Monday, February 22, 2010

Sunday's other news

As well as Gordon Brown being accused of being a bully (that I can well believe), yesterday the Tories announced very vague plans to allow Joe Public to buy shares in the various banks that are currently publically owned in the UK. I suspect the Tories were probably pleased that the bullying row started, as it's meant they've avoided scrutiny over their plans, which seem to be little more than populist.

The idea is that the shares the UK government currently owns (in return for the massive amounts of cash given to banks to shore up their balance sheets last year) would be given at discounted prices to young people and those on low incomes. In today's lecture we covered much of the stuff mentioned in that sentence: We discussed how banks have balance sheets with assets (claims they have on others) and liabilities (claims others have on them), and noted that in the crisis, all of a sudden bank assets (claims they had) became worthless as many people (and banks) couldn't pay what they owed and defaulted.

This of course meant banks had nothing to use for day-to-day activities as all their assets had vanished and selling them on these secondary markets would have yielded nothing. So the UK government stepped in and provided the kind of cash needed for things like meeting current account holders' demand for their money (bank liabilities), in return for bank shares.

Banks operate as intermediaries, but operate like firms, on the behalf of their shareholders - hence their purpose is to maximise shareholder return. Given the recent explosive return to profitability of the banking sector, shares ought to be very valuable in these banks, because when firms make profits they usually pay shareholders a dividend, a share of that profit.

Back to the Tory plan. It sounds like a really nice idea, but one has to ask whether anyone would really want these shares? The banks have lost much value in recent years, and who is to say that what value is left won't go again? Also, would these young people and unemployed people make good shareholders? Better analysis than this can be found from Robert Peston.

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