BANK BAIL-OUTS WEIGH ON SOME STATES / THE FINANCIAL TIMES

Bank bail-outs weigh on some states

By Patrick Jenkins in London and Francesco Guerrera in New York

Published: August 23 2009 23:30

Governments around the world are still sitting on multi-billion dollar losses from their direct shareholdings in banks, in spite of a strong rebound in equity markets in recent months.

In contrast to Switzerland, which sold its 9 per cent UBS stake for a SFr1.2bn ($1.1bn) gain last week, the world’s other large economies – except the US – are sitting on combined losses of $10.8bn relating to their holdings in the equity of listed banks they bailed out over the past 12 months.

The US government, by contrast, is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution.

The US authorities received more than 7bn shares in the troubled financial group at $3.25 apiece, after converting $25bn of preferred stock into common equity at the end of last month.

Since then, Citi’s shares have rallied, and closed on Friday at $4.70, increasing the value of the government’s stake by $11bn. That more than offsets the paper losses of all the other significant state interventions in listed banks – in the UK, Germany, the Benelux and France.

The UK is still sitting on the biggest losses – about £3.3bn ($5.5bn) – relating to the government’s 43 and 70 per cent stakes in Lloyds Banking Group and Royal Bank of Scotland respectively, although the number has shrunk dramatically in recent weeks. At the end of June, the shortfall was £11bn. The bounce has prompted the government to begin the process of appointing investment banks to advise on a possible sale.

With the FTSE World Banks index up 130 per cent since its lows of early March, the paper losses that governments in France, Belgium, Luxembourg and Germany are sitting on have also shrunk. Berlin’s 25 per cent stake in Commerzbank’s common equity is now worth only 2 per cent less than the €1.8bn ($2.6bn) the German government paid for it.

In spite of criticism of the bail-outs of lenders such as Citi, Bank of America and Wells Fargo, the Treasury has reaped gains from the coupons payable under the troubled asset relief programme bail-out funding, most of which has been repaid.

The government said it had earned an annualised return of 23 per cent from its $10bn investment in Goldman Sachs under Tarp. In June, Goldman returned the $10bn and later paid another $1.1bn to buy back warrants attached to Tarp aid. Morgan Stanley, American Express and other banks have done the same, leaving taxpayers with substantial profits.

However, critics of the bail-outs point out that Switzerland and the US cannot rightly claim to be turning profits from the schemes, given the remaining unknowns. They, and other countries, notably the UK, have put in place bad-debt insurance schemes, which could yet leave governments with vast deficits if loan losses end up being far worse than expected.

Other lenders that were forcibly nationalised in their entirety – such as Northern Rock in the UK, Anglo Irish in Ireland, Fortis bank in the Benelux region and the Icelandic banks – are also big potential drains.

Copyright The Financial Times Limited 2009.