The FT reports that the Tories are planning a “Tell Sid”-style privatization of bank shares. This is a bad idea, for four reasons.
1. It forecloses the possibility of some intelligent banking reforms. Should big banks be split so that they are no longer too big to fail? If they must stay intact, shouldn’t they become dull utilities that take only minimal risks? There’s a case for either. But these possibilities would make the banks less attractive to potential shareholders.
There’s a trade-off between reforming the banks and maximizing the revenue we’d get from privatizing them.
2. It was share ownership of banks that got us into this mess. The failure of banks was a failure of shareholders to exercise control. The Tories want us to return to an ownership model that has demonstrably failed.
The FT says they want to give “[voters] a say as shareholders over how they are run.” But would they exercise this say responsibly? Would they rein in banks’ risk-taking or would they instead cheer on their recklessness? And even if they do urge caution, will chief execs - many of whom regard retail shareholders as a nuisance - take notice?
3. The move wouldn’t improve public finances. If these were measured properly, privatization at the right price would merely exchange the net present value of banks’ future cashflows for a cash sum. The government’s overall balance sheet wouldn’t change. And if, as the FT suggests, the shares were “offered at a sufficiently attractive price” - that is, under-priced - the public finances would worsen.
Privatization only makes sense in terms of the public finances if you make a fetish of government borrowing, and ignore the asset side of the balance sheet.
4. Mass privatizations do not create a shareholding democracy. We needn’t look at Russian experience to tell us this. Thatcher’s privatizations had the same non-effect. In 1981 - before mass sell-offs began - individual shareholders owned (directly) 28.2% of UK shares. In 1990 - when Thatcher left office - they held just 20.3%. Sid sold.
Let’s be clear, then. What Osborne is contemplating here is simply the expropriation of state assets for the gain of his favoured client base.
We should not, though, blame him for this any more than we blame bears for shitting in the woods. It’s the nature of the beast; it‘s what politicians do.
What is deplorable, though, is that the government has given him the opportunity to do this, by not using nationalization as a stepping stone to more radical reform of the banks.
1. It forecloses the possibility of some intelligent banking reforms. Should big banks be split so that they are no longer too big to fail? If they must stay intact, shouldn’t they become dull utilities that take only minimal risks? There’s a case for either. But these possibilities would make the banks less attractive to potential shareholders.
There’s a trade-off between reforming the banks and maximizing the revenue we’d get from privatizing them.
2. It was share ownership of banks that got us into this mess. The failure of banks was a failure of shareholders to exercise control. The Tories want us to return to an ownership model that has demonstrably failed.
The FT says they want to give “[voters] a say as shareholders over how they are run.” But would they exercise this say responsibly? Would they rein in banks’ risk-taking or would they instead cheer on their recklessness? And even if they do urge caution, will chief execs - many of whom regard retail shareholders as a nuisance - take notice?
3. The move wouldn’t improve public finances. If these were measured properly, privatization at the right price would merely exchange the net present value of banks’ future cashflows for a cash sum. The government’s overall balance sheet wouldn’t change. And if, as the FT suggests, the shares were “offered at a sufficiently attractive price” - that is, under-priced - the public finances would worsen.
Privatization only makes sense in terms of the public finances if you make a fetish of government borrowing, and ignore the asset side of the balance sheet.
4. Mass privatizations do not create a shareholding democracy. We needn’t look at Russian experience to tell us this. Thatcher’s privatizations had the same non-effect. In 1981 - before mass sell-offs began - individual shareholders owned (directly) 28.2% of UK shares. In 1990 - when Thatcher left office - they held just 20.3%. Sid sold.
Let’s be clear, then. What Osborne is contemplating here is simply the expropriation of state assets for the gain of his favoured client base.
We should not, though, blame him for this any more than we blame bears for shitting in the woods. It’s the nature of the beast; it‘s what politicians do.
What is deplorable, though, is that the government has given him the opportunity to do this, by not using nationalization as a stepping stone to more radical reform of the banks.
It was share ownership of banks that got us into this mess.
Correction, Chris and that is an oversimplification you're well aware of. The problem came out of the way the CBs and the major players who control them played the game and decided that the time was ripe for the next killing to be made.
Posted by: jameshigham | September 14, 2009 at 02:41 PM
"Privatization only makes sense in terms of the public finances if you make a fetish of government borrowing, and ignore the asset side of the balance sheet."
...which, regrettably, politicians, the press and even the bloody ratings agencies appear to be doing based on their daft commentaries on UK debt.
Posted by: john b | September 14, 2009 at 02:58 PM
"What Osborne is contemplating here is simply the expropriation of state assets for the gain of his favoured client base."
Sid is Osborne's favorite client base?
Posted by: ad | September 14, 2009 at 06:33 PM
5. Most 'Sids' sold, but the market will remember the people who were handed shares as a result of the privatisations of the Building Societies. Many of them did not sell in time. Northern Rock was only an extreme example. With these recent experiences of small investors being very unhappy after taking bank shares, this proposallooks to be another of George Osborne's bright ideas that are market and politically silly; as well as costly for the taxpayer.
@ james higham
Wasn't a good part of any killing at the eventual expense of the shareholders?
@ ad
Sid was intended to be Mrs. Thatcher's favoured client base. In the privatisations as executed, the bulk of the financial favours were concentrated in the City of London. Presumably Osborne has learnt from experience, and understands where the money would go.
Posted by: Diversity | September 14, 2009 at 07:18 PM
I'm intrigued by the form of words "give voters as shareholders a say over the way that banks are run". Voters and shareholders are, in my eyes, two different groups. Voters have less influence if the shars are sold to another group, shareholders.
Posted by: Guano | September 14, 2009 at 10:50 PM
I am probably not experienced enough to properly analyze the positives and negatives of the bank privatization. But I will say that I would like to have seen the shareholders of the insolvent banks wiped out, and the creditors having to take haircuts based on the current market values of the toxic assets on their balance sheets (ideally it should have been based on market values back in late 08 before any taxpayer money was used to bail them out).
But given that central banks and govt's all over the world have decided to create the largest easy monetary policy of all time, it has become a race to devalue currencies. Fortunately, for investors who disagree with the govts' plans, they can invest in those areas that should continue to benefit from all the money printing. One asset class that I personally like is gold. The other day I read some insightful articles at http://www.goldalert.com/gold_chart.php that discuss the Fed's efforts to fight deflation and the potential impact on the global economy, fiat currencies, and the gold price in general. There are many important consequences of such a dramatic shift in policy that are very important for investors of all types to remain cognizant of.
Posted by: jturner | September 18, 2009 at 05:09 PM
And a lot of it reflects a switch from bank deposits to securities; foreigners “other investments” in the UK, http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.
http://www.watchgy.com/tag-heuer-c-24.html
http://www.watchgy.com/rolex-submariner-c-8.html
Posted by: rolex day date | December 27, 2009 at 04:45 PM