More than you ever wanted to know about preference shares…

A quick post that started out as a comment on Charlotte’s blog and got too unwieldy:

According to the Beeb report, the rescue package looks like this:

  • Banks must recapitalise to the tune of £25bn by a combination of Treasury loans and looking under the cushions
  • £25bn further will be available in exchange for preference shares.
  • £100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn
  • Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other
  • To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends

Given this outline, I’m not clear on how this will amount to a 10% “ownership” of the banks. The £25bn set aside for preference shares seems far too low to buy a tithe of the UK banking system. If we really mean a “stake”, as in the amount of government or government-sponsored money pumped into the system, however, then that’s not ownership. Furthermore, preference shares don’t generally have voting rights, so if that’s what Darling, darling! is buying £25bn-worth of on our collective behalf then I’d say the label of “partial nationalisation” is actually a good one. The dividends without the voting power. If the government had a significant minority of shareholder votes in every bank, then we might as well subsume the entire FTSE into UK Plc. So from the point of view of a small statist the fact that preference shares don’t carry votes, and the fact that the lion’s share of the £500bn will be in the form of loans anyway is a Good Thing. First point.

Second point, preference shares are first in the queue for receiving any profits that do emerge as dividends – ahead of ordinary shares, hence the “preference” (but they’re behind loan repayments in that queue, so the loan money is “safer” than the dividend money). Also unlike ordinary shares, that preference is rolled over if necessary. So even if ten years go by without any money being available for dividends at all, all the profit from the next ten years will have to be ploughed into paying back the preference shareholders for the years they missed (as well as paying them for current years).

And in the event of winding up, preference shareholders are also ahead of ordinary shareholders in the queue to get the value of their investments back. The only people in front of them, in fact, are Her Maj’s Revenue and Customs (the govt) and once again the lenders (also the govt). So, without having seen the fine detail, the investment is not actually as risky for the taxpayer as it sounds. If there’s no money at all again ever to pay preference share dividends, or loan repayments, or to share out among the survivors of a winding-up, then yes, we’re totally fucked, but in that scenario we’re probably totally fucked anyway and it’s strangled cat stew time.

Final point, we need to be careful with this conditionality question. Someone offering a loan can demand what conditions they like, but a purchase of shares is a regulated transaction and the government can’t use it to strong-arm the banks into obeying a code of conduct. So that FSA agreement can only legally apply to the loans, not the shares. The whole point of capitalisation-by-share, as a market-led solution, is that you buy your shares just like everybody else and hope it works. And that’s the real question, rather than perceived risk to the taxpayer – will it actually bloody work?

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  1. And just as an addendum I wasnt complaining about the risk as such I was saying they are a bad deal which they ruddy well are. If id lashed £2000 on something I *would not* expect to have no control over it and *would not, if i was that way inclined* be happy with being told at time of purchase I will only ever get £2,000 back regardless of if other items of it’s type are worth £5,000* being first in line to get the £2,000 back wouldnt impress me at all….

    I think people when they realise what the government actually spent their money on are going to be racked off…and rightly so…

  2. Hm, well usually prefs are at fixed rates (not fixed sums) and so are ordinary shares, and what rates they are depends on what the individual company offers. However, I think you’re bound to be right overall – if only because we wouldn’t be doing this out of choice.

  3. Alix,

    Everybody on QT last night said we will turn a loss…even Ken Clarke…and when that happens and the public finances are upside down questions will be asked…

  4. No, though it does look like it there. It’s a blue porcupine with a bit of a quiff. Normally on t’internet when I’m not under my own name I’m Blue Porcupine.

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