Searching for the 'Exit'.

With the UK stock market improving it will come as no surprise to learn that the UK Government is starting to look for ways to reduce the public debt it incurred from its recent intervention in the UK banking industry.

The UK Government acquired substantial shareholdings in both the Royal Bank of Scotland and Lloyds Banking Group, amongst others, at substantial cost to the UK taxpayer.

Exit from this industry is easier said than done however. Indeed perversely a sale of the stock held by the government will incur substantial fees (and presumably bonuses!) paid to the investment banks who, it has been argued, played the lead roles in the creation of the current crisis.

Not bad work, if you can get it, one might say. You only need to look at the orderly queue forming at the Treasury’s door to know there are plenty of investment banks who are eager to get there hands on some more of the public purse for assisting with a future sale of the governments investments.

Is government exit from this sector entirely shrouded in doom and gloom however?

UK Financial Investments (UKFI) looks after the public investment in the banks. It still has a variety of options to pursue. They could issue bonds exchangeable for RBS or Lloyds shares. This would offer investors a capital guarantee and exposure to a share price upswing. Alternatively they could issue warrants to sovereign wealth investors, as Barclays have done so successfully in the past.

Whichever route UKFI eventually take we would urge caution.

Timing of the divestment will be key. Too early and the price received may, with the benefit of hindsight, look like a steal for the purchaser.

If the recession lasts as long as some predict it might prove a worthy strategy to hold onto the investment in bank stock for longer than the present government might wish. Given there has to be an election in the UK in 2010 at the latest, we hope political expediency does not take precedence over getting our money back!