Reading earlier today the pressure that is being placed on RBS in particular to agree to debt restructuring and help save Peacocks from administration I couldn't help but think how perverse the world is. I am not a fan of the mistakes made by big banks which led to the collapse of the financial world as we knew it. It has left one hell of a mess and the tax payer as owner of a number of rather unattractive assets. However now that we find ourselves in the position of owning or part-owning large banks with significant exposure to numerous enterprises we should be a bit more circumspect regarding what we do with that ownership.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press. The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business. The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away. I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems. One can predict the questions that would be raised in Parliament if they do walk away:
I have personal experience of this political pressure. I was involved in an administration a while ago involving a bank with significant state ownership. The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses. However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it. To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses. Undoubtedly this is true. However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!
Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed. This does not mean that administrators will definitely be appointed but makes it significantly more likely. If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct. Time will tell.
I do not know any of the details of Peacocks or its current financial position save what I can read in the press. The decision-makers at RBS, however, will have available to them a significant amount of information as well as knowledge regarding the past and predicted trading for the business. The decision they need to make with all that information is whether it is in the best interests of RBS shareholders to continue to support Peacocks or whether it would be better to force it into some kind of insolvent restructuring with a view to potentially cutting losses and walking away.
The problem for RBS in particular is that, as a state-owned bank, it is no doubt under immense pressure (perhaps perceived rather than real) not to walk away. I note that Cardiff Central MP Jenny Willott is due to meet Business Secretary Vince Cable later to discuss the retailer's problems. One can predict the questions that would be raised in Parliament if they do walk away:
"Can the Prime Minister explain why the state-owned bank, RBS, failed to save Peacocks from administration wth the loss of thousands of jobs? Is not the minimum that the public can expect from the billions spent on saving the bank that it will not desert its borrowers in their time of need?"What a load of rubbish. This would be typical political spin using the livelihoods (and loss thereof) of voters as a tool to hit the coalition. The taxpayers who own RBS are not merely those employed by Peacocks; they are all of the tax payers. I do not believe any of us would like RBS to make bad business decisions simply because the right business decision will cost jobs. For RBS to have the potential to see itself returned to public ownership it must be allowed to make decisions without concern that political pressure will be brought to bear.
I have personal experience of this political pressure. I was involved in an administration a while ago involving a bank with significant state ownership. The bank made the right decision to enforce its security over the assets of the business as it had concluded that the owner/directors were unable to improve the performance and their continuing management was detrimental to the business and thus likely to increase the bank's losses. However, the owners involved local MPs and Councillors who wrote aggressively to the senior management at the bank running the argument that it was morally repugnant that a "state-owned" bank would enforce security against the tax payers who "owned it".
Thankfully in this case the bank made the right decision but not without a significant amount of time being spent justifying the decisions to politicians who were more interested in scoring points with their local supporters than protecting the tax payer in general.
Similarly, attempts to stop administrators from seeking to enforce agreements for sale for flats because the value has fallen from when the buyers originally agreed to buy them are just as galling; if buying off-plan was risk free we would all do it. To a certain extent the same concerns must be raised regarding the constant refrain that if we are to exit this economic downturn we need banks to start increasing their lending to small businesses. Undoubtedly this is true. However, I personally, do not want to see the bailed out banks making bad investment decisions just so that they can fill the quotas for lending to small businesses placed on them by the government for good political headlines.
Unfortunately I do not expect the political pressure to disappear and therefore it is most likely that banks will continue to be damned if they do and damned if they don't!
Addendum: As I was writing this blog it was announced that Peacocks has filed a notice of intention to appoint administrators although this has not been confirmed. This does not mean that administrators will definitely be appointed but makes it significantly more likely. If this is the case it will be interesting to see whether my predictions regarding the recriminations will prove correct. Time will tell.
