Banks and oil companies are the corporations many people â€“ and governments â€“ love to hate.
In a way it in unfair on them. Both industries find it best to organise through very large companies. Because the companies need to employ huge sums of capital, they will tend to make profits that look large. You need to have lots of shareholders and substantial resources to build the large refineries, or to have the branches and balance sheet strength to handle the transactions of millions of customers. When you split the large profits up amongst all the shareholders it looks rather different.
The oil companies carry an additional burden â€“ the government. Two thirds of what they charge people at the pumps goes to the UK Treasury, yet so often the oil companies get it in the neck for the high prices the high tax requires.
In the good times for the companies when the oil price is high they make good profits, but these are paid out in dividends to millions of small savers, pension fund members and the like, or go to reinvest in the business so capacity keeps up with demand.
The Banks must be wondering what has hit them with the tidal wave of criticism that has washed over them in recent months. Much of it is pointing in two different directions. On the one hand their critics say they made too many incautious loans and are having to write off too much lost capital, so they should lend less and at higher profit margins to rebuild their financial strength. On the other hand, if the banks start to do that then critics say the banks are profiteering by raising their margins, and are being unfair on the less well off who cannot get a loan any more.
Being a banker must be a hit like being a politician â€“ you canâ€™t win!
Banks were reporting very good profits in the 2003-6 period, and paid out good dividends. Now they are having to report substantial losses, writing down the value of assets they hold which turn out in these conditions to be worth less than they thought last year. At the same time as they announce these losses and write-offs, the regulator is demanding that they keep more money at the Bank of England and as a cash reserve, compounding the pressures on the banks to lend less and be more cautious. This is the mechanism by which the credit crunch is tightening.
Some banks have decided that to provide the extra cash the Regulators want them to have, and to pay for the losses they are announcing in their write-offs, they will raise more money from their shareholders. In effect the shareholders will be paying their own dividends for a bit, as the regulators want the cash generated from the profits to improve the solvency and liquidity.
Ws there a better way? Yes, of course. If the Regulators had demanded more capital in the good times, rather than in the bad times, we could have avoided some of the boom and bust. If there was a better way of assessing the worth of loans and other assets on the balance sheets, they could smoothed, to avoid big changes when markets change dramatically. Getting shareholders effectively to pay their own dividends by putting up more capital is not a great idea, but once a bank has paid out a good dividend it fears for its reputation if it were ever to cut it in a following year. Dividends turn out to be have been too high in the good years, because the high profits they were then making turned out to be unsustainable on some of the business they were writing. The regulators, as so often, are now making it worse by tightening conditions when the market has already tightened it substantially for them. Bolting doors after the horse has gone is so often what regulators