The (many) unacceptable faces of capitalism

January 23, 2009 by
Filed under: Credit crunch, The RSA 

I defy anyone to read the following without wanting to kick something or somebody. 

There is the tale of former Merrill Lynch boss John Thain who has just resigned from Bank of America. You might have thought that his disastrous management of the former investment bank might have been enough to persuade Mr Thain quite some time ago to retire quietly to one of his mansions. In fact, the reason for his hasty departure is the growing outrage not only at his decision – in the face of the imminent demise of his bank – to bring forward and increase bonuses to senior staff, but also the allegation that while Merrills slipped deeper into trouble, the Bank spent several hundred thousand dollars refurbishing his personal office, including one of the most expensive waste paper baskets in history. 

Then try Jonathan Guthrie’s piece in yesterday’s FT. He describes the growing practice of company owners opting for so called ‘pre-pack’ insolvencies. By putting their companies into administration they can shed all unsecured debts, and obligations to existing and former staff. Then, sometimes just hours later, the previous owners turn up and repurchase their former assets at a knock down price. Guthrie gives an example: ‘David Charlton, founder of the Officers Club, recently bought 118 of the garment chain’s 150 stores out of administration’.

As Guthrie says ‘the morality of pre-packs becomes questionable if owner directors use them to cherry pick the best bits of their struggling business. A director who agrees with secured lenders to shed his unsecured obligations is treating his suppliers, his pensioners and the tax man [that’s me and you] prettily scurvily’. Quite apart from the morality, this practice will increase distrust and fear in the market as suppliers demand immediate payment worried that otherwise they might be ‘pre-packed’. 

Finally, read a brilliant article by Alice Thomson in yesterday’s Times which exposes the myth that those who created the economic nightmare are also suffering the consequences. If I were a Northerner reading the piece I would get a train to Mayfair and start picking fights. Thomson’s piece has one flaw – she says that Sir Fred Goodwin, the disgraced former boss of RBS and one of the dozen or so people most individually responsible for the mess we are in, is Chair of the Prince’s Trust (but surely this can’t be true!). 

One day, enterprise, driven in large part largely by the pursuit of wealth, will help us get out of the mess we are in. Occasionally, we hear the CBI and the IoD making more demands from Government. How about these august institutions – or perhaps the British Bankers Association – taking a stand for ethical business practice. As John Kay told a packed RSA Great Room last night, this crisis is not one of capitalism but of the stupidity and greed of a cadre of overpaid and under-regulated bankers. If the champions of business are to save the reputation of wealth creation they might usefully start by loudly distinguishing good business from its many unacceptable faces.

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11 Comments on The (many) unacceptable faces of capitalism

  1. Susmita on Fri, 23rd Jan 2009 10:50 am

    2. Re Mr Thain and his wastepaper basket, I don’t believe that this egotistical behaviour and self-indulgence is linked to capitalism. I have seen many senior staff in charities conduct themselves in exactly the same way. I hope that the current crisis will not be perceived as a sign that capitalism is fundamentally immoral.

    Nothing will change as long as the Government continue to put bankers on a peculiarly high pedestal; the bonuses paid to Northern Rock staff being proof that they have no intention of learning any lessons from this crisis.

  2. matthewtaylor on Fri, 23rd Jan 2009 1:33 pm

    3. Thanks Susmita. I agree that charities too can be self indulgent. Although I hope you agree that I reallly did need the marble and gold plate personal en suite bathroom I have installed in my office. As for bankers not only getting away with murder but being paid to clean up the mess – I agree

  3. Indy on Fri, 23rd Jan 2009 1:54 pm

    4. The pre-packs are especially alarming because an advanced market economy runs on trust.

    As for the North and the South, sat here in S. Yorks, the first reaction is to paraphrase Warren Buffet: we’ve had the best part of 30 years of class warfare in the Anglo-American economies and the rich won. If picking fights in Mayfair would change anything I’d be down like a shot.

    It is of course bigger than that, oil and gas wealth has been misused to subsidise the financial sector through a “strong Pound” and manipulations of interest rates which had bad effects on other sectors. Much time, money and talent was sucked into the financial sector.

    Some have christened this phenomenon “Anglo Disease” in a parallel to the Dutch Disease where a natural resource sector overwhelms the entire economy.

    Example Anglo Disease article: http://www.theoildrum.com/node/2714

    Wiki on Dutch Disease: http://en.wikipedia.org/wiki/Dutch_disease

    And all this has been enabled by a complex economic philosophy which still towers over the intellectual scene…

  4. Mark Sheldon on Fri, 23rd Jan 2009 2:12 pm

    5. Pre-pack protects the interests of employees by Transfer of Undertaking & Protection of Employment. It has been proven that pre-pack provides the greatest probability of retention of employment.

    Businesses entering into pre-pack are insolvent and the effect on creditors should be no worse than liquidation; the alternative. In the judgement of the insolvency practitioner higher value of sale is achieved by pre-pack than by public sale.

    Some of the negative press pre-packs receive is due to high competitive intensity in industries with over capacity.

  5. Andrew Brown on Fri, 23rd Jan 2009 4:46 pm

    6. I’m afrad that Goodwin is the Chair of the Princes Trust, unless they’ve not updated their website recently.

  6. matthewtaylor on Sat, 24th Jan 2009 11:33 am

    7. Thanks Andrew. I don’t go in for attacking individuals and there were plenty of others who played their part. John Kay said on the RSA on Thursday that bankers had mortgaged the future to get rich today and that we are now all paying back the debts they built up. I wish people like Sir Fred would see it as their duty to show maximum contrition as part of the social healing process. But as the Thompson piece shows most of those more responsible for his disaster neither accept that responsibility nor suffer for the mistakes nearly as much as the poor and blameless will do.

  7. matthewtaylor on Sat, 24th Jan 2009 12:02 pm

    8. Thanks Mark. This changes the pictue as I understood it, particualrly the TUPE point. But there is still a point about natural justice. If a businessperson fails to run a business succesfully causing adverse consequence for other people, for the same business person to be able to be able to return to profitable business by cherry picking their former assets seeems wrong. After all, if this works it begs the question why didn’t they have the foresight and bottle to restructure the business the first time round?

    Thanks for the comment

  8. matthewtaylor on Sat, 24th Jan 2009 12:03 pm

    9. Thanks Indy. Powerful words and interesting links

  9. Daniel Snell on Sat, 24th Jan 2009 12:45 pm

    10. Matthew,

    Two thoughts; firstly, i’m not sure it’s a capitalism vs. other ideology thing, as human failings would follow us around anyway. Greed has always existed and I fear always will. It may be our short-term failings as humans that will lead us on the rocks.

    Secondly, perhaps there is a broader question about creating a debate for social responsibility and a transparent ownership of ones behaviour. (bonuses only kick in after 5-10 years once ones impact has been fully evaluated) There is a short-term unconscious attitude, that is prevalent everywhere. It seems the callous and selfish behaviour has for too long been endorsed by both media and politicians a like. GREED IS JUSTIFIABLE! This needs to change.

    Perhaps shifting social interest back to community and relationships would make people more satisfied and enriched rather than the disease of ownership, which will make us all unhappy any ways.

  10. matthewtaylor on Mon, 26th Jan 2009 8:55 am

    11. And now, according to the Daily Mail, he is going

  11. Mark Sheldon on Fri, 13th Feb 2009 7:18 pm

    12. Hi Mathew,

    serious restructuring may only be possible from a position of insolvency e.g. 50% of your outlets are unprofitable but most of them have leases exceeding five years left. Could the Directors have foreseen the impact of eCommerce on retail outlets when they commited to the leases?

    Cheers,

    Mark

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