Why George Osborne is itching to sell RBS

In 2010, the new Chancellor of the Exchequer was confident that in the first five years of government he would be able to trumpet what he considered a notable achievement - the sale back to the public markets of the state's stakes in both Lloyds Banking Group and The Royal Bank of Scotland.

It proved far harder than anyone in the Treasury thought at the time.

The reasons were myriad.

The banks themselves were in far more of a financial mess than thought, the economic downturn was deeper than expected, the full extent of the appalling misconduct within banking (and the subsequent multi-billion pound fines) had yet to be revealed, and the Liberal Democrat side of the Coalition was far less keen on a sale than George Osborne.

All these factors came together to slow progress.

Sub-prime probe

For Mr Osborne, many of those hurdles have now been removed, or at least reduced in size.

First, the economy is in better shape, a fact that particularly helps domestic-focused banks like RBS that lend to consumers and businesses.

Second, misconduct issues are slowly working their way through the system.

Yes, RBS is still facing a multi-billion pound fine from the US Department of Justice for its involvement in the American sub-prime mortgage market.

But investors believe that once that has been announced, possibly later this year, other misconduct problems (the European Commission inquiry into the manipulation of the foreign exchange markets and a legal challenge over the £12bn rights issue in 2008, to name two) will have less of an impact.

And, frankly, a major bank without any risk issues over bad behaviour is as rare as a hen's tooth.

Which tells us plenty about the depressing state of much of the banking system.

Finally, the Chancellor no longer has to consider the opinions of Vince Cable, the former Liberal Democrat business minister who was far less keen on selling RBS and wondered if it could actually be turned into a state-backed lender.

Mr Cable also felt badly burnt over the controversial sale of part of the government's stake in the Royal Mail.

Two-stage approach

Following the election, Mr Osborne is chancellor in a Conservative majority government.

And the RBS stake sale is back on.

In tonight's Mansion House speech it is expected that Mr Osborne will give the first details of how the government's 80% ownership of RBS will be unwound.

City sources tell me that Mr Osborne wants to take a two-stage approach.

First, an inquiry into the options for a sale and a major study on how it will be done. Second, a timetable for when the sale will take place.

Options for how the bank stake could be sold include a "Tell Sid" British Gas-style retail offer to the public.

Or, more likely initially at least, a sale to institutions such as pension funds of a limited tranche of the shares.

With a market capitalisation of £40bn, RBS is simply too big to sell in one go.

Sale price conundrum

What is important about the inquiry for the government is that it will give political cover and, banking sources believe, will be done by an independent individual advised by an investment bank.

It will look at the vexed question of the price at which the government could sell its shares and legitimately claim that taxpayers are making a profit on the £46bn bailout provided by the state for RBS when it collapsed in 2008.

The government bought the shares in the bank at around £5. RBS shares are trading today at £3.51.

Which is quite a gap and, if it was the only metric to test the "is the taxpayer getting their money back" question, would lead to howls of protest.

But, RBS has already paid back about £5bn in fees and repayments for insurance systems set up by the government as part of the bailout.

That would take the "break-even" share price down to around £4.55 according to an analysis by Bank of America Merrill Lynch.

The government could also argue that the bailouts should be seen in their totality.

And that with the Lloyds stake sale the government has already achieved in credit, the sale of RBS - likely in at least five stages - could at least start at a loss.

Using that argument, Bank of America puts the break-even price as low as 360p.

Further, once the government starts the sale, the share price is likely to respond positively as investors gain confidence that more shares will become available and the government "overhang" - the propensity for majority shareholders in companies to depress the overall share price - reduces.

RBS has always been mustard keen on the government starting to sell its shares. I wrote about why.

It looks like the day that wish comes true is about to come a little closer.