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© Phillip Toscano/PA‘Millions of pounds swilled round Whitehall, drenching consultants with fees and fooling ministers into gullible decisions.
The Treasury was badly advised on the sale, relying on firms accused of unethical practices and corporate greed

Thatcher would have screamed, "What! Flogging off her majesty's mail, cheap and to a bunch of spivs?" She always refused to sell Royal Mail. Her latterday apostle on Earth, Margaret Hodge, said as much on Tuesday. As the public accounts committee chairman, she savaged the business secretary, Vince Cable, for last winter's sale of Royal Mail. He had promised: "There is no way we will sell Royal Mail on the cheap." He sold it on the cheap. Hodge called him "clueless".

There was always something odd about last October's Royal Mail privatisation. Both Michael Heseltine and Peter Mandelson had tried it and failed. Driven by the Treasury's need for cash, Cable seemed rushed and nervy. The ground was rolled with a massive relief of pension liabilities, a 30% rise in stamp prices, and post offices detached from the business.

A chief executive was hired, and by May last year the business engineered a 60% surge in profit. It was clearly being gold-plated. So why was it sold as tin? Cable chose Lazards, Goldman Sachs and five other banks to advise on the sale. As anyone who has witnessed these events will attest, they are carnivals of cash.

Privatisation fees alone totalled £12.7m, according to the National Audit Office report. Since the banks advising on price are also placing shares with clients, Chinese walls are put in place to separate "sellers from buyers" within offices. But is this really possible in the City of London, where Chinese walls are most likely made of rice paper? Don't commissions and fees have money dripping from meeting rooms and wine bars, as bankers and lawyers sniff out the nearest and deepest trough?

The banks recommended an asking price as low as 330p a share. They said the big institutions whom Cable was eager to favour "would not pay more". Desperate to press ahead, Cable accepted the price, even as every commentator at the time expressed surprise at what seemed a clear undervaluation of the company. Part three of the NAO report shows how analysts across the City, and even within the "advising" group of banks, were predicting a higher value. Panmure Gordon estimated a £1bn undervaluation (which proved conservative). Even when early market signals confirmed this and officials pondered stalling the sale and raising the price, Lazards and the others advised strongly against. Cable took their advice at face value.

The ideal in "book-building" a stock of potential investors in advance of a sale is to see it two times oversubscribed. The Royal Mail offer was 24 times oversubscribed. The 330p price soared 38% to 455p within hours. More than £750m drained into the pockets of speculators. Never can the British taxpayer have been ripped off so soundly in so short a time.

Within weeks of the sale, Goldman Sachs's own analysts were predicting a price of 610p, almost twice what the "advisers" had been advising. The government had been shockingly ill-advised. As the price went up past 600p, Cable kept dismissing it as "irrational exuberance, froth, speculation". He indicated everyone should wait until the price came down. It is now 562p. Worse, he had allocated bundles of shares to 16 City institutions on a "gentleman's agreement" that they would hold them as "a core of high-quality investors who would be there in good times and bad". Within weeks, over half this stake had been sold, and to precisely "the hedge funds and other speculators" that Cable had pledged to keep out. Just four of the 16 are still big shareholders.

Cable was massively naive. On Tuesday he protested that he was merely showing caution against "risk of failure". I can hear the City laughing. As the head of the NAO, Amyas Morse, points out, had Cable been prudent when warned of an undervalued sale, he would have held back 49% of shares for the Treasury, as opposed to just 30%. Indeed, he might have held out for postponement and upped the price. As it is, he valued Royal Mail at £3.3bn - it should have been nearer £5.5bn.

His advisers treated his desire to sell fast as an excuse to sell cheap. Hodge's charge that his department "had no clue what it was doing" is hard to contest. Had a certain Vince Cable been on the opposition bench, we can imagine his sarcastic fury.

The reality is that ministers make dreadful bankers. Ever since Labour's Tony Blair fell in love with the City, they have been in thrall to an industry that saw continued privatisation as a chance for big killings. Even so, it remains astonishing that ministers can take advice from firms that, however high their Chinese walls, have an institutional conflict of interest.

Cable was spending millions on advice from firms such as Goldmans and Barclays that have been widely accused of unethical practices and corporate greed. This was not cautious but reckless. As the NAO's Morse said on Tuesday: "The price was borne by the taxpayer."

This saga is not about privatisation as such. The disposal of Britain's "other empire", the postwar nationalised sector, came too late to save many great British industries. Government brought close to death the companies that once made ships, planes, trains, cars, computers, gas, water, electricity and telecommunications. Access to private capital, management and competition has revived some. Others, notably in the social services and security, have been a disaster.

The Royal Mail was always a strong candidate for sale to the private sector, as indicated in the 2010 Hooper report. What was questionable was the privatisation of the privatisation. Millions of pounds swilled round Whitehall, drenching consultants with fees and fooling ministers into gullible decisions that have meant a gigantic loss of money to the taxpayer.

There must be a better way of selling off the family silver than Cable's way. Why can the Treasury not find independent advice? Why are the same banks allowed to act, at least in appearance, as sellers and buyers? Why is there no other way of market-testing or auction? Were such a stink to have emerged in local government or the private sector, we can hear the scathing comments from the Treasury bench. When the smell is in their own backyard, they are strangely silent.