Governments sitting on huge bank share losses

GOVERNMENTS AROUND the world are still sitting on multibillion dollar losses from their direct shareholdings in banks, despite a strong rebound in equity markets in recent months.

In contrast to Switzerland, which sold its 9 per cent UBS stake for a SFr 1.2 billion (€790 million)gain last week, the world’s other major economies – except the US – are sitting on combined losses of $10.8 billion on 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 profit of almost $11 billion on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial body.

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

Since then, Citigroup’s shares have risen, and they closed on Friday at $4.70, increasing the value of the government’s stake by $11 billion. 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 £3.3 billion 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 recently. At the end of June, the shortfall was £11 billion.

With the FTSE World Banks Index up 130 per cent since early March, the paper losses that governments in France, Belgium, Luxembourg and Germany are sitting on have also shrunk.

Despite sharp criticism of the costly bailouts of lenders such as Citi, Bank of America and Wells Fargo, the US treasury has reaped vast gains from the coupons payable under the troubled asset relief bailout funding, most of which has been repaid.

However, critics of the bailouts say 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. – Copyright Financial TimesLimited 2009