A steel works and a couple of banks

The large steel slab works at Redcar is in serious trouble. The collapse of steel prices allied to the loss of customers and demand leaves its future in doubt. The local MP calls for government support, but when cross examined the support he seeks is small and limited. A better system of trade credit insurance and retraining grants are unlikely to save the plant. The government has made it clear there can be no general subsidy, and no nationalisation of the assets.

Two large conglomerate banks acquired too many foreign banks and investment banking business by merger, and over expanded their loan books. They were given access to unbelievable sums of public money, were part nationalised, and are now allowed to grow fat at the taxpayers expense. The CEO of one has just been given a pay package that could amount to an eye watering £9.7 million, all signed off by Ministers who tell us bankers’ bonuses need to be curbed. Instead of acting as lender of last resort and telling the banks they had to cut costs and sell off surplus businesses to survive, the authorities rolled over and subsidised their crazy ways.

How does this apartheid treatment of business marry with Labour’s values, or indeed with commonsense and fair play?

Ministers tell us they will do whatever it takes to protect jobs and see people through the recession. Tell that to the 2.4 million now out of work, and say it again to the workers at Redcar.

So what should they be doing? They should not have subsidised and nationalised RBS and LLoyds/HBOS. There was a much cheaper and better way of avoidng the collapse of Nat West and HBOS, and one which would have meant those banks would now be further down the road to having sustainable and profitable businesses than they currently are.

Nor should the government nationalise and subsidise a steel works which has lost its main customers. What it should be doing is seeing how it can help British business reduce its cost base to become more competitive, and using public spending to boost sensible infrastructure investment that we need which will use local steel, concrete, aggregate, bricks and tarmac. It would have more scope to do that – and more scope to cut dangerous levels of borrowing – if it had not decided to waste so much taxpayers money on banks that got it wrong.

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20 Comments

  1. Posted July 18, 2009 at 8:28 am | Permalink

    John

    Agree that it was/is time to invest in the infrastructure.

    The problem is in this Country, we take years and years of Planning, delays, and Public Inquiries to get anything moving. By which time the economy has moved on.

    Compare this to France with their road sysytem.

    When in Spain last year to see teams maintaining roads in a rolling convey system was a revelation of simplicity. They started at one end with all of the machinery and materials in line, and simply moved along the road as work progressed, moving cones as they went, and I am talking major resurfacing maintainance here, not bodge and fill.

    Clearly anyone can see that the roads are in a terrible state, we spend a shed load of money on traffic obstruction schemes, speed cushions, chicanes, painted tarmac and a proliferation of road signs, but little on maintainance to keep traffic moving.

    The dreaded PFI schemes must be the biggest mortgage in history.

    It would seem to me that the whole public finance system is in a mess and needs to be looked at.

    Seems like another job for your skills.

  2. Posted July 18, 2009 at 8:38 am | Permalink

    I don’t get it. We, the taxpayers, own the banks. We therefore expect the Government to exercise some influence over them to pursue prudent credit policies that are in the national interest. We want the banks to lend money in cases where jobs can be saved and the borrowers are clearly viable in the long term and can therefore repay the loans. Why can’t the Government influence banks to do this?

    The British banking system is hopeless. It is run for the benefit of directors and senior employees, not the general public. What most of us want is a narrow bank with good customer service and a wide network of branches. We want to pay in, draw out, look at our balance and perhaps ask for the occasional loan. We do not want casino banking, overblown derivatives departments, silly bonuses and overpaid directors. Nor do we want services that others do better – estate agencies and mortgages spring to mind. Our worst nightmare is standing in line in the High Street in the middle on the night to withdraw our life savings because the bank is about to go bust.

    The first supermarket chain to add a narrow bank to its list of services and open a branch at each of its UK outlets will make a fortune. What could be more convenient than carrying out the odd bank transaction after you have bought the bread rolls? It will be money for old rope for supermarkets that can keep the costs low and the service levels high.

    • Posted July 19, 2009 at 11:33 am | Permalink

      Well, I believe that it’s largely down to the way incentive schemes are structured, and basically little has changed since the last time we went through all this.

      Here are guidelines for institutional investors dated July 1999:

      http://www.ivis.co.uk/InterpretationAndApplication.aspx

      “Institutional shareholders support share incentive schemes which genuinely align the interests of participating directors and senior executives with the interests of long-term shareholders.”

      The problem is that an insurance salesman will flog an endowment policy as a “long-term” investment, and in that context “long-term” means 10 years minimum and more likely 25 years; but in the context of “long-term incentive plans” for directors and senior executives, “long-term” may mean only 3 years.

      And as the directors and senior executives of the insurance company would prefer to have that second definition of “long-term” applying to their own incentive plans, they’re unlikely to object if it applies to the directors and senior executives of all the companies in which the insurance company has shares.

      It seems fundamental that if directors and senior executives are going to be rewarded on the basis of the success of the company, than that should be its success during bad economic times as well as good, and that means that their incentive plans should run for a period which is significantly longer than the typical economic cycle.

      If a company goes bust during the downturn, significant financial pain should be inflicted on those who mismanaged it during the upturn and left it in a vulnerable position – even if they’d left the company while the going was still good.

      Of course that wouldn’t apply to companies deliberately set up with a limited life to exploit a temporary opportunity, but Northern Rock, RBS etc weren’t in that category.

  3. Posted July 18, 2009 at 8:47 am | Permalink

    What we don’t seem to manage to get right in this country is the balance between the necessary creative destruction of genuine sunset industries and pragmatic assistance to companies facing a temporary period of difficulty.

    I don’t think it is necessary or desirable for the government to pick winners (since it generally picks losers), but focussed assistance similar to the kind of aid available in Italy for example the “cassa integrazione” which tops up the wages of workers on short time for up to 16 weeks in a year if I’m not mistaken.

    For manufacturing companies I reckon this could be the difference between weathering a rough patch and not.

    The fact is that if Redcar is allowed to close this will mean hundreds of directly affected workers will lose their jobs and have to retrain as shelf stackers or something, plus hundreds probably thousands of others will be indirectly affected. Their remaining customers will have to find alternative suppliers which will likely threaten their competitiveness.

    And we all know that the cost of this will be picked up by the tax payer.

    Seems to me that a few million put in now to assist with some sensible restructuring and focussed asistance would be money well spent.

  4. Posted July 18, 2009 at 8:49 am | Permalink

    It’s an interesting situation, the government has been captured by the banksters. Meanwhile our industrial capacity is allowed to go to the dogs.
    As we are now heading into the beginning of the middle of this crisis, bank losses are going to surge, along with bankruptcies and falling house prices.
    I find it surprising that we still haven’t seen much protest, maybe it’s because of the fluoride they put in the water. When the anger comes though, I think it is going to be something to behold, best watched from a beach hut in Thailand.

  5. Posted July 18, 2009 at 8:49 am | Permalink

    Dear John. You hit the spot yet again, In a way I feel sorry for you. So many targets, so little time………..

  6. Posted July 18, 2009 at 9:51 am | Permalink

    Things are definitely getting a bit grim. We got hammered by the IMF this week. The BoE balance sheet is up to £238 billion and the Banks are stashing £153 billion at the BoE as part of the toxic Armageddon fund.

    The budget is out of balance by about £200 billion on the downside. The balance of payments is still looking at negative £36 billion this year, and that’s after a major currency devaluation a while back!

    I am weakening fellow Redwoodians. I am starting to think joining the EURO money system might be a good idea. Please post calming words urgently.

    BTW. Paddy has a good video on “toxic gravy”:-

    http://marketplace.publicradio.org/display/web/2009/07/13/wheres_the_toxic_waste/

    • Posted July 19, 2009 at 11:31 am | Permalink

      Acorn, all the facts you mentioned would not change if we joined the Euro. The debts and deficits would just be measured in Euros instead of pounds. And with our currency locked to the prudent Germans, we could expect recession for a generation.

      I noticed today that the Ernst and Young Item Club are predicting a very weak recovery next year, with the main reason for the gloomy outlook being the fact that banks are still not lending enough to boost the economy. “It seems unlikely that they will be able to meet the demand for credit”, they said. The Club also predicted that UK interest rates will be kept at their current level of 0.5% well into next year. The two are linked. Low interest rates REDUCE the supply of credit. After all, if a bank is only going to make a tiny profit on a loan, and of course they take a risk in making any loan, the risk/ reward ratio for the bank in making the loan is poor. So in the current situation, where the economy is constrained mostly by low supply of credit, low interest rates will reduce the money supply and slow down the recovery. The people who are running our economic policy (and the policy in the US too) are demonstrating that they don’t even understand the most basic price mechanism in a free economy.

    • Posted July 19, 2009 at 11:42 am | Permalink

      No, we don’t need to join the euro, and it wouldn’t solve any of our problems and would make a lot of them much worse; what we need to do is elect better people to the House of Commons, which would solve many other problems apart from this problem of a government which is habitually careless with taxpayers’ money.

  7. Posted July 18, 2009 at 9:57 am | Permalink

    John,

    The banks worked in line with Labour policy introduced in 1997 – abolition of regulation – executives’ bonuses continue. Lloyds, the oldest, most prudent and stable has, in the eyes of it’s shareholders, been ‘stitched up and bound down’ by the toxic debts of HBOS. Lloyds lost their voice and trading independence in the highly questionable takeover process.

    The voice of the losers, shareholders and taxpayers, are quashed by the management – the ruling party – socialist totalitarianism in practice.

    To this end, and Federal Europe, Nulabor does not support British jobs for British workers, nor it’s industries or communities, focussing instead on profit yielding, non competitive, taxpayer borrowing/funded PFI’s. Eco towns are the latest in which ‘politically elected’ contractors will operate as opposed to competitive local builders/material suppliers.

    Unless Redcar can be used for the profit and gain of socialists, I fear it, along with so many others, will be left to perish. Conversely, the police (reportedly) are to be serviced with Jaguar cars – directly assisting an ailing business – at taxpayers’ expense, of course. Costs of disposing of current vehicles – undisclosed.

    Nulabor lacks the patriotism of all other EU countries who protect their indigenous citizens and industries, first and foremost. This government’s treachery leaves me speechless with anger.

  8. Posted July 18, 2009 at 10:00 am | Permalink

    We face a terrible future and few people realise the extent or depth of it’s nature. We are no longer a wealthy nation. Our oil largesse is all but gone, manufacturing in the doldrums and our financial services a laughing stock. All this was and is caused by too much meddling and socialist failure in every corner of our lives. We need to think as a small nation. Leave these expensive G20/G8 clubs and begin to make ourselves less prominent in the world. We just cannot justify or afford it and have to change dramatically the pompous attitude of our politicians and Civil Service. The goal is to become a self-sufficent, successful trading country in the image of The Scandanavian bloc. Great Britain must become Little Britain to survive.

  9. Posted July 18, 2009 at 11:49 am | Permalink

    If it is possible that the earnings and income of the steel works would pay taxation to the UK then this might contrast very sharply with the huge sums being offshored from banking incomes and investments. The governments subsidies and assistance to the banks is making a significant contribution to maintaining the celebrity lifestyles and incomes of the tax havens.

  10. Posted July 18, 2009 at 12:15 pm | Permalink

    John the only way that any government can effectively boost British Industry is to dump the present planning laws. These have degenerated into a charter for NIMBYs and Badger lovers. They are neither state planning (socialist) or free market and have become nothing more than a time wasting mess.

    Planning laws should be amended so that after 3 months of dithering by councils then permission is granted by default. If council planning officers recommend an application for approval then that should be a mandatory approval. It beggars belief that even when a planning application meets the regulations and standards that councillors still can say no.

    Individual councillors (and NOT council tax payers) should be responsible for the cost of planning enquiries. The old saying of “put your money where your mouth is” is will encourage more responsible local government.

    Conservative Transport plans are an example of poor planning. Domestic flights (to/from LHR) are to be scrapped and replaced with high speed rail. What the Conservative transport spokesperson hasn’t realised is that most domestic flights go to places that have little or no chance of a High Speed rail link. (Belfast, Aberdeen, Edinburgh, Glasgow & Newcastle). London Airport planning (!) is the classic case of planning rules blocking everything and leaving a mess that is Heathrow.

    In summary a major easing of planning laws will give a boost to the British Economy. the middle of a recession is a great time to apply this boost as it will less any inflationary impact the boost might otherwise have had.

  11. Posted July 18, 2009 at 1:15 pm | Permalink

    “How does this apartheid treatment of business marry with Labour’s values, or indeed with commonsense and fair play?”

    Well it doesn’t & I think the conservatives could usefully hammer in the last nail of a mass socialist movement by pointing out that a Labour government’s support of banks rather than manufacturing & willingness to subsidise windmeill but not mines shows where the class base of Labour’s ruling political class is placed. However that we did the wrong thing over banks is not a good argument for doing the wrong thing over manufacturing. If we want to help manufacturing & we certainly should, we should not subsidise the losers but provide an unencumbered playing field for all. In particular the steel industry depends on cheep power which we can certainly produce by aloowing free market nuclear rather than demanding the customer pays through the nose to subsidise windmills. We should also get rid of most of the H&S rubbish which, rather than saving lives, actually kills far more though cutting GNP. On top of that we should cut corporation tax – the single most economically damaging tax there is because rather than slicing fat, or even muscle, it drains the financial jugular of industry.

  12. Posted July 18, 2009 at 1:34 pm | Permalink

    Not sure I agree the government should be “seeing how it can help British business reduce its cost base” unless that is by getting out of the way, with lower taxes and less regulation. According to the government’s green agenda, of course, a steel works, as a major energy user, would be penalised.

    I’m also not sure that the answer is increased public spending on infrastructure. According to the BBC, the price for slab steel has fallen from more than $1000 last year to less than $300 now. A few more “schools ‘n’ ‘ospitals” aren’t going to materially affect that. The answer really is an economic recovery, and since the government seems to have no clue how to help bring this about, we may see much more of this until the next election sweeps them aside.

  13. Posted July 18, 2009 at 3:45 pm | Permalink

    Tragic.

  14. Posted July 18, 2009 at 4:28 pm | Permalink

    Listening to Newsnight and going on Labour List, I am honestly of the opinion that the Labour Party thinks that, by saving the banks in their hour of need, they averted the recession.
    I also think that, now the banks are saved, that the Labour Party think the Banks are already pouring freshly minted money into business start ups, lending to small businesses in need and generally supporting the economy.
    Also, they hope that by providing a tranche (slice?) of training programmes and pouring more money into the Dole, everyone will soon be back in employment and that they will, therefore, win the next election.
    No mention there of the nearly £2 billion deficit in government finances, the gilt market or quantitative easing which, apparently, at £125 billion is just about at its limit (News a couple of days ago).

  15. Posted July 18, 2009 at 5:16 pm | Permalink

    The £9 Million payout is excessive but it is of course peanuts compared to the real scandal that we have effectively given the Private banking sector hundreds of billions and yet there seems to be little if any benefit tp our society.
    Benefit to society should be the prime motive behind any business, personal gain/capitalism should come secondary to this.
    Capitalism is what drives us to excel, that’s why I think communism will fail unless it endorses this natural human quality.
    I can’t help thinking that we wouldnt be in this mess if Govts / Westminster listened to the people more on issues like globalisation, wars, abortion.
    Maybe we need a revolution.

  16. Posted July 18, 2009 at 6:51 pm | Permalink

    It’s being mooted that later this year the government will sell bonds which would be exchangeable for RBS or Lloyds shares after three years.

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5852797/UKFI-lines-up-banks-to-help-in-Lloyds-and-RBS-sale.html

    On the terms indicated in the article these would be a completely safe and incredibly attractive one-way bet for investors – three years later in the worst case scenario they’d get their money back with interest, while if the economy recovered they’d get shares worth potentially far more than their original investment.

    Eg, the government bought the RBS shares at 50.5p, and to recover the taxpayers’ money used for those purchases it might price the convertible bonds slightly higher; but in the spring of 2007 those shares were trading at over £7, and three years hence they could be worth several pounds – which could give the investors a return of up to 100% pa compound.

    All the risk would be borne by taxpayers – ie, if the share price hadn’t recovered above the bond price, the government would have to repay the £70 billion it got from selling the bonds, and be left holding the shares – while the potentially massive benefits would accrue to the investors.

    And billions of public money have been used to bail out these banks.

    So in my view the convertible bonds should be made directly available to the general public, rather than being restricted to institutional investors.

    It would be a simple matter for National Savings to offer tax-exempt “Bail Out Bonds”, guaranteed to pay on maturity either the original capital plus interest, or a sum equivalent to the market value of the bank shares, whichever was the higher.

    Making such bonds available to small savers would give many of those who were hit with extra taxes to bail out these banks the chance to recoup some of their losses, and could help to promote the savings culture that we’ll need for the future.

  • 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.

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