A dud giveaway

Various news outlets (1, 2, 3) have been running reporting of a CentreForum paper, under the name of Stephen Williams and with what might be euphemistically termed 'assistance' from Portman Capital [1], of a suggestion to give the taxpayer's stake in the part-nationalised banks to each taxpayer. Well, each voter, which is nearly the same right? Except for the taxpayers who can't vote and the voters who don't pay taxes; oh, and the voters who don't vote.

It has to be said that capitalism does work best when we all play. Getting more people to own shares or units in funds and trusts, to be using their laid-aside capital to involve themselves in the economy, is a good thing. But this is rather like convincing people to learn to swim by shoving — or should it be nudging? — them into the deep end of the pool; and the odds are that this pool may have the occasional shark lurking in it. Better to publicise the benefits of learning to swim rather than force people to do it.

And indeed, this plan would be a bureaucrat's dream, and a citizen's nightmare. How do you keep track of partial and full disposals, disposals below the floor followed by re-acquisitions above the floor, disposals by existing shareholders distinct from disposals of allocated shares…? This is, in the words of the FT's Bryce Elder, 'an unworkable proposal' (src).

But ignoring all those issues, the report contains a blinding error of fact which blows most of its democratising contentions out of the water and is recognisable by anyone who owns shares. It says,

At the time of distribution, the shares’ legal ownership will transfer to recipients, and their shares will be held in their name in a nominee account, in line with standard industry practice. As owners, recipients will receive dividends and have the right to vote at Annual General Meetings, giving them a direct role in the running of the banks.

The problem is that standard industry practice for nominee accounts is that the shares are aggregated in a single large account, and apart from in special circumstances the beneficial owners of the shares agree that they won't try to use their shareholder rights. This makes it cheaper to administer the shareholdings, which is arguably of more benefit to a small shareholder in such a very large company than being able to vote would be.

So if 80% of the shareholdings in RBS, or 40% of Lloyds, ended up behind such a wall, then the bank would become completely ungovernable. The Board would be answerable to next to no-one. It is possible that the bank could manage such a situation, but suppose it led to the share price stagnating. Since Williams/Portman propose that the Treasury would claw back some of the proceeds up to a certain price, if the share price never hit the floor then RBS would be effectively stuck: the lack of strong shareholders causing the company to flounder, the floundering dissuading small shareholders from selling their shares, larger shareholders unable to increase their shareholdings to increase their ability to give some direction to the bank.

Little wonder, then, that the Treasury described Williams'/Portman's proposal in a delightfully Sir-Humphreyesque tone as 'a welcome contribution to the debate'. Let's hope that's all it remains.

[1] Lesser mortals might suspect that Portman had a brainwave for getting their name into the media, and caught themselves a live one in a Lib Dem backbencher and CentreForum. But far be it from me to suggest such.

Disclaimer: I directly hold shares, through two nominee accounts, in Lloyds Banking Group.