Monday, 17 November 2008

Mounting dangers to the taxpayer of the government proposal to buy shares in RBS, HBOS, and Lloyd's TSB

Socialist Economic Bulletin (SEB) has repeatedly warned of the danger of very serious losses to the UK taxpayer if the government proceeds with its proposal to buy shares in Royal Bank of Scotland (RBS), HBOS, and Lloyds TSB. The government agreed to purchase these at a price per share of, respectively, 65.5p, 113.6p and 173.3p. It was claimed these were being bought 'at the bottom of the market'. SEB warned that, first, it was not an acceptable risk to the taxpayer for the government to become involved in attempting to judge the price of shares, and second any view that these shares had reached their bottom was likely to be seriously flawed as the government was underestimating the historical dangers of very prolonged depression of share prices. Other commentators have since strongly made the same point.
This danger is graphically revealed by the movement of these bank share prices under the impact of the further deepening of the international financial crisis. At noon on 17 November the prices of RBS, HBOS, and Lloyds TSB were respectively 49.1p, 77.0p and 149.6p.
This means that Lloyds TSB shares were 14 per cent below the price the government proposed to purchase them at, RBS shares were 25 per cent below, and HBOS shares were 32 per cent below.
This shows, first, that it was false to say that the proposed purchase prices were 'at the bottom of the market' and second that is is quite wrong for the government to be using taxpayers money to purchase shares at prices that are far above the market level. Purchase of shares at far above market prices is to subsidise shareholders while taxpayers suffer large losses.
The government should stand ready to take over companies that fail in order to ensure functioning of the banking system - as it did with Northern Rock and Bradford and Bingley. It should not be purchasing shares at far above market prices.

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