The chancellor had a brilliant idea. He would offer the big companies a choice: suffer a windfall tax or pledge to invest much more in the UK. No, not the oil companies, but the banks, and not Rishi Sunak but Nigel Lawson.
Geoffrey Howe had just presented his 1981 Budget, the one that so appalled the 364 economists, and he sent Lawson, as chief secretary to the treasury, to demand that the banks took over the financing of fixed rate export finance. Like the oil companies today, the banks were prospering mightily, thanks to painfully high interest rates, so they could afford to assume the liabilities.
The move would get the cost off the government’s books and pretty up its borrowing figures. If the banks refused, a windfall tax on them would follow. Jeremy Morse, the chairman of Lloyds Bank, acted for the banks. He could spot an open-ended liability when it was in front of him – the bad debts would mount up, and banks would never be able to hand the financing back again.
Rather than be told by the state what to lend to whom, he decided they should take the hit from the windfall tax, to be taxed lawfully rather than have a government department forever forcing them to back its good causes. He took some flak from heads of the other banks when they were hit with a windfall tax of 2.5 per cent of non-interest-bearing deposits, but a one-off payment was miles better than a continuing liability.
It’s a history lesson that Bernard Looney of BP and Ben Van Buerden of Shell might usefully learn. There is not much sign of it at present, as both companies are desperately bidding to spend more and more money here as they try and avoid having to pay it to the Treasury. Last week Looney pledged to invest £18bn in the UK by 2030, or 15 to 20 per cent of BP’s world-wide total, up from the historical average of 10 to 15 per cent.
Shell’s offer of Danegeld is to spend £20-£25bn in the UK over the next decade, three-quarters of which is for “low-carbon projects.” Quite where it will find enough low-carbon things that are worth doing has not been explained, nor indeed whether investing such a large chunk of its capital is a sensible use of shareholders’ money. Like BP, Shell is, lest we forget, an oil company. Its world-class expertise is in hydrocarbons, and it rather looks as though we are going to need as much of this as we can find if Russian crude is off the menu.
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The beleaguered managements of Big Oil deserve some sympathy. Gnarled executives might remember Brent Spar. A redundant Shell oil storage buoy on its way to being sunk in the deep Atlantic, it was subjected to trial by television news, courtesy of Greenpeace, which maintained it was a massive pollution risk. The campaign to stop the move turned very ugly, and Shell abandoned the plan, even though the buoy contained only a tiny amount of oil (as Greenpeace later admitted).
In today’s climate, with gas bills and oil profits soaring together, it will be politically almost impossible to avoid a windfall tax on the beastly oil companies, even if it involves the humiliation of stealing a Labour party policy. Rather than virtue signalling about how green their investment projects are, the oil companies should be considering how such a one-off tax might work best for both sides. Making promises to spend more, regardless of how poor the likely returns, is bad business, and taking dictation for where the money goes is poor government. As Rudyard Kipling observed: You can keep paying the Danegeld, but you’ll never get rid of the Dane.
He’s a law unto himself
The UK coverage of Elon Musk’s latest little adventure is in danger of getting a mite smug. Were Twitter a UK-listed company, the takeover rules would have barred him from playing ducks and drakes with the bid terms or price. Yet this presupposes that he would take any more notice of the Takeover Panel rules than he does of anything else he dislikes.
The Panel has no real legal force, and depends heavily on the players’ fear of being drummed out of the London market, jeopardising future deals. The key to its survival over more than half a century has been its ability to view each case on its merits, something which would be impossible over such a long time for a statutory body in a changing environment.
Musk has long shown contempt for New York’s listing rules, and has essentially got away with it each time, as Bloomberg’s Matt Levine frequently points out. As Twitter shares open up a multi-billion gap between the market price and what he promised to pay, few are betting that he lacks the firepower to bludgeon the US legal system into submission once again. The Takeover Panel should be grateful to be out of this fight.
Trampling down the hedge
Among the wondrous qualities attributed to crypto-currency was the argument that the likes of Bitcoin and Ethereum provided some sort of hedge against inflation because their supply was limited. Price movements would be unconnected with bond yields or shares, and it seems that professional money managers have been increasingly buying the argument. In 2018, according to Morgan Stanley, only 20 per cent of trading was with professionally managed money, but by the end of last year that portion had risen to 68 per cent.
The professionals may have bought the argument, and the crypto-currency, but it has provided no protection against meltdowns in other markets. The farcical plunge in the uncelestial duo of Terra and Luna – a sort of financial perpetual motion machine which we discuss in today’s Podcast – has provided an expensive education for crypto fans.
Central bankers everywhere have warned the unwary against getting involved with these strange new beasts. The bankers may have failed to prevent the arrival of inflation, but on crypto at least, they were right on the money.
Jonathan Ford and I produce a Podcast, A Long Time In Finance, every Friday. Listen on Spotify or Apple apps.