UK could whet appetite with loss leader RBS stake

LONDON, March 29 Thu Mar 29, 2012 9:56am EDT

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LONDON, March 29 (Reuters) - Britons take a dim view of the billions it cost taxpayers to rescue the banks four years ago, so they will take some convincing if the government sells a stake in bailed-out Royal Bank of Scotland at a loss.

Britain and Abu Dhabi are holding talks on the sale of shares in the troubled bank, which required a 45.5 billion pounds ($72.4 billion) taxpayer lifeline during the 2008 financial crash, leaving the state with an 83 percent stake.

Speculation that Britain's cash-strapped government could sell between 5 and 10 percent of the bank has risen in recent weeks, but there is little chance the UK will achieve the price it originally paid any time soon, raising the possibility the taxpayer might be asked to shoulder a loss on the investment.

At a time of harsh austerity measures to address a chronic budget overhang, critics would have a field day. And while stock markets might welcome the move as a sign that the government would interfere less in the running of the bank, voters might prefer the state to maintain some influence on the bank's lending.

Prime Minister David Cameron's coalition government is already under pressure after a Conservative fund raiser was secretly filmed offering access to the party leader for cash.

And last week Finance Minister George Osborne made it harder to sanction a loss-making sale by drawing attention to the ill-timed sale of gold reserves by former Labour chancellor Gordon Brown.

He might still be able to get away with a writedown if the sale cedes minimal control in the strategically important lender.

"First, what is the cash loss for the taxpayer, if any? Secondly, if a foreign investor takes a significant stake in RBS, can they strategically influence this major high street bank on which British citizens and companies depend?" said David Ruffley, a member of parliament's influential Treasury Select Committee financial watchdog.

"The answers to those two questions will determine the public and political response," he added.

Shares in RBS currently trade at around 29 pence, far below the 49.9 pence the government paid for them. Details have yet to emerge on how much Abu Dhabi might offer, but reports indicate an overall 10 billion pound investment.

A deal is not expected for at least another few months, a source told Reuters earlier this week.

John Redwood, a prominent parliamentarian and a vocal critic of the state's handling of RBS, said the sale of part of Britain's stake at a loss would not necessarily be damaging for the Conservative-led coalition government.

"The terms are going to be quite important. One would need to know how big a loss there was on the shares they were selling, and secondly what the conditions were relating to the sale," said Redwood, who, like Osborne, is a member of the Conservatives.

Redwood wants Britain to retain the ability to break the lender into smaller banks to boost competition in the sector, one of several proposals that would transform RBS into a vehicle to increase lending to businesses and stimulate the economy.

Commentators speculate that such proposals, including one to give RBS shares away to the public, could form part of the government's disposal strategy as they would soothe misgivings over a sale at a lower-than-expected share price.

PRAGMATIC APPROACH

Along with other British banks, RBS is facing the separation of its investment arm from its less lucrative retail operations as reforms are enacted to shield the public from the riskier investment banking - sometimes referred to as "casino banking" - blamed for the 2008 financial crash.

George Mudie, another Treasury Select Committee member and a member of the opposition Labour party, said that raises "big questions" on the future value of RBS shares, an argument that could justify a lower sale price and mitigate against criticism of taxpayer losses.

"Speaking personally, I would be very pragmatic about an offer, but not softly or weakly so ... I think it would be sensible to keep an open mind," he said, adding that he would object to an offer at the current market price.

Hopes that RBS shares would recover quickly after the financial crisis have dimmed, and the fallout from the euro-zone's debt woes has prompted many to conclude it could take a decade or more for the shares to get back to the level Britain paid.

Meanwhile, calls are growing for the cash-strapped government to dispose of its stake. Earlier this month, RBS chief Stephen Hester told Reuters the faster the government starts selling, "the better for everyone".

The benefits of starting a sale early would be to reinforce that Britain does not want to be a long-term investor, and by grabbing a major "anchor" investor it would signal that private investors see it as a viable investment again.

That could act as a loss leader that ultimately boosts RBS shares and in the long run helps Britain make a profit on future tranches.

A deal could also be structured so an initial investment could be added to later if shares rise or RBS's performance improves. That is how Abu Dhabi made a big profit on a 5 billion pound bet it took on Barclays in 2008.

Some Treasury officials have said the government is happy to hold onto its RBS shares until prices have risen.

But some shareholders want a sale sooner rather than later.

"Having another major holder ... would reduce the spectre of another slide towards nationalisation at some future point. I think a sale would also signal the first step towards RBS being a 'normal' investment again," one RBS investor said.

STORM IN A TEA CUP?

Despite the arguments for an early sale at a loss, significant political risks remain that threaten the government's standing with the public as well as the Conservatives' relationship with the Liberal Democrats, the junior partner in Britain's coalition administration.

"My benchmark is how will this go on the high street? And the fact is that nobody would buy that argument at all," said Mark Garnier, a Conservative parliamentarian and Treasury Select Committee member.

"If any part of that stake was sold at a loss ... I think there would be a huge outcry," he said.

Labour's finance spokesman Chris Leslie has said it is "vital" that the government recoup the money they invested in RBS, while the Liberal Democrats say they would reject what they saw as a poor deal.

The party has in the past called for the bank to be fully nationalised and directed to increase business lending to boost the economy, or for the bailed-out banks' shares to be given to the public.

"I would fiercely resist it if I thought it was a bad deal," said Richard Newby, a Liberal Democrat legislator in parliament's upper chamber, the House of Lords, adding that the current share price was "not desperately healthy".

Resistance has its limits, however, when the Lib Dems know that abandoning their partnership with the Conservatives could bring upon their own heads a disastrous general election, given their parlous poll ratings.

The government will also be encouraged that opponents made little capital out of Osborne's sale of nationalised bank Northern Rock last year at a loss of at least 400 million pounds.

Some calculate that former Prime Minister Gordon Brown cost the taxpayer billions in 1999 when he sold gold reserves shortly before the asset surged in price, but it didn't stop the party comfortably winning the following two general elections.

"There would be criticism; that's just the nature of it. Would it do sustained damage to the government over a protracted period of time? Very unlikely," said Alastair Newton, a former British government official who is chief political analyst at Japanese bank Nomura.

"It's not political suicide. It may be a storm in a teacup, but that will about be the extent of it."

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