Why are the government being blamed for the Royal Mail share price being set too low?

[joanofarchitrave]

The government followed 'expert' advice from Goldman Sachs and UBS that going for a higher price would be risky. And those banks both presumably then made fortunes on the extremely active market that resulted from the lower price. Meaning profits leaving the country to America and Switzerland, and on a smaller scale, to individuals in this country who, to put it charitably, aren't struggling to survive.

And Vince Cable is being put on the spot for it. What if he had gone against all the advice and the share issue had been seen as sluggish? He would still have been put on the spot for it.

Who needs conspiracy theorists when the world is so comprehensively set up for the benefit of some people and the cost of others?

[Isitmebut]

The government is to blame for the problems with the Royal Mail floatation as it was their policy, their timing, and governments in general never understand markets.

If you want a cure for insomnia I have explained the problems better on this post on 'Politics', but if anyone is happy to just blame the coalition and vent, don't bovver, carry on here (or the other post) regardless.

www.mumsnet.com/Talk/politics/2042121-The-Royal-Mail-Sale-kafuffle

[Catkinsthecatinthehat]

The government similarly screwed up a land deal with the Qataris in 2011, selling a prime London site for a knockdown £550m. The buyers are looking at a £1bn profit.

To add insult to injury with the Royal Mail sell off, they are trying to flog the Mount Pleasant sorting office site in central London for a luxury housing development. The site straddles Islington and Camden Councils who have both rejected the proposals as having too few affordable homes (12% against local Council targets of 50%). Local prices are insane and new developments in the area have become 'buy to leave' hotspots as well.

The Royal Mail wasn't happy with the rejection so went directly to Boris and asked him to take the decision away from democratically elected councillors and decide it himself. It's a rarely used Mayoral power, supposed to be deployed when local decision making has failed - not when Boris's mates haven't got their own way.

Boris hasn't ruled yet but has described objectors as “bourgeois nimbys”, so we can see how this one is going to play out aren't we?

Additionally, the sell-off was held back until just after the privatisation, so profit goes to the shareholders not the taxpayer.

[lessonsintightropes]

Whilst I am not a fan of any of the major political parties, Labour also dropped a bollock and lost the exchequer billions by selling off most of our gold reserve at an historic low - from which it has now bounced back.

[Isitmebut]

Lessonsintightropes...The sale of around 40% of our gold reserves soon after Labour came to power in 1997 was indeed a government cock up from start to finish and there was real no reason for it then, before, or since.

Never mentioned in their 1997 manifesto, Brown & adviser Balls failed to realise that gold historically appears to trade in regular cycles, roughly 20-years down, 10-years up, and as the previous high (over $800 an ounce) was around 1980, come the late 1990’s and trading under $300, it was ripe for a bounce.

The City gold houses and the Bank of England told the government it was unwise to announce a huge sale, over several auctions, in a weak market and near a cyclical low, but the government went ahead and other central banks were the main buyers, including China.

If memory serves the average auction price of our gold reserve sale was around $278 an ounce, the cyclical high of gold was over $1,900 an ounce around 11-years later – a very expensive mistake, to my knowledge, that was a switch into the (then) new Euro – like some Hedge Fund trade.

Someone one day should ask Mr Balls the reason, as he was there from the mid 1990's and advising.

That’s why I mentioned that UK governments and the markets shouldn’t play together, and both administrations recently must take responsibility for part nationalising RBS, paying an investment banking revenue stream premium with tax payers money, losing the best revenue earning people within months and looking to turn it into a commercial/high street bank.

The problem with that is that it would see their stock price trade at a far smaller premium to RBS's investment banking peers – thereby ensuring it is unlikely that we (the taxpayers) will ever get our money back.

[Catkinsthecatinthehat]

The gold reserve probably shouldn't have been sold - but when it was, it was sold at the current market value.

The Royal Mail has been sold at near half market value at a time when it was making over £400m per year profit. The fact it was 24-times over-subscribed at launch would indicate what a mess the government made.

[lessonsintightropes]

Catkin whilst I am clearly not as well informed as Isit, whilst it might well have been the market valuation at sale, it was a shit time to sell. Like selling an Islington town house in the 90s only to see it zoom up in value by a daft multiplier in a few years, as the housing market is less predictable that the gold market. I think Isit's analysis of why the Royal Mail valuation was a poor one is pretty spot on, even if I do suspect s/he and I are at different ends of the political spectrum.

[BillyBanter]

It shouldn't have been sold at all.

[Terrortree]

Because the opposition didn't sell it.

[BillyBanter]

I think Labour did sell off bits of Royal Mail/Post office. I could easily be misremembering though.

Or is it that the profitable bit has been sold into private hands and the loss-making bit kept by us?

[Isitmebut]

It appears the main reason Labour did not sell off any of the Royal Mail, was they didn’t want to ensure the pension rights of the postal workers – via a funding deficit that was getting worse annually, and wasn’t going to go away..

Peter Mandelson abandons plan for part-privatisation of Royal Mail
• Business secretary blames poor market conditions
• Trouble looms over £10bn pension deficit
www.theguardian.com/uk/2009/jul/01/royal-mail-mandelson-part-privatisation?guni=Article:in%20body%20link

“As part of the deal, the government had been planning to take on the £10bn pension fund deficit, as well as to change regulation.”

“But now Mandelson has put himself on a collision course with Royal Mail, its pension trustees and unions by refusing to bail out the postal company's estimated pension deficit.”

“The trustees are expected to revise their estimate of the shortfall from the current figure of £3.3bn to at least £10bn in the next few weeks. This would require Royal Mail to more than double its annual payments to plug the deficit, which would bankrupt the company.”

I'd say the only real winners via their shareholding and secured pensions are the Royal Mail workers themselves - so maybe Billy someone, the trade union geezer, should tone down his gasted blabber re the sale.

[Catkinsthecatinthehat]

Gold is extremely volatile, and it's not really a predictable cyclical market. It took 11 years from the Brown sell-off to rise to its highest price, but it's since sunk again. The proceeds of the sale were also invested in foreign currencies I understand, which have risen steadily?

The problem for Cable is that prices shot up immediately on floatation, and are now 70% up a few months on. And unlike a volatile trading commodity, the Royal Mail was a stable company, so this should have been predictable. By the sound of it one set of hired advisors (Goldmans) were telling him to set one price yet advising their other clients the shares were worth double. He took over 20 valuations from different banks and still set a price which was apparently far below the average valuation.

And in any case the RM was a successful public service which didn't have to be sold.

[Isitmebut]

Catkins…firstly re the Brown gold sale

Gold is volatile and tends to overshoot on both the up and downside of cycles, but in the late 1990's it had been TRENDING down for nearly 20-years, and the reason gold bounced off a 20-year low WAS TRIGGERED BY BROWN.

The Uk and another central bank, which may have been the Swiss had indicated that they wanted to sell a large quantity of gold into the markets, and the European Central bank and others with massive gold reserves themselves asked them not to. The UK chose to ignore those central banks, the BoE and the City gold houses and went ahead via several auctions, lowering the price.

Afterwards the central banks all agreed no more sales, and as the UK’s gold had been bought by mainly central banks (firm hands), due to the 20-year low, and little supply at those prices, the markets saw this as a fundamental and technical buying signal – and that low price and subsequent bounce, was affectionately nicknamed the ‘The Brown Bottom’ – catchy, huh?

As to the probability of a bounce after 20-years, the 20-10 year commodity cycle goes back around 200-years – I’d try to find you some charts if pushed to.
www.cnbc.com/id/47608840
“The 200-year history of commodity prices shows a repeated trend of two decades of price declines, followed by one decade of price gains, according to Sharma.”

The extended up cycle of gold after the low was fuelled by the weak dollar, the gold bugs expectations of near hyper inflation due to post crash loose money e.g. global QE, and generally the end of the financial world as we knew it – was over bought and as the $ strengthened, inflation is non existent in the world and the financial markets recovered, gold then pan-holed in price.

Re the currencies purchased as a replacement, as I alluded to due to the timing, when everyone predicted that the (then) new Euro was going to be a strong global currency and was being hyped up, I suspect that Mr Brown was being advised that a switch from a depreciating in price gold, into this new expected-to-appreciate Euro, was a good idea and we’d be seen as ‘good’ Europeans – the problem was the Euro then pan-holed on launch.

The moral of this story is that the UK is not a fricking Hedge Fund, trying to predict expensive/cheap anomalies in markets and betting the UK's 'family silver' on it.

[Isitmebut]

Catkins…re the Royal Mail sale and your points.

Firstly what it has done since the first few weeks of launch is irrelevant, as if equity markets would have crashed, is anyone try to tell me the Royal mail price would be at the current level?

Next the Royal Mail is an ‘old industry’ business, with growing competitors, seeing ever depreciating letter traffic, needing a huge investment to mechanise/modernise to remain competitive, employee intensive, with a militant trade union – so hardly an investment no-brainer, in a volatile stock market, where better opportunities present to global institutional investors on market corrections each day.

Re the Investment Bank’s pricing; generally speaking their clients i.e. huge global corporations, have instructions to price a bond or equity issue as tightly as possible, especially if frequent borrowers, as a corporate treasurers job is to obtain funds from the market as cheaply (to the company) as possible – so in my opinion if left to a top ten investment bank manager e.g. Goldman Sachs, who gets their fee no matter if the issue trades at a premium or a discount at launch date - the issue would have been priced very finely, using existing issues, to new investors.

And they can do this as IF the issue falls from the issue price, the investment bank manager usually has a ‘price stabilisation facility’, agreed with the borrower/issuer, allowing them to go in and support the issue if necessary, by buying bonds/stock out of the market place and feeding it back in at a later date, at the borrower/issuers expense.

My point is that the decision to price the issue at the level they did HAD TO BE THE GOVERNMENTS, being overly cautious to guarantee a successful launch, which would have brought in new interest to the Royal Mail issue (especially if equity markets had settled down by launch) in the days before and after the launch, so may have squeezed the pre launch market makers ‘short’ positions driving prices even higher - and with a shares rationing policy, would have multiplied the demand to shares offered ratios.

Investment Banks reputations in Lead Managing bond/equity issues are not enhanced by launching issues too cheaply, they would always want on first day a small premium to the issue price, which means they priced it accurately/as tight as they could, but left the investor happy with a small profit.

If anyone if government was so insecure they had to ask 20 investments banks to price the Royal Mail issue, they were too nervous a decision maker to handle it – it does not happen with corporate issuers – as once they have decided to mandate an investment banking manager, they both trust and allow that manager to carry out their instructions.

[BillyBanter]

I've just read that Osbourne's best man made a £36m profit on his RM shares.

How fortuitous. Some people are just lucky, I guess.

[Isitmebut]

Unless you think Osbourne ensured that anyone received preferential shares, that observation is rather pointless.

How much did those workers at Royal Mail who WERE given preferential shares, make?

[BillyBanter]

A tad less than £36m for those who could afford to buy any. At least they've contributed to the Post Office's success.

It's another case of privatising profit. It should not have been sold.

[Monty27]

Because it was nationalised. Like BT, gas, electricity, railways... yawn I'm old.

[PigletJohn]

The way advisers and consultants work, you choose the ones who you think will give you the advice you want to receive. They ask you enough searching questions to find out what you want to hear, and tell you that.

If for some reason they don't, you defer a decision and look for some different advisers. If you are the person responsible for making the decision, and paid to make it, it's your decision.

[niceguy2]

This is the equivalent of selling your house for £100k then getting flak because the buyer flips it straight away for £110k

Thing is, you price it at what you think it will sell at and take your chances. Noone, not even the government has a crystal ball.

The gold thing is slightly different. Because common sense dictates you don't just sell a HUGE quantity of gold at the same time because the price will fall. You should drip feed it into the market over time.

[Catkinsthecatinthehat]

Niceguy - this isn't a minor flipping though. If your estate agent recommended that you sell your flat for £100k, you took his advice and sold it to his mate, who immediately sold it for £170k, you'd rightly think it had been undervalued and a bad deal struck.

I believe the gold was fed into the market slowly, with auctions over three years, to prevent falls. But as isitmebut said, it was an asset which had declined for 20 years in any case. The case to sell - at the time - would have seemed reasonable.

[niceguy2]

I thought GB announced his intention to sell the gold? I could be wrong on that one.

As for the Royal Mail valuation, time will tell I guess. I always thought that governments tend to privatise cheaper to both encourage the public to buy shares as well as to make sure the price goes up. Because if it went the other way straight away then the opposition would make a meal of that too.

In this case it does seem that they have undervalued it by a lot but chances are it's more likely through incompetence than some dodgy backroom dealing.

Longer term though Royal Mail need to sort their act out or this share price will definitely plummet. It can't be right that I can send a small parcel cheaper using someone like Yodel or Hermes than through Royal Mail! I mean come on!

[Isitmebut]

Catkins….a country’s Gold Reserves are called ‘reserves’ for a reason, as in a crisis should our currency or credit worthiness be deemed next to rubbish, our government can use gold to pay our debts – and in 1997 we had the fastest growing economy in Europe, so there was no crisis – so there is NO excuse.

Most countries already had more gold reserves that us and take every opportunity to add to those reserves. In the financial crisis a decade later, what would have happened if Sterling, that I believe went from over $2.10 to around $ 1.35, would have kept falling?

It was during the LAST great recession that the UK came off what was called the Gold Standard, where the currency that was issued by a country was BACKED by the equivalent value of gold in the BoE’s vaults – and arguably(?) if we would have had the Gold Standard in the decade from 1997, we would not have seen the explosion of bank balance sheets, credit and debt .

www.investopedia.com/ask/answers/09/gold-standard.asp

“The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931 and the United States abandoned the system in 1971. The gold standard was completely replaced by fiat money. The term fiat money is used to describe currency that is used because of a government's order, or fiat, that the currency must be accepted as a means of payment.”

“Today, the price of gold is determined by the demand for the metal, and although it is no longer used as a standard, it still serves an important use. Gold is a major financial asset for countries and central banks. It is also used by the banks as a way to hedge against loans made to their government.”



Re your point on how Brown would sell tons of gold that trades by the ounce, once a country has announced the total amount it will sell of anything e.g. government bonds, the total size gets priced into the market place and will affect the price range until that known supply has hit the market and from a technical perspective, been absorbed by clients or sitting in dealers inventories.

Investors and dealers worth their salt do not buy assets in weak markets for a price appreciation, when they know that a significant new supply is coming down the government chute anytime soon.

[PigletJohn]

Isitmebut

Are there still any countries whose currency is convertible into gold?

What is the point of a country with a non-convertible currency having gold reserves?

[Isitmebut]

P.J…..to my knowledge no countries currencies are now pegged to the gold standard, but many are pegged to the U.S. dollar or a basket of currencies, which is part of the reason for gold moves, as it seen as a hedge against dollar risk/exposure – so does the opposite in price terms.

Re the point of gold reserves, apart from the scary notion of issuing a pound coin without anything of monetary value behind it at all, is that it is so universal, a country with gold always has collateral, in good times and bad.

Lets take as an example Greece at it’s worse, when if it could borrow at all, it was in relatively small amounts and over 14% (while we were borrowing £140 billion plus a year, at around 1.50% for 10-years at 1,6%, gold reserves could always be sold to pay your bills, which incidentally rises in value during a global crisis.

What if Mr Brown had decided to just sell gold and invest in the Public Sector; as ‘cherished’ as they may be, if the international pooh had hit our fan harder, what Ministries would be accepted by creditors as collateral for loans – and I have a feeling gold reserves influence country credit ratings.

I'm sure there are other reasons, but all those other countries can't be wrong buying ours when flogged off.

The thing is, the government initially lied in parliament to the amount despite ongoing questions from Sir Peter Tapsell the current Father of the House (oldest fart in parliament), sold more, then it went all secretive on the reason and results of its hedge fund trade. It took years for the newspapers to find out what we now know via freedom of information and the best article I saw was from The Times, probably The Sunday Times.

[PigletJohn]

so what do you do with the stack of gold, if you aren't offering to back your currency with it?