“People put their money in. I want them to get their money out,” said David Cameron on Thursday, apparently endorsing the view that the public is more interested in getting its money back from Royal Bank of Scotland than seeing the bank privatised as soon as possible.
The prime minister should have a word with his chancellor. George Osborne seems hell-bent on selling shares in RBS before the election in May 2015 and also appears to want the bank to perform strategic somersaults ahead of the big event. Neither ambition seems likely to allow the state to get the best price.
This week’s ousting of chief executive Stephen Hester may just be the start of the Treasury’s fireworks. If the whispers are correct, Osborne is determined to force RBS to deliver in the next year all the things he thinks should have been done in the past three.
Shrink the investment bank? The Treasury seems to want more of that, pronto. Citizens Bank in the US? The Treasury fails to see why it’s still hanging around in an organisation that it wishes would shower lending on the UK economy. As for Ulster Bank, one intriguing rumour is that the Treasury would like to see it sold quickly.
If these tales are well-founded, it would explain why Hester put up no resistance. The state owns 81% of RBS so the chancellor is the boss. But the game is up for an independently minded chief executive if number 11 wants to dictate strategy in detail and set priorities.
The point is that Hester’s vision for RBS has always had a different emphasis. On the Hester version, most of the hard work and surgery has been done. The pile of bad assets will fall to £40bn by the end of this year; Ulster’s problems are being dealt with soberly; and Citizens is a profitable asset so there’s no point in trying to flog it at less than full value, which is what you’d get these days.
Most pertinently, a Hester-led RBS would dispute the notion that the bank is still so big and complex that it can’t lend to UK householders and businesses effectively. As RBS always points out, the new Prudential Regulatory Authority has deemed the capital position to be strong enough to lend freely. In other words, there’s no need for more strategic fireworks.
So why does the Treasury disagree? Why does it want to interfere? It is frustrated. It is not impressed by RBS’ lending and thinks the bank could do more if it didn’t have so many distractions. Remove the distractions and a shiny new UK-concentrated bank will emerge, runs the thinking.
But it’s not that simple. Banking is a world of trade-offs. For example: if you want to encourage more lending, you may also have to accept looser lending standards, which may make a bank more risky. A remedy might be to shove in more capital to support more lending. But the Treasury has refused point-blank to do that at RBS.
Equally, would you really trust the Treasury to know how small the RBS investment bank needs to be to perform the limited role, on which everyone agrees, of servicing business customers? Of course not. It seems quite possible that Treasury might push too hard and cut off a source of profits.
The heart of the conflict is the Treasury’s pursuit of two contradictory goals. It wants a higher RBS share price to maximise the proceeds to the public purse, but it also wants a simpler bank with its lending taps in the UK set at full.
On Wednesday, when he delivers his Mansion House speech, Osborne may try to argue that a happy land exists in the middle where a slimmer RBS can fire economic revival in the UK and see its virtues and clarity immediately recognised by an improved stock market valuation.
Don’t believe it. There are only two options for RBS. The first is to take full control, maybe tow the “bad” assets into a separate unit, and then direct RBS as a state-backed lender. Alternatively, you allow the board to manage within broadly-agreed parameters, which was the policy set by the last Labour government and which has prevailed until now.
There are pros and cons to both approaches. But both are long-term policies and require the state to be patient in maximising the value of its shares. Osborne’s mad rush to privatise to meet a politically-dictated timetable risks a complete mess — strategic confusion, a weaker board and a lower share price. It doesn’t make business sense.
It was a bit rich of Borealis Infrastructure Management, and the other members of the LongRiver consortium bidding for Severn Trent, to whinge about the lack of “meaningful engagement” from the board of their target. Borealis didn’t once bother to engage with the water company’s customers.
Who would have managed Severn Trent under new ownership? How would surplus investment cash be shared between shareholders and customers? LongRiver didn’t think these questions needed to be answered in advance on the grounds that it was merely a “financial buyer.”
It hasn’t been paying attention. Even the water regulator has noticed that the world has changed and that the customers deserve transparent owners. If you want to own a regulated business with capitive customers, you can’t be invisible these days.
LongRiver’s failed to bag its prey for other reasons, of course. It didn’t offer a price that compelled Severn Trent’s board to talk. Or, rather, Severn’s hard-core shareholders didn’t pressure the directors to roll over. At £23 a share, the story might have been different; but, at £22, LongRiver was a paddle short of a fully-equipped canoe.
Well done, the shareholders. They knew the share price would fall on LongRiver’s departure (it did, to £17.60) but they still chose the security of inflation-proof dividends over quick thrills.
Borealis, an off-shoot of a Canadian pension fund, should rethink its role in life. There’s clearly a place for specialist infrastructure funds since a lot of infrastructure needs to be built. But why do they feel the need to pay top dollar for the privilege of owning outright a quoted water company?
In Severn Trent’s case, Borealis seemed to admire the management and liked the UK regulatory regime. So why not accumulate a decent stake at sub-£18 rather to try to buy the lot at £22? It would be less exciting for the deal-doers, but surely more rewarding for the pensioners at the end of the chain.
It was the way to bet. Paul Tucker was hot-favourite to succeed Sir Mervyn King as governor of the Bank of England but he lost to a younger man. In the circumstances, it was always unlikely that he would hang around to watch Mark Carney perform.
The interesting question is who will suceed Tucker as deputy governor for financial stability. One internal candidate towers above others. He is Andrew Haldane, a brain-box who can talk in plain english.
But Carney and Haldane have form. The new governor didn’t like Haldane’s famous “dog catching a frisbee” speech (it’s all about timing) in which he argued that the new Basel 3 rules on banking are so complex they would fail. Since Carney is head of the Financial Stability Board, which set the rules, he was bound to be irritated.
Are they friends now? We’ll find out. Haldane is the best choice. Carney would be a smaller figure if he blocked the appointment.
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