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Bank shareholders booking preference seats in the lifeboat

It's understandable that shareholders of banks are upset with the terms of the government lifeboat. The payment of dividends to shareholders is a prime reason for investment and in many cases the dividends form a vital part of pension's provisions. However, the tax payer is the innocent party in the financial crisis and the debacle of the banks ability to manage their business.

Arguably the investors of banks have been taking large dividend payouts for years built on almost criminal activities. Would shareholders payback dividends paid on a business that has brought the finance industry to the brink of ruin and which will now cost the tax payer enormous sums over many years. What about all charitable projects that are now going to be hit hard as people suffer a big hole in their spending power?

It is unfortunate that the investor and the tax payer have to have an unequal interest but the tax payer's money should repaid as quickly as possible.

The government has to treat the tax payer as a top priority. No tax payer likes this situation any more than the investor and I am certain that even the government finds this disaster and the terms which are necessary to be levied, tough. But this catastrophe demands drastic and punitive measures and there will be much suffering by all and the squealing of some shareholders is a very unattractive when we are all going to suffer. It looks to me a bit like self preservation such as those who fought for preferential spaces on the Titanic lifeboats.

Investing in equity is a risky business and when shareholders make that decision they have to understand that there is no god given right to dividends or capital returns. Market volatility goes up and down, nowadays there can be huge swings several times during an hour and shareholders are those most at risk, when times are good they do well but when times are bad they suffer.

If shareholders enjoy the good times of increased share prices and high dividends they must accept that the opposite can happen and not expect the rescuers (eg the tax payer) of their bank to offer preferential dividends on top of saving their investment from disappearing altogether. Then not only would they have no dividend they would have lost their investment also.

If this government lifeboat is rejected by the shareholders, it's unlikely to be replaced by a better option for the banks and we could well see some very major banking institutions disappear. Is winning the battle worth losing the war?


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Gary Wright

Gary Wright


BISS Research

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19 Sep 2007



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