The Spiteful Bailout

In an act of extraordinary spite, the Government has revealed its true Socialist heart, with regard to the banking rescue.

It seems that the sole bearer of the downside is to be the ordinary shareholder, in a move that has also left the banks with a mountain to climb that is much higher than Everest – maybe Mons Valeris on Mars would be more like it.

In denying the banks the right to pay dividends until the preference shares are repaid, the Government, probably deliberately, has:

1)      almost guaranteed that the banks won’t be able to raise the ordinary capital, for what institution or private investor will buy shares that don’t have any annual return, no matter how profitable the organisation?

2)      made it difficult for them to raise the capital in the future, to pay off the preference shares.  Instead, they’ll have to repay them out of retained profits, which will therefore need to return to the significant level they were before.  Is this Government going to be comfortable with profits around the £10billion p.a. level?  Maybe they aren’t bothered, since that embarrassment is likely to occur during the next Conservative term…

Gordon Brown has decided to kick ordinary investors when they are down, leaving all other parties with some upside.  The Government will get some return from the preference shares, so it is okay.  Ultimately, it will get its money back from the ordinary shares too.  Bosses will get bonuses – okay, not this year (and they were going to be low anyway), but they will in year 2 onwards, as the profits return.  Those with the highest risk – ordinary shareholders – get nowt until they presumably stump up more money to get rid of the preference shares at a later date.  This shows Gordon in his true light – as an enemy of private investors, who he no doubt doesn’t include in his definition of ‘hard working families’.  What he is forgetting is the sheer number of people who have shares in the affected banks.  Hopefully, they'll remember this when the next election comes.

The ordinary shareholders should be able to see some return, annually, for their investment – they have just as big a stake in this as anyone else.  Not at the levels seen previously, admittedly, but they should see something.

Not only that, but the stipulation that the participating banks return lending to the levels seen in 2007 surely replicates the problem that we are in now, as it is overindebtedness that caused the crash.  How does that work?

One can only hope that this mess of a rescue tides us over to the next election, whereupon the hopefully Conservative administration can alter the terms and restore some sanity.