Mandelson, Friend or Foe?
The “Cult of Mandy” is seeping all before it. But is the business Secretary really batting for British companies?
Even by the standards of Bob Monkhouse Syndrome by Proxy, whereby the most reviled national characters inevitably come into vogue if they hang around long enough, the transformation of Peter Mandelson from rank underdog to national superman is remarkable.
Those who not long ago would rail about him in the least elegant of language now nod sagely and say that he is the only minister they trust on the economy, in much the same way they talk of Kenneth Clarke and Vince Cable. The man is a force of nature.
Having swept back from hobnobbing with the Rothschilds in Corfu to take charge of the country, the Business Secretary has certainly been out to woo the City. Reportedly dismayed by what he regards as Alistair Darling’s defeatist approach to European legislation that could “destroy the multibillion pound private equity and hedge fund industry”, he has promised to redouble efforts to fight off Brussels.
Mandelson’s championing of financiers is hardly surprising given his love of any well-connected circle where money, glamour and power mix. He is deemed one of the few senior Labour people with who the City identifies. Indeed, the eclectic group comprising “Peter’s Friends” includes a host of big business names: including former BP chief Lord Browne, entrepreneur Jamie Palumbo, and Wall Street Journal boss, Les Hinton. The powerful family behind the Indian Tata Group, owners of Jaguar Land Rover, are also close friends.
Much good it did them. How can Mandelson style himself a friend of business when he was prepared to jeopardise thousands of jobs at Jaguar Land Rover by refusing to all the Government to stand as guarantor to enable the company to secure funding. The episode reveals Mandelson’s feet of clay. He talks of a new industrial policy to help rebuild our economy but has produced nothing substantive to back it.
And it will take a genius even more steeped in the dark arts than Mandelson to persuade a sceptical public that the Government’s handling of the MD Rover affair was anything less than an unmitigated disaster. Motor industry leaders, it is true, are disillusioned, but Mandelson was right to play hard ball with Jaguar – the Government cannot bail out every private company that gets into difficulties.
Meanwhile, his reputation for delivering is growing in other sectors: tourism bosses are desperate to ditch the useless Department for Culture, Media and Sport to move to his empire. For better or worse, business leaders can’t get enough of Lord M.
Tackling The Banks
Trading profits are up and bonuses are back. Yet Britain’s banks are still not lending. Is it time to get tough?
There’s a new buzzword doing the rounds in the born again City – BAB. It stands for Bonuses are Back and its arrival in the lexicon is evidence that bankers are once again looking forward to bumper payouts, just eight months after the sector faces meltdown.
Goldman Sachs staff are now looking forward to the biggest payout in the bank’s 140-year history. Many other investment banks are anticipating stellar profits in no small part as a result of the chaos caused by their previous activities. Bond markets are hectic as a result of governments’ needs to finance their deficits, while economic problems have created (profitable) volatility in foreign exchange markets.
When even majority government-owned banks, like RBS, join the party, you know the system is rotten. RBS chief Stephen Hester’s £9.6m bonus shows that bankers haven’t changed. Indeed, there is growing suspicion that this lethal breed is going back to business as usual, although the financial crisis remains unresolved – frightening prospect for taxpayers everywhere.
Fading political will to secure a strong regulatory response – and a good deal of sustained lobbying – would appear to have let banks off the hook. That is dangerous, particularly against a background of unresolved global imbalances. There must be a possibility that, with bankers once again at play, the financial system will return to chaos in the not too distant future.
What should be done? Bank of England Governor, Mervyn King, argues that investment and retail banking should be separated, along the lines of the old US Glass-Steagall act. His reasoning is that it is too risky for high street banks to continue playing in the casino of investment banking. The problem, though, is that shrinking banks so dramatically would generate a big chill just as the markets are beginning to unfreeze.
Without its investment banking division, Barclays would have joined RBS and Lloyds as a burden on the taxpayer. It would be better to follow the FSA’s strategy of making banks reserve more capital the banks warn that even a tamer crackdown could stifle recovery, because the more capital and liquidity a bank has to hold, the less they are able to lend.
That’s a valid point. The crucial thing now is to get enough money into the system to get the taxpayer off the hook, keep good businesses alive, and convince jittery foreigners to find the Government’s truly extraordinary borrowing requirements. The niceties of financial regulation can wait.
War Of The Watchdogs
Should the big banks be broken up? And who should regulate them? The battle-lines are forming.
Ever since the fall of Northern Rock, a cold war has been waged between the Treasury and the Bank of England. Last week we witnessed the equivalent of the Cuban Missile Crisis. The setting was the gilded banqueting hall of mansion house, and the level of brinkmanship and tensions, as Alistair Darling and Mervyn King faced each other down, was palpable.
Darling delivered a lacklustre speech on regulation, setting things up nicely for the Governor’s putsch. King is making a power grab: not only does he want to put the Bank in charge of spotting squelching future threats to financial stability; given the chance, he’d break up Britain’s biggest banks, too. The Treasury is opposed to both measures; the Tories broadly sympathetic.
The financial crisis has descended into a tedious soap opera. Alistair and Mervyn have fallen out again. The guv’nor is getting matier with David and George… It’s all so trivial. Instead of arguing about who should be sheriff, we should begin with the broader question of what sort of financial system we actually want.
Yet the sheriff question is key. The tripartite system of joint regulation (between the Bank, the FSA and the Treasury) which Darling defends in such lukewarm fashion clearly hasn’t worked. The tatters of the British financial system are testament to its failures. Indeed, in continuing to champion it, Darling has cast himself outside consensus.
A key measure of President Obama’s regulatory blueprint is to put the US FED into the cockpit. King’s wise proposal echoes that. The FSA should be left to deal with consumer protection and the solvency of individual banks, leaving the Bank to safeguard against systemic risk.
There are regulatory battles everywhere. This week’s tussle between Gordon Brown and Brussels over fiscal independence was a more significant encounter than the Darling-King scrap. Who would you prefer to, make judgements about the UK banking system, Mervyn King or the European Central Bank? The PM, fortunately, secured an opt-out.
Clearly, the posse of global regulators is breaking up as national interests assert themselves, and, given the confusions, that’s all the more reasons why Darling is right not to rush reform. The FSA chairman, Lord Turned, fears that the will to reform… could weaken as recovery takes hold. Perhaps, but until you know what new levers you want to give the regulators, you can’t really decide who should pull them. Darling is right to take his time. We need to get this one right.
Recession Over?
Predictions of a faster than expected recovery are gaining ground. But there are big dangers in jumping the gun.
“Don’t be fooled by one month’s data” is one of the first lessons taught on any good economics course. Yet the accumulation of upbeat stats can no longer be ignored. Rather than the odd green shoot, the economic landscape now resembles a fragile carpet of green, and economists are busy revising their forecasts higher.
The most weighty of the green-shootists is the National Institute of Economic and Social research. If the NIESR is right, and they have been in the past, there’s a good chance that official GDP figures could show a flattening in the second quarter and a return to growth in the third. Good grief! The Chancellors’ much-derided Budget forecast could turn out to have been right all along.
Perhaps there is an economist’s recovery but, with large numbers of job losses still to come, the pain for many ordinary Britons is just beginning. Meanwhile there’s a danger that we lose something crucial amid all the green spouting. Momentum for reforming the financial sector and for rebalancing the UK economy was strong in the depths of crisis. Now it is palpably slipping away… on the slenderest of pretexts.
Forget green shoots, GMB union leader Paul Kenny said, what we are actually seeing is “greed shoots”. The “recovery” seems to consist largely of bankers getting “the financial gravy train back on the tracks” – witness the recent huge payouts at Barclays. Yet it is clear that the banking system is not yet out of the woods. The ECB warns of a further bank writedowns totalling $283bn this year: a bleak outlook.
There is now a big risk that central banks and governments will move too swiftly out of recession-mode strategy and begin reversing their supportive monetary and fiscal policies. There were hints of such exit strategies at the last G8 meeting. Yet there is still meltdown potential, especially in Europe. Latvia, for example, is a ticking time bomb.
Some economists think that the world has dodged a bullet. The risk of an all-out Great Depression… has receded, but historical analysis by economists Barry Eichengreen and Kevin O’Rouke gives pause for thought. The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted. But we shouldn’t delude ourselves. The path to full recovery is likely to be long, hard and uncertain.
Brown Sugar
Is the appointment of Sir Alan Sugar as the Government’s “enterprise tsar” anything more than a distracting gimmick?
The recession ended in May. Whether or not you believe that to be true, the one thing Gordon Brown hasn’t had to worry about recently is the economy, which is staging something of a fightback.
It looks like output will start to grow again by the end of the year. But the recovery will be sluggish, and could be short-lived – and swingeing job cuts and business insolvencies could make it feel far worse next year. So what are we to make of the bizarre appointment of Sir Alan Sugar to the House of Lords as enterprise tsar? A serious man for serious times, no doubt.
Sugar seems to have a lifelong gift for boarding sinking ships, leaving computers for property and property for politics. Yet, as he has shown on The Apprentice, at least he is comfy on camera – which is more than the PM can say. How Gordon Brown must envy him. He doesn’t have charm. There’s no sign of any emotional intelligence. His sense of humour is oddly stunted and he’s stubborn, arrogant and mouthy. And yet the public not only love him, but back him in their millions with their remote control. But will he get results?
Sugar’s stated aim is “to help out businesses and act as a kind of giant Dragon’s Den… although not with my money”; he plans to act as an intermediary between banks and companies. But that may be as empty a promise to the average small business as every other emergency enterprise package: you only get the cash if you can show you don’t need it.
Sugar’s recent track record in business hasn’t exactly been brilliant, and he’s not always the most prescient forecaster: “Next Christmas, the iPod will be dead, finished, gone, kaput,” he predicted in 2005. But there’s a lot more to him than boardroom bluster. The Amstrad PC genuinely revolutionised consumer electronics in Britain, and that alone makes him a business visionary. But that was a long time ago and you’d think the less-than-happy experience of Lord (Digby) Jones in Whitehall would have dulled Brown’s enthusiasm for bringing bumptious businessmen into the big tent.
You can’t help thinking the PM has missed a trick. Who better to knock the banks into line than Sugar’s sidekick, Margaret Mountford? The strategic application of that sceptical scowl and cocked eyebrows would soon stop them coming up with another fiasco like subprimes. Never mind Lord Sugar, bring on lady Salt.
The Travails Of Vauxhall
Vauxhall car-workers have become pawns in the international carve-up of GM Europe. Do they face the scrapyard?
Saving General Motors’ cash-strapped European division from the consequences of its parent’s bankruptcy was always likely to be both complicated and highly political. Last week the two remaining bidders for Opel and Vauxhall were invited to a summit at the German Chancellery.
Many though Fiat would come out on top, but the Italians were beaten by the unlikely alliance of a Canadian car-parts maker, Magna, and the Russian savings bank Sberbank. The irony of a Russian state bank rescuing a pair of car firms whose US parent is being nationalised will be a jolt to anyone who still thought the car industry was ruled by market principles.
The question facing Vauxhall’s 5,000-strong workforce is: who the hell are Magna? The company, built from a single garage by a colourful Austrian-born entrepreneur named Frank Stronach, is the largest car-parts supplier in North America, yet it has no experience of running a motor company and there is scant detail on what, exactly, it plans to do to the European arm of GM.
The involvement of the Russian oligarch Oleg Deripaska – the man caught up in the Mandelson/Osborne yacht imbroglio last summer – may provide a clue. Deripaska (an “industrial partner” in the deal) owns the Russian carmaker GAZ and, until he fell on straitened times, had a 20% share in Magna. The plan he hatched with Stronach in 2007 was to conquer the Russian car market and make headway into Europe and Asia. Thanks to the deep pockets of Sberbank and the convenient collapse of GM, the plan is back in play.
That may not come as much reassurance to workers at Ellesmere Port and Luton, and matters haven’t been helped by the verbal sparring between the Business Secretary, Lord Mandelson, and union leaders who accuse him of not doing enough to secure a commitment for the plants. Mandelson will probably stave off significant job losses for now. But since he has not committed a penny to Vauxhall’s new owners (unlike the Germans, who advanced a 1.5bn euro, bridging loan to secure Opel) his influence is limited.
One might have hoped for better. Imagine the creations of an industrial culture in which somebody fought for British ownership of some of our landmark marques. This is not a protectionist, but a pluralist position: neither a wholly British-owned nor wholly foreign owned industrial sector is desirable. You want a mix. If Magna redirects Luton’s van production to Russia and Ellesmere’s car production to Spain and Germany, we will see that ownership matters.
Britain’s “Credibility Gap”
Both the IMF and Standard & Poor warn that Britain’s public finances need drastic surgery. Are our politicians up to it?
On the face of it, it is clear why Standard & Poor’s has cut Britain’s debt outlook from “stable” to “negative” for the first time in decades and threatened to strip us of its cherished AAA rating for the first time ever. After all, new stats show that government borrowing surged fivefold in the year to April, while tax receipts slumped 10%.
S&P warned that the UK’s ratio of debt to GDP could be about to double to 100% and stay there – and they might be right. On the other hand, these are the same people who brought you triple-A rated collateralised debt obligations, rock-solid Icelandic banks – and failed to predict any of the financial crises of the past 20 years. Ratings agencies always accentuate the book and exaggerate the bust, and this latest offering is typical of their output: a risible piece of guesswork.
That said, it’s not too hard to spot the gigantic hole in the UK’s public finances, and it doesn’t help that the Bank of England’s quantitative easing strategy has meant that it’s busy buying back the Government’s own debt from lenders – underpinning and distorting the price of gilts. Ernest Saunders went to prison for doing something similar.
S&P aren’t saying anything that hasn’t been well documented by any number of other worthy bodies – including the IMF. The S&P downgrade matters, because if we lose our AAA rating, our problems will be much worse. Foreign investors buy two-fifths of our government debt, and many of them are only allowed to hold paper with a pristine rating. That’s scary.
Given the current political disarray, it was no surprise that the Treasury couldn’t come up with a convincing response to S&P. They need to – and fast. When it comes to getting people to lend money, Britain has historically relied on two factors: its strong and stable governance, combined with a history of paying our debts back. There is no fundamental reason why that can’t continue. Even the chasmal fiscal deficit of 12.4% projected for 2009-10 is affordable as a one-off, but only if investors are told how the Government is going to pay them back eventually.
Instead, Britain is suffering from a credibility gap. With the expenses scandal and uncertainty over the state of the election causing political paralysis, and neither party remotely clear about their future tax and spending plans, the UK looks financially exposed and politically weak, and that’s perfect ground for ratings agencies to wreak their usual havoc.