THE SPECTATOR
UNPOPULAR CAPITALISM
he last time a British Government and the City got into a row about BP shares, the Government was buying. On 31 De- cember 1974, in the very depths of the last bear market, the Bank of England bought Burmah Oil's 21.5 per cent stake in BP, for £179 million, which was enough to save Burmah from bankruptcy, but not enough to please Burmah shareholders when they realised what a deal the Government had struck.
That is why this Government has so many BP shares to sell, and it is in effect the old Burmah stake, plus another ten per cent, which was sold for £6 billion to City and foreign institutions. So the Exchequer has made a return on its investment of 2,300 per cent, or 180 per cent for each of the past 13 years. Which is more than it would have made by leaving its money with the Abbey National. Yet there is a great danger that the result of the turbulence of the past fortnight will be to persuade the British people that, after all, they should leave all their excess funds with the build- ing societies, and forgo the chance of creating real wealth.
Even before the recent collapse of the stock market, the small investor had disco- vered that the City, post Big Bang, had become a less friendly place. While com- missions, for big investors had declined or disappeared, deregulation has meant that it is now much more expensive than it ever was to deal in small amounts — up to £2,000.
The unit trust companies had always claimed that they had the ability to make equity investment easier and cheaper for the small investor, yet when unit trust holders attempted to bale out at the beginning of the crash, the vast majority of unit trust companies — if they answered the telephone — were unable to give them any idea of the price they could get for their units.
It is not as if popular share ownership in this country is so robust that it can easily shake aside such insults. Indeed it is arguable whether popular capitalism really exists in Britain at all.
The Government takes great pride in the fact that now almost ten million citizens own shares. Yet over three quarters of that number own only one or two shares, while barely 300,000 own ten or more — or a sensible spread of risks. The political idea is that people with shares will vote for a party which fosters respect for property and free enterprise. But it is hard to believe that someone's view of society will be much altered by the possession of £1,000 worth of British Gas shares, any more than it would be by the acquisition of a similar amount of premium bonds.
What is clear is that the Government has created a new breed of small shareholder which is even more ignorant of the risks and rewards of equity investment than the professionals in Tokyo, New York and London who drove share prices up to such unsustainably high levels. Up to 2,500,000 applied for the BP issue, with the vast majority coming in after the collapse of the BP shares to a price well below that offered by the Government.
In the past the Labour Party has scoffed at the Government for selling privatisation pounds to the public at 50 pence each. Now the public has shown that it is more than willing to pay a pound to get 50 pence from the Government.
The Government is directly responsible for inducing such idiotic behaviour from the British people, and should therefore feel some shame over the matter. Televi- sion advertisements which merely tell the public to 'be part of the BP share offer, are designed for maximum impact and minimum understanding. Any other ven- dor would be required by the IBA to include, at the very least, a warning on such adver- tisements that the value of the shares could go down as well as up. Indeed the Euro- tunnel group was obliged by the IBA to do just that, much to its chagrin. The adver- tising standards authorities should not continue to treat the Government as a special case in these matters.
In its earlier privatisation share pushing exercises, such as for Cable and Wireless and Enterprise Oil, the Government's television advertising was a model of recti- tude. The suspicion must be that as the bull market went into its final dizzying run, the Government, like investors, had lost sight of the essential volatility of the equity markets. That was certainly the case with the underwriters of the BP share issue, who have only themselves to blame for accepting the unprecedentedly low fee of £18,000 per £100 million of stock under- written.
The Government's innovation of selling shares to the public with meaningless `concept' advertising, rather than by de- scription of worth or value, was just about to catch on. Last month the Royal Insur- ance company mounted the 'Royal Event' in a blaze of glitzy television advertising as a result of which about 100,000 investors jumped into the stock market just before the crash. But at least they, as well as the quarter of a million BP share offer appli- cants, will have learnt an invaluable — if expensive — lesson about risk and reward in the equity markets.
With the end of the bull market, the Government will have to use more sub- stantial methods than crass media hype to stimulate share ownership. For a start, the Personal Equity Plan needs rethinking. By offering capital gains tax exemption on the profits made on investments of less than £2,400 a year, the Government is merely providing a nice little tax shelter into which existing big private investors can tuck away the most profitable last few inches of their portfolios. If the Government really meant business in this matter it should adopt something like the French Monory laws, which allow individuals to offset against income tax their entire new equity invest- ment in quoted companies. Indeed, if the Government was really after the widest level of share ownership it should — as we have argued before — give away the shares in the nationalised industries to the public, in lieu of tax cuts.
The financial markets would certainly be more stable, and less like an unthinking, stampeding herd, if there was a much wider degree of individual share own- ership. For while the week's popular image of the small shareholder might be the man who walked into a Merrill Lynch office in Miami and shot dead his broker, the real story is that last week UK unit trust companies received more client orders to buy than to sell. That is in the spirit of the British Government's brilliant investment in BP shares 13 years ago.
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