Royal Bank of Scotland's issue has done shares no good

May 16 2008 By Nevill Boyd Maunsell

If you have the misfortune to own shares in The Royal Bank of Scotland, today you have the opportunity to win back a little cash as a consolation for the prospect of getting none for this year's interim dividend.

It is being paid in shares, meaninglessly, in the view of Barclays finance director, "not a dividend".

Now the Royal Bank's rights issue has been formally nodded through at yesterday's special meeting you can sell your rights in the market.

The price of your existing shares adjusted itself yesterday to take account of the fact that your right to buy more at a deeply discounted price is worth cash on the nail.

Your chairman, Sir Tom McKillop suggested you might care to sell enough of your rights to raise cash to take up the rest - provided you cannot think of a better use for the money.

The Royal Bank's issue has done the shares no good at all. Sir Tom spelled out why. The £4 billion he hopes to raise by selling Direct Line, Churchill and the rest of the Royal Bank's valuable insurance side will not fully offset the £4.3 billion lost in writedowns - after tax, that is, the rest of us pick up a tab for £1.6 billion as taxpayers.

So the £11.7 billion shareholders are chipping in for the rights just preserves their stake in a smaller company.

Mind you Barclays' shares are being punished because their directors cannot make up their minds whether to take the plunge with a rights issue or raise the capital they need some other way.

Gordon Brown dithers, the boys at Barclays keep their options open.

One consolation amid the present mayhem is that British sub-prime mortgages have not gone down the plug like the American ones. Various reasons are put forward - British sub-prime lenders had the wit not to throw money at the NINA (no income no assets) community as happened in the States, housing benefit can in some circumstances pay British mortgage interest, that unemployment did not start creeping up until December and then in a really rather undramatic fashion.

There is a murkier possibility, raised by the Financial Services Authority's £900,000 fine on Thinc, a big network of financial advisers.

Thinc's sin was failing to keep coherent records of the advice it gave to people who bought sub-prime mortgages.

The lack of records prevented the FSA from establishing whether or not any of these sub-prime borrowers could have got much cheaper prime mortgages if they had been better advised. But the suspicion is plainly there - reinforced by the records the regulator did find showing that Thinc did not probe too deeply into the finances and credit records of some of these people and that some of them were sold the mortgages that were wrong for their circumstances.

It is tempting to take perverse comfort from the thought that people lured by mis-sellers into British sub-prime mortgages may have tolerably well ordered finances and are therefore far less likely to default than their luckless American counterparts.

That may be a misjudgment. Anybody paying over the odds for their mortgage is more likely to fall behind with it than they would with a cheaper deal.