NAO to Osborne: 'you didn't actually make a profit on Lloyds'

George Osborne is the subject of gentle joshing over his pronouncement that taxpayers made a profit on the sale of Lloyds. They actually made a £230m loss.

by Emma Haslett
Last Updated: 18 Dec 2013

Well, this is embarrassing: remember in September, when the government sold off 6% of Lloyds for £3.2bn, and George Osborne said things like ‘that is a profit for taxpayers’? It turns out that wasn’t actually entirely true. Because, according to findings by the National Audit Office this morning, taxpayers actually lost £230m. Whoops.

The NAO’s point is that Osborne failed to take it down to what the City calls 'the carry'. Although the government technically made a £100m profit on the amount it originally paid for that slice of the bank, the government hasn’t taken into account interest of about 3% a year it had to pay on the £19.9bn it borrowed in 2009 to refinance the bank. It also hasn’t taken into account the general costs of bailing out a bank in the first place.

The confusing thing is that, having wagged its finger at Osborne, the NAO goes to great lengths to point out that the sale, which was done through UK Financial Investments, the government body which, er, manages its financial investments, was ‘managed effectively and provided value for money’.

The 3% discount to the closing market price ‘compares well’ to the average discount of 4% seen in the 10 largest share offerings since 2008, it says. ‘Pricing the shares higher would have required allocating more than 60% of the shares to… shorter-term investors. If these investors sold their shares soon after the sale, there was a risk of a weak aftermarket and negative perceptions affecting future sales,’ it points out.

And the decision to sell only to institutional investors, rather than complicating matters by selling to retail investors, meant the sale was speedier and better-timed than it would otherwise have been. The government chose not to announce a sale date, but instead to wait until share price was close to a 12-month high, which worked well, reckons the NAO. ‘A sale including individual investors would have required up to six months of preparation and an announcement of the sale date. This would have signalled the sale to the market and limited UKFI’s flexibility to time a transaction when market conditions offered the best value.’

So the general message seems to be that the government did the best it could do under the circumstances.

The bit about pricing will come as a relief to Lazard, which advised the government on the sale and then went on to advise on the Royal Mail sale, which didn’t go quite as smoothly. So un-smoothly, in fact, that chief executive William Rucker was called before a Commons select committee to explain why it advised the government to price shares in the company so low.

And the implication is that when the government comes to privatise the rest of the company next year, this model works well. Although George Osborne should probably think twice before he starts bragging about making a profit…

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