If Business Secretary Vince Cable had simply dumped up to £1bn of taxpayers' money off the top of his Department's Victoria Street HQ to flutter into the lake in St James's Park, the British public would rightly demand his immediate resignation.
The recent fire sale of Royal Mail saw a less dramatic but equally disastrous erosion of taxpayer value; the company's severely underpriced shares were snapped up by a select group of priority institutional investors, many of whom cashed in their allocations as soon as they could. With a 38% price rise on the first day of trading, and the shares now 58% above their starting price, the scale of loss to the taxpayer is staggering.
But during an evidence session in front of the Business, Innovation and Skills select committee this week, Mr Cable brushed off this rapid profit-taking as a 'fact of life', and simply 'the way financial markets operate'; astonishing comments for someone who previously stressed the importance of attracting a committed, long term shareholder base to protect the company against share volatility. Crucially, he had been given no assurance that the large investors who were initially allocated 22% of Royal Mail would stay with the company for more than a few days or weeks. The 'gentlemen's agreement' Mr Cable struck with the priority investors he had lined up meant nothing as soon as the shares began to increase in value.
The price has held up extremely well, showing what a valuable proposition Royal Mail was to investors, and the future potential it has. Responding to the BIS committee's questioning, the Ministers continued to claim that the threat of industrial action was reason for keeping the initial offer price so low. Yet neither Mr Cable nor his Coalition colleague Michael Fallon could name how many days Royal Mail lost to industrial action in the year before the sale. The answer is no days were lost; the threat of strikes has always been a smokescreen that the Ministers have used to justify a bargain sale price.
Mr Fallon went on to cite high demand for Facebook shares and their subsequent poor price performance as evidence of there being no link between pre-sale demand and the eventual share price. Comparing two totally different companies in this way smacks of total desperation. Royal Mail was a solid, well-managed and profitable company before this privatisation with considerable capital assets, and the oversubscribed offering is testament to its future potential.
The role of the Government's main advisor on the sale, Lazard and Co, should be closely scrutinised. In front of the committee, William Rucker, London CEO of Lazard, asserted that pricing the shares above 330p would have resulted in demand sharply falling away. This is nonsense. The huge interest in the shares before the first day of trading is surely evidence that the price could have been higher and still attracted significant interest. The 38% surge in the price on day one is further damning evidence of how underpriced the shares were.
And who told the advisors to the Government that 330p was the ideal price for Royal Mail shares? Mr Rucker admitted to the BIS committee that institutional investors let him in on this fact - that is, those who would directly benefit from a lower offer price. It seems scarcely worth mentioning how inappropriate it is for the Government's main advisor on the pricing of Royal Mail's shares to have considered the (inevitably conflicting) opinions of the big investors in this way. As fellow committee member Brian Binley MP pointed out, businesses don't normally take advice on the cost of goods from their own customers. Why the Government didn't consider this fact and increase the price of the shares is a mystery.
Most concerning of all is that one of the select priority investors in the sale was Lazard Asset Management, the money managing arm of Lazard and Co. This was revealed to the committee in a letter today from the Business department; information withheld for months, despite repeated FOI requests. Vince Cable cited commercial confidentiality as his reason for not releasing the list of priority investors, but we now know it was to conceal the fact that his main advisor also stood to gain hugely from the sale.
Lazard Asset Management are no longer visible on the share register, meaning that they must have sold their shares for a big profit very soon after trading began. Whether the 'Chinese walls' which financial institutions are required to operate were working at Lazard remains to be seen. It certainly seems incredible that Mr Cable could accept Lazard as both his advisor on the sale of Royal Mail and as a special priority investor. To call this a 'cozy' relationship between Government and advisor is an understatement; it is outright corruption. Financial firms have gotten into hot water for being active on both sides of their client deals before, and this is another example of such a conflict of interest. Mr Cable must come clean on whether he vetted the list of priority investors, and whether he approved the selection of Lazard to that list. And if not, why not?
Given that millions of individual investors either lost out on a chance to buy shares, or were given smaller allocations than they wished, Vince Cable must explain why he put short-term speculators above ordinary investors trying to buy a piece of a valued national institution. He must also explain why a company advising him on the sale of Royal Mail was also accepted as a priority investor; a clear conflict of interest which he bears sole responsibility for.
It is great news that so many individual investors have gained from the jump in the share price, but with so many receiving no allocation at all, and the taxpayer missing out on so many lost millions, there is no way this sale can be labelled the 'success' that Mr Cable is keen to call it.
Those who advised the Government on the sale have yet to receive bonus payments for their work. For overseeing such a significant loss of taxpayer value, and after profiting so much from the sale already, it would be quite incredible if they ever do.