Tax Payers lose £900M as investors fear political interference with RBS

[T 42]

The taxpayer has lost almost £900million on the value of its shares in Royal Bank of Scotland and Lloyds Banking Group amid fears that the backlash against bonuses would damage their performance.

 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9050671/Taxpayers-lose-900m-as-RBS-shares-fall.html

 

Stephen Hester, the chief executive of the Royal Bank of Scotland, gave up his bonus after sustained political pressure that culminated in Labour calling for a parliamentary vote.

 

The share price of RBS dropped by 3.5 per cent yesterday, wiping £580 million off its value. Lloyds, where the chief executive has also turned down his bonus, saw its share price fall by 4.1 per cent, stripping £921 million off its value.

 

With the taxpayer owning 83 per cent of RBS and 41 per cent of Lloyds, that equates to a fall of almost £900 million in holdings — equivalent to £36 for every British family.

 

It makes the prospect of recouping the £45 billion used to prop up the banks in 2008 even more distant.

 

 

But on the plus side we've saved nearly a £million by recouping his bonus.

[Rupert_Baehr]

You only lose money on shares if and when you sell them at a loss.

 

The taxpayer hasn't sold those shares yet, so he hasn't lost any money on them.

[T 42]

You only lose money on shares if and when you sell them at a loss.

 

The taxpayer hasn't sold those shares yet, so he hasn't lost any money on them.

 

That's the point though. The government needs to sell the shares to recoup its losses. The market has reacted to political interference. The feeling is that the investment arm could disintegrate due to staff moving to other institutions. The share price has fallen another 1.5% this morning knocking another few hundred million off Gordon's investment.

[ampersand]

but the Government doesn't need to sell the shares today - I know you're trying to make a political point rather than an economic one, and it is unlikely the Government will recoup it's full investment in the banks, but there is a more significant economic calculation than a simple "for how much did we buy them & for how much did we sell them?"

[T 42]

but the Government doesn't need to sell the shares today - I know you're trying to make a political point rather than an economic one, and it is unlikely the Government will recoup it's full investment in the banks, but there is a more significant economic calculation than a simple "for how much did we buy them & for how much did we sell them?"

 

The government needs to sell them sometime. And all the time it has billions tied up in the bank it can't get a return on it elsewhere or use that money to prop up the economy. A low share price also hits the banks ability to raise capital or attract key staff.

 

From the Wall Street Journal.

 

The British political establishment, by piling pressure on Mr.Hester to waive the bonus, has created a damaging precedent. It has underscored the degree to which RBS is not just a largely state-owned but effectively a state-controlled bank.

 

The perception now is that regardless of how much good work Stephen Hester and other executives do in chipping away at the bank’s balance sheet, reducing risk and generally getting RBS’s house in order, they can be subject to sudden and arbitrary interventions by politicians.

 

Not only is this bad for investor confidence in RBS, it is inconsistent with London’s broader reputation as a free market.

 

As Gary Greenwood, an analyst with Shore Capital, puts it:

 

“From my perspective, it’s difficult to recommend buying RBS stock because the government’s actions have effectively limited the potential upside.”

 

With a kneejerk response to the legitimate concerns of voters and politicians, RBS has undermined confidence in its management, leaving investors with an inadequate fudge. It should have held its nerve and done a better job of explaining to the government, the opposition and voters why it needs people like Mr. Hester to restore the value of their investment.

[L00b]

The British political establishment, by piling pressure on Mr.Hester to waive the bonus, has created a damaging precedent. It has underscored the degree to which RBS is not just a largely state-owned but effectively a state-controlled bank.

For a traded title, that's the crucial bit.

 

And guess what...while the electorate may have whinged about a £1m bonus, and the politicians caved in to same for a quick good soundbite, this 'saved' £1m is likely to cost the electorate a fair number of billions over time (how much do you think traders advising against an RBS buy, in the UK and further afield, affect a share price in the short and medium term?)

 

The politicians may dictate to majority state-owned bankers, but can't dictate to the trading floors, particularly elsewhere on the planet.

 

As clear a case of not seeing the forest for the tree, or cutting one's nose to spite one's face, as I've ever seen.

[ampersand]

if the Government's investment in RBS and Lloyds didn't help to "prop up the economy" - what do you think it did?

 

and what do you think their attempts to sell so many shares at such a low point in the market will do to the economy (and the Banks' share prices)?

 

I don't, however, disagree with your comments regarding the political interference affecting the ability of the bankers to do their jobs effectively, and can see why it might put off some bankers from wanting to work there, but they are totally separate issues to the Government's holdings of shares

[T 42]

For a traded title, that's the crucial bit.

 

And guess what...while the electorate may have whinged about a £1m bonus, and the politicians caved in to same for a quick good soundbite, this 'saved' £1m is likely to cost the electorate a fair number of billions over time (how much do you think traders advising against an RBS buy, in the UK and further afield, affect a share price in the short and medium term?). The politicians may dictate to majority state-owned bankers, but can't dictate to the trading floors, particularly elsewhere on the planet.

 

As clear a case of not seeing the forest for the tree, or cutting one's nose to spite one's face, as I've ever seen.

 

Another link to Wall Street Journal

 

 

http://blogs.wsj.com/source/2012/01/27/u-k-taxpayer-needs-hester-and-must-pay-up/

 

The government’s role in Royal Bank of Scotland was never going to be an easy one.

 

Here’s the problem: how to satisfy the taxpayer that it was getting value for its 83% stake in the bank, while ensuring the business had sufficiently skilled and incentivized managers to return it to profitability.

 

But the public–and many politicians–are still at a loss to understand why its CEO Stephen Hester should be allowed to get away with a massive bonus package: £963,000 on top of £1.2 million basic pay. Especially when performance remains lackluster to say the least.

 

The unfortunate truth is that the government needs Mr. Hester. He was brought in to turn around a bank that was on the brink of collapse and posted a record £24 billion loss in 2008.

 

Mr. Hester’s pay would be based on how well he did the job and by several accounts he has done well.

 

Gary Greenwood, a banking analyst at Shore Capital, said:

 

“He has shrunk the balance sheet, improved capital funding and increased liquidity.”

 

Specifically RBS has already significantly slimmed down its global banking and markets balance sheet to£399 billion, from £874 billion at the end of 2007, and it has just launched a further and drastic restructuring plan to prune back large parts of its investment banking operation, which will see the unit shed a further 3,500 jobs over a three-year period.

 

To be sure, shares have lost 50% of their value over 2011, the year for which Mr. Hester is being awarded just under £1 million as a bonus.

 

On the other hand, the third quarter of 2011 saw the bank post a net profit of £1.2 billion–it’s first profit since before the bailout.

 

Mr. Greenwood added:

 

“Hester has effectively reduced the risk of the taxpayer having to put more money into the bank.

 

Ultimately bankers’ pay, like everyone else’s, is driven by market forces and if Mr. Hester feels he isn’t being rewarded for what many, including himself, believe is a good job, he is likely to up sticks and leave with his team for pastures new, Mr. Greenwood added.

[L00b]

if the Government's investment in RBS and Lloyds didn't help to "prop up the economy" - what do you think it did?

 

and what do you think their attempts to sell so many shares at such a low point in the market will do to the economy (and the Banks' share prices)?

These points are essentially moot, as it is well understood that the Gvt isn't about to sell out its stake anytime soon.

 

But the bonus/running/etc. "meddling" has probably kicked the projected/proposed/hypothetical sale a few months, or even years, further away: it's not so easy to recapitalise and operate as Hester has done, once you have lost a good portion of the Stock Exchanges' backing.

I don't, however, disagree with your comments regarding the political interference affecting the ability of the bankers to do their jobs effectively, and can see why it might put off some bankers from wanting to work there, but they are totally separate issues to the Government's holdings of shares

They are not. The Gvt is no different to a private shareholder, insofar as the question of "how well is the bank doing?" is concerned: the faster the banks are turned around and appreciate in real/stock market-perceived value, the earlier the Gvt can sell the shares at break-even or a profit (or hold and grow the potential profit).

 

Having good management in place -and keeping it- is crucial to this. As crucial as anything the Gvt (or a private majority shareholder) may do, which undermines the repute/attraction/advisability/value of the share in the market place.

 

In that context, traders generally abbhor any notion of state control, because company decisions are likely to be made as much for political gain (per the bonus thing) as in the interest of shareholders (keep Hester there and happy), which rarely coincide.

 

Personally, I hope he does leave with his team, and leaves the entire political establishment ears-deep in the brown stuff.

[Riannon]

if the Government's investment in RBS and Lloyds didn't help to "prop up the economy" - what do you think it did?

 

and what do you think their attempts to sell so many shares at such a low point in the market will do to the economy (and the Banks' share prices)?

 

I don't, however, disagree with your comments regarding the political interference affecting the ability of the bankers to do their jobs effectively, and can see why it might put off some bankers from wanting to work there, but they are totally separate issues to the Government's holdings of shares

 

Im not sure that anyone was planning a share sell off anytime soon. The bank has quietly been disposing of its assetts and all of a sudden that job has become an awful lot harder.

I would just ask one simple question. "Is the public any better off today for saving the 1p each that they would have contributed to Heston's bonus?"