Hedge funds snap up 60% of first tranche of shares as critics brand UK government’s share sale as ‘short-changing the taxpayer’

George Osborne has tried to justify a £1bn loss on the first sale of shares in Royal Bank of Scotland in the face of criticism from politicians and City analysts by saying it was the right thing to do for the British taxpayer.

The chancellor sanctioned the first sale of the stake in RBS, announced on Monday night, to cut the taxpayer shareholding from 79% to just below 73%. Slightly more shares than expected were sold after the stock market closed on Monday, crystallising a loss for the taxpayer after £45bn was ploughed into the bank to rescue it amid the financial crisis of 2008-2009.

RBS share price graph RBS share price graph

Around 60% of the shares were bought by hedge funds.

Royal Bank of Scotland: from bailout to sell-off Read more

The £2.1bn of shares were sold at 330p – below the 337p at which they closed on Monday and less than the average 502p that the taxpayer paid for them. If all the shares were sold at this price, the loss would be £15bn. The bank’s shares ticked higher to close at 339p on Tuesday.

UK Financial Investments, the body which looks after the taxpayer stakes in the bailed out banks, is likely to be called to give evidence to the Treasury select committee before the end of the year. Andrew Tyrie, the Conservative MP who chairs the committee, said: “The sooner the banks are put back in the private sector the better. RBS is our biggest small business lender and very important to the sustainability of the recovery.”

Shadow chancellor Chris Leslie said the sale had been rushed, especially as the bank is awaiting a penalty in the US over the way it sold mortgage bonds before the crisis. That bill could reach as much as £8bn, according to some estimates.

“Getting back the taxpayers’ money is not an impossible objective and the chancellor is dismissing this too lightly,” said Leslie.

Osborne issued a statement in which he said: “This is an important first step in returning the bank to private ownership, which is the right thing to do for the taxpayer and for British businesses: it will promote financial stability, lead to a more competitive banking sector, and support the interests of the wider economy. Now is the time for RBS to rebuild itself as a commercial bank, no longer reliant on the state, but serving the working people of Britain.”

He did not speak publicly, leaving Treasury minister Harriett Baldwin to try to explain the sale at a time when shares were at a low for the year. Among the reasons she gave was the encouragement of Mark Carney, governor of the Bank of England, who wrote to the chancellor in June to encourage a sale.

John Mann, the Labour MP who sits on the Treasury select committee, said that rather than use the proceeds to pay down the national debt, the government should have used it for public spending, such as infrastructure projects. “It’s a political move. Osborne is trying to sell off both [RBS and Lloyds Banking Group] before the Tory leadership battle, which he will enter,” said Mann, who also expressed concern about Carney’s intervention in the sales process.

Ian Gordon, a banking analyst at the stockbroker Investec, said he was “perplexed” by the timing of the sale: “[Monday] night’s disposal at 330p achieved a new 2015 low and arguably sold the taxpayer short.”

“This will likely be a subject of controversy for a while akin to the Gordon Brown sale of UK gold reserves 15 years ago,” said Brenda Kelly, head analyst, at brokers London Capital Group.

The Treasury published letters from UK FI and John Kingman, the second permanent secretary, who both recommended to the chancellor that the sale should begin. Kingman signed the letter in the absence of the most senior civil servant in the Treasury, Nick Macpherson.

Bankers working for the government sold 5.4% of the taxpayer stake – around 630m shares – rather than the expected 5.2% but could have sold more than double that amount because of the demand from institutions. Just under half were bought by investors in the UK and around 40% by US investors.

Osborne had signalled the sale after taking advice from bankers at Rothschild, who have calculated that the loss on RBS can be outweighed by profits on other bailed-out banks, such as the Lloyds Banking Group and Northern Rock.

Around three-quarters of the RBS stake is earmarked for sale during the five years of this parliament.

The winners and losers in Osborne’s RBS sell-off | Letters Read more

Ross McEwan, chief executive of RBS, said the sale was “an important moment” for the bank “and reflects the progress we are making to become a stronger, simpler and fairer bank”.

He added: “There is more work to be done but we’re determined to build a bank that the country can be proud of.”

The share sale has taken place just weeks before Sir Philip Hampton, who was appointed chairman at the height of the financial crisis, leaves to chair GlaxoSmithKline.

The shares were sold at a 2.3% discount on the market price, a tighter range than the 3.1% discount at which the first tranche of Lloyds Banking Group shares were sold in September 2013.

The government’s stake has now fallen from 42% to just under 14% following the latest disposal earlier this week.