Wednesday, 8 October 2008

Why preference shares are a bad deal for the taxpayer.

. Ok this post pretty much directly arose from a posting over on Liberal Eye which obviously thinks the bail-outs purchase of preference shares is some kind of masterstroke. Apparently they have;

"the huge merit of giving taxpayers a big stake in any bank rescued, a big say over policy (including executive remuneration) and the very real possibility of a profit in due course when the govt eventually unwinds its position."

Unfortunately, for the hapless taxpayer who has just lashed £2,000 per head on these 'gems', this is pretty much totally wrong. The conditions on the executive pay are placed by the government as a condition of the injection; preference shares come with no voting rights and no place on the board. There is no possibility of mountains of profit because the dividends of preference shares are fixed; of course this might provide some stability but it genuinely means that the chances of the taxpayer recouping hugely on their investment is zip.

As soon as this filters through the system and people realise they have paid an awful lot of money for such shares does anybody seriously expect them to be happy??


Liberal Eye said...

Hardly a "masterstroke" (your word). Rather it's the least worst option in the desperate position we are in. And the "huge merit" was explicitly only in contrast to the plan advocated by Paulson in the US which is dreadful.

As for the form of the Govt's stake you appear to take your information from John McDonnell quoted on your earlier post. The Govt is indeed being a little coy about the precise mechanics yet I think it is very clear that there are tough and continuing conditions attached as I intimated in the piece you quote. (The board of RBS has already gone for instance).

Darrell G said...

No, the 'information' is taken from knowing what a preference share is which will be confirmed anywhere you look.

Just because a board goes does not mean that the government is going to try and actually exert any control which it cant through the ownership of these shares in any case....