UK: Taxpayer nursing huge losses on RBS and Lloyds

Three years on from the bailouts and – instead of the profits expected – market meltdown and bank regulation mean the taxpayer is sitting on a £32bn paper loss

Guardian,

13 October, 2011

When taxpayers bailed out Lloyds Banking Group – which was two separate banks Lloyds TSB and HBOS at the time – and Royal Bank of Scotland the expectation was that the government stake would have begun to be sold off by now. And at a profit.

Instead, three years later, the taxpayer is nursing a loss of close to £32bn on stakes originally worth more than £60bn. The meltdown in the financial markets and the impact of the report by the independent commission on banking to "ringfence" high street banks is being blamed for the fall in the share prices.

The terms of the bailout were announced on 13 October 2008 although the taxpayer eventually ended up buying its stake in RBS in three tranches – and spending more than first envisaged. The first tranche, of 22.8bn shares was bought in December 2008 at a price of 65.5p; the second was a preference share conversion in April 2009 when 16.7bn shares were bought at 31.75p and then a further slice in December 2009 of 51bn shares at a price of 50p when the asset protection scheme (APS), designed to insure its most toxic assets, was eventually set up. UK Financial Investments, set up in November 2008 to act as an "arms length" investor in the stakes in the bailed out banks, reckons this gives an average price of 50.2p share – plotted on the graph – for 90.6bn shares that were worth £45.5m at that price.

There is another £8bn put aside for RBS to buy a separate class of B shares at 50p if the bank's core tier one capital ratio falls below 5%. It is currently 11%. There is also a dividend access share (DAS) which was created at the time of the APS which gives taxpayers rights to an enhanced dividend (although the bank is banned from paying dividends until next year under EU state aid rules) in certain circumstances and only expires when the share price exceeds 65p for 20 days in any 30 day period. UKFI last published a theoretical value for this DAS as at 31 March, when it was worth £2.3bn.

The investment in Lloyds also took place in three tranches: 7.2bn shares at 182.5p in January 2009 – as the HBOS takeover was completed – another 4.5bn shares at 38.4p in June 2009 and then 15.8bn shares in December 2009 when the bank avoided participating in the APS and conducted a rights issue in which the taxpayer took up its rights at 37p. UKFI calculates an average investment price of 73.6p for the 27.6bn shares although notes this could fall to 63.1p if the £2.5bn Lloyds paid to exit the APS is included.

What does all this mean? Well it shows the complicated nature of the taxpayers' investment in both banks and demonstrates that the first bailout package announced in October 2008 was not big enough to stem the panic about the industry at the time. The charts show just how far they fell in the early months of 2009 when there was fear across the stock market about the extent of the losses that would be caused by "toxic" loans, largely to property companies. It also might indicate that extricating the taxpayer from the situation could take quite some time – although the rally in the shares after the 2009 downturn was very sharp and even with the falls during the summer of 2011, those lows have not yet been revisited.

The scale of the downturn is also worth noting. David Buik, the City commentator, has pointed out that back in 2007 RBS stood at 547p a share. It is not alone. Goldman Sachs, for instance, has fallen from $200 to $96 a share while Société Générale, for instance, is down from €123 to €21. As Buik puts it: "The mind boggles.