It is tempting to dismiss Nick Clegg's suggestion for a mass hand-out of shares in Royal Bank of Scotland and Lloyds Banking Group as a political stunt. But while the Deputy Prime Minister is no doubt keen to be seen as holding up the Liberal Democrats' end in the Coalition at the expense of the Chancellor, it is worth reading the Centre Forum policy paper on which his proposal was based for a non-partisan discussion of the pros and cons.
The most compelling argument presented by the think tank is not that, having shared the pain of the credit crunch, taxpayers would now get a share in the upside of floating these banks, desirable though that might be. Rather, it is that this might be the Treasury's best shot, at least in the short to medium term, at getting rid of its stakes in Lloyds and RBS without incurring hefty losses.
These stakes are so large that they have created what the market calls a "structural overhang". So, everyone knows the Government wants to offload its shares in RBS and Lloyds – and that they would have to price any sale at a discount to the prevailing market price. As a result, when holders of the shares judge that the first sales might be imminent – when the market price of the banks rises above the break-even price for the Treasury – they sell their stock in the knowledge they will soon be able to pick it up more cheaply. That depresses the price and makes a sale, at least at a profit, impossible.
It is difficult to see how the Treasury is going to be able to resolve that difficulty, except by dribbling out its bank shares very slowly over a great number of years. Transferring the holdings to individuals might also mean it would only be in the long term that the Treasury got its money back, but the diversification of owners should ease the overhang – and no taxpayer would sell the stock until they were making a turn for themselves on it, guaranteeing repayment in full for the Government.
In other words, even leaving aside the politics, there is much to admire about this idea – for which we should credit Portman Capital as well as Centre Forum. And while there are some administrative hurdles to overcome, this process ought to be a damn sight cheaper than paying a string of investment banks to organise a full-blown privatisation.
Incidentally, the Centre Forum paper identifies one other wrinkle which has the potential to cause some grief. The easiest way to get shares to all British adults, it says, would be start with the electoral roll. But what about the continuing controversy over whether those in jail should be entitled to the vote, as European legislation appears to require? Here's looking forward to ministers tying themselves up in knots during the row over share windfalls for prisoners.Reuse content