The angry reaction to Barclays' decision to recapitalise using Middle Eastern money rather than a taxpayer bailout mystifies me. In my News of the World column today, I argue that Barclays may well become 30% Arab but its 100% correct. It has no duty to accept a UK taxpayer bailout over more expensive Arab money, as is widely suggested. Its duty, in fact, lies is in the reverse. A taxpayer bailout is supposed to be the last resort, preventing the banking system from collapse.
I'm glad that John Varley, Barclays' chief executive, realises that even if some politicians do not. As Guido notes, Vince Cable has disgraced himself in claiming Barclays should have gone with the taxpayer. The patriotism argument, that British taxpayer financing is preferable to Arab money, is also nonsense: who do you think the British government borrows from? Barclays has just cut out the middleman.
Another popular argument is that the only possible explanation for Varley's actions is that he wants to keep paying himself and his directors bonuses. In fact, they have bought something far more precious: freedom from government. As Varley knows, the road to disaster starts when you start inviting government to help manage your company. The last thing any company wants is Gordon Brown or his proxies popping up saying "Only me!" and then launching on "You dont want to do it like that" Harry Enfield-style diktats, which the Scottish banks now have to swallow. If Barclays' rivals are operating under state directions (including demands to keep mortgage lending at 2007 levels) then they will soon be in real trouble. Barclays shareholders will realise this, I suspect, and for all their moans vote the new deal through.
On the whole, I do agree with him. The history of banks is that there is cyclical ownership by one country of a large number of banks then take overs from other countries as strength of economies change. All the man traditional British banks have long since been taken over by European and American banks. There is no more Barings, SG Warburgs or Cazenove Banks anymore - they are now part of ING, UBS and JP Morgan. In the US, there is no more Salomon Brothers, Dillon Read, First Boston - thy are now part of Citibank, UBS and Credit Suisse. We have to accept that finanical power moves on and will always do so. Arab, Chinese and Indian Banks will be the new powers instead of US and European Banks.
However, when seeking funds Chairman must make sure that they are seen to be acting in the Shareholders' interests (which is their statutory duty) and not their own interests in protecting their own executives' large shareholdings and bonuses. For too long in the banking sector, mergers and takeovers have been instigated because of the benefit that accrues to the executives rather than the Shareholders. In the Barclays Banks deal, the terms that the new money coming in has not been made public, but one of the reasons to go for more expensive funding is that the terms are less onerous on the executives. The same question has to be asked with the Mitsubishi financing for Morgan Stanley (the main benefactor being John Mack himself). While Fraser Nelson is right in suggesting that there are good reasons to be free of Government interference, Government ownership can also bring benefits as well, such as a better credit rating and cheaper day to day funding. For banks, the credit rating can be king when it comes to longer term survival and business opportunities. Don't forget that Barclays benefits by Government bail outs of other banks. If RBS, HBOS and other US banks did go under, they would have faced huge losses on their exposures.
But let's give Barclays Banks the benefit of the doubt and assume they have gone for the option that is more beneficial to the longer term interests of the Shareholders of the Bank. Where Fraser Nelson is incorrect in his article is in the following paragraph:
...the big picture is that a British bank has been saved and without recourse to semi-nationalisation. If the Barclays deal goes wrong, the UK taxpayer will have no liability (one shudders to think how we'll be stung by what horrors the semi-nationalised banks have to unveil). In the last analysis, we should all be glad that Barclays has (as the Guardian put it) avoided taking cash from the British taxpayer because the British taxpayer has no more cash to offer. Varley should be knighted, not pilloried. He has fended off immense pressure from the Treasury to swallow the bailout, and preserved for the nation a strong, independent bank. I only wish that the Scottish banks had been in a position to do the same.
This is the myth we have no discovered with the British banking sector (the same myth that exists with large public/private partnership PFI deals). The myth is that in reality there is no private sector risk. If everything goes well, the private sector (in this case banks) takes all the upside in profits. If things go very badly, there is a public sector bail out. It is therefore the public sector, the British taxpayers, who bare the risk.
The unfortunate outcome of the Credit Crisis is that while hundreds and thousands of 'ordinary' workers are losing their jobs, the personal fortunes in shareholdings and favourable pensions for executives are being protected. Let's not kid ourselves about risk and reward and the motives behind the sudden rush to accept large injections of non-Government cash into the Banks. While we on the right of centre may be in favour of as little Government interference into the private sector as possible, we must also press for regulation to be in place to ensure that those responsible for poor decision making and bad managing of the banks do not benefit and instead have to bare the results of bad risk taking themselves...
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