Time for another 'Don't tell Sid' sell-off? Better not to bank on it

The Crunch one year on: RBS and Lloyds quickly followed Lehman Brothers into crisis. James Moore wonders how the taxpayers' stakes will be sold
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Sir Martin Sorrell couldn't resist a cheeky smile as he rose to collect yet another award for WPP's bank privatisation campaign. It was hardly the most original concept – shamelessly stealing from the "Don't Tell Sid" campaign that accompanied the privatisation of British Gas in the 1980s. But "Don't forget to tell Fred" – making a joke about the public anger over former RBS boss Sir Fred Goodwin's egregious pension and suggesting they could join him in his French bolt hole if they bought privatisation shares in the bank he used to run, had worked spectacularly well. And that was what really mattered.

Could it really happen? Could a future government replicate the gigantic privatisations of the 1980s with its stakes in Lloyds Banking Group? George Osborne appears to think so. Aides to the populist Shadow Chancellor have been floating the possibility as part of a Tory administration's privatisation programme.

But most of those sell-offs were structured to make them as near as possible sure things to the armies of retail investors who backed them. Hard to see how that could be replicated with Lloyds and RBS, Britain's "Zombie Banks" as they were once memorably (and accurately) described by Exane BNP Paribas analyst Ian Gordon.

Mention their names in any pub and the responses would probably not be printable in a family newspaper. The public may also very well wonder why they should pay twice given that, through their taxes, they have already invested a fortune.

Still, there is a certain amount of excitement being generated by the prospect of a sell-off. Despite the best efforts of RBS chief executive, Stephen Hester, who has been relentlessly talking down RBS's prospects after he signed up for the £10m job of turning round one of Britain's greatest corporate disasters, the Government's stake is in profit. Taxpayers bought into RBS at an average price of 50.5p. Yesterday the shares closed at 56p. Lloyds TSB remains in loss, closing yesterday at 108.75p compared to the taxpayers' buy-in at 122.6p. But the way the shares have been going, it might not be too long before it too is showing a profit.

Said Mr Gordon: "I suppose, given how the world has changed and everything, that Zombie Banks is a rather out of date term."

So how does he think the privatisation will be achieved? "The answer is that we will probably see staged placements, a series of sales to institutional investors over protracted periods of time. Is a Don't Forget to Tell Sid offering possible? Yes. Is it likely? No because you can get greater certainty and less requirement for a discount if you go through institutions than if you go through a big retail offer."

As Mr Gordon points out, when Lloyds bought out government preference shares through a £4bn placing, many of the shares offered were not taken up. In fact 13 per cent were sold off on the open market. Retail shareholders account for 10 per cent of the register. Given the institutional appetite for the Zombie Banks it doesn't take Sherlock Holmes to work out who didn't take up their rights.

Mr Gordon's prediction of several sales to institutions over several years also chimes with what UK Financial Investments, the body set up to oversee the taxpayers' investments in these two members of the corporate living dead, has said. UKFI has been rather less than the model of openness and engagement that institutions are increasingly being told to adopt since it was set up. Despite stewarding taxpayers' funds it refused to answer any questions in public at the recent presentation of its annual report.

However, what the body did say was that it was likely to adopt a range of different approaches. There will be some institutional placements but, if for example, a sovereign wealth fund were to come knocking with an interest in a piece of the action, well its representatives would find themselves welcomed with open arms. While UKFI did not rule out a retail offer, its people did their best to play down the prospects.

The next question is when. UKFI has not even assumed its full stake in RBS and Lloyds because the final terms of their entry into the Government's asset guarantee scheme that will cover them against losses made against £500bn of dodgy assets – have not yet been finalised. UKFI currently owns 43.44 per cent of Lloyds and 70.34 per cent of RBS. Depending on the final terms (which have to be approved by Europe), its stake rise substantially. No sales can be accomplished before this has been done.

The question then, is whether Gordon Brown applies the thumbscrews to UKFI in the hopes of achieving a successful partial sale before an election. UKFI has insisted it will only act "when the time is right". Many think it may not have this luxury.

Mike Trippitt, banking analyst at Oriel Securities, has a warning: "The worst thing that could happen is that they start to sell and the banks then hit icebergs. They need to sell into a market where investors have confidence in the sector. That could happen after the shares have reached a level where the Government is back in the money."

Mr Trippitt is concerned that the recent recovery in the price of both banks might have gone too far, particularly in the case of Lloyds.

"They may have become detached from the realities."

Barclays offloads $12bn of risky assets in deal with former employees

While rivals negotiate over yet more government cash to protect risky assets, Barclays yesterday sold $12.3bn (£7.5bn) of its off to former employees.

The assets will be held by Protium, a Cayman Islands-based fund managed by C12 Capital Management. C12, which is based in New York, is run by Stephen King and Michael Keely, who will leave the bank. A number of C12's 45 employees are from Barclays' principal mortgage trading group.

The deal is being financed by a $12.6bn loan from Barclays, which will be repaid through cashflows generated by the Protium assets.

Barclays' finance director, Chris Lucas, said he expected interest repayments of $3.9bn over the course of the loan. The deal, he said, would create "greater predictability" for the bank.

The assets are an alphabet soup of products, including mortgage-backed bonds, and lost the bank £1bn in 2008. Cash generated by them over and above the loan repayments will go to the fund's partners, who are likely to be in the market for more such assets and similar such deals.

The products will remain on Barclays' balance sheet for regulatory purposes, but it has in effect swapped the risk of short-term volatility in their price through "mark-to-market" accounting for the risk of the 10-year loan.

Barclays has not called upon the taxpayer for cash, although it has admitted that it benefited from the Government's bailout of the banking system.

Barclays made £3bn of profits in the first half of the year, fuelled by Barclays Capital, its investment banking operation, run by Bob Diamond.

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