Category: Blog

I read that some senior clergymen want to lose their seats in the Lords, and some Labour MPs think it would be another glorious chapter in their modernising of Britain to abolish an Established Church in England.

I wonder if by chance they have at last been reading some English history, and have stumbled over what a money spinner the Reformation was for Henry and Cromwell? It would be an interesting question who owns the assets stashed away by the Church Commissioners, and who should have title to them if we are to have revoltutionary change in the nature of the Church.

Whilst the Bishops might think it would be automatic that the money and buildings should pass with them in charge to a new and differently structured Anglican Church, the Labour left might have other ideas. They might argue that the Church and state have been so intermingled over the last 500 years, that some if not all of the money and buildings based in England should rest with the state for good causes, a new kind of Lottery giving Labour MPs more power to borrow and spend. Or they might decide to let competition flourish, and split the Endowment between competing religious leaders making a case that they could run a better Church which reached out more than the current Establishment manages.

The Archbishop miight find that opening up the issue of establishment takes the debate in ways he will find less comfortable. There might be no automatic right for him to lead the new Church, which would presumably wish to exercise its new found freedom in unpredictable ways. It would certainly mean an end to the present system of choosing the Bishops and Archbishops with an involvement for 10 Downing Street in the appointments. Who knows, people might even want an elected Archbishop, to create someone with more political and moral authority. Whatever method of choosing a religious leader which the new Church decided upon might result in a different bench of Bishops once it was properly up and running.

Sir John Gieve’s interview with Robert Peston was very worrying. There should be no instant history from the participants fighting the banking crisis, as the problem is not yet resolved. Anything they say could damage confidence further. They need to give us the figures and make the official statements they need to make, but they should not wander off into risky analysis and self justification. When it’s over, when they write their memoirs they can do that.

Sir John wanted to get over the fact that in his view the UK banking crisis in the week before the re-capitalisation was severe. I guess he wanted us to know this, so that no-one would try to argue they had over reacted or made the problems worse. At one point he wisely said he would not mention individual banks, but comment on the system as a whole. He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment. Both these banks are open for business and should expect decorum and support from their Central bank.

So what was the nature of this crisis that the authorities suddenly decided they needed to tackle? There are 4 possibilities.

1. There was a run on the deposits, the disaster which brought Northern Rock down.

There was no visible run, although the authorities’ leaks were far from helpful in maintaining confidence. It is difficult to believe it was a prospective run on retail deposits that led to the action.

2. The authorities suddenly discovered the loans these banks had made were far worse than they thought, so they became fearful for their solvency without more capital injections.

There is no evidence that the authorities suddenly became more alarmed by the banks assets. Indeed, when I asked in the House if they were carrying out proper due diligence before buying the shares, I was told they were not, implying they were not especially worried by the then value ascribed to the assets they were buying on our behalf. They did not insist on any immediate additional write downs.

3. Certain banks were unable to gain access to money market funds in sufficient quantities which would force them to contract rapidly, too rapidly for comfort.

Sir John implied it was partly this. Why then didn’t the authorities get on with supplying the ample liquidity to money markets they have subsequently supplied through the Bank? That can explain the need to make the loans and guarantees available through the package, but does not explain the need for more capital and the sudden request of the regulator for higher ratios of share capital to loans. That would only have been a sensible thing to do if they were worried about 2 above.

4. The share prices of leading banks were falling.

Yes, that is true. However, a falling share price does not bring a bank down. RBS is just as able to trade with its share price around 45p today, as it was with its share price many times higher before the crunch. A low share price does not stop a bank doing anything, unless it reflects a general loss of confidence by depositors and other providers of cash.

Whatever the rights and wrongs of these four points, two points should be incontrovertible. Firstly, any sensitive discussions between banks, the Bank, the Chancellor and the Regulator should take place in confidence and in private. Bankers do not have to be invited in dramatically over a week-end to the Treasury through the front door. We live in an age of conference calls, emails, webcasts, working in normal working hours, and there are side entrances. There are not many top banks, so each one could have been sorted out individually. It does make it worse for the authorities to show how worried they are in public.

Secondly, any action should be based on revised figures that are as accurate and well based as possible. Confidence building in banks requires the banks and the regulators to put out credible information in a timely way. It is no good denying things have changed from the heady days, nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function. Working through this is about access to cash, and having the right amount of patience to minimise the losses on all the positions the banks have taken.

I do not believe they had just a week-end to save the world or the banks. Their actions increased the pressure to do something, and the leaks made action imperative, but that does not mean it was a good way to handle the situation. Nor do I believe they then in a single flash of the government cheque book solved the problem. The nationalised banks still have a cost level out of line with their earning potential, and probably more to write off. The sooner they recognise that reality and get on and sort it out the better. I see no reason why taxpayers should have to tip more money into these banks, when they are still employing too many people on high salaries and big bonuses, and still have a gap between what they charge and what it costs them.

As for Robert Peston, he was the recipient of information that should not have been released in that way. Some of the things he broke to the BBC audience looked like price sensitive information that should under the rules have been released to the Stock market as a formal announcement in the usual way, to be followed by all news outlets handling it at the same time. Whilst one can admire his journalist skills in getting hold of such a fount of stories, one is left to wonder who leaked the information, and for what possible reason? It is also curious that so far no Minister has made a big issue of the leaks in the way they did over immigration figures.

I suppose it is progress of sorts that the Bank of England now admits it got it wrong in 2003-6, when it allowed excess to build up in the banking system by keeping interest rates too low.

When will they also admit they got it wrong in 2006-7, when they kept interest rates too high, bringing the pack of cards tumbling down?

And when will they admit they are still getting it wrong, pushing huge quantities of money at ever lower interest rates into a system which is still broken, but which one day may ignite inflation again?

I would be far happier if they confessed to current sins than long gone ones. It is difficult to fathom how bad they can be and can remain, when they seem to get every important call about banks and markets wrong. If this were a private sector business the management would have been changed a long time ago. When are they planning to hit any of their targets and forecasts for the economy?

In the final analysis a subsidy is a subsidy. We are in that phase at the moment when governments are trying to dress it up. Let’s look at two such schemes – the German employment scheme and the putative UK R and D scheme.

I have been told that in Germany there is a current government scheme to keep skilled workforces together. Apparently an employer can announce that a large number of workers are no longer needed and send them home. The state will then pay between 60 and 67% of their wages, depending on their marital status, for as long as they are doing nothing. The theory is that the downturn will be temporary, and the worker will go back to their company when normal demand resumes.

Such a scheme is not necessarily a good idea for the company concerned. After all, they still have to pay a substantial amount to employ someone who no longer does any work for them. There can be no guarantee that “normal” demand will resume any time soon so they need them again. Nor can there be any certainty that the employee will come back to work for that employer. They may change their mind and resign many months into the enforced period of no work.

It can be an even worse deal for the German taxpayer. Big multinationals could decide to lay off more German workers rather than taking action elsewhere, if someone else paying two thirds of the wages is enough to sort out the cost problem. The scheme could become very expensive, as it is very expensive to cut the size of a German workforce so this could be attractive compared to the full costs of redundancy. It does nothing to resolve the underlying business problem that some German companies are facing. They have too few sales, and need to cut all their costs.

We read that the UK is thinking of an R and D subsidy scheme for certain car makers. The thinking here is that we wish to keep R and D in the UK auto sector here in the UK, and therefore taxpayers should pay to do so. This well intentioned proposal would also be fraught with difficulties when it comes to sorting out the detail.

Spending is spending. Accountants can have long arguments about which part of an auto company’s spending is R and D. How much of the Board’s costs is R and D, as they spend time talking about future products? How much of the CEO and the rest of the executive overhead, as they too are heavily involved? Is investigation of a complaint or a technical problem with the product R and D? Is market surveying and customer contact R and D? How much of the engineering overhead is truly future oriented?

There is no easy way of indentifying and ring fencing all R and D spend. Nor is it magic spending, clearly better than other spending. The government will discover, if it presses on with this, that a subsidy is a subsidy, by whatever name.You keep R and D here if we continue to produce good people who want to innovate and engineer new solutions, and they are affordable.

BUSINESS IS VERY SIMPLE. If the money you collect from your customers exceeds the money you spend delivering the product and service, it works. If the money from customers falls below the costs you are in trouble. Borrowing to pay the losses cannot solve the problem. It makes it worse, as you have to pay the interest as well. You end up losing more jobs, as BL proved in the 1970s.

Good Boards of Directors saw this downturn coming months ago and told their CEOs to cut costs to get ready for it. Good CEOs did so. Bad Boards looked firmly in the rear mirror, accepted the authorities view, and did not ask their CEOs to take evasive action. Bad CEOs failed to alert their Boards, and carried on spending as if there was no recession. They deserve to lose their jobs.

Companies in automotive manufacture have one major cost – bought in materials and components. When you hit a downturn it is vital to cut back strongly on the amount of raw material and component you are buying. You need to cut back by more than the anticipated drop in your sales, as you need less stock to maintain lower production. In this downturn there is the added bonus that the price of the raw materials has collapsed at the same time as you need less of them, so if your buying department is any good there will be a huge decrease in the cash cost of your supplies.

The cost of labour is much smaller than the cost of parts and materials. Nonetheless you will need to take some action to curb it. The first thing to do is to stop all recruiting. Next, you ask all temps and short term contract labour to leave. Third, you offer voluntary redundancy packages to those who might wish to go. If you still need to cut costs more because your sales have collapsed, then you need to discuss with the workforce whether they would prefer to all go onto shorter time to keep the jobs, or whether they want to sustain the incomes of the many at the price of a compulsory redundancy programme for a minority. No sensible person likes doing all this, but one thing keeps you going when you have to do it – the knowledge that if you do not shed some jobs you could end up presiding over the loss of all the jobs if the business goes bust.

You may need bank bridging finance if you were slow to make the adjustments, but that can be no substitute for controlling the losses. You cannot ask future customers to pay more for the product to pay for the subsidy you gave to current customers. They will not be prepared to do that. State loans can be an excuse to put off the necessary adjustment. They are also a massive diversion of top management time from tackling the reality that costs have to be slashed to survive in dreadful conditions like the present.

I read in the Labour press this morning we all need to go out and shop til we drop – but showing suitable responsibility at the same time.

I ventured out this morning to buy a couple of newspapers and some fresh bread. I added seasonal marzipan to my basket so I could ice the Christmas cake later. Was that enough, I wondered, to meet the new patriotic requirement to be a cheery shopper? The marzipan was certainly dear enough to make a difference to the Sunday bill. It didn’t mean, however, that I needed to up the mortgage.

Therein lies the dilemma. The authorities visited this crunch on us, because they judged we were collectively borrowing too much and spending too much. They hiked the interest rates and later told the banks to lend less for the level of capital they held. Now they don’t like the results that come from jamming on the monetary brakes so spectacularly. They want us to be both prudent and to spend more. Given many families personal circumstances they can’t do that.

The spectre at the feast this Christmas is not just cash strapped banks reluctant to lend. It is many people worrying about whether they will get any overtime in the New Year, whether they will be on short time working, or whether they might lose their job altogether. Unemployment is the spectre stalking the land. If you fear loss of job you are not going to go out and buy big ticket items. You are going look carefully at the price of any inessential you would like to buy. You might buy some decorations and some Christmas lights, but preferably on the day the shop has cut their price by 25% to promote them. You won’t buy the new plasma TV, even when it is £300 off, because it’s still a large commitment. As for a new car, well you can forget it.

Companies are in an even worse plight. If people don’t spend enough in the shops, they feel it first at the factories making the goods. The stores soon turn off the suppliers. Companies cut out buying new cars for their staff, cut back on corporate hospitality, and review the prices they are paying to all who work for them on contract. You soon get into a recessionary psychology. Why buy it today? It might be cheaper tomorrow. Why buy it today? We might not be able to afford it tomorrow. Why buy it today? We can make the one we’ve got last longer.

After years of fulminating against the throw away society, after years of moral condemnation of the have it now pay later society that fuelled the boom, the government has come to the conclusion there is one thing worse than such a society. That’s a society where people are so careful with their things and their money that they throw others out of work with their parsimony. Did I do enough with my marzipan? No I didn’t. Should I do more? No, I don’t think so. What’s the point of buying food you cannot eat, only to throw it away, or buying things you do not need. Besides, many are saving up for the tax bill in January, as the government does want to spend so much for us.

HSBC, a typical large regulated bank, in 2007 had a balance sheet showing total liabilities of $2,354 billion. Shareholders had put up $5.9 billion in capital, and had accumulated total share capital and reserves of $128 billion. In other words, the bank was able to gear itself at around 20 times its shareholders capital. That left it comfortably within the Regulator’s limits on how far a bank can gear up its capital to lend and spend.

There is today another well known UK bank whose shareholders put up just £15 million, with total shareholders funds of £2.3 bn at end February 2008, which on December 4th 2008 had total liabilities of £259 billion. In other words it was able to gear itself more than 110 times its shareholders total capital.

That bank is the Bank of England. It is true the assets of the Bank of England are on the whole lower risk than those of commercial banks. It is also true that the government and state stand fully behind it. Last week was down a bit on the 4 December level. It does go to show, however, that they are not just thinking about quantitative easing. I wonder how much further they are prepared to go in expanding the Bank’s balance sheet?

When you are in as big a mess as the UK is in, it is vital those in authority begin with an honest review of where we are, and honest analysis of what is possible. Instead every day I read in the media half truths and lies about the financial position. We need to start from an accurate base to get the diagnosis and prescription right.

Main myths:

1. The government will borrow £78 bn this year and 8% of GNP next year.
The government’s own figures (PBR) show it will borrow £157 bn this year, more than 10% of GDP. Why will no-one write that in the newspapers?
2. The Bank will consider “quantitative easing” after lowering interest rates more, if they do not work.
The Bank’s own figures show that it is massively into quantitative easing already, with a ballooned balance sheet that makes most hedge funds and investment banks look very restrained.
3. The problems came from the USA, and this is a global problem.
Most of the UK’s problems were home grown. UK Regulators and the Bank made the same type of mistakes the US authorities made, but they did not import them. Northern Rock was a British bank lending British money to British customers under a British Regulator. It was not brought down by sub prime US mortgages.
4. We will do whatever it takes to get the banks working again and to abate the recession.
Why then did the authorities demand the banks have more capital to sustain their lending at this point in the cycle? Couldn’t they see that would make the lending crunch worse? Why did someone brief the press that our banks were weak and needed more capital, at a time when confidence was low? No bank at that point faced a run.
5. Regulators are the answer.
Why then did the Regulators set capital requirements that allowed the excess? Why were Northern Rock Directors discussing how they could increase lending and cut capital on the eve of their disaster, in order to get down to regulatory requirements? (N Rock Report 2007)

6. Regulators cannot be expected to detect fraud and scams.
What then is the point of them? Why can’t they do some detective work based on the usual warning signs of companies likely to overtrade or worse? The signs are well known to people with experience in financial markets, but it takes the Regulator’s powers to go in and find out for sure. Not all those who show the signs are bad.

The plain truth is you cannot solve a crisis of over borrowing by borrowing more. The state is not big enough and rich enough to take over all the bad risks of banking and industry at the same time. The state has to avoid borrowing so much and printing so much that it too loses the confidence of people and markets. When is this nightmare going to stop? When are the authorities going to realise they are pouring petrol onto a fire that has gone out. Instead of pouring more petrol, they need to find a match and ignite a controlled fire again.

When you look at the massive amounts of money and liquidity they are pumping into the system , when you look at the growing government bond bubble, you must feel “Here we go again”. The authorities have forgotten – if they ever knew – that there are big lags in the system. It takes time for lower interest rates to work through, just as it took time for their high interest rates to work through a couple of years ago. Nothing will work without mending the banks, but once they have found a way of mending the banks they need to reverse the ballooning of cash and liquidity rapidly before they create a big inflation. As someone who pleaded for them to halve interest rates a year ago to stave off recession, I say to them, do not cut interest rates any more until you have worked how to get on top of the government debt problem and have done more to create a sensible and competitive banking system. Zero interest rates could make the poblems worse, not better. You need to think of savers as well as borrowers when we are trying to get the country out of debt, not more into it.

So what does it take to mend the banks? A sensible way forward would be to invite them in for private talks. The Regulator shouod be prepared to amend the capital requirements temporarily to get things started again. The government should be prepared to change the terms of its short term loans and guarantees to help markets. No more capital should be offered by taxpayers, and a route to getting the taxpayer out of share ownership, and certainly out of majority share ownership should be agreed.

Every year since I have been an MP I have gone to my local Post Office around 6 am in the morning near Christmas, to thank the postal workers for their extra efforts over the Christmas season, and to wish them a happy Christmas when they reach it. Many of my colleagues do the same.

This year I wanted to go next week just before Christmas. My office was told it had to be today. I accepted and said I would arrive at 6.30 am, to catch the postmen and women before they left the Sorting office. We were told it had to be 8.30 this year.

At 8.30 I have to be at one of my regular Business breakfasts, when I brief local business people on the current economic situation and relevant matters from Parliament. My office explained this to the Post Office, and said it would be better to come early, or failing that later after breakfast, or some other day. We were told it was 8.30 on Friday or nothing.

So nothing it is then. Was it something I wrote on the blog I wonder?

At least I can use this blog to wish all the post employees a very happy Christmas, and to thank them for their work to get the post out in all weathers and at all times over the year. It’s just a pity that management would not allow me to do it person this year.

Jaguar does not need state subsidy. It needs more customers. Management needs to have more feel for the brand and for what people want from it. I want the management to fight successfully in the market place so the jobs can be saved. My thoughts are with the employees. There can be no future for their jobs if they need to rely on state subsidy rather than customer income.

When I was 36 I acquired my first Jaguar. I was appointed Chairman of a big quoted industrial group of companies. The large black Sovereign saloon came with a chauffer to pick me up for the first day’s work.

The only reason I got such a job was the Group had been bid for. During the course of the bid the Board had signed up to a stretching profits forecast for the forthcoming year. The defence worked, but shortly afterwards my predecessor as Chairman fell seriously ill. The Board asked me to take over, as they thought it unlikely anyone would want to come in from outside to deliver the profits we had promised. I recognised we needed to raise revenues and cut costs to meet it. I also realised I could guarantee to cut the costs, but could not guarantee the extra sales.

So I cut the Chairman’s salary, sold the company aircraft, placed the pilot with the new buyer of the plane, and sold the company flat in the West End. Armed with moral authority from cutting my own perks and pay, I then persuaded others to cut their costs in turn. We made the profits forecast easily and went on to hit 37% return on capital. The Jaguar was the one luxury which I kept. I asked the chauffeur to do other things for the company when I did not need him for company business trips, which had the side effect that I could drive the car as well. It began a love affair with Jaguars which lasted for a long time.

I was fortunate to inherit an older Jaguar saloon when I made it to the Cabinet. It wasn’t as good as the company one I had enjoyed, but it did have some style. I restrained officials from buying me a new Rover to replace it, managing to combine my enthusiasm for careful control of public spending with the happy outcome that I could keep a Jaguar in government that I had got used to in business. On leaving government I just had to find the money to own and drive a Jaguar myself.

At the end of the 1990s as Shadow Secretary of State for Trade and Industry I was asked to be one of the people who turned up to admire the then new Rover at the Birmingham Motor show. I did so, and gave favourable comments to the press. I also saw the new S type on the Jaguar stand. I was so glad they did not ask me which car I would buy. I thought the flowing lines of the S type were superb. Whilst it had a hint of the 1960s icon Jaguar, it was a thoroughly modern car. Place them side by side and they are very different.

Until recently I have been happy with the brand. I am now not surprised to read that Jaguar are struggling. They have made mistakes with the way they design, present and project their cars and handle their customers.

I was first mildly worried when I visited the Jaguar Formula One outfit shortly before they gave up. They were spending too much for comfort, but not enough to win. It was difficult to see why they did it for so long. Wouldn’t it have been better to have raced modified production cars in a cheaper competition, and achieved a higher standard?

The launch of the X type was not a comfortable time for the company. Many traditional supporters of Jaguar did not see it as a good addition to the range. Jaguar compounded the error by trying to persuade owners of more expensive Jaguars to switch to their new cheaper product! That was a great way of trying to cut the margins and turnover.

More recently the Group has been spending substantial sums on market research and questionnaires. I have bothered to fill a few of them in, but developed an increasing frustration when I realised they were not listening. They were not understanding the answers and were not communicating back. I explained several times that I was not yet persuaded by the design of the new XF. The windows are small, the back is very high, the width is narrow, and the radiator grill looks like a mini Bentley gone wrong. They have lost the classic elegance of many of the best Jaguar designs. I bought one of the last S types instead. Now I am being bombarded by requests to buy the XF as if I have never expressed an opinion on it.

Worse still, somehow the press picked up a negative line about those of us who had bought S types when the XF was launched. We read that the S type was old fashioned and stodgy. The all modern exciting XF was designed to sell to the younger executive, a new breed of Jaguar buyers, people who had been buying BMWs. Well if that is the case, why do they wish to sell one to me, having insulted me? What compelling deal or argument can they put to me to say sorry, if they want older Jaguar fans back? I did not see myself as old fashioned or stodgy for buying one of their cars.

The reason Jaguar is struggling is it does not have enough customers. Yes, it had to widen its customer base. No, it did not have to do that by upsetting the existing supporters. Jaguar does not need a public subsidy, it needs a stunning successor to the XJ, possibly a remodelling and relaunch of the XF, and some much more astute marketing to reposition the brand comfortably, so it can reclaim its old supporters whilst winning some new friends.

Political parties could tell them a thing or two about the need to win over new friends without losing the core support. Comments like “the new Jaguar is styled specifically to shed its stodgy British lines” and “No more for Jaguar the relentlessly retro approach that is perceived to have done the marque no favours at all in modern times” must have come from briefing close to the company. It is undermining perceptions of their previous cars, never a good thing to do given that many likely Jaguar new car buyers have probably owned one before.

It would be so 1970s to go back to subsidising car makers. In those days the more the government subsidised, the more the state aided companies lost market share. The car companies came to see the government as the main customer, as they sought cash from them, whilst the foreign competitors got on with designing and building cars that individual customers wanted to buy. It was a disaster. The UK fell further and further behind the best of modern car design.

Surely even this government must see the folly of subsidising a foreign owned company to make luxury cars to sell to people with good incomes or money in the bank? And can’t the top management of Jaguar start listening to their customers, instead of contracting that out to consultants who manage to make a former Jaguar addict like me hopping mad with the way we are being treated? I am all in favour of the company innovating, and recognising that time moves on and perceptions of beauty change. What I cannot accept is clumsy “repositioning” in a way which makes former friends uncomfortable with what the Group is doing.