Citibank and Woolworths – signs of the times

Do you remember Gordon Brown on coming to power telling us he would take Parliament more seriously and make it the centre of our political life? Ministers would report first, and fully to Parliament. So this weekend the government was busily leaking all the contents of the Pre Budget Report and the media were lapping it up. I will of course go in today to hear it in Parliament as well, but it does take much of the point away when it has been the subject of media debate for twenty four hours beforehand, and when I have been able to get my views across about it on the media before the Chancellor rises.

Meanwhile a more gripping drama was unfolding in the USA. Paulson’s much battered and changed bank bail out plan had to be modified again to handle a real crisis for Citibank. They ended up both buying some equity in the institution and guranteeing loans. On both sides of the Atlantic mega plans to spend $700 billion (£570 billion) and £487 billion to prop up banks have been on ice owing to problems with their design. This week-end reality caught up with the USA with the need to do something to help a mega bank which would otherwise damage the system.

In the USA too there are long debates about whether, when and how much money to give to the US car industry. Is it a bellweather for corporate USA still? Is the gas guzzling US car an icon worthy of state preservation? More importantly, how serious was President elect Obama when he implied his magic wand could be waved to help keep the jobs? If they debate for too long there could be car makers going into Chaper 11. Reading some of their balance sheets does not reassure.

In the UK this week-end it was the turn of bankers and shareholders to pour over the plight of Woolworths. The Credit Crunch has come back to the High Street, after its earlier visits in the form of the run on the Rock and the refinancing of MFI.

Citibank, Woolworths, the car makers all in one weekend show just how big this crisis is and how so far government remedies have not worked, or even started to work. In the 1974 world oil crisis the bankruptcy of Burmah Oil in the UK was a huge event. Once that had passed the market sensed the worse was over and a long slow process of recovery began. Secondary banks were nursed through the crisis by intelligent Central banking, until they could be disposed of or dispensed with. They were not nationalised in the meantime. One large bank was in difficulties but all the talks and actions took place behind closed doors and no long term public money was committed to seeing it through.

This time the crisis is much bigger, and the action of the authorities so far much less adept at containing the damage. So what should Mr Darling do today?

He could begin by apologising for the leaks. He could surprise us by doing something better than the VAT cut. He is right to delay his increase in profits tax on small business and the extra Vehicle Excise duty on cars we already own – better still just to cancel those proposals.

He should say that nothing is going to work to reflate the economy unless the banks work. Instead of lecturing them and threatening them with legislation to make them lend he should revisit his huge £487 billion bank package. He should ask why it is not being taken up, and should seek to find ways to guarantee, supply liquidity and offer short term loans so the banks can lend to each other and to customers again. It is no good getting bored with the banks package and moving on to a general reflationary package. It reinforces the impression that this whole thing is just one great spin exercise to show the “governemnt is on our side in difficult times”. What the public wants is a government who knows how to get us out of the difficult times they led us into. That requires understanding, patience and perseverance to get through it all.

The idea of legislating to force the banks to lend is bizarre. How would that be phrased? Do they have to lend to anyone who fancies borrowing, whatever their income and security? Or do they start laying down in law details of how a bank should assess a customer for a loan? How do they protect the banks (for they will be owning some of them) from customers who manage to meet the criteria in the law on Day One but soon change their circumstances once the loan is obtained? How do the courts deal with genuine differences of interpretation of the loan rules?

One of my contributors says that the difference between myself and the government is that I like bankers. My answer to that is I like some bankers. I do not condemn any group as a whole – there are some good estate agents and politicians, and there are a few bad doctors. More importantly I recognise that we need bankers, as they create and destroy money by the attitude they take to new and old lending. If they are contracting their businesses and being tough, it means the authorities have set the wrong framework of regulation and interest rates, as bankers like most business people are natural optimists who would rather exapnd their businesses. That is why Mr Darling must go back to the drawing board and revisit the capital adequacy framework, the interest rates and the support package for the banks. In that lies the answer to the Credit Crunch, not in the level of VAT.

This entry was posted in Blog and tagged . Bookmark the permalink. Both comments and trackbacks are currently closed.

25 Comments

  1. James
    Posted November 24, 2008 at 9:56 am | Permalink

    Pedant I'm not, but your last paragraph could do with spelling corrections as many words are jumbled.

    • jean baker
      Posted November 24, 2008 at 11:22 am | Permalink

      Pedant you are …

  2. Neil
    Posted November 24, 2008 at 10:00 am | Permalink

    At the Scottish Parliament since the new administration took office the Presiding Officer (speaker equivalent) has stopped a Minister making an announcement as the details were leaked in advance.

    This has helped cut down on the media briefing you describe and means that statements are made where they should be made – in Parliament.

    He waited until the Minister was due to speak and then said the Government statement (but not the debate to follow) was cancelled. The Minister did not like it but it had to be done.

    At the Scottish Parliament the Speaker is Alex Fergusson MSP – elected as a Scottish Conservative.

  3. tim t
    Posted November 24, 2008 at 10:00 am | Permalink

    John, should cash be held in sterling or euros?

    Reply: You need an investment adviser, as it depends on your circumstances and someone offering advice under the regulations needs to know these before advising.
    My general view is the main Asian currencies will be the strongest. The Western currencies all have some problems.

  4. Stuart Fairney
    Posted November 24, 2008 at 10:11 am | Permalink

    I have this great idea to set myself up in business as a professional footballer. Now granted, at 44 this is a bit late in life to be trying it, but I propose to wait until Darling forces the banks to lend to small business and then set up a limited company called "Dreaming unrealistic football fantasies" Hence DUFF Ltd will demand a government mandated loan, because after all, it wasn't imprudent loans that got us into this.

    Then, if Arsene Wenger inexplicably discriminates against me in favour of the young, athletic and vaguely competent, at least the government can bail out the bank that made the loan in the first place ~ oops, I may have stumbled over a tiny problem in the logic. But thank you Chancellor and thank you all for your investment in DUFF Ltd.

    Reply: Brilliant idea! You might also be able to bring a discrimination action – I too would probably be discriminated against by high salary paying clubs who think I am not the right age for the job!

    • Acorn
      Posted November 24, 2008 at 12:18 pm | Permalink

      Stuart;as you have been in business since 9:11 am today -unfortunate number – I think it is now time to convert DUFF Ltd into a PLC.

      I represent a group that recently started a new venture and we have loads of spare cash and operate in a zero corporation tax environment. We are in the short term SWAPS market, we borrow assets from international companies and exchange them for a shed load of cash before doing a "reverse repo" on the assets. Profit margins average about 99% on all our projects!!!

      The UK government is currently using our internationally recognised business model. You must admit, that is recognition of the highest international quality!!!

      We prefer to operate in US Dollars but all currencies are available and are easily converted through our counter-parties.

      If you are interested please reply to the following:-

      SOMALIA OFFSHORE OPERATIONS (MARINE) PLC. (Pirate Limited Company)

    • Lola
      Posted November 24, 2008 at 12:54 pm | Permalink

      Bugger. Beat me to it. I had the same idea – diffrent sport but sme principle.

    • Donitz
      Posted November 24, 2008 at 7:55 pm | Permalink

      I refer you to the government exec commitee: YTC-BIOSE which specialises in matters of such ilk.

      The Dept for the "You too can blame it on somebody else".

  5. Lizzie
    Posted November 24, 2008 at 12:25 pm | Permalink

    John, should I take my money out of Citibank? Is it likely to go bust?

    Reply: I am not allowed by law to offer you advice on this site about such matters.

    My general observation (not a comment about Citibank) is there are schemes for compensation for deposits in various banks , and you can ask if your deposits in banks are protected in case of extreme and unforeseeable events. There are limits on the amount that is protected in any given UK bank.

  6. Lola
    Posted November 24, 2008 at 12:55 pm | Permalink

    "What the public wants is a government who knows how to get us out of the difficult times they led us into. That requires understanding, patience and perseverance to get through it all." Erm. How are they going to do that without losing all their remaining credibility when what it means is savage cuts in governemnt spending and government jobs?

  7. Neil Craig
    Posted November 24, 2008 at 1:00 pm | Permalink

    Bankruptcy is an important part of the free enterprise system, arguably the most important part, since noyhing else prunes out the dead wood or gives such an incentive to improvement. It has not been allowed to work throughout this crisis.

    Had a couple of banks been allowed to fail & another couple bought over just short of bankruptcy, possibly by the gentleman from Abu Dhabi, we might now be on the road to recovery.

    In the same way the best thing for the US car industry (though granted not its shareholders) would be to put it in Chapter 11, which would nullify the outrageously featherbedded contracts of the workers & allow its useful assets to be restarted by a considerably lesser number of emp0loyees on national average wages.

    It was the refusal of the Japanese government to allow banks to fold that put the entire country into zero growth mode for 17 years. We are visibly now doing the same.

  8. Adam
    Posted November 24, 2008 at 1:45 pm | Permalink

    'the subject of media debate for twenty four hours beforehand'

    If only! The PBR [supposed] leaks were well up to speed on Saturday.

  9. APL
    Posted November 24, 2008 at 2:12 pm | Permalink

    JR: "Paulson’s much battered and changed bank bail out plan had to be modified again to handle a real crisis for Citibank."

    Not so much a bank bail out, more a banker bail out.

    JR: "when and how much money to give to the US car industry."

    People forget there are auto production facilities in the US that don't bear the brands Ford, GM or Chrysler.

    These are not queuing up for bailout, yet (although they must be wondering why they shouldn't get some cash). GM, Ford have been on an IV drip for the last ten years. It reminds me of the old British Leyland, or British Steel.

    JR: "Citibank, Woolworths, the car makers all in one weekend show just how big this crisis is and how so far government remedies have not worked, or even started to work. "

    With respect Mr Redwood, this crisis is this big because the Government (in the US, UK and Europe) has been trying to stave off economic reality and destroying market dicipline, by subsidising and protecting companies that should have gone under a decade ago.

    It was a standing joke until it went bad recently, that GM was a finance company with an auto manufacturer bolted on. Well now the one can no longer subsidise the other the whole edefice has toppled.

  10. Stephen Southworth
    Posted November 24, 2008 at 2:15 pm | Permalink

    I don't pretend to be an economic master, but even I can see that the decisions being made now will have a profound effect on this country's development and growth for the next thirty years.

    The way that the Labour administration is making big tax and spend decisions, and then justifies them as "essential crisis measures that are not a gamble" horrifies and frightens me. Of all the times to have a Labour government in power.

  11. George Gittos
    Posted November 24, 2008 at 2:33 pm | Permalink

    A cut in VAT will be a complete waste of time. We have got into this mess by people spending what they cannot afford – solution spend more in the shops on largely imported goods. WHERE DO THESE GET THEIR IDEAS?

    What we need is an increase in the nil rate tax band, a cut in the employers' NI tax on jobs, and a reduction in corp tax. The way out is to work our way out -not spend our way out

    • Robert Arnold
      Posted December 26, 2008 at 6:52 pm | Permalink

      Is this the George Gittos I was in the army with (Hamburg, Elke< Brunsbuttelkoog) Hohne? If so do pls get in touch, George _ wd love to hear from you! robertjarnold@gmail.com

  12. mikestallard
    Posted November 24, 2008 at 6:30 pm | Permalink

    Let's just knock this idea that Mr Darling has a clue on the head:
    "He was educated in Kirkcaldy, and the private Loretto School, Musselburgh, East Lothian, then attended the University of Aberdeen where he was awarded a Bachelor of Laws (LL.B). He became the head of Aberdeen University Students Union. Before joining the Labour Party at the age of 23 in 1977, Darling was a supporter of the International Marxist Group, the British section of the Trotskyist Fourth International.[2][3][4] He became a solicitor in 1978, then changed course for the Scots bar and was admitted as an advocate in 1984. He was elected as a councillor to the Lothian Regional Council in 1982 where he supported large rates rises in defiance of Margaret Thatcher's rate-capping laws and even threatened not to set a rate at all.[2] He served on the council until he was elected to Parliament. He was also a board member for the Lothian and Borders Police and became a governor of Napier College in 1985 for two years."- Wikipedia.
    The man has absolutely no qualifications for looking after billions of pounds except that he friends with Mr Brown.
    And that is truly scary.

  13. Peter Osborne
    Posted November 24, 2008 at 6:45 pm | Permalink

    I think the government has missed a big trick with respect to pension deregulation. Two years ago Gordon Brown, as Chancellor, came very close on what became known as 'A Day' when pensions would be massively simplified. Amongst other things this would have meant that the asset classes acceptable to self invested pension plans (SIPPs) would be de-restricted. At the last minute he decided against this simplification, it is believed because he was concerned about the inflationary effect on house prices as people bought property as a pension investment.

    Well times have changed and the one thing the government is desperate to do is to inject momentum into the housing and retail markets. And this is how to do it. This example is my own but illustrates the principles well. The same logic would apply to any asset class and any collectible.

    I deal in art and art is the only thing I know about. Currently I am not allowed to put art into my pension fund and am forced to watch the fund managers lose a substantial part of my fund investing as they do in the stock markets. Millions of others are in the same position.

    It is possible within a SIPP to hold cash and I am more than happy that I saw a crash coming and chose for the last two years to put my pension contributions into a deposit account which has grown by 6% pa. (If I had handed it over to my fund managers I would have lost 25% at least by now)

    So I am sitting on cash, like thousands of others. Just what the government doesn’t want.

    Imagine that I could buy art for my pension fund. (It is another argument as to why, with my money, at my risk I can't anyway).

    Step 1. I take £10,000 out of my SIPP and buy a picture (triggering a VAT benefit to the taxman and possibly increased corporation tax from my supplier)

    Step 2. I consign it to my gallery

    Step 3. I sell it through my gallery for £20,000 and split the profit (triggering a VAT charge, and a possible corporation tax increase)

    Step 4. I put £15,000 back into my SIPP.

    Step 5. I take out an extra £5,000 when I draw down my pension, (triggering a personal tax charge)

    Obviously Steps 2 to 5 don’t necessarily take place, but it is rather logical and there are several extra tax benefits from this investment with no downside to the government, only to me. And the scenario I have described does suit well those who work in sectors that deal in 'investibles' thus providing potential liquidity that may not be as accessible for others.

    I understand that one reason why a relaxation of the restrictions did not occur is that the Inland Revenue was concerned about a lack of expertise for valuations. Well a body of accredited Appraisers would deal with that, following the model in many other countries such as USA.

    I am sure there are flaws in my argument and I would be interested to hear what they are.

  14. james barr
    Posted November 24, 2008 at 8:44 pm | Permalink

    There was nothing new about Labour leaking all the details before the Chancellor's statement. They are a thoroughly discredited group of politicians. Brown was a disastrous Chancellor, is an unelected Prime Minister and Darling is simply his bag carrier. It's time for Labour to exit the scene. As ever, they leave the country in a truly awful mess.

  15. Blank Xavier
    Posted November 24, 2008 at 10:02 pm | Permalink

    >The idea of legislating to force the banks to lend is bizarre

    It's far worse than bizzare. It is socialism. It is beginning to approach State mediated credit allocation. The harm to the economy will be immense and the corruption of State will be huge. I have *never* known a State which controls credit allocation *not* to become deeply corrupt.

  16. adam
    Posted November 24, 2008 at 10:21 pm | Permalink

    I was in a Woolworths once, i wanted to top up my phone. Instead the( money went without topping it up -ed).
    I should have asked for the reciept, silly
    me for thinking i could trust a high street store

    I glanced at the job application form on the counter, they wanted four references.
    Most people looking for temporary work at Woolworths will not have four references, they may have one. I thought the only people they will end up employing are liars.

    Good riddance to a defunct business culture and failing executives who cant even make a success of one of the biggest brands on the highstreet.

    Lets hope the longtime bankrupt US auto industry isnt a bellweather for corporate USA.

  17. adam
    Posted November 24, 2008 at 10:34 pm | Permalink

    If you do launch as a PLC then my private equity firm would be interested in taking control. We use leverage from the banks to buy your shares then transfer the debt onto your books.
    We will need to sell your assets to finance the usury while taking a 5% cut of every transaction for our own company.

    Should make my LLC lots of money.

    Yours
    Vulture Capital Limited

  18. Jonathan
    Posted November 25, 2008 at 12:47 am | Permalink

    Is Woolworths really a sign of the credit crunch? I've never been able to work out its reason for existing, and judging by the number of the people in their shops over the last few years, not just since the recession started, I don't think anyone else can either.

    They started off life as an early example of a pound shop, except that in those days it was a 3d & 6d shop. Poundland and other similar stores are doing better than they were before as a result of the recession and are expanding, but Woolworths seems to have completely lost the way, and has been performing poorly in both good times and bad times.

    They've already vanished in their native America, and completely transformed into a different business in Australia.

  19. Patrick
    Posted November 25, 2008 at 6:20 am | Permalink

    my initial thought upon hearing about Citibank's potential bankrupcy was, Yipee! this will cancel out the small fortune's worth of debt I have stored up on my trusty Citi-card… right?

  20. adam
    Posted November 25, 2008 at 11:47 pm | Permalink

    They have been in trouble for years.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page