The bailout announced by Alastair Darling does now mean that up to £50bn will be spent buying preference shares in the banks. I was disappointed to hear that these shares won't have voting rights - but it seems they will be entitled to dividends when the banks become profitable once more.
The advantage of having shares with voting rights would be that the government could use them to make the banks change their reckless behaviour. They could also remove the members of the banks' boards, who seem not to have been fulfilling their duties properly.
The banks' market capitalisation is apparantly so low that £50bn would be about half the market capitalisation of the British banking sector. If the government had got voting shares then, it could have taken 49% stakes in them all. If it chose to take 51% stakes then it probably could with the £50bn as well. That would, though, have been hugely controversial as it would have meant the state would be having direct control of virtually all the banks. This is not something that would concern me, but I am sure that free marketeers would have been up in arms about it.
By buying preference shares, the government has avoided the charge that it is trying to take control of the banks. But, to my mind, they _do_ need to take control. After all, it is hardly as if the private-sector management has been that good! It is time to give the state a go.
We will only know in the medium to long-run whether the state can actually make money in terms of dividends etc from the preference shares. If so, then this could prove to be a good investment by the government and gives it a direct stake in the profitability of one of Britain's biggest economic sectors.
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