Red herrings, known for their pungent odour, are said to have been used by escaping prisoners as a way of throwing the pursuing bloodhounds off their scent. Who knows if it ever worked. But if your nose tells you that there’s something fishy about the government’s decision to start selling off its shares in the Royal Bank of Scotland at below the price it paid for them, ignore it. You’re following the smelly herring, not the fleeing convict.
Critics of the announcement point out that the price of the shares in the first chunk to be sold, at 330p each, is significantly lower than the figure of about 500p which the Treasury paid for them at the height of the financial crisis. On the face of it, this may look like a bad deal for the taxpayer, but it’s a comparison which reveals little of significance.
The RBS share price has barely breached the 400p mark in the last four years, and has been remarkably stable around its current level since 2013. Yes, it might have gone up slightly in the next few months, allowing the government to eke a bit more out of each share, but it seems unlikely that the price will be back at 500p in the foreseeable future.
The losses have already been made, and holding onto the shares won’t change that. With a share price that wasn’t really going anywhere, and while the bank was not paying a dividend, RBS looked like a rather unproductive asset. Neither the taxpayer, nor the bank, was benefiting from public ownership.
In any case, the sale announced this week will only reduce the taxpayer’s stake in the bank from around 78 per cent to 73 per cent. There is no suggestion that the chancellor intends to flood the market with the shares, and every reason to think he will reduce the stake gradually, as has been the case with Lloyds.
Indeed, if RBS’s share price does go up, as the bank rebuilds itself after the trials of the last few years, then there are grounds to be optimistic about the government getting a higher average price as it sells off more shares over the coming years.
The exact timing and price for the share sale may be the subject of plenty of political bluster at the moment, but there is actually remarkably little disagreement over the central idea that banks will ultimately perform better in the private sector. Alistair Darling, the architect of the bank rescue plan, said in January 2009 that it was his intention to sell off the shares “in time, when conditions improve” as we got though the financial crisis.
That was six years ago. The economy has now passed its pre-crisis peak; unemployment and inflation are low. Conditions have improved to the point where the priority must be to get the bank out of the government’s hands and back to the market. This is one situation where it’s not a good idea to trust your nose, no matter how distracting the smell.