Get Your Very Own Four-Figure Bank Bonus

Published in Company Comment on 16 May 2011

A plan to transfer the government's stake in RBS and Lloyds to individuals is gaining ground.

Investing in bank shares has been a controversial topic over the past couple of years among fund managers, pundits, and The Motley Fool's own community.

The bulls say it's only a matter of time before beleaguered giants like Lloyds Banking Group (LSE: LLOY), Royal Bank of Scotland (LSE: RBS), and Barclays (LSE: BARC) are back on their feet and converting their dominant market position into profits for shareholders who buy at today's cheap prices.

The bears retort that the good times may never return, due to increased regulation, tighter lending, and poorer consumers -- and that even if they do, there'll be plenty more profit warnings and asset writedowns to come, making bank shares too risky to buy.

We've thrashed out the pros and cons in countless articles, and perhaps you've still not made up your mind.

But you could soon be the owner of bank shares whether you like it or not.

Realising our assets

Of course, all UK taxpayers are already part-owners in Lloyds and RBS, as a result of the 2009 government bailout that saw us buy a 43% stake in Lloyds, and an 84% shareholding in crippled RBS. In that sense, the government has already forced us to invest in the banks, by buying in on our behalf.

If you're not happy about this, there's currently nothing you can do about it. Phoning your MP and demanding he or she sells a few Lloyds shares and mails you a cheque isn't going to cut much mustard.

This could be set to change, however, as more details emerge of a mooted plan to distribute these shareholdings directly to UK citizens. It would be done as an alternative to the government offloading them via the stock market or directly to institutions.

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Who'd get what

It's not clear exactly how the shares would be doled out under the plan, which is just one of several options being explored by the Treasury.

It may be that the bank shares only go to UK taxpayers, for instance. Alternatively children could also get a stake, in recognition of the long-term impact of the financial crisis.

It would surely be too unwieldy to allocate shares on the basis of exact taxes paid, though. Therefore if it goes down this route the Conservative-led Coalition would be taking part in a massive wealth redistribution exercise -- since the alternative of selling the stakes to the market to raise the same money for the government would effectively be most beneficial to those who pay the most tax.

No money down

Unlike the privatisations of the 1980s, this time shareholders probably wouldn't even have to stump up cash in advance. But equally we wouldn't be able to sell until the price was above the price the government paid for the shares -- 51p for RBS, and 74p for Lloyds.

Nor would we retain all the proceeds of our sales. Instead, we'd get to keep the difference after refunding the Treasury the initial purchase price.

Reports suggest initial allocations could be in the £500 to £1,000 range, depending on the exact method chosen. If the shares rise 50%, say, and you decide to sell, then gains would be in the order of £250 to £500 -- a decent windfall for most UK households.

A PR boon for the bankers

The government put £45.5 billion into RBS and £23.3 billion into Lloyds, and its holdings are currently underwater.

Arguably it makes little difference in terms of the national balance sheet how the government offloads its shares -- since its liabilities and assets are effectively our liabilities, and it can always raise more money by taxing UK citizens if it has to.

That said, according to Portman Capital, who did the maths behind the proposal, it would be cheaper to redistribute shares directly to households. Portman claims it would cost £250 million, versus £1 billion if the government sold up on our behalf.

Either way, the banks would come off the public balance sheet. A public that has struggled to understand that the government -- and hence they -- will profit if these shareholdings rise will certainly appreciate it if their own shares go up. It might also calm down the banker bashing if everyone directly owned bank shares, which would arguably be helpful in an economy is so dependent on financial services.

All in all, it seems like a great PR move, and a win-win for the government.

More from Owain Bennallack:

> Owain owns shares in Lloyds. He hopes to soon own some more!

> Your tax-free ISA allowance has now increased to £10,680. Open a Motley Fool Self Select ISA today.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

theRealGrinch 16 May 2011 , 4:32pm

too costly and inefficient and frankly fanciful

Dames1 16 May 2011 , 6:37pm

Do you have any calculations for your comments grinch? The article says it would cost a quarter of going direct to market. Genuine question.

Dames

wordofandy 17 May 2011 , 5:41am

I find the idea fascinating.

Are there any UK / world precedents?

Seeing as shareholders frequently tend to favourably patronise the companies they own, are the other banks not going to cry foul?

To get children interested in holding and trading shares, could the share certificates have a fun monster/CEO picture on the front, company fundamentals printed on the back, and be made of playing card size laminated plastic?

MrChriss 17 May 2011 , 7:14am

To hell with it, can't we all have certificates like that?

mackeson29 17 May 2011 , 8:55am

'Arguably it makes little difference in terms of the national balance sheet how the government offloads its shares -- since its liabilities and assets are effectively our liabilities, and it can always raise more money by taxing UK citizens if it has to.'

Utter Drivel. It makes ALL the difference how the government offloads the shares - just like it makes ALL the difference as to what they get back for them. A better redistribution would be for the treasury to get the highest price possible for them, thereby reducing the mountain of (our) debt, thereby benefitting all of us - not just a lucky few, whom get a ticket in a lottery draw.

SmudgeButt 17 May 2011 , 9:04am

It cost the government nearly £70 billion to buy the shares and would cost either £250 million or £2 billion to unload. Does that mean it won't be trying to recover any of the £70 bill??

I can't believe that the government wouldn't recover at least a portion of the purchase price if they were selling the shares. And if that's correct then they should sell not give away. Or have I misunderstood something here???

tru2me 17 May 2011 , 10:02am

That sounds different Owain, but how would it be decided who gets how many?

Not sure that leaving it up to the government to sell off the shares, makes much sense.

Look what Brown did with the treasury gold.

TMFFlaneur 17 May 2011 , 10:11am

@Ram59 -- It's a mooted plan, and as I say, the final calculations have not yet been decided.

@smudgebutt -- They get their cash. :) As mentioned in the article, "Nor would we retain all the proceeds of our sales. Instead, we'd get to keep the difference after refunding the Treasury the initial purchase price."

@mackeson29 -- Your argument is inconsistent. To help the 'lucky few' the best thing to do would be for the government to keep the shares and sell them at the best possible price to directly reduce the debt, as you call for, since 'the lucky few' are the higher earners who individually pay the most tax, and will ultimately pay disportionately more of the debt off.

dhorsley 17 May 2011 , 1:05pm

My question is why does it cost £2 billion to unload the shares on the market? Seems a rather steep cost.

glad69fool 17 May 2011 , 1:11pm

Hold on. "Instead, we'd get to keep the difference after refunding the Treasury the initial purchase price." That refund money has ALWAYS been tax payers money. The tax payer has already paid twice for this fiasco. Once, in paying normal taxes to HMRC and twice in higher taxes, public spending cuts and job losses when Brown handed over our taxes without strings attached. We need to be careful we are not forced to pay a third time in this case.

shinygoldcar 17 May 2011 , 1:24pm

On a related-issue, if I was a direct shareholder (i.e. not just taxpayer-shareholder) in Lloyds or RBS, I think I would want the bank to be thinking about (and the government to think about allowing them):
a. buying-back shares equivalent to the new shares issued to the taxpayer (conditional on balance sheet strength and a favourable share price, and piecemeal, not all at once)
or
b. paying dividends (conditional on balance sheet strength)
...and as a taxpayer-shareholder, I think the same.

Not sure what I'd want the government to do though!
@wordofandy fantastic idea!

TMFFlaneur 17 May 2011 , 1:30pm

@dhorseley - One billion. Still expensive I agree! It will presumably be a percentage fee to the usual investment banks etc, and even 1-3% of £68 billion is a big number.

TMFFlaneur 17 May 2011 , 1:31pm

@shinygoldcar - Agreed. As a shareholder in Lloyds, I'd like Lloyds to have first dibs on buying back the shares. As a taxpayer though...

mackeson29 17 May 2011 , 1:39pm

'since 'the lucky few' are the higher earners who individually pay the most tax, and will ultimately pay disportionately more of the debt off.'

Erm, getting muddled here ? if its our collective debt which is paid mainly buy the higher tax payers, then surely reducing the collective debt by the treasury benefits that same group as the government either doesn't need to increase taxation, or can reduce the top rate later on ? Thereby releasing the higher rate payers from their unfair burden ?

And how does a lottery fairly distribute between tax payers exactly ?

Really hope your not gonna take this down a redistribution of wealth propaganda speech, there's enough communists lurking on this site as it is.

TMFFlaneur 17 May 2011 , 1:39pm

@glad69fool - Agreed, that's my point (as reiterated above, too). Taxpayer money and Treasury money is in the end the same thing.

If we *don't* repay the Treasury the purchase price (on our the shares it - agreed - bought with *our* money on *our* behalf) then the Treasury is £68.5billion down, and will have to tax by the equivalent to make it back, all things being equal.

So how the government offloads the shares is a seperate issue from your (and my!) understandable frustration that sillybanking practices and slack regulation put us in this place, IMHO.

tophernator 17 May 2011 , 1:41pm

Perhaps you should drop the government a line and tell them about the MFs share dealing service. Their brokers fees of £1 billion seem a little steep.

In all seriousness; couldn't the government appoint a broker to sell/release their stake into the market at prices over the original cost and at a rate which wouldn't adversely affect the SP? Why on earth would that cost £1 billion?

dhorsley 17 May 2011 , 1:49pm

Theoretically the government gets its original investment back when the shares are sold (+CGT), but what happens if they are never sold, can they be passed on on death or will the government get its money then and the estate will just get the gains? If the banks start issuing divis it could be a nice little earner for those who keep them.

Still I think it would be simpler for the government to sell them into the market in tranches as and when the price is favourable.

TMFFlaneur 17 May 2011 , 2:00pm

@mackenson29 - Communist? What an odd comment. Amongst all the articles I read about this yesterday, mine was the *only* one that pointed out that doling out the shares at a flat rate to all citizens, regardless of how much tax they pay, is effectively redistributitive.

On the contrary, the right-leaning press focussed entirely on the return to Thatcherist shareholder democracy type principles.

4spiel 17 May 2011 , 2:08pm

This is just a political bribe - Labour bribes with benefits -well this maybe the Tory bribe. Something for nothing is a bribe and it disgusts me. Why not give shares to existing shareholders at a discount -to the customers of these banks who have savings accounts and have suffered % rates less than inflation. No principles . Bomb Libya but never set foot near Zimbabwe where we had a duty. Our political class is rotten to the core.

mackeson29 17 May 2011 , 2:52pm

Sorry, maybe I should have put a ';-)' after the comment, as it was mean't tongue-in-cheek.

I don't really get it, or your argument for it. I do think it is a gimmick.

F00LU 17 May 2011 , 2:56pm

I have only ever written in one suggestion to a chancelor and beleive it or not I sent in a similar thing to that idiot Darling over a year and a half ago. My suggestion was redistribution of the shares via everyones pension scheme thus helping both situations the youngest getting the biggest chance of a return against something which will surely be most under threat. The idea was simple bolster the pension short fall with the bank bail out. Everyone would feel like they had got something and the shares would be drip fed back onto the market. Shame he didnt listen as it couyld have been his policy rofl. Did he reply did he B&*llocks did anyone reply did they B&*llocks. At least someone is now thinking about what could be done right or wrong it is an idea and we seem a few short at the moment.

TMFFlaneur 17 May 2011 , 3:57pm

@wordofandy -- Interesting point. Is it effectively marketing for Lloyds and RBS?

Luniversal 17 May 2011 , 4:08pm

Do you really think transactions of this magnitude will take place under a predominantly Tory government without armies of auditors, lawyers, investment banksters, brokers and marketeers getting much of the proceeds to stick to their fat, grasping paws?

Get real. Ours is a society designed to benefit elite middlemen:: intermediaries who consult, advise, arrange, promote and regulate are far better and more surely rewarded than those lesser mortals who create things that human beings need.

Just look at where the Conservative Party gets its funds and follow the money.

Hand the shares out to the little people who saved the banksters' sorry backsides by being forced to bail them out under PAYE? In post-industrial Britain, with our wonderful financial services 'industry' short of private-sector carrion such as takeover battles to gorge itself on? You're having a laugh.

wondrinfree 17 May 2011 , 4:40pm

@ 4spiel "Something for nothing is a bribe and it disgusts me."

If you are a tax payer then these shares are not for free as they have already been paid for by your taxes.

If you are freeloading off the state then you never paid for them and are getting them for free - that disgusts me.

Fingered 17 May 2011 , 4:52pm

......Akin to the conundrum of what a highly unethical butcher might do with the grey meat of two diseased cows.

F00LU 17 May 2011 , 5:24pm
oldafricaman 17 May 2011 , 5:33pm

better to put these assets and others into a sovereign wealth fund
run like an investment bank but with very competetive rates
give the banks some real competition and benefit UK entrepreneurs

aldwark 17 May 2011 , 6:10pm

In time the bank share's will start making money. so keep the share's and put the money in the NHS that we all need.then over time we will all get some benefit out of them and it will cost nothing to get rid of them.

Fingered 17 May 2011 , 10:08pm

.......if the nice Mr Butcher *gives* me for free somehow any of this putrid grey meat ( Oh, I paid for it once already cos he already held me up at knifepoint and robbed me of tax money, the cheeky f$£%^"! ) ....then ta very much......I'll flog it off asap to some other hungry punter in the village looking for a long term buy and hold oppourtunity to fill up his portfolio freezer .....if he tries to somehow *sell* me back any of this variantCJD garbage for a second time at anything more than a few cents on the dollar, so I can get a quick kill in the market, I'll probably go vegetarian.

henrybenson 18 May 2011 , 12:54am

If it happens, we could at last vote down the directors' remuneration packages!

AlysonThomson 18 May 2011 , 1:15pm

Not long ago, I'd never have believed any British Govt would consider doing that.
However, having heard that the reason David Cameron is going to pass legislation to enshrine our Foreign Aid Budget in Law is to prove that the Tories are no longer the cruel Party some people believe them to be, maybe they will?
Of course, as well as having to pay the Govt back when he sells, Joe Public will also be liable for Capital Gains Tax on the sale.

sonrisa1 18 May 2011 , 4:11pm

Really hope your not gonna take this down a redistribution of wealth propaganda speech, there's enough communists lurking on this site as it is. What on Earth are you talking about mackeson29, I have not noticed this, but there are some thieves about ie Gordon Brown who stole my B & B shares & sold them & others to Santander for £600,000,000 I did not see a penny.

sonrisa1 18 May 2011 , 4:12pm

henrybenson 18 May 2011 , 12:54am

If it happens, we could at last vote down the directors' remuneration packages!
the big institutions well get so many they will support the directors??

mackeson29 19 May 2011 , 10:24am

' I have not noticed this, but there are some thieves about ie Gordon Brown who stole my B & B shares & sold them & others to Santander for £600,000,000 I did not see a penny.'

I agree with that entirely - which is why I think this to be a gimmick. So we are going to allow some of the populous to enter a lottery to have some of these bank shares as a way of 'compensating' us ? Then what do we do about the B&B shares ? or the good folk of Northern Rock who sank their pensions into the shares schemes of the company they work for & trusted ? It seems to me, the only fair way of distribution for the state owned banks that survived is to sell them off to the market at as much profit as possible. The money returning into the treasury benefits us all in the same way that the treasury bailing the banks out in the first place fleeced us all. Going down a path to allow 'some' to be compensated is a slippery slope, because as you point out - you weren't compensated in your loss. If people want to buy the bank shares that are going to be on offer - they already have that opportunity.

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