Privatising Britain's banks: Buy high, sell low WHEN, at the height of the financial crisis in late 2008, investors and creditors started pulling money out of Royal Bank of Scotland (RBS), Britain's economy teetered along with its banks. "The game was up," Alistair Darling, then the chancellor of the exchequer, later noted in his autobiography. Britain, which since Margaret Thatcher's privatisations had been a standard-bearer for free markets, soon found itself the partial owner of two of its largest banks. In 2008 and 2009 it pumped £46 billion ($71 billion) into RBS and another £20 billion into Lloyds Banking Group to prop them up. Almost five years later the state still holds an 81% stake in RBS and a 39% share in Lloyds - a position that feels increasingly awkward. In a speech on June 19th George Osborne, the chancellor, proposed to begin slowly selling down the government's shareholdings, starting with Lloyds, the healthier of the two banks, with the aim of getting back at least as much as was put into them. A sale of RBS is some way off, he explained. This leisurely approach is mistaken. A faster sale, even at a loss, would do far more to benefit the economy than would holding out for a rise in their shares. It would appear to be a terrible time to sell. By some reckonings shares in European banks are as cheap as they have been since the early 1990s. RBS shares change hands on the stockmarket at about half of the bank's book value. An economic recovery would make the banks more profitable. If they were to pay dividends again they would be more attractive to institutional investors. Eventually bank regulation will settle down (see article). The government would look foolish if shares in RBS and Lloyds were to rocket after the sale, delivering stupendous profits to their new owners. But this is hardly a sure bet. Markets may be fickle at times, succumbing to irrational exuberance or depression, but over time they do a passable job of establishing value. If it were obvious that the banks were deeply undervalued, speculators would be buying them now and driving up their prices. Instead their shares reflect large uncertainties, ranging from a deeper economic slowdown and a collapse in property prices to the possibility that hidden losses may still lurk on their balance-sheets. The one point in time when the shares were undeniably cheap was when the banks were about to topple over. That was the time to drive a hard bargain. And the banks are not passive investments, like bars of bullion, which can be left to gather dust. They are at the heart of Britain's economy. Its health depends on theirs. When the government first nationalised the two banks it promised to manage them at "arm's length" and to allow them to operate as if they were in private hands. But it has been unable to resist the temptation to meddle. The state has weighed in on the pay of senior staff of RBS and on its commercial strategy. In early June it shoved out RBS's boss Stephen Hester, prompting a sharp fall in the bank's shares. More worrying is that the two state-owned banks are the most weakly capitalised of Britain's biggest banks, with a combined capital shortfall of about £20 billion. They are trimming their balance-sheets and cutting lending to the rest of the economy. Loans by these two banks to British households and companies contracted by more than £10 billion over the nine months to March. Two big privately owned lenders, Nationwide and Barclays, increased their lending by more than that amount over the period. Instead of following Japan's disastrous banking policies of the 1990s and allowing undercapitalised banks to keep muddling through, the government should learn from America, where the authorities force-fed banks with capital, using taxpayers" funds when necessary, and insisted they write down bad debts. As a result America's banks have helped its recovery and the taxpayer has made a tidy profit on its bail-outs of banks such as Citigroup. It is politics, not economics, that underpins the government's decision to privatise the banks slowly and to get back at least as much as it paid for them. The Treasury fears embarrassment and pointed fingers; selling at a loss would echo the decision a decade ago by Gordon Brown, then the chancellor, to sell much of Britain's gold at the bottom of the market. Too bad. It would be more foolish still to hobble a £1.5 trillion economy with weakly capitalised, state-directed banks to spare a chancellor's blushes.