Vince Cable in his own words on the sale of Royal Mail

Vincent CableThe publication of a report today by the National Audit Office criticising the “deep caution” of Vince Cable’s department in setting the sale price of shares in Royal Mail has, inevitably, been leapt on by opponents of the policy. Critics who would, of course, have been equally happy crowing if the Department of Business, Innovation and Skills had set the price too high causing the flotation flop.

Vince Cable went to the despatch box of the Commons today to defend his department’s actions, making headlines for unambiguously stating, “The last thing I intend to do is apologise”. Here he is, in his own words, on the sale of the first batch of shares of Royal Mail:

The Secretary of State for Business, Innovation and Skills (Vince Cable):
The National Audit Office has today published its report on the Royal Mail sale of shares. The report confirms that we achieved our primary objective of securing a sale of shares, allowing Royal Mail to access the private capital it needs to invest and thrive. As a result the taxpayer now faces reduced risk of having to provide financial support to the universal postal service.

It was right that we took a cautious and measured approach to the sale. That approach was taken in the light of our primary objective, and reflects the considerable risks we faced due to industrial relations and challenging market conditions.

The price range for the shares was set following a comprehensive programme of engagement with over 500 potential investors and was benchmarked against valuations of comparable postal companies. I am clear that this was the correct approach to secure a successful transaction.

A more aggressive approach to pricing would have introduced significantly greater risk. The advice that we received in this respect was unambiguous. There was no confidence that a sufficient number of buyers would offer a significantly higher price. A failed transaction and the retention of Royal Mail in public ownership would have been a very poor outcome for the taxpayer, as the NAO report confirms.

Achieving taxpayer value is about securing both short-term and long-term benefits. In the short term, we have delivered a successful transaction, which raised £2 billion for the Exchequer, enabled over 690,000 members of the public to buy Royal Mail shares and put in place the largest employee share scheme of any privatisation in nearly 30 years. In the long term, we have reduced the ongoing risks to the taxpayer by putting Royal Mail in a position where it can operate commercially and finance its own funds if needed. In doing so, as the NAO confirms, we have achieved our key objectives.

The sale of shares in Royal Mail has delivered on our commitment to protect the universal postal service and safeguard vital services for the taxpayer.

Mr Chuka Umunna (Streatham) (Lab):
… The Secretary of State dismissed claims that a cherished national institution was being sold off on the cheap as “froth”. The truth is that this has been a first-class disaster for the taxpayer and those he once referred to as “spivs and gamblers” are laughing all the way to the bank. The very least he can do today is apologise.

Vince Cable:
The last thing I intend to do is apologise. What I do intend to do is refer to what the report actually said, as opposed to the spinning and froth that is being generated around it. Let me read again the report’s initial conclusion on value for money:

“By floating Royal Mail on the Stock Exchange the Department achieved its key objectives of introducing private capital and commercial disciplines. Given Royal Mail’s prospects and prudent initial capital structure it is now less likely that the taxpayer will have to provide public support for the universal postal service.”

That is what it actually said.

Let me address the criticisms, if that is what they were. The first was that the Department was cautious, but I would have thought that caution in this context had a lot to commend it. The reason the Department was cautious was the very real risk that the floatation could fail. The choice we faced was: had the floatation failed, it would have remained in public ownership and, despite the hon. Gentleman’s preference for keeping it in public ownership, the valuation placed on it continuing in public ownership was about £1 billion. That was not disputed by the National Audit Office. The alternative—the floatation which happened—resulted in a value for the taxpayer of £2 billion in cash and £1.5 billion in continued value of the retained sale. There was a choice between the £3.5 billion that resulted from the privatisation and the £1 billion had it failed, so it is absolutely right and sensible that we were cautious.

The hon. Gentleman made the point that there was a lack of flexibility in the initial public offering system. Indeed, the National Audit Office makes that point: there was a lack of flexibility. The question, therefore, is: were there any alternatives? Could this have been done in a different way? The Government could have eliminated the retail investors and had more flexibility over price at the time of sale, but as it happens one of the successes of the privatisation is the fact that 670,000 investors now have shares.

The other way of selling Royal Mail would have been through a trade sale, and of course we looked at that as an option. One of the reasons we did not pursue it was that we looked at the history of privatisation under the Labour Government. and there was one very good example of what happens when a trade sale is pursued: I refer the hon. Gentleman to the NAO report on the privatisation of QinetiQ. … What happened in that trade sale was that a company with an equity value at sale of £125 million was eventually valued at £1.3 billion—10 times what the Labour Government sold it for. That is the alternative model with which we were confronted.

Let me address specifically the issue of the long-term institutional investors. The hon. Gentleman is absolutely right to say that one of the key objectives, to which I attach particular importance, was ensuring that the long-term institutional investor base was strong, and indeed it is. When the hon. Gentleman looks at the breakdown of share ownership, he will see that between two thirds and 70% of the shares held as a result of the IPO are held by those long-term institutional investors. When we put that with the Government’s retained shares and those of the workers, we see a very large majority of investors who are committed to the long-term strength of the company. One does have to ask the question: why did some of the long-term institutional investors sell? Some bought, some sold. The reason they sold was that they considered the share price after sale was overvalued. It was an obvious market reaction, and that was the consequence. None the less, having a long-term investor base remains a basic objective, and we have achieved that fundamental objective.

Let me turn to the issue of the valuation, to which so much importance is attached. It should be blindingly obvious, although I do not think it is to the Opposition, that trying to sell 600 million shares at one go is a fundamentally different proposition from the 2 million to 3 million sold in daily trading, which explains why the price has varied since the flotation.

I have said and I continue to say that there is a great deal of froth in the valuation of this and other shares—that is how equity markets operate—and this particular share is surrounded by a great deal of volatility. There are two main reasons for that. The first is a great deal of uncertainty over industrial relations in a company that has had a very troubled industrial relations history. It is worth pointing out—I do not know whether the hon. Gentleman noticed—that the mere mention last week of a Unite strike took the stock price down by 20p. That was the context in which we had to make the sale. …

Looking at the volatility of shares, this company is exposed to a considerable level of competition, as a result of actions of regulators beyond the Government’s control. The estimate has been made—I think that I cited this to the Business, Innovation and Skills Committee—that a 1% fall in sales is the equivalent of a 17% fall in profits for this company. We hope, and we have every reason to be optimistic, that with the very good management of the company, the co-operation of the work force and the investment that privatisation now makes possible we shall have a positive outcome in terms of competitiveness, but there is a great deal of uncertainty, which lies behind the volatility of the shares.

We in the Government have been criticised, not least by the Select Committee, over the past few months because we failed to take account of the estimates made by the banks that were bidding for business. One section of the NAO report—the hon. Gentleman has clearly not read it—completely vindicates the Government’s decision to ignore those estimates as completely worthless. They were touting for business, the estimates had no value whatever and we were quite correct to ignore them. Much of the propaganda that he and his colleagues have developed over the past few years has proved to be completely beside the point.

Let me make a final point on valuation. The hon. Gentleman gave us a lecture on the dangers of undervaluing public assets, but let me just quote to him his Government’s experience of the difficult art of valuing assets. The former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), sold large quantities of gold at between $250 and $300 an ounce, but the price subsequently increased to more than $1,500—five times the original value. That is the nature of the highly volatile markets in which we have to operate.

The NAO report reached the important conclusion that we had successfully achieved our objectives. Under this Government, we have taken a loss-making public enterprise and turned it into a highly successful, respected public company.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

Read more by or more about , , or .
This entry was posted in Parliament.
Advert

56 Comments

  • His point about gold is absurd. The government sold that for within 0.5% of the market price.

  • Stuart Mitchell 1st Apr '14 - 10:55pm

    Vince Cable: “Under this Government, we have taken a loss-making public enterprise and turned it into a highly successful, respected public company.”

    Fact: The Royal Mail made an operating profit of £404m in 2009-10.

    http://www.royalmailgroup.com/sites/default/files/RMG_PDFs/2009_10_RM_Holdings_Group_Accounts_Final.pdf

    Vince Cable: “The report confirms that we achieved our primary objective of securing a sale of shares, allowing Royal Mail to access the private capital it needs to invest and thrive. As a result the taxpayer now faces reduced risk of having to provide financial support to the universal postal service.”

    Fact 2: The Royal Mail made a profit of £403m in 2012-13. Yet Vince Cable claims he’s doing the taxpayer an enormous favour by selling it off at a knock-down price.

    Of course anticipating the market value of Royal Mail was never going to be an exact science – but given that the flotation was twenty-four times over-subscribed, calling the government’s valuation “cautious” is a euphemism for colossal incompetence.

    http://www.independent.co.uk/news/uk/royal-mail-float-how-banks-broke-promises-and-raked-in-a-323m-fortune–and-lost-taxpayers-1bn-9226885.html

  • Eddie Sammon 1st Apr '14 - 10:55pm

    For some reason I am feeling a rare sense of loyalty and that criticising Vince in public over this would be wrong. I genuinely think he has done a good job, but like many things: we all probably would have done it our own way.

    Selling to good investors is better than pumping it and dumping it to the highest bidder then letting the company go bust.

  • David Allen 1st Apr '14 - 11:24pm

    Somebody has told Vince that it is better in the long run not to admit to an obvious blunder, because if you admit it, opponents will just seize upon the admission and read it back to the public repeatedly. It is better politics to stick to denial, because nobody can prove for certain that it was a blunder, even though it’s fairly clear that it was.

    It’s “good politics”. It’s also one of the things that turns people off politics.

  • Philip Rolle 1st Apr '14 - 11:40pm

    If this sub-deal had happened when Vince was challenging government , he would have been a very effective critic of it. But refusing to accept the obvious is particularly not his strength

  • Frank Booth 1st Apr '14 - 11:47pm

    Eddie Sammon – how long are these ‘good’ investors going to keep their shares? Expect within a decade Royal Mail to be owned by a private equity firm based in a tax haven. It will be demanding money from the government to meet it’s public service obligations. Some bits of the Royal Mail will not be profitable. The owners aren’t going to be interested in them. They will therefore demand public subsidy for all the uneconomic rural postal services.

  • A Social Liberal 1st Apr '14 - 11:47pm

    It was wrong to sell the mail off. It sold too quickly, too cheaply and – quite frankly – the decision to trust 11 financial organisations not to sell the extra large amount of shares they were allocated was disgraceful.

  • Eddie Sammon 2nd Apr '14 - 12:10am

    I don’t know Frank, but my point is: if anybody cares about a company then they care who they sell it too. I agree the City doesn’t have the best reputation, but at least they are capable of managing a board of directors.

    I don’t want to get into a big debate about this, I’m just saying I think Vince should be listened to and given the benefit of doubt. I was disappointed when people first cheered the privatisation before the price had been analysed, but Vince has done post-sale analysis and he’s still sticking by his actions, so I think we should trust him.

  • Hedge fund run by Osborne’s best man has made a £36m profit out of this.

    http://politicalscrapbook.net/2014/04/osborne-best-mans-hedge-fund-made-36m-profit-on-royal-mail/

  • “The former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), sold large quantities of gold at between $250 and $300 an ounce…”

    Well maybe but then it is the Lib Dem’s message that ‘Labour cannot be trusted with the public’s money. ” . Nor can Vince it seems.

  • David Evans 2nd Apr '14 - 1:38am

    @Matt – Sadly your comment is totally misguided. Your comment “His point about gold is absurd. The government sold that for within 0.5% of the market price,” it shows how little you understand about markets. The problem was that Gordon Brown announced to the world he was going to sell the gold well in advance and that gave speculators all the information they needed to sell gold short and drive the market price down. It was incompetence of the highest order. Pure and simple.

  • Vince’s comparison with gold is absurd, and he knows it. A volatile commodity is not the same as a stable company. This has been a massive screw up that yielded terrible value for the taxpayer. If Vince and the Lib Dems had been in opposition they would have been shouting to the rafters about financial incompetence and demanding the head of the minister responsible.

  • Paul in Twickenham 2nd Apr '14 - 6:58am

    @David Evans – your point about Brown’s naivety in pre-announcing the gold sale is a nice comparison with Dr. Cable’s gullibility in accepting the investment banks’ price. In both cases the vested interests of the rich were sold to politicians as disinterested, objective and rational. And it seems to me that Dr. Cable’s whataboutery shows that he understands that he was taken for a ride. As has been reported widely now, as Goldman were advising him to set a price of 330p their analysts were preparing a research note for clients that anticipated a price of 610p. Vive la difference and triple bonuses all round, lads!

  • Stuart Mitchell 2nd Apr '14 - 7:07am

    @Eddie Sammon
    “Selling to good investors is better than pumping it and dumping it to the highest bidder”

    Eddie, read the Indie article I linked to earlier (or any other article from yesterday).

    Most of the “good investors” who Vince believed would hold on to their shares and give Royal Mail stable ownership did in fact sell the shares to make a quick profit when they saw how much Cable had under-valued the company.

    There’s nothing to defend here – it was a colossal shambles in every single respect.

  • The core of Vince Cable’s defence is in his opening remarks and his conclusion, it is that —
    “…The NAO report reached the important conclusion that we had successfully achieved our objectives. .”

    Nobody denies that on any side of the argument. The Coalition wanted to privatise Royal Mail and that was the mistake. But they achieved their objective.

    We should not be diverted by all this stuff about Brown and gold, or whether the spivs made buckets of money or swimming pools of money. The problem is not that the privatisation was done badly, the problem is that it was done at all. This is just an echo of the 1980s privatisations. Just as handing over the electricity and gas supplies to spivs was a bad idea, so too is handing over the postal service. Just as we have now realised with the East Coast Line that handing over the trains to spivs was a bad idea, we will eventually have to admit that this was a bad idea as well. Handing over another partial monopoly public service to people whose basic interest is profit and greed will not result in an improved public service.

    The excuse for privatisation is often that it will lead to greater investment from private sources. If that were true ask yourself where the investment for HS2 is coming from. Is it coming from the private sector train companies or is it coming from the tax payer? Where is the investment for the nuclear madness at Hinkley C coming from? Is it coming from the private electricity companies or is it coming from a thirty year deal in which Ed Davey sold our children’s future so that they will be paying through their bills even if they chose not to use nuclear power?

    Which brings us back to the Royal Mail. Who was the junior minister who was originally responsible for this privatisation? Ed Davey before he switched departments. Any similarities between what is going wrong with the energy suppliers “market” and the postal service “market”? Or is it just that this neo-Thatcherite, snake-oil policy of privatisation is basically flawed?

  • Once again all we are seeing is bluster by politicians…
    Vince gives no evidence that his department had any real idea of either how to assess equity market value and hence a true equity market valuation of Royal Mail. In fact his evidence shows that his department has not learnt anything about pricing from previous privatisations nor from the Ofcom spectrum auctions…
    (To illustrate the point I’m making, Vince’s department would of valued Facebook based on it’s tangible assets etc. and hence would probably have valued it, like QinetiQ at few hundred million rather than a hundred billion and hence priced shares accordingly…)

    The report’s initial conclusion, cited by Vince is correct, namely the business governance objectives of the sale (including the unstated removal of political and Treasury interference in the normal operation of the business)
    do seem to have largely been achieved. However, these objectives have little to do with value for money at the point and time of sale, which is what much of the criticism is about.

  • @David Evans
    “The problem was that Gordon Brown announced to the world he was going to sell the gold well in advance and that gave speculators all the information they needed to sell gold short and drive the market price down.”

    That’s not correct at all. While it’s true that the market price fell 10% between the first announcement (in May ’99) and first auction (in May ’99), you are ignoring the fact that the sale took place in bi-monthly auctions spread over three years – precisely to avoid the kind of “incompetence” you describe. After that initial drop, market prices soon recovered and in fact averaged the pre-announcement price for the duration of the sale.

    People like you also overlook the fact that Brown did not blow the proceeds of the gold sales – he reinvested it in foreign currencies, most of which have gone up in value. This alleviated the “losses”.

    And as others have pointed out, you can’t compare a company like Royal Mail with a highly volatile commodity like gold. While a lot of people made big profits from gold up to 2011, a lot of people have lost a fortune since as the price has collapsed. If you feel confident in your ability to anticipate these kinds of price movements, can I assume you are super-rich?

    Cable’s comparison with gold is a joke and he knows it. It took TWELVE YEARS for gold prices to rise to £1,500 after Brown announced his gold sale. How long from the start of trading did it take for Royal Mail shares to massively exceed Cable’s valuation? ZERO SECONDS. Not being able to predict highly volatile markets twelve years hence is nothing more than a lack of omniscience. Being unable to see the value of something that’s sitting under your nose is true incompetence.

  • Why should someone who doesn’t get what the city is about be in charge of the privatisation anyway, don’t we have anyone better? As usual, there is not just the binary choice he implies. You can make all potential subscribers bid the price they are willing to pay and the higher bids get the shares – exactly the same way they sell bonds every quarter.

    What does the comprehensive programme of engagement actually mean? Asking them what they want you to sell the shares for? Of course they are going to say a price that is much, much too low. That’s why that is not the technique used to set prices in business.

    The idea of “good” financial institutions and “bad” financial institutions rather than just “oriented towards making a profit for their investors and shareholders” financial institutions is nonsense . The whole point of making it a plc in the first place is that making it tradeable on the second-hand shares market, so people know they are not locked in, is the best way to get first-hand investors to invest now and in the future – that’s what the stock market is about.

    I tend to think this is part of Vince Cable’s generational politics thing. That they get a bit of money in now to spend on his generation, but don’t

  • the above comment should end “but don’t care about the long-term situation”. It’s similar to his Browne report that puts a massive debt-write-off obligation on the government 30 years down the line.

  • Sorry, this

    “the market price fell 10% between the first announcement (in May ’99) and first auction (in May ’99)”

    should be

    ” the market price fell 10% between the first announcement (in May ’99) and first auction (in July ’99)”

  • Mack (Not a Lib Dem) 2nd Apr '14 - 9:59am

    Because Royal Mail shares have been incompetently sold on the cheap the people of this country who owned this great British Institution have been deprived of £1.4 billion, the rise in value that immediately followed the flotation.That huge amount of money could have helped to pay off the deficit or to build schools and hospitals, or to create jobs for our young people. Instead of which it goes straight into the pockets of those who were already rich. This sale of a public service was completely unnecessary. Others have already remarked here that it was making a decent profit.. Previously, it must be remembered that in order to prepare the way for this smash and grab, to soften it up and and make the sell off more attractive to the predators, responsibility for Royal Mail pensions was offloaded upon, guess who? The poor abused British taxpayer. The only people to do well out of this were the bankers and the fat cats.

    The government defends the share price by saying that Royal Mail was sold to investors that would prove secure and would hold on to the stock for long periods. But the NAO report shows that half of these so called “long term” investors, knowing that the stock was grossly undervalued, sold it off within weeks of the flotation for huge, eye watering profits. Indeed, seven of these so called secure, long term investors sold off their entire allocation within a month. Four of them sold off half of it. A great deal of the stock is now in the hands of Hedge funds. Proud of that achievement, are you?

    Five months on the Royal Mail share price is seventy per cent higher than the absurdly low price at which the Liberal Democrat government offered the shares . If I sold my house through an estate agent who valued it at £200,000 and then five months later it went back on the market and sold at £340,000 I’d be entitled to say that that estate agent completely undervalued my sale price wouldn’t I?

    To add insult to injury the NAO report comes swiftly after Royal Mail announced that it was axing more than one thousand six hundred staff and has decided yet again to increase stamp prices. First class has risen by 2p to 62p, double what it was in 2002, and second class has risen by 3p to 53p

    Thanks to the Liberal Democrats propping up a Tory led government a great British Institution has been virtually given away to the City and now exists only to make quick profits instead of being a Public Service for the Nation. And yet the Coalition insists on calling this shambles “a success”. Do any of you Lib Dems think that this “success” is going to get you re-elected?

    This massive incompetence is a national disgrace. Of course Vince Cable should resign.

  • Bill le Breton 2nd Apr '14 - 10:21am

    For what it is worth the price of Royal Mail shares on the grey market the night before the launch was £4.00.

    That is, people who wished could and did buy and sell WITH REAL MONEY ‘options’ on the shares with roughly the same information that the advisers and the Secretary of State had had a few days before when they announced the price. Some therefore sold at slightly less than £4.00 and some bought at £4.00 that afternoon – a premium of just under 20%.

    They did so against total ignorance of how the market would react to this not previously marked to market organisation (except for indications signaled by the grey market) and also against the background of uncertain industrial relations.

    This is not to argue for or against privatisation but to demonstrate that with the knowledge and technical restraints applying at the time, £3.30 was NOT inexcusable.

    Let us just hope that those who were given preferential allocations on pledges to be long term shareholders, but who sold out, receive the message that their cards are marked – that any chance of gongs, baubbles, lunches at the Palace or future admission to preferred tender lists have vanished and that those who consider partnering and advising them in future risk a similar marking of their cards.

    The only way is ethics.

  • Vince Clegg is a busted flush. He has no achievements that I can think of at all. The sound of his voice boasting to those two female Telegraph journalists about all the power he had just proves what a vain and foolish man he really is. Now this utter incompetence has laid bare his total lack of understanding of how the markets operate and his utter naivety in being taken in by vested interests. Lib Dems may not be ‘funded or unions or millionaires’ but it seems Cable is so hopelessly gullible that he can sell off our national assets at rock bottom prices to multi-billionaires without even realising he has been well and truly done up. A person of integrity would at least have apologised.

  • Paul In Twickenham 2nd Apr '14 - 10:26am

    @Stuart – actually the sale was utterly incompetent. The pre announcement that the UK government was going to start selling bullion caused the spot price to drop to a 20 year low. The auctions themselves were not at spot price but at a (lower) price determined in advance. The whole thing was so much like free money that it was either incompetence, misrepresentation by the government’s advisors or the conspiracy theories about bailing out a globally significant investment bank (not Goldman Sachs I should add) with dangerous short positions in gold are true. Certainly a while back in an interview Eddie George seemed to imply there was something to it. Take your pick..

  • David Evans 2nd Apr '14 - 10:36am

    Phyllis – What you say in your second sentence says a lot more about you than it does about Vince.

  • A number of comments in this thread talk about knowledge of “how the markets work”.

    I have no more knowledge about the detailed working of the spivs in the City of London than I do about the detailed workings of the New York City Mafia. But I can spot one obvious similarity.

  • @Bill le Breton
    “For what it is worth the price of Royal Mail shares on the grey market the night before the launch was £4.00.”

    And for what it is worth, the price the next morning when trading started – and people had the same information everybody had had the night before – was about £4.50 (a premium of 36%), rising to £5.60 (a premium of 70%) within three weeks and sticking around that level ever since. As for the information at Cable’s disposal, we know that he had valuations from 21 different banks, and the average was much higher than what he went for. Share prices are set by supply and demand like anything else, and with the sale over-subscribed 24 times over, it was hardly a shock when the price shot up.

    @Paul in Twickenham
    “The pre announcement that the UK government was going to start selling bullion caused the spot price to drop to a 20 year low. The auctions themselves were not at spot price but at a (lower) price determined in advance.”

    The spot price was $282 immediately prior to announcement of the sale. The gold was eventually sold at an average price of $276.60. The sale therefore achieved over 98% of the market price immediately prior to announcement of the sale.

  • @Paul in Twickenham
    Incidentally, how can an auction price be “determined in advance”?

  • Paul In Twickenham 2nd Apr '14 - 11:29am

    @JohnTilley – there’s a great quote from Al Capone when he was asked why he didn’t invest the proceeds of his endeavours in Wall Street. He said “it’s a racket. Those stock market guys are crooked”.

  • David Evans 2nd Apr ’14 – 10:36am
    Phyllis – What you say in your second sentence says a lot more about you than it does about Vince.

    What do you mean?

  • Bill le Breton 2nd Apr '14 - 12:45pm

    Stuart your write, “we know that he had valuations from 21 different banks, and the average was much higher than what he went for.”

    So what was the average of the valuations he had from the 21 different banks?

  • I’m with the commentators who think selling the royal mail was a mistake in the first place. Vince Cable simply did what the coalition required him to do. I suspect it will cost him his job because there is no loyalty from the Lib Dem’s partners in this government.

  • Bill le Briton

    “For what it is worth the price of Royal Mail shares on the grey market the night before the launch was £4.00.”

    A very sensible point.

    I would add even when the market did start to react in a positive direction at close on the 11th of October they were £4.55 after trading had shown positive movements in the price and clear demand.

    That is not so say £3.30 was right or wrong but anyone who uses the price months later (when market conditions had changed, new management had been feeding back to analysts for months) simply doesn’t understand the nature of these things.

    A share is worth what someone is willing to pay for it, and that is time and location specific.

  • Psi

    That is not so say £3.30 was right or wrong but anyone who uses the price months later (when market conditions had changed, new management had been feeding back to analysts for months) simply doesn’t understand the nature of these things.

    Except the price has remained reasonably stable since the second week after the flotation. It rapidly climbed to the 560-600p range and has been sitting within that ever since. Nothing to do with decisions taken months after flotation.

  • Passing through 2nd Apr '14 - 1:35pm

    @Bill Le Breton

    “Let us just hope that those who were given preferential allocations on pledges to be long term shareholders, but who sold out, receive the message that their cards are marked – that any chance of gongs, baubbles, lunches at the Palace or future admission to preferred tender lists have vanished and that those who consider partnering and advising them in future risk a similar marking of their cards.”

    That’ll teach them!

    I imagine that will be a great solace to the people queuing today at Food Banks or facing losing their home because of the Bedroom Tax all because of an ill-conceived austerity drive ironically due to the self-same incompetent, unethical and even downright criminal bankers who’ve just taken the tax-payer to the cleaners for another billion pound and more.

  • Passing through

    “criminal bankers”

    Crimes are committed by people (or on rate occasions legal entities) so I assume that you are thinking of specific individuals? Id so which ones committed crimes and then were also involved in the Royal Mail Listing.

  • Tony Rowan-Wicks 2nd Apr '14 - 1:48pm

    I agree with Bill le Breton, as I usually do. But should the flotation have been delayed until George’s ‘slightly fixed economy’ was evident? The timing does seem odd – though this is hind-sight to those of us who follow the process but didn’t arrange it.

  • Paul In Twickenham 2nd Apr '14 - 2:09pm

    @Stuart – how do you auction a commodity at all?

  • @Bill le Breton
    The 21 banks estimated a valuation range of £3.9bn to £4.8bn on average.

    http://www.thisismoney.co.uk/money/investing/article-2567691/Huge-5-8bn-gulf-Royal-Mail-shares-valuation-revealed.html

    @Psi: “I would add even when the market did start to react in a positive direction at close on the 11th of October they were £4.55 after trading had shown positive movements in the price and clear demand.”

    That is not an accurate description of what happened. The shares OPENED at £4.50 on 11th October, and only rose a further 5p by the end of the day. From the very first trade, the shares were selling at 36% more than Cable’s valuation.

    http://www.telegraph.co.uk/finance/business-news-markets-live/10371566/Royal-Mail-share-float-as-it-happened-October-11-2013.html

    The following BBC report on the first day of trading contains some corking quotes :-

    http://www.bbc.co.uk/news/business-24488144

    “Business Secretary Vince Cable told Channel Four News he could have charged a higher price for Royal Mail shares. Asked if he could have raised the sale price when he saw the level of demand for shares, Mr Cable said: ‘I could have done and I could have joined the speculators and spivs. I’m not interested in doing that,’ he said.”

    “Mr Cable told the Today programme that the bulk of the shares had gone to ‘long-term stable investors’ in the UK.”

    Vince Cable: “The objective of the exercise, which fits in with what we want for the Royal Mail, is to make sure it has stable, long-term investors.”

    “[Vince Cable] said any volatility in the Royal Mail share price over the next week or so was of little consequence. ‘What matters is where the price eventually settles in three or six months’ time’.”

    The more one reads about this, the more monumental Cable’s incompetence seems.

  • Passing through 2nd Apr '14 - 2:17pm

    @Psi

    Both the LIBOR fixing scandal and the original financial crash were marked by endemic criminality within the banking sector yet few people have faced any sort of charges so pretty much the same bunch of crooks remain in place. The only question is why anybody is surprised that when given the opportunity they’ve chosen once again to fill their boots at our expense. That the well-paid analysts were simultaneously telling the government they could only expect 330p while telling their own investors to work on the basis of a market valuation around 610p shows how secure their Chinese Walls were and leaves a strong suspicion of insider trading.

    As to the specific villains it is hard to say given that the both the government and the NAO refuse to name the 16 companies which welched on the “gentleman’s agreement” to keep hold of their shares in the long-term in exchange for a favourable allocation and nice discount so we can’t even express our disapproval by denying them custom, bad publicity or shareholder activism.

    All of which makes Cable’s claims about the “long-term institutional investor base” of the RM laughable.

    Still, I’m sure not being invited to Royal Garden Parties must sour the millions of pounds these guys have made out of the deal.

  • @Paul in Twickenham
    You tell me – you claimed to have detailed knowledge of how the auctions were carried out!

  • @Stuart – re: corking quotes
    And to think there are some who want Vince to be the LibDem’s shadow chancellor in 2015…

  • Passing through:

    So your answer translates as “I have no evidence.”

    LIBOR submitters (and the traders implicated) are not corporate financiers who are those who are involved in primary listings. So your sweeping empty generalisations meaningless.

    I note you make no attempt to back up your claim of criminals involved in “the original financial crash” seems to be unsupported by your response. Corporate Financiers involved in UK Equities listing were not those who (allegedly) helped facilitate fraudulent US home Loans which were then made their way in to the system. If you think the crash was the result of criminal activity you are really deluded.

    Massive incompetence (by Government, Central Bankers & Financial Firms) may not be damaging and infuriating and cause significant suffering it does not make it criminal. Just because you don’t like it doesn’t not make it illegal, it is an old idea called the rule of law, you may not be happy with it but without it we have tyranny.

    I would question the behaviour of the firms advising if your figures are correct that their valuation was £3.30 but the advice to clients was £6.10. I can understand the valuation did underestimate to £3.30 but If I were a client of theirs I would be very worried that they on so little evidence would recommend £6.10 as a valuation.

    Stuart:
    “@Psi: ‘I would add even when the market did start to react in a positive direction at close on the 11th of October they were £4.55 after trading had shown positive movements in the price and clear demand.’
    That is not an accurate description of what happened.”

    Well, it is, look it up.

    The shares closed at £4.55 on the 11th of October.

    You can pick as many other bits of data as you like but I quoted one the closing price on the 11th of October, and that is correct.

  • Paul In Twickenham 2nd Apr '14 - 5:35pm

    @Stuart – well let me help you understand what it means to auction a commodity: it means nothing. There is no auction process to be had for a gold brick. One gold brick is exactly the same as another gold brick – you’re not going to get 2 bidders vying for it. The price that will be achieved at the auction is well known – it is the spot price. So what is the point?

    As you observe, Mr. Brown advised the markets that he intended to sell off 400 tonnes of UK gold and the price between that announcement and the first auction fell by 10%. This put it at a 20 year low. So much for the old adage of “buy low and sell high”. Mr. Brown chose to sell at the bottom of a market that he himself had largely caused to bottom out. Why would you do something so irrational? And why on earth would you take a commodity that has for thousands of years been a store in value in good times and bad times and swap it for fiat currency? Go and ask the Bundesbank whether they would follow Mr. Brown’s lead.

    And the process of “auction” itself is strange: the Bank advises the market that on a certain day it will dump 20 tonnes or so of physical gold. What happens? The price falls. How about a nice short position on that? Hey! Free money! The comparison with The Fed’s POMO operations are startling.

    You say that the “investments” made by Mr. Brown have increased in value. How have they compared with the return he would have achieved had he simply held onto the nation’s gold? I think you’ll find that we lost, big time.

    None of this mitigates my view that Dr. Cable was simply wrong to sell Rotal Mail at 330p – or indeed, as John Tilley trenchantly observes, at any price.

  • @Psi
    I said your description was inaccurate because you referred to “movements” in the market. There were no movements; the closing price on day 1 was virtually the same as the opening price. The market had made its mind up about Cable’s valuation before a single share had been traded.

  • @Paul in Twickenham
    At 10:26am you said there was an auction and the price paid was less than the spot price. Now (5:35pm) you say there was no auction and the spot price was paid.

    The facts, as I told you earlier, are that the gold was sold at over 98% of the market price immediately prior to the announcement of the sale. It simply isn’t true that Brown caused the price to plummet then sold all the gold at the lower price.

    “And why on earth would you take a commodity that has for thousands of years been a store in value in good times and bad times and swap it for fiat currency? Go and ask the Bundesbank whether they would follow Mr. Brown’s lead.”

    Why does any central bank sell gold at some times and buy it at others? (Which they all do.) Because they want to hold a balanced mix of reserves. This is perfectly sensible. As for the Bundesbank being oh-so-sensible holding so much gold, you might want to go ask them how much success they’ve had obtaining their reserves from the Fe’d vaults in New York this past couple of years. They asked for 300 tonnes and have only been given 37. .German auditors have questioned whether some of the gold even exists! This has been a long-running farce which you might want to go read about.

    “You say that the ‘investments’ made by Mr. Brown have increased in value. How have they compared with the return he would have achieved had he simply held onto the nation’s gold? I think you’ll find that we lost, big time.”

    Over the past three years, Brown’s investments have massively out-performed gold. That’s the nature of investment – sometimes they go up, sometimes they go down. Claiming wisdom after the event really is the height of absurdity.

  • @ Stuart

    Impressive, doubly wrong.

    The price to subscribers in advance was £3.30, this is the starting point – this is the primary issue. The fact that people paid £3.30 and received shares shows this where the price starts. The Secondary market opens, the first secondary transaction (note, not the first transaction – which was the issue) starts at £4.50.

    £3.30 to £4.50 is a positive movement. I assume you agree that £4.50 is higher than £3.30?

    Even ignoring this 36% positive movement the price opens at £4.50 and closes at £4.55. Back to the basic Maths for you:
    £4.55 is greater than £4.50, it is a whole 5p higher;
    5p is a movement (the prices are not the same);
    That fact that the number is positive which means a positive movement.

    So to recap:
    £3.30 to £4.50 – Positive movement;
    £4.50 to £4.55 – Positive movement.

    If you are still struggling, see the teacher after class.

  • @Psi, I didn’t make patronising remarks about your poor grammar, so even if my maths were bad (which it isn’t) I’d thank you to do the same.

    I’m well aware of primary and secondary markets, but your point is meaningless. One market had its price set arbitrarily by Vince Cable, the other has its price set by supply and demand – a “market” as most people would understand it. You can describe the high opening price as a “market movement” if you like, but that’s just you.

    I’m also aware that £4.55 is higher than £4.50, which is why I said the closing price was “virtually” the same as the opening price. You must have missed that.

  • @Paul in Twickenham

    Sorry, forgot to mention this bit.

    “And why on earth would you take a commodity that has for thousands of years been a store in value in good times and bad times and swap it for fiat currency?”

    This comment simply shows that you don’t understand why the Treasury holds the gold in the first place. It’s not there as a “store of value” – it’s purpose is to form part of a reserve primarily for intervening in foreign currency markets as and when necessary. People talk about the gold as if it’s some sort of nest egg sitting there to make the country feel good when we look at its value. It isn’t.

    You keep criticising Brown for the fact that the gold price went up years after he sold it, but that’s like saying we’re all fools for having not bought the best-performing unit trust over the last five years back in 2009. It’s ridiculous. Gold prices were extremely flat for about 25 years between 1980 and 2005. Please explain why Brown was foolish not to anticipate the unprecedented price rises that took place between 2005 and 2011. And if you could demonstrate that you were saying the same thing at any point PRIOR to 2005, I’d be incredibly impressed. We can all be market experts after the event.

  • @ Stuart
    “I didn’t make patronising remarks about your poor grammar”
    Indeed you didn’t, and I wouldn’t care if you had.

    So what did you claim? That I was wrong, which you appear to be unable to establish. You just get stuck in to semantics, hence my patronising tone.

    If someone attacks my basic facts, that are clearly right, I will assume you don’t want to engage with the meat of the argument.

    I am not interested in what you consider to be the view of “most people” about what a market is. I didn’t say you didn’t understand primary and secondary markets, they are completely irrelevant to the point in hand.

    A market is the place where a buyer and seller exchange. Hence why a “Market Maker” is someone who must buy and sell in a particular product, they “make” the market at the point where they exchange.

    Hence the issuance of the vast majority of shares on Royal Mail is where the Buyers (the initial subscribers, public, banks or whoever) exchange with the seller, the Government. This is the market (yes the primary market but this is irrelevant), the market next exists when the “opening” transaction happens (on the secondary market, but again irrelevant) in this case at £4.50 then the next, and the next, etc. etc.

    It doesn’t matter the medium through which the transaction takes place be it an Exchange, a platform or a dark pool. The market exists where and when the share is brought or sold.

    So to make clear:
    My comment:
    “the market did start to react in a positive direction at close on the 11th of October they were £4.55 after trading had shown positive movements in the price and clear demand”

    What was your claim:
    “That is not an accurate description of what happened”

    Well I refer to the Maths above, that you find patronising.
    Did the price increase from £3.30 to £4.50 at opening – Yes
    Did the price increase from £4.50 to £4.55 between opening and closing – Yes.

    Just accept you are wrong, this isn’t even an important point in the discussion. It is one of the basic facts the evidence is there for all to see. The issue that matters is:
    Could the government have obtained a better price at acceptable risk?
    Is it reasonable to expect them to have done so given their limited access to knowledge?

    I would add:
    If it was the Bank’s advisers giving bad advice, is that due to a closed shop for this sort of transaction, what needs to be done in terms of competition?

  • Passing through 2nd Apr '14 - 8:53pm

    @Psi

    “If you think the crash was the result of criminal activity you are really deluded.”

    Well given that completely contradicts your own previous sentence, I wouldn’t be too quick to chuck out accusations of delusion.

    I said the crash was a combination of incompetence, greed and corruption; it looks like the same toxic mix in the sale of the RM has left the taxpayer out of pocket once again. The first two factors are inarguable, the corruption itself remains unproven but given how the sale has panned out for the various actors involved it certainly strongly suggests a degree of shenanigans have taken place.

    Even if it is true that everything that has happened in the financial sector in the last few years was all above board and legal that doesn’t prove the system follows the rule of law, it simply shows how dysfunctional the system has become that an outright kleptocracy has become normalised. The irony being pre-2010 Cable was one of the loudest voices denouncing the outrageous behaviour endemic within the sector.

    You would have us believe that the government, bankers and financial firms were all doing their very best but just happen to be massively incompetent, it is strange how out of three it is only the government that has lost money in the deal, the apparent “incompetence” of the bankers and financial firms has still seen them make tens of millions in profits in a matter of months (even weeks) for minimal risk, odd that. I wish I had that level of incompetence.

    You say that the clients of the firms advised that 610p was a reasonable valuation should be concerned, Why? That valuation proved curiously accurate, in stark contrast to the woefully wrong valuation they were giving the government, again the apparent incompetence of these firms is remarkably selective in when it strikes and always somehow seems to work out in their favour.

    Still it is only £1.4bn, I’m sure the difference can be made up by making another few thousand disabled people homeless or knocking another quid off unemployment benefit or something. That is what all the” stronger economy, fairer society” stuff is about, isn’t it?

  • @Psi
    You know, it might have helped if you’d used the odd comma or other punctuation in this sentence :-

    “the market did start to react in a positive direction at close on the 11th of October they were £4.55 after trading had shown positive movements in the price and clear demand”

    Because what you are saying now is not how the above sentence reads. Though in fact both your versions of events are still wrong.

    Why should I admit I’m “wrong” about the closing price of £4.55 being “virtually the same” as the opening price of £4.50? I think any reasonable person would say I’m right about that, and I really can’t understand why you’re pursuing it. If you go and look at the live share price for Royal Mail you’ll see it can change by that amount in seconds.

    But where you’ve really got this wrong is your strange claim that the opening price of £4.50 represented a shift in the position of the market from the previous “market price” of £3.30. That is clearly nonsense. What we had here was two completely separate and profoundly different markets – one of them a wholly inefficient monopoly with one person (Vince Cable) acting as price-setter, and the other an efficient open market. These are chalk and cheese – treating one as a continuation of the other makes no sense to anybody but you. You’re also overlooking the whole notion of market *value* (which afterall is what this discussion is supposed to be about), which can only be determined by an open market.

    Any good is worth what people are prepared to pay for it. At 8am on 11th October, people were prepared to pay £4.50 for Royal Mail shares. By definition, Cable had undervalued the shares – this is impossible to deny. Can he plead insufficient information? No way. He knew before the float that it would be massively oversubscribed, and admitted to C4 News that he could have set a higher price. He also had access to numerous expert valuations that told him he’d got it wrong. If you read the news, you’ll find that virtually everybody outside the government now accepts this.

    How should we judge Vince Cable? Well, he said himself that “what matters is where the price eventually settles in three or six months’ time”. If that’s how he wants to be judged, let’s do it. Those six months are virtually* up, and the shares are worth 70% more than what he sold them for. By his own criteria, it’s fair for us to say that Cable literally gave away £1.4bn worth of taxpayers’ assets for nothing.

    * I trust even you will accept that five months and twenty-two days is virtually six months.

  • “How should we judge Vince Cable? Well, he said himself that “what matters is where the price eventually settles in three or six months’ time”. If that’s how he wants to be judged, let’s do it. Those six months are virtually* up, and the shares are worth 70% more than what he sold them for. By his own criteria, it’s fair for us to say that Cable literally gave away £1.4bn worth of taxpayers’ assets for nothing.”

    Much as I am enjoying this interchange, can we agree that this is something which we can all agree on?

  • Stuart

    “You know, it might have helped if you’d used the odd comma or other punctuation in this sentence”

    There you go that should feel better.

    “Why should I admit I’m “wrong” about the closing price of £4.55 being “virtually the same” as the opening price of £4.50?”

    You shouldn’t admit to being “wrong” about claiming to be “virtually the same” because that is not the point I made. You were wrong to say there was no movement.

    “But where you’ve really got this wrong is your strange claim that the opening price of £4.50 represented a shift in the position of the market from the previous “market price” of £3.30. That is clearly nonsense. What we had here was two completely separate and profoundly different markets – one of them a wholly inefficient monopoly with one person (Vince Cable) acting as price-setter, and the other an efficient open market”

    If we follow your logic, then the market of shares is only a specific exchange, as if the likes of dark pools aren’t part of the market. But if you are looking to acquire shares you will buy for where ever. Regulators are expending considerable effort to improve transparency in dark pools to help the functioning of the market. A primary market issue is rather like dark pool transactions large and off exchange.

    “You’re also overlooking the whole notion of market *value* (which afterall is what this discussion is supposed to be about), which can only be determined by an open market.”

    Well you have managed to get to the point there. The value has to be determined by an open market. Which can’t happen until the primary issue.

  • Passing through

    “Well given that completely contradicts your own previous sentence, I wouldn’t be too quick to chuck out accusations of delusion.”

    Read it again, criminal activity taking place does not mean it is endemic or fundamental to the a particular market. If someone sells fake drugs in a market does not mean that all the drugs in that market are fake.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

If you are a member of the party, you can have the Lib Dem Logo appear next to your comments to show this. You must be registered for our forum and can then login on this public site with the same username and password.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

*
*
Please complete the name of this site, Liberal Democrat ...?

Advert



Recent Comments

    No recent comment found.