Who Can We Trust to Protect Our Money?

Carl Mortished Times of London March 15, 2010

What every saver seeks is a secure bolthole, a deposit account with the lowest risk, the financial Rock of Gibraltar. Where can you salt away Granny’s gift to your children with absolute confidence that there is no lunatic chief executive hiding in a cupboard burning £50 notes?

Our trust in financial institutions has been broken. If you still have faith, consider last week’s report on Lehman Brothers, that American pack of financial cards whose collapse provoked the crash. We now know that its bosses were card sharks, shuffling liabilities off the balance sheet. All strictly legal, say Lehman’s advisers: Linklaters and Ernst & Young.

In despair, we turn to government — savings bonds gilded with the seal of the nation’s treasury ought to be safe, but what about Greece? And what about Britain — the gap between our Government’s spending and its tax revenues has become a chasm that rivals Greece, and the arbiters of credit risk, the rating agencies, have put Britain’s triple-A rating on watch. It is no longer foolish to ask which is a safer home for a cash deposit: National Savings or Tesco. It doesn’t help that the face chosen to promote National Savings is Bob Geldof. His shambling demeanour is too apt a metaphor for the nation’s finances. Perhaps he will soon be promoting a new charity concert — HM Treasury Aid.

While we took holidays on next year’s wages, a great extinction was taking place in the financial world. If triple-A credit rated companies were four-legged furry animals, Greenpeace would be campaigning to save them. Today there are only four independent triple-A rated companies in the world, says Standard & Poor’s (S&P): ExxonMobil, Johnson & Johnson, Microsoft and Automatic Data Processing, the business outsourcer. No British group reaches the bar.

Triple-A was once there for “widows and orphans” — investors for whom safety was paramount; in the 1970s large swaths of corporate America, including General Motors and Ford, could claim financial “perfection”. Ten years ago, S&P rated only 20 companies with a credit risk close to zero.In the past two decades, corporates have shed their affection for solid finances and embraced risk. Triple-As were seen as dull sausage machines that delivered a dividend but no exciting share price ride.

Over the past 18 months there has been a great unwinding as companies and households began to pay back the money they owed. Panicky governments find themselves rushing to take up the slack of the private sector, borrowing and spending to prevent our wind-up toy economies from slowing to a halt. The effort to rewind the music box is becoming expensive and dangerous, reckons Pimco, a top US pension fund manager. Pimco doubts the credit ratings awarded to many national treasuries.

What we need now are governments run like triple-A businesses. Instead, we have a Government that has run Britain like a start-up company. Funds raised from the public were squandered and the management issued boastful press releases until the money ran out and the core business (financial services) went belly-up.

Bond market analysts talk of “crossover” between sovereign and corporate debt. The interest rate on the best corporate bonds is edging closer to the yield on government debt. So, who do you trust more with your money, BP or HM Treasury, ExxonMobil or the Federal Reserve? The easy answer is HM Treasury because behind the Chancellor lies HM Revenue, the police and the Army. If Alistair Darling is skint, he can always print money or pick our pockets, which is why rating agencies are so reluctant to downgrade sovereigns.

Is it too easy for the Chancellor? Do we need laws that limit the State’s powers to borrow and to run up deficits that rob our grandchildren. When Enron ran out of cash after hiding its debts in off-balance-sheet vehicles, the bosses went to jail. Greece concealed the parlous state of its finances and there is now talk of a European monetary fund that might impose fiscal discipline. Germany is keen; it fears becoming a lender of last resort to the Mediterranean beach bum economies of the eurozone.

We are not part of this eurozone club, thank goodness. But it is time for us to impose financial straitjackets on future British governments. Why don’t we just do it?

Carl Mortished is world business editor

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