Will no-one think of the preference shares!

So the government has been taken up on its offer of buying shares in the major banks, to the tune of (at the time of writing) £50bn if you’re the Telegraph and £40bn if you’re the Guardian (fight, subs, fight!)

The takers are HBOS, RBS, Lloyds TSB and Barclays. The government will hold majority stakes in the first two. And here’s the thing. Apparently, we’re no longer talking exclusively about preference shares, but about ordinary shares too. This matters. It means nationalisation is an ever-more realistic word for what’s going on here.

Preference shares offer the purchaser more favourable terms than your common-or-garden ordinary share (usually higher rates, always priority payment) but no voting rights. A company can offer as many preference shares as it likes, offering a good investment deal to those who receive them and raising liquidity for themselves, without affecting the balance of power at its AGM. Ordinary shares, however, carry voting rights. If, say, the government buys a majority stake in HBOS and that majority stake is entirely made up of ordinary shares, the government has bought direct, indefinite control of HBOS via the share-dealing mechanism as surely as it bought Northern Rock by underwriting it. It’s no longer just an investor – it calls the shots.

Restrictions on individual banks’ behaviour in return for the whole largesse can now therefore be imposed from two directions: one, the agreement each bank signs up to before it has access to the money, and two, an open-ended rule-changing power in the government’s hands for as long as it owns and controls a majority voting share in a particular bank. This sets confusions bells ringing which may, in time, turn out to be alarm bells. Do the banks need regulation – yes. Is it a government’s place to impose regulation – yes.  Can this be done via the terms of an upfront agreement – yes. Is it a government’s place to implement regulation and micro-manage regulation on an indefinite basis via a legal mechanism which treats it as a rights owner – not really.

Pending details of the individual deals being known, this new element has the potential to undermine the impartiality of government as a regulator. What attention, one wonders, is being paid to legality in this frantic climate?

15 Comments

  1. (Is it a government’s place to implement regulation and micro-manage regulation on an indefinite basis via a legal mechanism which treats it as a rights owner – not really.)

    Fuck legality mate – treat this as a pilot scheme – for once I’m with new Labour (gulp!) I don’t trust the banks further than i could throw ’em and I WANT the regulators to be there looking like a hawk all the time for the next couple of years. The Lib Dems would do well to agree with this (even if it needs new legislation) as well as taking on some new bank regulations on mortgages and savings/investments.

    We have found out over the past month there are only two ways of regulating – hands off and let the devil take the hindmost (trouble is we all get sucked into the mire) or tough regulation and control with the state changing individuals behaviour to responsible borrowing and lending.

    What other way is there? I’d love to be able to trust the banks to take the past month as a lesson – but they won’t – i ask you which failed CEO has apologised – answer:none.

    No, they can go to hell

  2. I’m not saying they shouldn’t be shaken till their teeth rattle, I’m warning that it has to be done legally and in an above-board manner in order for it to stick. The government must stand back impartially and regulate everybody, not dick about with individual banks as a private shareholder.

    But as I say, it depends on the exact composition of the deals.

  3. The devil will be in the detail agreed….i think you are rather missing out the democratic deficit of preference shares vis a vie ordianary shares and as you may expect I have no problem with the government calling the shots on that score….

    Banking is effectively finished as ‘just another private market’ where everybody competes in the mad scramble for profits…is this a bad thing, not in my view especially when it is OUR money…

    Indeed, it’s nice to see Vince Cable saying that the government may well have to take seats on the board….

  4. This is terrible news. Really, really bad. Government representatives on the boards of HBOS and RBS to make sure they lend to people who the banks, currently, believe it would be unwise and dangerous to lend to?

    That’ll end well.

  5. Lol really not surprised youd say that Charlotte…do you mean other banks?? Sorry, couldnt resist that…

    As you probably can imagine I am happy to welcome this news as a sign that this government is willing to get some value for OUR money which it is spending and it makes sure that the banks are providing the service it should be to the people keeping them afloat…

  6. Charlotte you are obsessed with this subject – no bank is going to be forced to give money to someone who can’t repay. Perhaps we could have something sensible here proper reforms of the domestic lending market and TOUGH RULES.

    Can you tell us where it is said that banks will be FORCED to lend to people whom can’t repay.

    This Govt might be idiots for 11 years – and the debate will need to come on to that once some stability is put back into the market – my problem is that there has been no incentive to do the right thing. Look at me for example – i pay my bills on time including monthly credit card debt – i use a mutual for saving and banking yet other people can just claim bankruptcy when their debts get too high as the banks know someone will bail them out.

    Perhaps a ruling that no one can borrow more than one months salary unless they go into the bank might help. £20,000 on a credit card is just ridiculous – it just gives the economy a false sense of security.

  7. Well i defend Charlottes obbsession because it is the most pressing issue of the day…but on the other hand John is right…what is more i would add that part of sensible lending entails guiding customers; making sure they keep their debt manageable and generally being all round more socially responsible…

  8. John you’ve published a similar comment on my blog, so I’ll publish a similar reply here😉

    According to the reports linked in the original post, and now in other stories leaking out across the media, the reason the Government wants to get its own people on the boards is to get them to increase their lending. They’re currently only lending to people who are AAA credit risks, or people with significant deposits/security. This then is what will cause the knock on effect to the economy when less credit worthy individuals and businesses start experiencing serious cash flow problems.

    The whole economy is built on debt. Those people and businesses that can afford the debt they have and do not need any more will find they come through this. Those who were depending on borrowing more to fuel day-to-day expenses are going to fail horribly and suffer enormously.

    You’re talking about clamping down on lending, but what the Government wants is the opposite of that – it wants the banks to start throwing credit around again.

    And yet you’re taking their side! I love it🙂

  9. Charlotte,

    ‘The whole economy is based on debt…’ at last something I agree with…it is totally true that capitalism is based on debt….within the framework of capitalism this then offers the only way that peoples safety can be guranteed so that is why i am prepared to make semi-supportive noises….

    Your Darwinian anarchism would bring the whole system crashing down which although it would prove me right about capitalism’s flaws is not something i can find it in my heart to wish upon people….

  10. I’m concerned by this, partly for the reasons the Alix and Charlotte elaborate and also for purely selfish reasons. As I said before, I’ve always taken a dull, cautious approach to my finances – what John calls doing the right thing, but I think of it as taking the other side of the investment gamble. I and those like me (to pretend this is ageneral rather than selfish point) are now looking for considerable lowering of house prices and a regretable but unavoidable part of that will be banks foreclosing on defaulting mortgages and repossessing (or at least the threat of repossession forcing people to sell for what they can get.) For obvious political reasons, I really can’t see the Government permitting banks it controls to do this (“The Government threw me out of my house!” type headlines etc.) I fear it’ll end up distorting the housing market and indeed the personal financial market in general for reasons of political expediency.

    If that seems hard hearted, I’m sorry. I really don’t gain any ‘serve the buggers right’ pleasure from any of this. But for the years when it looked like the speculators had made the gamble and the cautious investors the wrong,I don’t recall anyone proposing massive Government intervention to prop up me.

  11. It’ll distort every possible market as far as I’m concerned.

    If the Government is able to set lending policy, or worse has a direct say in major investment decisions, like funding major start-ups, projects and so on – thinking Euro-Tunnel here – then the risks of a corruption and a favour based economy become very real.

    I can sum up where this is headed with the following: “No, you MUST lend more money to MG Rover, there’s a General Election coming up and the last thing we need is that going under.”

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