be the easiest solution; a £4.4 billion bid from French power group EDF has just saved the government the problem of offloading its 36 per cent stake in British Energy on to a volatile stock market. However, for the government to get out at cost on RBS, an offer would have to value it at £29 billion; and it would take a bid of almost £50 billion for the state to exit Lloyds without a loss — prices three times what the stock market thinks those banks are currently worth. The last £50 billion bank bid was not a good omen: it was the RBS offer for ABN Amro that pushed it over the precipice. It’s hard to see any bank in the world mounting a cash takeover of that size at present.
In any stock market, never mind the present one, placing £20 billion of shares in a single company would be tricky. The final tranche of BT raised only £5 billion in 1993; six years earlier, when the state attempted the biggest privatisation ever by selling its remaining shares in BP, it discovered the dangers of trying to finesse markets. The Black Monday stock- market collapse happened between pricing the £7.5 billion BP issue and applications closing — and the underwriters sought to cancel the offer rather than suffer huge losses. The Bank of England was forced to provide a buy-back, the Kuwaitis snapped up the cheap shares and, amid diplomatic tension, the Monopolies Commission told the Kuwaitis to re-sell their opportunistic stake.
Yet if UKFI tries to sell its bank shares in a series of bite-size placings, it risks depressing the price because of the overhang of remaining shares waiting to be dumped. It would be a hard exercise to sell any company that way, but UKFI has two very similar companies to offload. There would be no logic in simultaneous disposals of Lloyds and RBS shares — but staggering the sales will produce an alternating series of mammoth bank offers that could last for years.
The 1980s privatisations involved wholly owned monopolies in different sectors; disposing of stakes in already-quoted rival businesses is a feat never before attempted. It will be hard enough for UKFI to work out how it can own stakes in banks that ought to be competing with each other, but ultimately it must reconcile how to sell them in share sales that also compete with each other. Perhaps the Post Office people’s bank could help?
Comments