The Independent View: How the Stephen Williams plans for the banks would work

Portman Capital, an independent corporate advisory firm, has been asked to comment upon the technical issues raised by Mark Pack’s column on Stephen Williams’ proposal to privatise RBS and Lloyds by distributing the shares to the public. Portman Capital is not politically aligned and its comments are intended to explain the technical feasibility of the proposal rather than its political aspects.

The proposal to distribute the shares to the UK people is innovative, and as the British people will participate without having to provide cash up front, it has fairness at its core. Over time, the scheme is likely to deliver a profit for recipients, over and above the repayment of the £66bn that was spent to rescue the banks in the first place.

The press has understandably been focussing on the individual’s profit, with some critics suggesting that the Government should simply sell the stakes to fund additional debt reduction, tax cuts or additional public spending. This is based on the assumption that the amount of money generated by the share sales would be equal under both scenarios.  We think this is inaccurate.

We believe the act of distributing the shares will significantly increase the total receipts to the taxpayer through the combination of two distinct effects. Firstly, it changes the dynamic from having a few very large sales of shares by the Government, into a large number of very small sales by individuals. Secondly, the distribution moves the vast majority of the shares back to the market in a single transaction, rapidly expanding the “free-float”, whilst simultaneously removing the large seller. This is known as removing the overhang on the shares.

Under a conventional privatisation, the Government sells blocks of shares over a number of years. The problem for the Government in this case is that the market knows both the price paid (and therefore what the Government needs to recover) and how many shares the Government has to sell. Under these circumstances maximising value is like trying to play a game of poker where your opponents can see your hand.

The ‘price’ of a Government placing under a traditional privatisation programme will have to be at a significant discount to the true ‘value’ as investors will expect to profit from these transactions. This discount to value is likely to be even greater for the initial placings as investors will be aware that the Government will have further shares to sell. Whilst this ‘overhang’ remains, there is greater risk attached to buying shares and investors will demand a higher return through a greater discount to value.

Investors will anticipate that share sales are likely as soon as the Government is in a position to recoup its investment. Consequently, the banks’ shares will underperform their market peers above the Government’s breakeven price until the overhang is removed.  By contrast when the Government’s last shares are sold, the price is likely to rally – with all the subsequent profits going to the private sector.

Transferring the shares to individuals means that, for example, in the case of RBS the number of shares in circulation would increase nearly seven-fold overnight. This means that tracker and benchmarked funds which mimic the FTSE index would need to increase their holdings of RBS shares by seven times in order to maintain their relative weightings.

This then creates demand at a pricing point at which there is limited supply, as the public has no incentive to sell unless the shares rise significantly above the Floor Price. Thus, the distribution itself, removes the discount between ‘price’ and ‘value’ required in a conventional privatisation. This maximises total receipts to Treasury and the public.

Portman Capital Partners LLP is registered and regulated by the Financial Service Authority and is incorporated within England & Wales. Portman Capital LLP works for a range of clients irrespective of their political persuasions or creed and furthermore is not aligned, nor a subscriber, to any political party.

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

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3 Comments

  • toryboysnevergrowup 11th Mar '11 - 4:01pm

    Stephen William’s proposal is not going to happen – as I’ve said before my expectation is that the proceeds from the bank sales will in all likelihood be used by the Tories to provide tax cuts/pre election bribes (Inheritance tax, the 50% rate) to their supporters. History tells us this is how the Tories use privatisations and I see nothing on their part to demonstrate that they have changed their behaviour.

  • Yes, and in a slightly less blinkered response, this article shows exactly why the idea is such a good one. It may even appeal to Tories who like privatisations and citizen shares (that is, not the baby-eating Tories that ‘toryboysnevergrowup’ is obsessed with) to back it in government.

  • toryboysnevergrowup 11th Mar '11 - 5:14pm

    Mboy

    I suspect time will show which of us is right and whether or not the present lot of Tories really are the “children of Thatcher” that they claim to be.

    Personally I’m not automatically against what is being proposed – but perhaps you should bear in mind that “peoples shares” have not had the best of records in Russia and Eastern Europe where the shares have often ended being sold off on the cheap to some very unscrupulous people and the advisers concerned have pocketed some very fat fees.

    There is also a lot to be said for the mutual model where the depositors and borrowers of a financial institution become its owners, rather than all the control being vested in shareholders who perhaps have more of an interest in short term profits and increases in their share price.

    But anyway I doubt its going to happen – and I don’t see many Tories clamouring for anything otehr than a straight sell off.

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