Robbing Peter to pay Paul

I know that the British government doesn’t have much control over private enterprise, and it’s not desirable for them to have strict control over what companies can get up to. Can you imagine the situation if companies had to ask permission of the government before borrowing, lending, or buying interests in other companies – we would be similar to China.

But, the recent situation with Cadbury seems quite bizarre.

If Cadbury shareholders believe they have now got a good price for their shares then there is nothing to stop them selling to Kraft. That is just business and the emotional response to the loss of another British company is actually not fair – though it’s worth remembering that the majority of shareholders are just funds (pension funds) and so they have no emotion anyway. If British people want to prevent foreign investors buying into Britain, then that restriction would apply in the opposite direction too… Britain would find itself unable to invest in foreign businesses as a reciprocal measure.

But, Kraft had to borrow money to finance the deal. And the British bank Royal Bank of Scotland (RBS) financed Kraft. And Royal Bank of Scotland is 84%-owned by the British government, and therefore by the British people. So the British public are effectively financing a deal to buy their favourite chocolate manufacturer.

The government is claiming that RBS can’t be controlled like a government department, that it needs to operate as a regular bank so it can return to profit and that’s mostly correct. But surely someone must have seen this public relations disaster looming on the horizon? Billy Bragg has initiated a campaign where he is refusing to pay income tax, until the government starts controlling the publicly-owned banks – particularly the hefty bonuses bankers are already starting to pay themselves again so soon after the economic collapse.

Bragg won’t change much with this campaign. Even he acknowledges that the government will get their tax from him in the end, but he is demonstrating that the British public are not stupid. They care about how the banks behave and when they own a share of those banks they have a right for their views to be respected.

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2 responses to “Robbing Peter to pay Paul

  1. Yes, but people buying companies have always used external finance and backers. This is just one example. So yes, your points about an emotional reaction being inappropriate are right but can’t we allow ourselves a bit of a smile at the thought that Kraft is buying a British company but paying a British bank, owned by the Government, handsomely in order to do so? Your post kind of omits the fact that this finance is a service for which Kraft is paying rather than something for which we’re footing the bill. You’re saying the bank ought to be turning this sort of business away?

    The Times search engine is down at the moment so I can’t find the piece, but there was a good analysis of RBS last week which commented that the new chief exec, bonus and all, appears to be set to buy the bank back into private ownership earlier than scheduled and at a better price than the Govt was expecting. This will do serious work in repairing the economy, which is probably worth the bonus in its own right – and surely whatever they’re charging Kraft is part and parcel of that?

    Kraft isn’t robbing Peter to pay Paul. It’s paying Peter handsomely to enable it to pay Paul, and ooh look, we own Peter…

  2. I do agree, it’s more complex than many critics suggest – and I don’t think that ministers can or should run banks even if they dislike the bankers… I don’t think the situation could have been avoided, but as you suggest, it should have been sold to the public in a far better way – as an example of RBS recovering and becoming a major player again… though most people would emotionally prefer Wispa bars to leveraged finance!

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