Gordon Brown will always be mocked by some as the financial klutz who sold the nation’s gold reserves for less than $300 an ounce. With the precious metal now trading at more than $1,600, that decision has cost the best part of £12 billion.
It doesn’t matter that many clever people agreed with his decision back in 1999. It doesn’t matter that one day gold, Keynes’s “barbarous relic”, will again be languishing in the bargain basement.
Mr Brown got it wrong in his own political lifetime. And, crucially, he got it measurably wrong. Few disastrous political decisions can be reduced to a simple cash sum. His auction of 400 tonnes of bullion could, and it was.
It will be the same with George Osborne and his handling of the Government’s stakes in Royal Bank of Scotland and Lloyds Banking Group. The sums are relatively easy. His success or failure will be measured very precisely in billions of pounds of profit — or loss.
So the decision on whether and when to start offloading those shares will depend on how the story can be spun in Westminster. “It is all about the narrative,” one senior investment banker says.
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The charts tell the story so far. The old Labour Government rescued RBS and Lloyds with, respectively, £45.5 billion and £20.3 billion of equity injections. In effect, it bought the shares at 49.9p and 73.6p. Yesterday they were trading at only 28p and 38p.
The loss on paper is £20 billion on RBS and £10 billion on Lloyds, which together is more than twice as much as Mr Brown’s unfortunate bet against gold.
Till recently it was thought unlikely that any minister would risk the embarrassment of selling any shares below breakeven and so crystallising that loss. But attitudes have softened. Stephen Hester, the RBS chief, is pushing for a sale as soon as possible. Robin Budenberg, the chairman of UK Financial Investments, the quango that holds the stakes, indicated to MPs this week that he had no problem with an early sale.
Whatever happens, ministers will want to claim the credit if the price is good and blame the Opposition if it is not. But the charts show how awkward this is for Mr Osborne. At the time of the general election in May 2010, the taxpayer was close to breakeven on both bank stakes. (The Lloyds breakeven price is strictly 73.6p, although it can be argued that after adjusting for fees that Lloyds paid for the benefit of a government guarantee on toxic assets, taxpayers will be in the black at 63.1p.) It is only since the coalition came to power that both banks’ share prices have dived. To sell at a loss now risks accusations that this is more the coalition’s fault than Labour’s.
Of course, Mr Osborne can blame outside factors for some of the slide. The eurozone crisis has hammered bank shares: the exposure to the eurozone of all UK banks, including RBS and Lloyds, is $1.1 trillion, according to Bank of England figures published yesterday. But the sovereign debt mess explains only about half the precipitate fall in the RBS and Lloyds prices, if they are compared with other European bank stocks.
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Half is down to more local factors, including the Vickers reforms and growing worries about ministerial interference. Political pressure over executive bonuses and small business lending has damaged private shareholder sentiment.
Vince Cable’s call, in a leaked letter to the Prime Minister, for RBS to be broken up and a new business-friendly lender created out of it, was just the kind of wheeze that frightens private investors. It was also pretty insensitive because they still own 17 per cent of RBS and, in most cases, paid a great deal more per share than HMG for that dubious privilege.
The privatisation of the two stakes is going to be a long haul. The market won’t buy the Government’s 83 per cent RBS stake — that’s an indigestible 90,645 million shares — in anything less than several tranches over several years. The 41 per cent Lloyds stake is huge, too. So why not at least set the ball rolling with a small early sale, even at a loss?
It would give investors confidence that the Government was serious about returning the banks to the private sector. It would also make ministers think twice about interventionist remarks or policies in future.
It would signal to politicians, the media and the stock market that it was time to move on: the emphasis now would be on trying to get taxpayers their £66 billion back, not on intervening within banks in pursuit of other policy goals, however laudable.
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The risk for Mr Osborne is that an immediate sale would realise a loss on his watch. If the share price were subsequently to rise, he might face criticism that he should have waited. But that is a problem he would love to have, because he would still have lashings of shares to sell at a profit. The longer he leaves it, the more the banking crisis and its costly legacy will be associated with the coalition rather than with Labour.
Just now, investors probably wouldn’t touch bank stocks at any price. But it wouldn’t take much of a pick-up in the economy to improve their sentiment hugely. Don’t bet against Mr Osbourne pressing the button on at least one experimental share sale in the next 18 months — so long as it can be spun to his credit.
Gilts UK government bonds fell again, tracking US Treasuries lower as investors felt sufficiently confident about the prospects for the global economy to buy riskier assets such as shares. The June gilt future touched a contract low and settled 79 ticks down at 111.71. In the cash market, the yield on ten-year gilts rose eight basis points to 2.45 per cent.
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Bet of the day Spread-betters were selling the price of oil a day after Britain and the United States said that they were ready to release reserves. However, crude remains stubbornly dear, with exports from Iran restricted because of its nuclear programme and those from Syria disrupted. Capital Spreads quoted $124.65-$124.70 on a barrel of Brent crude in May.
Tiddler to watch Max Petroleum rose by 7.8 per cent to 13¾p after the Kazakh Government allowed it to develop its Zhana Makat field for a further 25 years and export four fifths of the oil that it produces. Max expects to start selling oil from Zhana Makat next month. The broker Macquarie applauded the “clarity” that the news brought about Max’s main production asset.