UKFI Annual Report Shows That They’re In This For The Long Haul

UKFI stands for UK Financial Investments, and it’s effectively a 9-person fund management company shacked up in the Treasury. After the government took out stakes in strained banks like Lloyds and RBS, they created UKFI to look after them, and the body has just published its first report outlining how everything’s going. 

First of all, UKFI’s people are doing it for the love – they must be the worst-paid fund managers in London. Senior teachers make more than these guys. John Kingman takes home £143,000 for heading the company, but the others, including the ironically-named Lucinda Riches, make either nothing or no more than £40,000. There’s a Remuneration Committee that sorts out the pay for these people, presumably with a big flashing Powerpoint slide reading “REMEMBER FRED GOODWIN” playing throughout. Mind you, they have all worked for the likes of Credit Suisse, PWC and Merrill Lynch, so they’re not exactly going to be getting the bus home.

As well as reminding everyone that they’re NOT involved in the day-to-day running of the banks, and that they’re not going to “discourage them from operating efficiently” (good call), they’re outlining how they’re planning on easing the banks back into private profitability. They’re going to be prodding RBS along with their retreat from overextended global megabank status, nurturing a “broad group of investors who are comfortable with the direction that the banks are taking, and who are willing to step into our shoes over time”, and are basically going to be in this for the long haul. They maintain that even if share prices go up, and remain robust, they’re going to wait for the economy to catch up before selling off their assets. And they’ve got a long way to go – take a look at this most depressing of tables:

So losses have decreased by over £7bn in five months, which is encouraging, but they’re still £10.9bn. It’ll be a long time before the government can reasonably frame a selloff as being profitable and defensible in a resurgent economy.

Their plan is to avoid big headline-grabbing selloffs, and instead play it slow – they suggest that a series of small sales, that don’t distort the market either before or after a sale, and that incrementally build confidence, are the way forward. They’re also planning to use a variety of different types of selloff – as well as traditional placements, they might deploy exchangeable debt issues, where a “sale” is made now at an agreed price, with the shares actually being sold at later date as long as that price is met or exceeded.

They’re also keen to show that, along with the rest of the Treasury and its attendent bickering sisters, they’re dedicated to reforming compensation, risk management, and executive appointments. The FT reports that thanks to the outcry over Stephen Hester’s bonus at RBS, more conditions are to be placed on him receiving the cash. He’ll have to wait five years rather than three to get it, and he would have to hit new profitability targets.

So we just have to sit tight and hope that the massive and unpredictable asset pools of Lloyds and RBS continue to provide returns, and that the confidence of the banking sector as a whole remains high(ish). The government is going to wait until the economy is healthier before selling off its bank assets, and the economy is only going to get healthier if banks continue to provide credit; an upswing in the banks’ fortunes could yet be undercut by wider problems in the economy like unemployment, and wider problems in the economy could yet be created by a fresh loss of confidence in the banking sector. For those reasons the government may end up being in the position of having to stay in the casino even when they’re sitting on a lot of winnings – taxpayers are going to have to be patient for their returns.

Posted by Ben Beaumont-Thomas in Hot Money | July 14, 2009 11:44AM |