Duncan’s Economic Blog

Banks & Public Debt

Posted in Uncategorized by duncanseconomicblog on May 19, 2009

I was chatting with a friend the other day who noted that we own a great deal of the banking sector and that these banks were once perceived as very valuable. Surely, he argued, that time will come again and we can sell our stakes at a profit to pay down a big chunk of the national debt?

Whilst I accept that the bank stakes will be sold on at some point, and we might make a decent profit (as Sweden did in the 1990s), I suspect we shouldn’t hope for too much.

The chart below is RBS (70% government owned and currently valued around £24.5bn).

 rbs

The shares currently trade around the 44p mark, up some 266% since they hit 12p a couple of months back but still down around 95% from the peak of 590p.

So what if the government can sell our stake back to the market at 590p? That would imply a valuation around £300bn so our 70% holding would be worth a huge £210bn. A lot of money certainly.

But one we are sadly unlikely to realise.

We have experienced a credit bubble over the last two decades and, in a world with less credit, less fancy structured profits, less securitisation and more regulation it is unlikely that bank profits will ever be as high again. All of this implies a lower valuation in the future.

 

When bubbles burst things get messy. Here’s Yahoo:

 yahoo

Even though it rose by over 800% from its low, it was still 60% below its bubble valuation peak. And here’s BT (also caught up in the dot.com/TMT bubble):

 bt

It rose over 100% from its low but was still some 70% below peak.

So, whilst we may make a profit on our bank stakes it is unlikely to be a huge amount. It will also be important not to sell them too early, it could take years before they are valued appropriately.

Equally of the above is premised on the idea that we definitely want to sell them all. I suspect we will eventually but it’s a debate we shouldn’t be so quick to close down.

5 Responses

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  1. CharliemcMenamin said, on May 19, 2009 at 3:49 pm

    I’ve always had doubts about the likely or even plausible timescale for this ‘we-can-sell-the-banks-back-to-the-market- once-we’ve-fixed-them’ proposal. Some kind of resale is undoubtedly implicit in the Govt’s moves, and I’ve even read some ultra-marketeers refer to the nationalisations as ‘pre-privatisations'(”Nationalise, Rationalise, Sanitise, Privatise.”) for this reason.

    But take a look at this graph I nicked from John Ross back in October last yr. http://itslifejimbutnotaswknowit.blogspot.com/2008/10/on-living-in-first-days-of-swedish.html It shows it took the US stock market 25 yrs to recover its 1929 levels. Even if we avoid a 2nd Great Depression I think you’re right to note the possibility, possibly a probability, that it’s going to take a long time for the banks to recover the paper value the nation paid for them. So why sell?

    Of course,I don’t want them sold off as they are. I want them broken up and only the retail banking arms to be licensed to operate under proper regulation, with the more dangerous stuff kept under firm govt control. But that’s another matter.

    • duncanseconomicblog said, on May 19, 2009 at 4:30 pm

      Charlie,

      I’m all for a Glass Seagal type split.

      And I agree on the point about the US stock market – over in Japan the Nikkei is still 76% below its 1989 peak (20 years ago!).

      I doubt RBS, in real terms, will ever attain that sort of share price again. If we hold them long enough, we’ll probably book a profit – but not one meaningfull enough to make a huge impact on Debt/GDP ratios.

  2. Mr. Mxyzptlk said, on May 19, 2009 at 7:14 pm

    I was chatting with a friend the other day and we talked about the price of lager and how many pints we could drink before falling over.
    and if that barmaid would sleep with one of us like she did with kev after he took her out.
    we then shared a spliff and went and had a kebab but he was sick and puked up in a side road….dirty git

    My friend is much more fun than yours I mean what normal chap wants to talk about credit bubbles….


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