CEO’s Report to UK shareholders

Report to Shareholders in UK PLC by the Chief Executive

This year will be difficult for your country. Our turnover (output) will continue to fall, as it has been doing for the last half year.

I have decided to use this opportunity to expand the cost base substantially. I intend to increase the numbers on the payroll and to raise their pay. I intend to pay bonuses to all employees who helped us make such large losses in the banking subsidiaries. I do feel we need to build up their morale when they have had such a setback. I rule out the conventional approach of our competitors who seek to husband cash and cut their costs at times like this.

I have also decided we need to borrow more. We will have to increase our borrowings by around 10% of our turnover in both 2008-9 and 2009-10 anyway, given my commitments to increasing our costs.

I think we need to go much further. This is a good time to take on more debt. I have decided we need to at least treble the debt. I intend to do this through two major acquisition programmes.

In the first I have been buying up banks and bank shares. This sector of the economy has been performing very badly. I do not wish to exploit their bad luck, so I will pay above the market value for some of the shares we buy. We have already bought all of Northern Rock, and the assets of Bradford and Bingley. We have a majority share in RBS and a substantial minority in Lloyds. Our own accountants think this will treble the country’s debt. Outside auditors suggest this is an understatement.

Just in case these acquisition programmes do not expand the debt enough, I have decided to accelerate the borrowing programme further by buying the worst assets off the remaining banks. I could probably expand our borrowing and liabilities by as much as an additional £400 billion by doing this. It could also be done quite quickly.

Some shareholders question the wisdom of this, pointing out that many banks got into trouble by borrowing too much in the first place. They ask how can we borrow all this money? I have taken the precaution of seeing that our interest rate setting subsidiary, the Bank of England, has taken the price of borrowing down to 400 year lows in preparation for this. Just in case there are problems I am about to sanction printing the money we need for the takeovers, to ensure we can get all the cash we may need for this ambitious programme.

It took my predecessors in this job 500 years to reach borrowings of just half a trillion pounds (£500 billion). I am proud to tell you I expect to be well above £2trillion quite soon. Our own Central bank subsidiary is showing the way by now having a balance sheet 120 times its share capital. Meanwhile I will continue to lecture everyone else on the importance of prudence.


  1. Stuart Fairney
    February 23, 2009

    Neat and very amusing ~ they live in a different world !

  2. duncan robertson
    February 23, 2009

    You know you’re in a bear market when people are losing money but feeling pretty good about it

  3. David Eyles
    February 23, 2009

    It is now quite apparent from this, your previous entry and a whole spate of related articles over the last few months that you have developed a level of expertise in banking problems that appears to me to be unsurpassed by any other shadow cabinet member.

    As the government has now nationalised banks, something which I do not think has happened before in our history, it is now clear that there will be a need for a ministerial post to try to administer the huge number of problems that will result from regulation and state ownership of banks.

    Were it created, would you be up for such a job?

    Reply: I am always ready to help, but that will be up to Mr Cameron.

  4. Quentin
    February 23, 2009

    Question from UK PLC Shareholder:
    You failed to mention in your report how much this is going to cost me, my family,my children,my childrens’ children, my childrens’ childrens’ children………..

  5. oldrightie
    February 23, 2009

    Problem submitting. My comment was how fitting that irony is truth for a Labour Government. Will the public ever wake up to what is happening?

  6. Ian Jones
    February 23, 2009

    If this doesn’t get the economy moving in the next 6 months then we are truly doomed. Its a huge risk but one Labour are willing to take for the sake of their re-election…….

    Still, one advantage of a knackered economy is that you can push through changes quickly that otherwise would take decades. I am of course talking about public sector pay & benefits as well as spending on social “investment” i.e. welfare. Hopefully the IMF gets involved then its even easier to get the red pen out!!!

  7. Colin D.
    February 23, 2009

    …I shall also claim that inflation is falling to zero when the reality is that the steps I have taken will ensure inflation starts to rise. This increasing inflation will reward those who took on too much debt. At the same time I shall penalise those who were foolish enough to save by reducing the purchasing power of their money. This transfer of resources from unworthy savers to deserving debtors is right and fair.

  8. Andy Strang
    February 23, 2009

    You keep on about how bad it is to pay bonuses (regardless of whether these staff are contractually entitled to them). If you don’t believe in paying these people bonuses then what happens to person x.
    Person X is an FX and Commodity Derivs trader who has been at RBS for 4 years with a Natural Sciences undergrad from Cambridge and a PhD in Applied Maths from Oxford. He is on a base salary of £120k and normally brings home a bonus of 1-2 million.
    Under your scheme, this trader is told that he will not receive a bonus to which he is contractually entitled this year and he will also not receive one next year. Why should this guy who has made the bank several million pounds stay with RBS and not go to Barcap/JP/Nomura/Goldmans?
    If he does jump ship, as do some of the guys who build his trading and risk systems in IT, aren’t you left with an unprofitable shell of a bank?
    Sure the whole bank made catastrophic losses this year due to their Credit Divisons, but these other groups are profitable and are the most likely way for taxpayers to recoup their investment in these banks in the coming years.
    Where is the flaw in the logic here?

    Reply: I am suspicious of the superior talent of the individual concerned, divorced from the colleagues and the bank’s capital which he is putting at risk. If there is a contractual bonus the person entitled should be asked to forgo it in view of the bank’s plight. If someone is trading that profitably the bank should stop them and ask them to leave, as last year’s success could easily become next year’s big losses which the taxpayer cannot afford. We don’t want a taxpayer bank relying on low grade trading earnings, putting too much money at risk.

    1. alan jutson
      February 23, 2009

      If Mr X is earning £1.2 million in Bonus then he should contribute far more than just a few million in profits.

      The problem with this sort of reward is that no one makes the right choices all of the time. It is inevitable that by the law of averages Mr X will at some stage make a loss, is he then going to pay the Bank £1.2 million.

      If he is confident of making Millions all of the time, why does he not set up his own investment Company with his own money, and take all of the profit, why work for someone else?
      The reason, he has security of at least £120,000 even if he fails.

      The whole problem with Bank and City Bonuses seems to be that they are paid, win, lose, or draw, They are investing other peoples money who are only paid out if they win.

      I am all for rewards for successful people, I have been a commission only self employed sales manager controlling a 60 strong self employed salesforce in my time, but it has to be balanced reward.

      Time to get in the real world, for most people its tough out there at the moment.

      Reply: Exactly. If Mr X is just buying and selling for commission for principals outside his firm taking the risk he is overpaid. It is not a difficult task. If he is taking positions with the bank’s money, that is a risk a nationalised bank should not be taking. He should be privatised.

      1. Robert
        February 23, 2009

        …which demonstrates why the banks should never have been bailed out in the first place. It’s up to shareholders to decide how much risk they want to take on and to install managers who know what they are doing to manage that risk. If the managers destroy the business and with it the shareholders’ capital then the business must be allowed to go bust and be wound up. If Mr X’s department can demonstrate that it is a viable entity then it can be sold by the adminstrator/receiver as a going concern and the proceeds returned to the creditors of the bank. If not, he and his colleagues would lose their jobs, which is the risk they take for being employed there in the first place. In other words: the misallocation of capital is corrected immediately; business enterprises and associated risks are evaluated accordingly; and the risks of future misallocations of capital and labour are reduced.
        Incidentally, what Mr Brown has done is the worst of both worlds: he’s bought bank shares at a high market price on which he has now lost tens of billions; and he has saddled the exchequer with balance sheets that are toxic enough to poison the public finances for generations.

      2. Andy Strang
        February 23, 2009

        He doesn’t do it for himself as you need a high level of capital and leverage to play in some of these markets – say if you spot an arbitrage opportunity for instance. Piling in with £200 of his own money won’t do much good, hence you invest capital belonging to your clients.

        Anyhow, according to your logic, you don’t believe that any bank should pay any traders any bonuses? We’re in the real world here, so as much as you may wish it weren’t so, other banks will continue to pay good bonuses and RBS will be an empty shell hurting tax payers even more…

        Reply: If Mr X runs a good business within RBS then sell it off and give him some equity in it when you sell it. If he is just a dealer he is overpaid.

        1. alan jutson
          February 23, 2009

          If Mr X is as successful as you say then I would have thought he could go in with more than the £200 you suggest.

          If he has been successful for 10 years then thats £12 million in bonuses he has been paid, surely he could spare at least half of that for a good opportunity in a market he knows well.

          No objection to a sensible bonus structure in any business if they are earned and reflect and balance the risks to the employee and the employer.

        2. Robert
          February 23, 2009

          No, my logic is not that banks should not pay traders bonuses. They should pay whatever bonuses they see fit in accordance with the wishes of the shareholders. If the shareholders permit stupid risks to be taken wtih their capital then they must take the consequences. My point is that the state should never have become a shareholder in the first place. Now that it has, obviously the Government is in a position to direct the banks on the subject of bonuses. Because the state’s actions are determined by political rather than economic logic then this direction invevitably will be flawed (the Government’s current thinking appears to be: “no-one can possibly be worth a bonus of £1m, if we blame the bankers we can deflect blame from ourselves, and banning such awards goes down well with the tabloids”). The consequence is that you risk throwing the baby out with the bathwater: bank workers who are adding value to the firm are likely to re-deploy their labour elsewhere. Thus the state’s actions will result in a further diminution in the value of its asset (the empty shell hurting taxpayers) and a misallocation not just of capital but of labour too.

        3. R Davies
          February 23, 2009

          “…to play in some of these markets…”
          The choice of verb says even more about the culture.

          Northern Rock, still making losses wants to pay bonuses. From The Guardian: “[CEO] Hoffman said that Northern Rock had not yet decided which senior managers might be in line for a deferred bonus.” If they don’t know who yet, it can’t be contractual and must be discretionary. Would not have happened if there’d been no bail-out. Smacks of greed and is self-serving. But then, our government is setting an example on that one too.

    2. brian kelly
      February 23, 2009

      RBS has lost and is losing a very large amount of money and this govt has made the decision to put a very large amount of our money into it in order to prop it up. How wise that is is open to debate. No bonuses whatever should be paid. And as for X, he will certainly not have the very best of credentials in applying for another job coming from RBS. He will also be in competition with hundreds, if not thousands, of equally qualified applicants. In any case, I don’t at all accept your argument as to his unique worthiness to receive a bonus [see posts above].

      1. Andy Strang
        February 23, 2009

        I’m sorry but you really have no experience of how these things work…please enlighten me otherwise but I would presume you do something incredibly political?
        Person X would have very good credentials coming from RBS if he has a good Sharpe Ratio and solid earning potential for the bank. I wish people could understand that RBS has several distinct profitable divisions and these need to be sustained if we are ever going to see our taxpayer investments back.
        It is cheap and easy and politically expedient to clamour for “no bonuses” and “sack the bankers” but it is naive.

        1. brian kelly
          February 24, 2009

          I do not do, nor ever have done, anything at all remotely incredibly political. I am an engineer working in industrial automation on the computerisation of machines and processes. I have done this for 50 years up to my retirement working both for large companies in this area throughout Europe and then running my own small company. You are right, though, I know little about the more arcane areas of banking. What I do know is that 10’s or even 100’s of thousands of people are being put out of work and companies being made bankrupt through no fault of their own by the climate of collective recklessness of many banks of which RBS is one of the main culprits. Where are the bonuses for these recently unemployed people, many of whom have also unique skills but enjoyed no grotesque bonuses even whilst in work? The banks were, of course, not the only culprits to the sad fate of our country – it goes much higher than them. We, the ordinary taxpayer, are now propping up RBS and others because of their grotesque losses and I say no bonuses even at the cost of X moving on.

    3. adam
      February 24, 2009

      isnt the reason they are paid in bonuses to avoid taxation.
      The bonus is effectively a salary.
      Im sure there would be plenty of potential employees lining up at the door when the markets turn around again. Until then the bank has to cut costs.

      1. Andy Strang
        February 24, 2009

        Adam. No, bonuses aren’t a form of tax avoidance – they are taxed and have national insurance paid on them like any other salary element.
        I’m sure there would be lots of potential employees lining up at the door but firstly, they may not be good enough, and secondly there may not be a door.

        I will try and break this down one more time to make this easier:

        Pension Funds and Insurance Firms and suchlike all have millions to invest, not to be greedy but to enable them to cover their long term liabilities. Companies also have money to invest in order to hedge risks – of currency exchanges or oil price increases or prices of orange juice. Many things.
        Banks conduct this trading on behalf of their clients and make money from this. If you don’t enable state owned banks to pay decent bonuses then traders and sales staff who deliver profitability to the bank by servicing these clients will take the relationships elsewhere. Even if they don’t take the clients with them at first, clients like to work with trading teams who have experience and understand how best to trade on their behalf.
        These clients will therefore leave RBS or any other state owned bank and direct their business through other banks – it is really easy – just the flick of a switch to change your broker nowadays – and RBS and co would now be even less profitable than they are now.
        I don’t work in a bank and I don’t get a fat bonus but I appreciate why they do and why you need to reward staff who are delivering value for your business. Banks aren’t fools – if this work could be done by any 15 year old off the New Deal scheme then they would hire these kids and not pay our huge amounts to traders.
        Does this make sense?

        1. alan jutson
          February 24, 2009

          Just to be clear I am not against bonuses at all.

          Of course what you say all makes sense, its just the scale of the bonuses which is out of squew.

          The Client or Bank take all of the risk with Millions of pounds invested in the expectation of profit, for which (in the case of a client) it pays the Bank a significant fee, even if it looses.

          In contrast the Trader has no financial risk at all, he even gets paid a good salary (until he looses his job through poor performance), even if he looses the Client/Bank millions.

          Surely a Trader is paid a salary in the expectation that he will make his Bank a profit no one should be employed in the expectation of a loss.
          Sure motivation in the form of a bonus encourages some people to work harder, but your example suggested 10 TIMES salary was Ok.
          Sorry but I simply do not agree, I think it encourages recklessness, and I think the market (Banking Industry) as a whole will eventually stop paying such large bonuses in the future.
          If this is the case then his opportunity to go elsewhere will be limited.

          The poor percentage performance of many Insurance Companies Investments and Pension Funds can be contrasted to the money which the Traders and Banks have up until now made out of the trading of those same Investments.

          No I do not have any Political connections.

  9. Rare Breed
    February 23, 2009

    We will never know the true level of defaults the banks are hiding until they manage to hive them off to the tax payer.

    If they were in good shape they would be lending to each other. My guess is that they are so far beyond repair that it is only when they are nationalised that we will realise the extent of the debt they are deliberately hiding.

    It is disgraceful and almost unimaginable that the tax payers of this country are being made to pay for this.

    If we had let them fail 6 months ago we would soon have had new banks on the highstreet, with the help of the Post Office and some help for the old fashioned building societies all would have been sorted by the end of this year. …… Not any more!

  10. Demetrius
    February 23, 2009

    There is a suggestion going around that the loans for PFI funding of new projects will be garnered from the pension funds for local authority employees (this does NOT include teachers). This was the way ENRON supported its expansion. In the Sunday Times Dominic Lawson had an interesting article about the UK government now being a Ponzi scheme. This notion was presaged by a submission I made to the OECD in December last about High Net Worth Individuals. The first paragraph runs:

    “As a resident, taxpayer, and pensioner of the UK, who was called to the colours to serve The Queen, and who had no national insurance entitlement as part of the economies in the payment of conscripts, it is my considered view that the UK Government is engaged in a vast system of payola for the benefit of the international HNWI elite. It may be more by accident than design but for the several elites of the London Mediocracy it is a happy accident whose arrangements they are reluctant to dispute or to reform in any way. The consequence is that the UK Social Security Budget has come to be a gigantic Ponzi scheme for which the ordinary people, and notably the poor, are paying a heavy price. There are associated dire effects across the world for the poor in regimes which are corrupt or vulnerable.”

    1. alan jutson
      February 23, 2009

      The State Pension has been a Ponzi scheme for decades, what is paid in this week, is spent the very next, there is no Fund, its paid out of Taxes.

      Its not a particular problem if income always exceeds expenditure (most people have and run similar finances at home), problem is its getting out of balance, that is why either Taxes have to rise, or Benefits have to be cut, or as is happening at the moment, you borrow in the hope that you can put it right EVENTUALLY/SOMETIME.
      The worry is that the debt is getting so large that it may be never in your childrens lifetime.

      Mr Cameron should be very, very worried, as the next Government will have its hands so tightly bound with debt that it may be impotent to act for many years to change things for the better.
      Makes it all the more worrying that the opposition (all Parties) I exclude JR and Vince Cable (like him or not) are not making enough of this.
      They cannot be given much better ammunition, at the moment they are ahead in the polls by default only.
      If it was on merit then we would be into 30-40-% regions.

      Lets face it, Brown has Bribed half of the electorate with Government jobs and benefits of one kind or another.

  11. Neil Craig
    February 23, 2009


    Only thing is that our biggest competitor USAInc is doing the same. Only currently smaller competitors like Ireland & the BRIC ones are being more “conventional”, which is why we saw pictures of lots of public employees in Dublin demonstrating because their pay rises have been stopped merely because people are losing their jobs. No risk of that here.

    As regards our rate setting subsiduary Mark recently did an item showing that they don’t really set rates – they have just been following changes in Libor with a 1-2 month delay. Their attempt to do so now is visibly failing.

  12. Lola
    February 23, 2009

    Your best yet, but as it is written amusingly it is telling as to the state of mind of those that have a vague idea of what’s going on. Our emotions have gone from quizzical, to disbelief, then fury and apoplexy and finally to hysteria. You’re getting to the hysterical stage (where I have been for some months). But really what else can you do when faced with such awesome incompetence, deceit, and self delusion?

  13. Mark Wadsworth
    February 23, 2009

    Can anybody work out a way in which we taxpayers can sell our shares in UK plc before the market tanks any further, short of just moving abroad?

    Reply: there are legal ways of putting your savings into overseas assets, but you need to take proper investment advice tailored to your circumstances etc.

  14. William Palfreman
    February 23, 2009

    The terribly imprudent and inflationary behaviour of the current government outlined by Mr. Redwod above re-enforces my belief that we are coming up to a really good time to return to the gold standard. It is easily done – all a government need do is start issuing gold coins of a fixed price, and sticking to that price.

    Currently a sovereign is about £160. By having a gold coin of that face value it natually regulates the money supply. When the relative price of gold falls people can take more gold to the mint to be coined for a fee, so increasing the money supply and inflating the economy. When the relative price of gold rises people can either arrange for their coins to be melted down or can ship their coins abroad to pay for imports, both having the effect of reducing the money supply and deflating the economy.

    The beauty of such a system is that it is self regulating. No central banker need to have a better-than-market understanding of the state of the economy. No political intervention is needed.

    Seeing as the current policies will rapidly reduce confidence in the currency and continue to undermine the productive economy, a return to a gold coin standard can be presented as depoliticised natural solution to what in about two years time should be a problem sufficent to have hungry voters rioting in the streets. That will be a good time for simple but far-reaching change like this.

    1. mike stallard
      February 24, 2009

      The problem here, as adumbrated above, is that the government has absolutely no intention of stabilizing the currency! On the contrary, it wants to borrow more and to mint money so that it can meet some of its bills as cheaply as possible.
      We are well into IOU and pawnbroker territory. Our income is falling fast and our earning capacity even faster.
      The gold standard would mean – horror on horror’s head! – that the government would not be able to borrow and would fall prey to a cash flow crisis.
      That comes a couple of years down the line when the Zimababwe/Weimar catastrophe has happened.

  15. StevenL
    February 23, 2009

    You should put this on a funny letterhead and mail it to everyone!

    1. Brian Tomkinson
      February 23, 2009

      How about a 10 Downing Street letterhead?

  16. Matt
    February 23, 2009

    Mr P – Have you gone completely potty?
    You must be talking in a Scottish accent and chewing your fingernails.

    You are not Gordon Brown! At least you didn’t say “Started in America” so there is hope that this delusion is not complete.

    Your proposed solution to the crisis – looks even more barking mad. Even the real Mr Brown wouldn’t do anything as nutty as this.

  17. David Burch
    February 23, 2009

    Very witty. The problem is that no one in charge of government in the Western economies appears to want to admit to what is happening.

  18. Mark Demmen
    February 23, 2009

    Blimey. John Redwood’s got a sense of humour. Who would believe it. But at least it proves that DC has got absolutely no excuse for not bringing you back into the fold.

    February 23, 2009

    SU – bloody – PERB!

    Nowt to add!

  20. rugfish
    February 23, 2009

    That’s his next book – “The asinine approach to economics”, by Gordon Brown?

  21. wrinkled weasel
    February 23, 2009

    Read and weep. It’s all true.

    We all seem to have the same idea today..

  22. Adam Collyer
    February 23, 2009

    Thanks for this John – quite made my day! :o))

  23. J Mitchell
    February 23, 2009

    Another initiative for Gordo! Tell the whole Civil service, both nationally and locally employed, that they will all have to take a pay cut of 10% or be decimated. That way we save a shed load of government expenditure and reduce our liability to pay their pensions.

    As for Gordo’s pension, perhaps it should be performance related. Given the destruction of value in UK plc under his stewardship, perhaps his pension fund should be cut from its reported worth of about £3.5M to £2.0M just like all those of us who are not employed by the state!

  24. no one
    February 23, 2009

    i hope the Conservatives sack the (people-ed) running Coventry NHS and North Wales police when you inevitably win the next election

    cannot happen soon enough for me

  25. mad tony
    February 23, 2009

    You forgot to mention that we will run the banks at arm’s length so that we can delegate the blame for the failure and yet take all the credit for its success if any.

    The whole of the independence for the Bank of England, the use of agencies and authorities is to stop us from blaming government (especially central and possibly local governments) as has been illustrated during the bad weather recently due to the lack of planning and grit which was blamed by some on the Highway Agency.

    1. mad tony
      February 26, 2009

      Half of my submisson has gone missing! C’est la vie.

  26. David Belchamber
    February 23, 2009

    If Gordon Brown had not set up the failed tripartite regulatory system in 1997 and the BoE had continued to monitor the banking sector (we hope efficiently), do you think that there would have been a very different outcome for Northern Rock?
    Reply: Yes. It need not have gone under

  27. David Belchamber
    February 23, 2009

    If there had been a statutory requirement for the members of the Board of banks to (i) know about, (ii) to understand and (iii) to approve every product offered by their bank, do you think that the toxic asset problem imported from the USA might have been either averted entirely or hugely mitigated?

  28. chris southern
    February 23, 2009

    Superb bit of humour John 🙂

  29. bill
    February 24, 2009

    You’re often been portrayed in the press as humourless – but I think that this is brilliant satire.


  30. Steve Tierney
    February 24, 2009

    How does the song lyric go:-
    “I started a joke that started the whole world crying.”

    It isn’t funny. We should all feel like crying.

    What the government is going is nothing short of economic suicide. Although I agree with your principle point, I don’t think even you are painting this picture its proper shade of black.

    I’d love to say: “This is all going to end in tears,” but in good conscience I can’t. That would be the optimistic ending, and we’re long past that already.

  31. jim
    February 24, 2009

    These traders have been destabalising the world for too long. Giving traders the opportunity to gamble with depositors funds is irresponsible. To determine if someone is a good trader might take 30 years or more, the simple fact is they could be lucky for a few years then lose more than they ever made. But previous bonuses are never repaid, so gambling pays off.
    What we are seeing today is that money is being transferred from the productive and prudent to the black holes on the banks balance sheets, with bonuses paid. At this rate capital in Britain will soon disappear, leaving nothing with which to rebuild.

  32. mike stallard
    February 24, 2009

    What crisis?

Comments are closed.