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This Is How The Government Ended Up Losing £7 Billion On Its Investment In RBS

After the 2008 crisis, the government bailed out the banks. This is where the money went.

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The British government is going to sell its stake in Royal Bank of Scotland (RBS). It's being reported that the taxpayer will lose £7 billion on the deal.

Danny Lawson / PA

But how did the government come to own a such a huge stake in the bank? And what does that £7 billion figure actually represent?

In 2007, the global banking system ground to a halt. There's some argument over the exact causes, but essentially, it's because banks in the US lent billions of dollars in mortgages to people who couldn't pay it back.

And then they hid those bad loans in ever more complicated financial products which they sold to each other, thinking they had avoided the risk by doing so.The crisis knocked about 40% off the value of the global stockmarkets.
"Dowjones crash 2008" by StefanPohl - Own work. Licensed under CC0 via Wikimedia Commons / Via en.wikipedia.org

And then they hid those bad loans in ever more complicated financial products which they sold to each other, thinking they had avoided the risk by doing so.

The crisis knocked about 40% off the value of the global stockmarkets.

What this meant was that several banks became unable to lend money, or even to allow customers to get their own money out.

And it was going to get worse. Around the world, banks were refusing to lend to each other, and it looked as though ordinary people were going to lose all their money.

So governments in Britain, America, and Europe decided to put money into the banks so that the money would start moving around again. In total, Britain pledged to put £1.16 trillion into the financial sector.

About half of it went on industry-wide measures to get money moving around the economy again: notably, the Credit Guarantee Scheme, which promised investors that if the banks collapsed, the government would pay their debts, and the Special Liquidity Scheme, which encouraged banks to loan more money. (Not all of this money was actually spent – it was just made available as backup.)The rest of it was used either to support individual banks or to buy their shares, making many of them government property.
BuzzFeed / National Audit Office

About half of it went on industry-wide measures to get money moving around the economy again: notably, the Credit Guarantee Scheme, which promised investors that if the banks collapsed, the government would pay their debts, and the Special Liquidity Scheme, which encouraged banks to loan more money. (Not all of this money was actually spent – it was just made available as backup.)

The rest of it was used either to support individual banks or to buy their shares, making many of them government property.

This was, obviously, a huge amount of money. For context, it's about a third more than the government spent in total last year.

It's even bigger when you take inflation into account: £1.16 trillion in 2007 is the equivalent of about £1.44 trillion now.
BuzzFeed / National Audit Office / ONS / Via nao.org.uk

It's even bigger when you take inflation into account: £1.16 trillion in 2007 is the equivalent of about £1.44 trillion now.

Of the money that was pledged to RBS, £46 billion was spent buying shares. It gave the government an 81% stake in the company.

The remaining £202 billion was kept in reserve for an insurance scheme called the Asset Protection Scheme, which protected RBS's assets in the event of some future disaster. That scheme ended in 2012.
BuzzFeed / Via ibtimes.co.uk

The remaining £202 billion was kept in reserve for an insurance scheme called the Asset Protection Scheme, which protected RBS's assets in the event of some future disaster. That scheme ended in 2012.

The government hasn't got any of that £46 billion back yet. And the value of its shares has dropped by quite a lot.

Because RBS has not had a good few years, their value has gone down from 500p when they were bought to about 361p at the time of writing, meaning that the value of the shares now is around £33 billion. That's not quite the whole story: The government has made some money on the deal in the intervening years via fees and repayments totalling about £6 billion.
BuzzFeed / Via uk.finance.yahoo.com

Because RBS has not had a good few years, their value has gone down from 500p when they were bought to about 361p at the time of writing, meaning that the value of the shares now is around £33 billion.

That's not quite the whole story: The government has made some money on the deal in the intervening years via fees and repayments totalling about £6 billion.

Ultimately, according to Rothschild, the investment bank managing the deal, the government can expect a loss of £7 billion.

Which is, obviously, a decent sum. A billion here, a billion there, pretty soon you're talking about real money.

But in the overall scheme of things, the government has actually made a profit.

While it will take a hit on the RBS sale, it's already made large sums from its sale of Lloyds shares and the assets of Bradford & Bingley and Northern Rock. In total, the taxpayer will come out about £7 billion in profit. It's made about another £7 billion from those Credit Guarantee and Special Liquidity schemes we mentioned above.
HM Treasury / BuzzFeed / Via citywire.co.uk

While it will take a hit on the RBS sale, it's already made large sums from its sale of Lloyds shares and the assets of Bradford & Bingley and Northern Rock. In total, the taxpayer will come out about £7 billion in profit. It's made about another £7 billion from those Credit Guarantee and Special Liquidity schemes we mentioned above.

It's not what anyone would have wanted. But all in all, it could have been a lot worse.

Tom Chivers is a science writer for BuzzFeed and is based in London.

Contact Tom Chivers at tom.chivers@buzzfeed.com.

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