Review of the Year 2009: The corporate classes

Fattest cats fell to earth with a bump

(Reuters)

It lacks the scale of the Roman amphitheatre or the beauty of the English countryside, but The Thatcher Room in Westminster's Portcullis House knows a thing about hosting blood sports. Home to the Treasury Select Committee, it was to this House of Commons suite that four of Britain's best-known bankers were summoned on a grey morning in February.

Officially, Sir Fred Goodwin, Sir Tom McKillop, Andy Hornby and Lord Stevenson were there to give evidence to the MPs' inquiry into the banking crisis. But what the audience really wanted was its pound of flesh, some terrible public retribution for the public faces of an industry that had tipped the world into the worst economic downturn since the Great Depression.

As is so often the way with such moments of high theatre, the reality was disappointing. All four bank bosses apologised for their failures – while seeking to pass on plenty of the blame – and the committee's MPs played a mildly diverting game of trying (and generally failing) to come up with ever-more humiliating put-downs.

But it was never going to be possible to get to grips with the credit crunch during a three-hour interrogation of four desperately defensive men. This crisis has cost the world $10.8 trillion ($1.5 trillion in the UK alone). The Bank of England said in March it would print £75bn of new money to tackle Britain's recession after cutting interest rates to a 315-year low; it then increased that to £200bn. Royal Bank of Scotland, one of the institutions represented at the inquiry, admitted to having made a loss of £28bn.

Nor do the numbers do justice to the scale of the financial crisis. The bare figures do not give any sense of how thousands of individuals' lives have changed as a result of what Mervyn King described as the "breathtaking" near-collapse of the world's financial system. "Never in the field of financial endeavour has so much money been owed by so few to so many," the Governor of the Bank of England remarked.

Take Sir Fred himself, who became Britain's poster boy of the credit crunch. After almost destroying RBS, an 281-year-old institution, leading it to the biggest loss in British history, he had to quit as part of a government bail-out that leaves it 80 per cent owner by the taxpayer. But not before he had secured himself an £8m pension fund boost as a pay-off. Sir Fred fled to France, returning home to Edinburgh briefly to visit a home defaced by vandals, and spent months resisting all calls to pay back the reward for failure before eventually reaching a compromise deal.

Alternatively, take Steve Ramsay, a 51-year-old employee at the giant steel manufacturer Corus's plant on Teesside. Less than three weeks before Christmas, he discovered that after 31 years working at the plant, he was being made redundant. Corus is closing the factory because steel prices have dropped so dramatically that customers have pulled out of contracts with the company. In a world where a global property boom has turned to bust, the demand for steel is no longer there.

For Mr Ramsay, there will be no bail-out. The demise of Britain's steel industry may be something to regret, but these are not businesses considered to be of "systemic importance". The banks could not be allowed to fail because if they had, the world economy would have ground to a halt.

The Treasury, the Bank of England and the Financial Services Authority have spent much of 2009 wrestling with this dilemma. Their challenge is to cut the banks down to size so that the financial services industry can never again hold the world to ransom in this way. It is not simple. On the one hand, Britain's banks are under pressure to be more prudent, to rein in staff driven by short-term profit targets and to rebuild their balance sheets. On the other, they are lambasted for failing to lend enough to kick-start Britain's economic recovery.

Add in the explosive issue of bonuses and the debate over regulatory reform becomes poisonous. Bad enough that US investment bank Goldman Sachs is on course to pay total bonuses of $21bn for 2009 as a whole. When Royal Bank of Scotland's new board warned they might resign if the Government vetoed a bonus pot worth up to £1.5bn, the Treasury felt compelled to act.

Alistair Darling's last pre-Budget report thus included a 50 per cent "supertax" on bonuses for bankers worth more than £25,000, though the new charge is expected to raise £500m, only a sixth of the £3bn that the Chancellor's plans for higher national insurance contributions will raise.

Nor has the supertax been enough to dispel the notion that bankers have somehow got away unscathed from a crisis they created. Lloyds Banking Group raised £24bn of new capital in order to avoid the Government's asset protection scheme, a punitively priced insurance fund for future bank losses, and now faces a future in which it dominates UK retail banking. Barclays, too, is benefiting from having avoided taxpayers' support, while HSBC, having tapped up shareholders for £12bn during the summer, is also performing well once more. Even Northern Rock has continued to trade and the Government now hopes to sell off part of it before the election.

The downturn, meanwhile, continues – despite base rates at 0.5 per cent and that £200bn Bank of England "quantitative easing" programme. When Business minister Baroness Vadera spied "green shoots of recovery" in January she was ridiculed. No wonder: of all the economies in the G20 (the group she now advises in a slightly less public-facing role), only the UK did not make it out of recession before the end of the third quarter. The pundits believe data to be published in the new year will show Britain's downturn ended in the fourth quarter of 2009, but don't bet your house on it.

The winners and losers of this downturn have never been predictable. For example, despite plummeting sales figures, not a single car plant anywhere in Europe has closed down. Massive state support for the car industry – bail-outs of the US car giants and scrappage schemes in the US and much of Europe – has seen to that. There may be no British car manufacturers of any scale, but several foreign companies have big plants here. Not least GM, which eventually backtracked on its plan to sell its European arm, including Vauxhall of the UK, and hopes are high that British jobs will now be preserved.

Happier times too for ESPN, which, after years of trying, finally secured the right to broadcast football to a British audience thanks to the demise of Setanta.

Individually, Marc Bolland, boss of supermarket group Morrisons, has benefited from the pressure Marks & Spencer has come under from shareholders – who across the listed market feel they must be more challenging in the wake of the downturn – to secure a successor to Sir Stuart Rose. Mr Bolland will take that role next year. At ITV, meanwhile, succession planning remains in flux, though the broadcaster has finally found a new chairman. Former Asda boss Archie Norman is to succeed Michael Grade.

Stock market investors, too, are smiling again. Anticipating good news – and seemingly oblivious to its non-arrival – the FTSE 100 index has risen almost 50 per cent after hitting a six-year low of 3,600 in March. The gold price has hit a series of all-time highs while oil is climbing again, too – up above $70 a barrel having started the year at $45. Even house prices are recovering: they may end 2009 higher than they began.

With the return of market confidence – though economists wonder if new asset price bubbles have been created by the Bank's £200bn of QE – has come renewed interest in wheeling and dealing.

Orange and T-Mobile are to merge their UK businesses, while a deal between British Airways and Spain's Iberia has been cleared for take-off. Kraft is pursuing Cadbury, though a campaign is under way to prevent the chocolatier – with all its origins in 19th-century philanthropy – being sold to the Americans. Rio Tinto almost sold a chunky stake in its business to the Chinese (causing a minor diplomatic row when it changed its mind at the last minute) and is now pursuing a huge joint venture with another mining giant, BHP Billiton.

And yet the black clouds persist, not least on the UK high street. A weathervane of consumer confidence, it continues to see high-profile casualties. The last Woolworths stores shut their doors as the year began, but the retailer was far from the last hit by this recession. Land of Leather, Icelandic retail chain Baugur, Waterford Wedgwood and Threshers have all slipped into trouble this year.

The fear of further financial crises has not entirely receded either. In November, the state-backed Dubai World announced it wanted six months' grace to restructure £4bn of debts, prompting a global panic about the extent to which the banking system is exposed to the hugely indebted emirate. Greece and Ukraine are sliding further towards financial meltdown, too. And there is always the terror that recessions expose hitherto unsuspected criminality. In the famous words of Warren Buffett: "You only find out who has been swimming with no trunks on when the tide goes out."

Enter Bernard Madoff. Over almost 50 years, the financier built a reputation as one of Wall Street's leading lights, a brilliant investment manager and an upstanding corporate citizen who even sat on the board of at least one securities regulator. His brilliant career earned him a personal fortune estimated to have been worth more than $800m.

And then, as markets tumbled in the wake of the worldwide financial crisis, Madoff's clients began seeking access to their cash in unprecedented numbers. The elaborate pyramid scheme Madoff had operated for years could not cope, forcing him to confess to the world's largest ever financial fraud. Some $18bn is still missing according to the Securities and Exchange Commission.

In May, Madoff was sentenced to 150 years in prison after pleading guilty to 11 counts of fraud. He also joined the ever-growing list of former financial superstars who have suddenly had to learn a new word. "I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren," he said. "This is something I will live in for the rest of my life. I'm sorry."