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The Spiteful Bailout

In an act of extraordinary spite, the Government has revealed its true Socialist heart, with regard to the banking rescue.

 

It seems that the sole bearer of the downside is to be the ordinary shareholder, in a move that has also left the banks with a mountain to climb that is much higher than Everest – maybe Mons Valeris on Mars would be more like it.

 

In denying the banks the right to pay dividends until the preference shares are repaid, the Government, probably deliberately, has:

1)      almost guaranteed that the banks won’t be able to raise the ordinary capital, for what institution or private investor will buy shares that don’t have any annual return, no matter how profitable the organisation?

2)      made it difficult for them to raise the capital in the future, to pay off the preference shares.  Instead, they’ll have to repay them out of retained profits, which will therefore need to return to the significant level they were before.  Is this Government going to be comfortable with profits around the £10billion p.a. level?  Maybe they aren’t bothered, since that embarrassment is likely to occur during the next Conservative term…

 

Gordon Brown has decided to kick ordinary investors when they are down, leaving all other parties with some upside.  The Government will get some return from the preference shares, so it is okay.  Ultimately, it will get its money back from the ordinary shares too.  Bosses will get bonuses – okay, not this year (and they were going to be low anyway), but they will in year 2 onwards, as the profits return.  Those with the highest risk – ordinary shareholders – get nowt until they presumably stump up more money to get rid of the preference shares at a later date.  This shows Gordon in his true light – as an enemy of private investors, who he no doubt doesn’t include in his definition of ‘hard working families’.  What he is forgetting is the sheer number of people who have shares in the affected banks.  Hopefully, they'll remember this when the next election comes.

 

The ordinary shareholders should be able to see some return, annually, for their investment – they have just as big a stake in this as anyone else.  Not at the levels seen previously, admittedly, but they should see something.

 

Not only that, but the stipulation that the participating banks return lending to the levels seen in 2007 surely replicates the problem that we are in now, as it is overindebtedness that caused the crash.  How does that work?

 

One can only hope that this mess of a rescue tides us over to the next election, whereupon the hopefully Conservative administration can alter the terms and restore some sanity.

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Comments: (6)

Gary Wright
Gary Wright 13 October, 2008, 21:36Be the first to give this comment the thumbs up 0 likes

Sorry Roger

As a banking shareholder myself its the risk all shareholders take. The issue is far beyond shareholders I am afraid and we will have to swallow the pill and hope for the best. Perhaps learn by the experience that shares are risky and will go up and down.

Stephen Wilson
Stephen Wilson - Lockstep Consulting - Sydney 13 October, 2008, 22:06Be the first to give this comment the thumbs up 0 likes

It's curious that the terms "ordinary investor" and "ordinary shareholder" are used interchangeably.  But until recently, I suggest that the "ordinary investor" was probably a deposit bank account holder, content with a few percent p.a. ROI. 

Shareholders can actually be seen as extraordinary investors.  They are, of course, part owners in their traded companies.  As such, why should anyone be surprised that they are liable for the losses of their companies as well as their gains?

Cheers,

Stephen.

 

Paul Seagrove
Paul Seagrove - Seagrove Associates - London 14 October, 2008, 08:36Be the first to give this comment the thumbs up 0 likes

Anybody that contributes to a private pension scheme or company money purchase pension scheme is in effect an "ordinary investor", even if they don't hold shares directly.  Often "ordinary" people who seem to take delight in seeing the markets crash and the "fat cats" squeeling forget that large chunks of UK plc are owned by the pension funds that they are relying on for their old age. 

Dear Gordon had already shown his true colours a few years back when he decided to change the tax regime for dividends paid to pension schemes.  I'm afraid he's still of the old school tax and spend, "I know better than you do how to spend your money" Labour party.

A Finextra member
A Finextra member 14 October, 2008, 15:01Be the first to give this comment the thumbs up 0 likes

The main points I was trying to make here is that:

  • only one group of stakeholders has been penalised, and they didn't need to be
  • they are the only group that doesn't bear some guilt for what has gone on (or at least they bear the least guilt)
  • the way the package has been constructed that has left shareholder like this will, in fact, hinder the recovery of these banks, rather than help them.

...none of which is good for UK PLC.

Matt White
Matt White - Finextra - Toronto 15 October, 2008, 15:07Be the first to give this comment the thumbs up 0 likes

I think you should read this from the BBC's Robert Peston.

There is a ban on dividend payments for a year but after that it's down to the Treasury's discretion "irrespective of whether all the prefs had been repaid".

A Finextra member
A Finextra member 15 October, 2008, 17:32Be the first to give this comment the thumbs up 0 likes

I'd rather wait and see whether it's formally announced, but it would be a sensible U-turn on their initial pronouncements.  If it does wortk like that, at least they have probably realised that the ban would hurt far more than what they see as their 'enemy' - the 'rich' shareholders (i.e. that it damages pensions too).

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