An important report in the The Times this morning shows the way in which even details of the proposed financial package for the banks are being shaped to protect shareholders but unloading risk on tax payers.
The Times notes: 'bank shareholders were cheering last night as a side deal to give the Government a chance to share in the benefit of the £50 billion bailout appeared to have been quietly dropped. The Government will not now receive warrants – options giving it the right to buy bank shares at a low, preagreed price – as part of the plan, a measure that would have diluted ordinary shareholdings....
'One banking source confirmed that warrants or some other kind of “equity kicker” had been on the table at one point in secret negotiations that began ten days ago. However, that aspect of the arrangement had disappeared by Tuesday night and the deal was watered down so that banks were obliged to sell the Government only plain-vanilla preference shares or permanent interest-bearing shares.
'Although the Treasury insisted last night that the preference shares in some cases could be convertible into common stock, allowing the Government to share in any recovery, at least one bank chief executive was adamant that no such feature had been discussed. Another senior banker said that it was still not clear...
'Now, if the bailout succeeds, the banks will be obliged to pay only a fixed rate of interest of perhaps 10 per cent on the preference shares, according to one senior banker.
'It was not clear whether the Government would receive a premium payment from the banks when they were in a position to redeem the preference shares. The Treasury announcement left ministers with some opportunity to tighten the details.'
It is not often that Socialist Economic Bulletin thinks the TaxPayer's Alliance speaks sense but in this case the same report in The Times notes it judged the situation accurately: ''The TaxPayers’ Alliance denounced the structure of the bailout, saying: “We are concerned that, if things go well and there is a profit, it stays with the banks. If things go badly, it falls on taxpayers’ shoulders.”'
The policy stance that flows from that is not to demand that the public sector shares in any 'upside' - there may well not be any upside at all in the unfolding of the current financial crisis. It is that the taxpayer should not take shares in the banks.
The Times report also shows sophistical arguments being used by large bank shareholders to justify public subsidy. It notes:
''Keith Skeoch, the chief executive of Standard Life Investments, which owns billions of pounds of bank shares, was pleased that ordinary shareholders did not appear to have been disadvantaged by any dilutive arrangement. He said: “We welcome particularly the fact that the announced package shows a willingness by the authorities to work with market mechanisms in a manner that appears to respect the capital structure.”'
The financial bail out package is not working 'with market mechanisms'. If market mechanisms were left to operate there would be no such buying of shares by the taxpayer. You or I might decide, or not, to buy bank shares. That would be a market operation. But yesterday's package is forcing taxpayers to buy bank shares, which is not a market mechanism.