Another year, another set of disappointing news for shareholders of the Royal Bank of Scotland.
The bank – which following its bailout during the 2008 crash is now 73 per cent-owned by the UK taxpayer – reported a £7bn loss for 2016, a negative bottom line for the ninth-consecutive year. After such an extended period of consistently underwhelming results, any investor might be questioning the wisdom of holding on to a stake in RBS, which helps to explain the sluggish performance of its share price over the past 12 months.
Not the British government. Former chancellor George Osborne shelved plans to begin offloading the government’s shares in June of last year, citing uncertainty related to the Brexit referendum. In October, it was announced that the state’s ownership stake would be written down to £14.8bn from £21.5bn to reflect the present valuation of the firm. And last week, Osborne’s successor Philip Hammond confirmed that he intends to hold on to the RBS stake into the next decade.
The government claims to be acting in the best interests of taxpayers by patiently waiting for RBS’s prospects to brighten. But this is fallacious reasoning, and it must be called out as such.
First, the government did not “invest” £45bn in RBS in 2008 – it spent that money as part of a £500bn intervention to prop up the financial system. At the time, it was believed that such actions were necessary to restore confidence in British banks and prevent a more profound economic crisis. Unless the taxpayer stood between RBS and insolvency, so the argument ran, the losses to the non-financial sectors of the economy would be all the greater.
Regardless of the merit of that contention, the rescue must not be evaluated on the basis of whether it got value for money for the taxpayer. The government spent money to stabilise the financial system, and stabilised it has from the turmoil of Autumn 2008. In economic parlance, the RBS bailout is a “sunk cost” which should not figure in the Treasury’s calculations of whether or not to sell the stock now.
Second, it is not like holding on to the stake has delivered better returns for taxpayers. Consider this: if the government had gradually sold off its stake over the first six months of 2016 – perhaps anticipating increased volatility following the EU referendum – and had invested the proceeds in a diversified portfolio of FTSE 100 shares, it would be sitting on a return – exclusive of dividends – of around 18.5 per cent, compared to the negative 18.8 per cent that RBS shares have returned over the period. Of course, it is not the business of government to invest in securities, but the comparison highlights the opportunity cost of remaining a shareholder in RBS. It is costing us dear.
That one should hold on to loss-making investments in the hope of a future turnaround in their fortunes is a common investing fallacy. Star psychologists Daniel Kahneman and Amos Tversky, among others, have shown time and again that loss-averse individuals would rather sit on their bad bets than sell them, realise the losses and invest what remains in more promising ventures. Yet this is exactly what the Treasury is engaging in when it says that this is a bad time to sell its stake in RBS. It is ironic that a government which is increasingly concerned with correcting the alleged behavioural biases of consumers – via such policies as auto-enrolment and sugar taxes – would itself fall victim to those very human biases.
It would be funny if we were not talking about serious amounts of money that could be better spent elsewhere. To put it in perspective, £14.8bn is equivalent to the current budget deficit (£15.2bn) as estimated by the Office for Budget Responsibility. It is £2bn more than what this body expects HMRC to raise from stamp duty in the 2016-17 fiscal year. Much could be done with the funds – such as putting our public finances on firmer footing, or reducing the tax burden – if they were released.
It is not only taxpayers who would benefit from the sale of their stake in RBS, but the bank’s shareholders, employees and customers arguably would too. The bank is clearly in dire need of new and activist ownership which will re-define its business model and re-focus its activity. It is time for the government to let go of RBS.