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How to stop bank nationalisation

• Robert Peston
• 14 Oct 08, 06:06 PM

As I said this morning, there's a chance the state won't end up owning a whacking 60 per cent of Royal Bank of Scotland and 40 per cent of the superbank formed by the merger of Lloyds TSB and HBOS.

But if the Treasury wants to minimise the probability that it will own the maximum number of shares in these two banks, it may have to make a fairly important change to its banks rescue scheme.

In the case of Royal Bank, for example, its market price has been hovering around the subscription price for the new shares.

If the market price were to settle higher in six weeks, when its make-your-mind-up time for investors, lots of those new shares might end up being bought by those investors, leaving taxpayers with a relatively modest stake.

But to woo private-sector shareholders, the Treasury may have to concede that the banks were right in their last minute negotiations that there is a flaw in the rescue scheme - and it's rarely easy for Government to put its hands up and say "we were wrong".

The Treasury may have to abandon its stipulation that no dividends can be paid to shareholders in RBS, HBOS and Lloyds until these banks have repaid preference shares which they are selling to the state.

The prohibition on dividend payments has spooked our big investing institutions.

It's wreaking havoc in particular on Lloyds TSB's share price, because its takeover of HBOS would give it a vast burden of preference shares to pay off.

Which may sound technical and dull, but a good deal is at stake.

Lloyds TSB's shareholders could refuse to approve Lloyds' takeover of HBOS, because of their annoyance that the deal would make them wait much longer for dividends to be resumed than would happen if Lloyds were to stay independent.

So if the Government doesn't show flexibility on dividend payments, it'll probably end up owning much more of the banks than is necessary and the takeover of HBOS by Lloyds could implode.

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RBS to stay private?

• Robert Peston
• 14 Oct 08, 10:40 AM

Whisper it softly, but there's just a chance that Royal Bank of Scotland won't be nationalised after all.

Its shares have been lifted this morning on the wave of global stock-market euphoria to around 70p, a margin above the 65.5p price being paid by the government.

At that level, it would be rational for RBS's existing shareholders to exercise their right to buy the new shares and "deprive" taxpayers of this investment.

After all, if apples - or RBS shares - can be bought from the orchard at 65.5p when the market price is 70p, you'd be a fool not to buy in the orchard, even if you plan to dump them almost immediately in the market rather than hold them.

Which means that if RBS's share price were to stay at this level or rise, the state's stake in RBS might turn out to be far less than the 60% that taxpayers would own if we bought all the new stock.

The big imponderable is how much spare cash is available to our battered pension funds and whether some cash-rich overseas investors might be tempted to buy - because the 拢15bn that RBS needs is a lot of wonga.

But the important point is that, for all its hideous booboos, RBS is a fearsome moneymaking machine. And its new chief executive, Stephen Hester, has a formidable record of sorting out complex financial problems (which he demonstrated from his time at Abbey).

So private-sector investors might just conclude that this is too attractive an opportunity to leave for taxpayers.

Whatever happens, RBS will still be lumbered with paying off 拢5bn of preference shares which we as taxpayers are buying willy nilly.

Hester didn't want these but he's lumbered with paying the 12% coupon and ceasing dividend payments on all ordinary shares till the 拢5bn has been repaid.

That said, it's all looking a lot less bleak than Hester might have feared yesterday.

Hester may find himself running a bank that can claim with conviction that it's still largely in the private sector.

And that's all the more humiliating for HBOS, whose shares have also risen this morning but remain firmly below the subscription price being paid by HM Treasury.

What is it about HBOS, owner of the Halifax, that makes it less attractive to investors than RBS?

It's our viciously deflating residential housing market, to which the fortunes of this market-leading mortgage lender are inextricably linked.

Probably almost nothing can prevent us as taxpayers becoming the full or partial owners of the three mortgage lenders most closely associated with the bubble years in UK residential housing.

Soon we'll have the full set of Northern Rock, Bradford & Bingley and HBOS - which will be seen by many as confirmation that the near-catastrophic failure of macro-economic management by Bank of England and Treasury over the past few years was to allow house prices to rise and rise and rise and rise and rise.

UPDATE, 04:00 PM: The wobble in Lloyds TSB's share price, down again today in a rising market, will be giving the jitters to the bank's board.

Its shareholders don't seem to like the Treasury's insistence that no dividends can be paid till all the prefs sold to the state are paid off.

The merged Lloyds/HBOS would have to pay off some 拢4bn of the prefs before it's dividends as usual for the group's ordinary shareholders. And that could perhaps take a couple of years.

But if Lloyds weren't to buy HBOS, it would have only 拢1bn of prefs to pay off.

So some shareholders may well be wondering whether Lloyds should press ahead with the takeover.

If the prime minister wants the takeover to go ahead - and he seems very keen on it - he may well have to instruct the Treasury to waive the requirement to cease all dividend payments to holders of the ordinary shares.

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World back from brink

• Robert Peston
• 14 Oct 08, 07:26 AM

Argument will rage for weeks and months about the extent to which Gordon Brown was responsible for the economic mess we're in.

But it would be churlish to fail to note that the bank rescue plans announced by eurozone governments yesterday and expected to be announced in the US later today are variations on the template launched a week ago by the British government.

HM Treasury has led. Other governments have initially expressed severe reservations about the UK's prescription of injecting new capital into banks and guaranteeing lending between banks. But, finally, those governments have followed the British lead.

If HM Treasury were the corporate finance department of one of those battered investment banks that are now being rescued, it would be collecting a very fat fee.

And if you believe in the trickle-down effect on public opinion, what's striking is that business leaders, who only a fortnight ago had more-or-less given up on G Brown as the political equivalent of an over-leveraged business with the bailiffs at the door, are now buying shares in him again.

But in the scale of what's gone wrong with the global economy, that's all relatively trivial.

Far more important is that bankers and investors have become a bit more confident that the governments of the major Western economies are back in control of events, rather than running around putting out small peripheral fires while the main inferno raged.

Yesterday France, Germany, Spain, the Netherlands and Austria committed around 拢1,000bn to guaranteeing loans between banks and injecting new capital into them.

Today, the US Treasury Secretary, Hank Paulson, is expected to confirm that he's investing $250bn in US banks, including $25bn each in the three biggest and proudest, Citigroup, JP Morgan and the merged Bank of America/Merrill Lynch.

Even Goldman Sachs - once the bank which defined swaggering self-confidence - is being obliged, it seems, to take $10bn of US taxpayers' money.

And, apparently, all this money comes with the obligation to restrict executive compensation - though there's scant detail as yet about quite how much more than minimum wage the bankers will be earning.

One important wrinkle is that the capital injection in the US will be in the form of preferred stock with attached warrants to buy ordinary shares (common stock). It's similar to how the world's greatest investor, Warren Buffett, took his recent stake in Goldman.

The point of doing it this way is that existing shareholders will be diluted far less than will be the case at RBS and HBOS after the UK government completes its acquisition of controlling stakes in them.

But there's a risk for US banks and their shareholders in the Paulson plan - which is that recipients of Paulson's capital injection will be under greater financial pressure, to pay back the dividends on the preferred stock and possibly also redeem it, before a penny goes to existing shareholders.

What's happening in the US is less obviously nationalisation than what has happened in the UK.

But it still gives the US government vastly more influence over the behaviour of US banks than it's had for decades.

And the overall scale of the plan is, like that of the UK and the eurozone, without any meaningful precedent.

The US package includes the extension of deposit protection to businesses, to deter them from pulling out their funds to the detriment of individual banks perceived to be weak.

And the US authorities will provide a taxpayer guarantee to issues of new debt by banks, which is very much like what the British Treasury has done.

For me, the greatest hope that we're back from the brink of a financial-markets meltdown that could turn recession into depression comes from this new global action by governments to establish taxpayers as the formal guarantors of all lending between banks and big financial institutions.

But we should be under no illusion that these ambitious rescue plans are cost-free.

They heap on to the public sectors of the US, the eurozone and the UK undreamed-of levels of debt and contingent liabilities.

That will probably dampen growth for years in the whole of the developed West, as governments may feel financially constrained from spending and investing on other services and projects, and the banks themselves are likely to devote all their spare resources to repaying their debts to taxpayers, rather than financing proper wealth creators.

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