Vericool Finance

Ronald Reagan must be spinning in his grave.  In 1984, the champion of the free market knocked out his big government “dirigiste” challenger Walter Mondale by 49 states to one.  A quarter of a century on, the current occupant of the White House is all but running the US car industry.

President Obama has rejected the survival plans submitted by General Motors management, gave it 60 days to work out new ones, sacked Rick Wagoner as GM boss, gave Chrysler 30 days to merge with Italian suitor Fiat and is even set to decide what brands live or die.  In effect, he’s saying that what’s good for America will have to be good enough for General Motors.  His power to do this comes not from statute, but from taxpayers’ cash – GM’s last hope of staying afloat – and Obama made clear he will force GM into a quick managed bankruptcy if it looks like the fastest way to remake the company.

Chapter 11 Bankruptcy is, in fact, Obama’s preferred route.  The car makers could use it to purge their biggest problems, enabling them to renegotiate terms with their creditors.  (The new scheme for guaranteeing car warranties will make it easier to take this route without poleaxeing sales.)  But if that’s his endgame, the big guy has badly miscalculated.  We can forgive Obama his daft, dewy-eyed rhetorical guff about the auto industry as an emblem of the American spirit – that kind of silliness is expected from politicians.  The problem is that he really does have too rosy a vision of Motown.  He and his car quango seem to think that short sharp shock of bankruptcy filing would be a cure all.  They’re wrong.

Detroit’s problems go much deeper than Obama understands.  This is not about leadership, it is about huge legacy costs in pensions, healthcare, uncompetitive working practices and inflated wage rates.  And it is sensationally bad politics from the new president.  By getting too intimately, involved, Obama and the Democrats are now completely implicated in the coming GM wreck - and have made it likely that March’s “menacing threat” will soften into June’s “wobbly wiggle-out”.

With or without a formal bankruptcy, expect backdoor subsidies forever and the world’s most expensive jobs programme.  For better or worse, Obama is now on the hook.  Stand by for “Joe Biden doing car commercials within weeks”.

Nobody, least of all a foreign government, should be allowed to dictate the course of a criminal investigation, yet the high Court has ruled that that is exactly what happened in December 2006, when the Government – at the behest of the Saudi royal family – leaned on the Serious Fraud Office to halt a bribery probe into the £43bn al-Yamamah arms deal with BAE Systems.

The judges didn’t mince their words. They declared that caving in to Saudi threats, which included withholding intelligence and junking a lucrative new jet-fighter deal, was an unlawful act of abject surrender. They were right. This judgement is a victory for the rule of law over a hypocritical and expedient administration.

It’s typical of the liberal metropolitan elite to react with such pious righteousness. In fact, pulling the plug o this pointless probe – designed to drag the reputation of our leading defence contractor through the mud – was one of the few things Tony Blair ever got right.

There’s now clamour for the investigation to be reopened, but no one seems to care that thousands of jobs and our national security may be at risk. Yes, the law must be respected, but British economic and strategic interests have to be respected to, and Tony Blair had powerful reasons to put realpolitik first.

He certainly wasn’t the first to do so. Margaret Thatcher considered the huge 1985 al-Yamamah deal so important that she ordered MI5 to bug the Saudis to stop them handing it to the French. Subsequent revelations – such as the slush fund BAE allegedly set up to entertain the Saudis, and the alleged £1bn paid to Prince Bandar bin Sultan – were merely a continuation of the same policy.

Given that bribery is so endemic in its target markets, BAE (which also faces probes for its dealings in Africa and the US) could argue that it’s commercially suicidal not to play ball. The City seems to agree, yet there are powerful commercial counter-arguments against turning a blind eye to corruption.

BAE’s hopes of growing in the giant US market have taken a severe knock. Moreover, modern Britain’s prosperity lies in the hands of the new merchant adventurers: the bankers, lawyers and accountants who trade, above all, on our international reputation for integrity.

BAE should pledge to reform a corporate culture too over-dependent on cosy relationships. Whatever the implications of this ruling for Anglo-Saudi relations, the long-term health of British justice is more important. It is the bedrock of British civilisation – and prosperity.

Jaguar is the preferred mode of transport for Britain’s political and financial elite, and Land Rover provides the nation’s aristocratic set with wheels. Yet these two world-famous marques have been poor performers for their cash-strapped owner Ford, which is now inviting potential buyers to kick the wheels.

Financially, they’re not a pretty sight. Jaguar has been a sinkhole ever since Ford paid $2.5bn for it in 1989. Land Rover is the shinier asset, but it’s estimated $2.7bn value is still pretty lousy, given Ford stumped up $3bn for it seven years ago. It looks as though Ford will have to settle for a less than luxurious price for both.

Given the industry’s appalling record, it’s easy to see why foreign buyers may be leery of jumping in: BMW’s acquisition of Rover nearly destroyed the German car company; Daimler’s merger with Chrysler was a disaster of even greater proportions. Indeed, it’s hard to think of a cross-border deal that has actually worked.

There may be some interest from Asian manufacturers in search of trophy assets, but attention is already focusing on private equity. Ford’s plans were barely off the drawing board before the “buyout bogeyman” crashed into the debate, with union leaders calling on the Government to protect the companies from the “asset-strippers”.

Ministers should resist the temptation. Past attempts to influence such deals have invariably backfired; moreover, private equity may yet prove the best solution for Land Rover and Jaguar.

Had MG Rover been acquired by Alchemy – the private equity consortium vilified by the unions and rejected by the Government in 2000 – it might well have escaped being run into the ground.

Yet, with 15,000 jobs in the balance, the political stakes are high. Labour survived the crash of Rover before the 2005 election; voters will be less forgiving if either Jaguar or Land Rover collapses ahead of the next.

Yet the bigger question is whether car-making can survive at all in the UK, given the growing dominance of low-cost manufacturers such as China. With even the mighty Americans on the run, what hope is there for Britain? The answer may lie in BMW’s Cowley plant, home of the rejuvenated Mini, a premium product built by a dedicated workforce.

The gap between success and failure is very narrow in the motor trade, but Britain can still punch above its weight. There is no reason why Jaguar and Land Rover cannot thrive – they just need good owners, some money and some tough love.

Forget about cash for peerages, ignore the debate about when Tony Blair will stand down as Prime Minister; a far bigger matter in his in-tray is what to do about Saudi Arabia. The Desert Kingdom is not only Britain’s leading ally in the Middle East but a major trading partner.

The 1985 Al Yamamah arms deal was our biggest export deal ever - worth £40bn to BAE Systems and its partners. But it is being threatened by an SFO investigation into alleged BAE kickbacks to Saudi officials, which has now embroiled the Saudi royal family.

The Saudis could cancel a £10bn contract for 72 Eurofighter Typhoons unless the SFO backs off. Meanwhile, the French are pushing for the contract to be awarded to their Rafale fighter instead.

The stakes couldn’t be higher. If Al Yamamah falls apart, 50,000 jobs would be at risk and Britain’s largest hi-tech manufacturer severely damaged - perhaps fatally. That seems a heavy price to pay for bribing a few foreigners in order to land a valuable contract. After all, everyone else does it.

We are routinely told that this is a slippery slope: if we give in to the Saudis, what’s to stop President Putin from stopping our gas supplies if we put a Russian on trial for poisoning Alexander Litvinenko?

But this case doesn’t have to set a precedent: we’re surely at liberty to choose the circumstances in which we agree to be successfully blackmailed in the national interest. The real issue is proportionality: given what’s at stake, there’s an argument for choosing pragmatism over cherished principles.

The political and commercial reasons for calling off the SFO are powerful. Many argue that the 2001 Crime and Security Act, which made it a criminal offence for a British firm to bribe foreign officials, was misguided. And the thought of losing out to less scrupulous nations is galling. Yet against these arguments stands the primacy of maintaining the rule of law.

In any case, that doesn’t excuse the foot-dragging that has been going on at the SFO. It has the right to investigate this case, and the Government cannot be seen to interfere at the behest of a foreign ally. But a secretive inquiry that goes on indefinitely is the worst of all worlds.

The ball is in the SFO’s court: it should either prosecute BAE or drop the case forthwith.