Government and company

The UK government is reducing its stake in the bank, RBS. By the market close on Monday, the government sold approximately 925 million shares, 7.7% of the bank. After today’s  trade, the UK government should still hold around 63 per cent of the bank, and the government plans to reduce its holding to zero over the next five years. The shares were bought by the UK government during the financial crisis. The UK did not pay much for the bank at that time since the bank was at the edge of bankruptcy. Despite the money put into saving the bank during the crisis period, the trade should still give some profits to the UK government due to the share price difference. Such investment does not only happen to the government, many private equity firms are using similar investment strategies. However, firms and governments have different goals. Governments buy firms, especially banks, to stabilise economies, as the firms they buy are usually large corporation and can have systematic influence on their economies. The firms bought by private equity firms are those which are potentially more profitable and not being managed well, so the private equity firms buy these companies merely for profit reasons, and this is understandable.

However, although governments do have different goals, they can make profits as well. The firms they buy are large companies and have systematic influence on the economies. The characteristics of these companies should be attractive to investors, especially they are more secure as they are highly likely to be rescued by their governments; therefore, the shares of these companies should have good prices. Once the governments can manage these companies well and rescue them from crisis periods, basically they are doing nothing much different from private equity firms and can potentially make profits out of it.

To conclude, the rescue programmes during crisis periods could potentially be a profitable opportunity for governments, and should not be seen as a waste of taxpayers’ money, even if we do not consider the externalities of such programmes on our economies.