Why the Treasury will never make a profit on RBS

Chancellor George Osborne sells a chunk of RBS for £2.1bn, amid criticism that it's a bad deal for taxpayers.

by Adam Gale
Last Updated: 27 Jan 2016

Anyone want to buy some RBS shares? The government finally began selling off its majority stake last night, offloading 5.4% of the bank’s shares to institutional investors for £2.1bn. The Treasury now holds 73%, though the figure is likely to drop steadily over the next few years.

Opposition MPs aren’t happy (to be fair they’re never happy – that’s their job), claiming that Osborne is short-changing the taxpayer by selling low.

‘Are we getting good value for money?’ Shadow Treasury Minister Barbara Keeley asked on the Today programme. ‘[Osborne] said he would only sell these RBS shares when we get good value –clearly that’s not now.’

In a sense, the criticism is justified. Osborne sold the RBS shares at 330p each, which represented a 7.6p (2.3%) discount on the market rate. More to the point, that’s a full 172p (34.3%) below the price that the Labour government paid when bailing out the bank for £46bn in 2008-9. If the remaining stake were sold at yesterday’s price, then the state would make a face value loss of £16bn.

Osborne, who acted on the advice of Rothschild’s investment bank as well as Bank of England governor Mark Carney, has countered that fees and repayments from RBS will result in losses being ‘crystallised’ at more like £7bn. More importantly, he said, the ‘profit’ from the other bailouts (of Lloyds, Bradford and Bingley and Northern Rock) would more than make up for RBS’ poor performance.

This isn’t exactly accurate, though. The £46bn figure is a moving target. Adjusted for inflation, the RBS bailout would be worth £57bn in today’s money. Then there are the holding costs attached to owning those shares – the government essentially financed the purchase with debt, which brought interest payments and could have been used productively elsewhere.

The bottom line is that the government will indeed almost inevitably make a hefty ‘loss’ of the RBS bailout – there is very little chance the price will reach the heights necessary to break even in real terms.

But it never entered into that transaction as a private investor. It isn’t in that business, and if it were it certainly wouldn’t have invested in RBS in 2009 (there’s a reason its share price fell from nearly £70 to just over £1). The point of the bailout was to prevent a devastating collapse of the financial sector, and in that it succeeded (or in any rate it didn't fail).

It might have been better from a purely financial point of view to have sold earlier in the year, when the share price was around 400p, but the fact remains that RBS is now essentially able to stand on its own two feet. Boss Ross McEwan’s skill with the scalpel has seen to that, transforming the bank from a bloated, high risk investment giant into a much steadier, smaller and more retail-focused operation.

Rather than wait around for the market to bring the price up, Osborne is electing to free the cash now to cut that debt mountain piling up outside the Treasury.

Of course it’s possible his decision to do that right now reflects pessimism about the direction of RBS shares over the next few years if left to their own devices. The bank isn’t out of the ‘regulatory challenge’ woods yet, after all. Might as well get on with it, eh?

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