Banks giveaway plan fails to excite

Deputy Prime Minister Nick Clegg arrives at 10 Downing Street, in central London May 24, 2011.

LONDON (Reuters) - Investors have been critical of a proposal by the deputy prime minister to give every voter shares in the country's state-owned banks, saying the plan could be counter-productive and impractical.

Members of the public also gave a mixed reaction to the proposal while the British Bankers Association only said that the idea of giving the public the opportunity to get some shares when the banks are re-privatised had "real merit."

Deputy Prime Minister Nick Clegg, who heads the coalition government's junior Liberal Democrat party, said he wanted to create a "people's banking system."

He said he had written to Chancellor George Osborne and Chief Secretary to the Treasury Danny Alexander, asking them to look into introducing a "mass share-ownership scheme" as part of the privatisation of bailed out lenders Royal Bank of Scotland and Lloyds.

However, fund managers were sceptical that Clegg's idea would work in practice.

"You can devise a plan like this but I can't see the point of it," said Royal London Asset Management fund manager Jane Coffey.

She said it would be easier for the government to focus on cutting the country's debt and liabilities in order to increase the wealth of taxpayers.

"It seems to me to be the most expensive way of distributing the shares that one could think of, with the least benefits for taxpayers and the most benefits to the investment banks who will charge the fees on it," she said.

SVM Asset Management fund manager Colin McLean said many people could want to get rid of those RBS and Lloyds shares as soon as possible under the Clegg proposal, rather than hold onto them, and a mass sale could then further destabilise the banks.

"It just doesn't look like a solution," he said.

The chief executive of the British Bankers' Association, backed the plan only to some extent. "There is real merit in a proposition that gives the public the opportunity to get some shares in these two banks when the government stake is privatised," Angela Knight said.

The idea received a mixed reception from members of the public interviewed on the streets of central London.

Jeff Clark, 67, a photocopier engineer from north London, said the proposal was a just way to repay taxpayers who bailed out the banks and expected that most would sell the shares.

"I think it's fair. Taxpayers have paid for the banks and so we should get the money back. I think there will be an avalanche of people selling ... I wouldn't think there would be that many people who would decide to hang on to them."

Others were more sceptical.

"I just think it's a gimmick. For the majority of people it won't make any difference at all, they won't understand the significance of it, and the shares will just find themselves back into the commercial market anyway within a year," said Ian, a 55-year old company executive from south west London, who declined to give his full name.

A Treasury spokesperson said it would look at all options but that the question of share giveaways had not yet arisen.

Giving the public collective ownership of the two banks could create 46 million shareholders if every adult in Britain were given shares -- three times as many popular shareholders as created by former Prime Minister Margaret Thatcher in privatisations in the 1980s.

Britain pumped 66 billion pounds into the two banks to rescue them during the global financial crisis, giving the state an 83 percent stake in RBS and 41 percent of Lloyds.

The experience of America's Citigroup has shown how governments can recoup the cost of tax-payer funded rescues.

The bank took $45 billion (28.2 billion pounds) in bailout funds in 2008 and 2009, but since then has reported its first full-year profit since 2007, shed the last of the U.S. government's common share stake, and reinstated a nominal dividend to shareholders.

In contrast, the British taxpayer has sat on losses on their RBS and Lloyds stakeholdings as both lenders wearily strive to recover from the effects of the crisis.

Britain acquired its shares in RBS at an average price of 49.9 pence, and got its Lloyds holding at an average price of 63.1 pence.

However, RBS and Lloyds shares have continued to trade well below the price at which the state bought into the companies as part of the bail-out.

RBS shares were down 5.5 percent at 38.46 pence in late afternoon trade, while Lloyds fell 3.9 percent to 46.66 pence, amid a broader market decline due to worries over the global economy.

Based on those prices, Clegg's plan to give every Briton 1,450 RBS shares and 440 Lloyds shares would mean that an individual UK taxpayer would acquire a bank stakeholding worth roughly 760 pounds.

(This story was corrected in paragraph 11 to adds dropped phrase “only to some extent”)

(Additional reporting by Tim Castle, Jodie Ginsberg and Christina Fincher; Editing by Greg Mahlich)