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Monday, 19 January 2009

Probably the worst deal ever - worse than the Conservatives' Black Wednesday

At close of business last Friday, the UK government held £5 billion in preference shares and a 50% of the ordinary shares of RBS. I calculate the market cap of all of the company’s ordinary shares at £8.33 billion, so the total government holding of prefs and ordinaries would have been worth about £9.16 billion.

At the weekend the government cut what it thought was a good deal to exchange the prefs for ordinaries at a price 8.25% below the Friday closing price, giving the government a 70% interest in the ordinaries. With the discount on the ordinaries, the government would have thought they held about £9.56 billion of shares at the start of business on Monday. Unfortunately the share price fell 67% on the day leaving the market cap of RBS at £4.58 billion, and the UK government’s 70% share at £3.2 billion. So instead of getting a benefit of a £400m discount on the conversion price, the government took a £5.96 billion loss on the day, or rather the tax payer took that loss.

If the rating of UK government debt is downgraded as has just happened to Spain, then the banks will still be short of capital and the whole exercise will have been in vain.


Anonymous said...

No Alex, the taxpayer took the hit.

RobertD said...

The market clearly believes that as currently constituted RBS is worthless. The only solution is to send in Administrators to break it up into two basic groups. Those parts which are essential to keep the UK economy operating which should be transferred to someone willing to put up the capital to enable it to operate effectively. The other group are all of the vanity projects, securitisations and proprietary trading that need to be closed down as the management clearly are not up to the job and it is no place for UK tax payer money to be at risk. If selling / closing down this second part results in losses then let the shareholders, senior management and debt providers take the hit. Oops! too late! Gordon has put us in the firing line for most of this write off. Makes his dealing in gold look like a primary school warm up.

Anonymous said...

Of course, I'm sure they weren't thinking of making a short term killing.

Anonymous said...

The greatest irony was that Brown started the day by castigating the banks for irresponsible investments.

Anonymous said...

Good easy to understand tale of staggering incompetence and stupidity. Thanks.
Now any idea how we can get rid of Nu Liebour and 'Save the world'?

G. von Brun said...

But it all started in America and then came over here ! Unlike the Do nothing Tories - No more boom and bust !

Its because I'm worth it ?

Anonymous said...

Id say the bad deal was getting the preference shares in the first place...BUT only because of the high interest rate that the banks had to pay on those shares while American banks are paying half the interest rate as UK banks.


Adrian P said...

I blogged about this too
Unplug yourself from the Bankster Created Matrix

Anonymous said...

I took my last £40 quid oota the Royal Bank of Scotland today.

yarnesfromhorsham said...

Scottish Bank Scottish PM - its the Scottish Mafia - stupid