EDITOR'S LETTERMerryn Somerset Webb
Philip Green is not the only villain in town
When Philip Green bought BHS back in the early 1990s he had a choice. As Patrick Hosking points out in The Times, he could have looked at the company as a long-term proposition. He could have invested in training, reburbishment, and in the online business, in the hope of being one of the better of the high-street survivors. However, he could also have “made a dash for cash” – loading up with debt, selling assets and extracting every single penny of profit there was. He did the latter. Today, BHS, laden down with bank debt and a vast pension deficit, is in administration; its pension fund has landed in the lap of the Pension Protection Fund (PPF); and Green is generally recognised to be the biggest villain in town.
However, he isn’t the only villain about. Let’s look for some of the others. How about our politicians? They’ve known for ages that the favourable tax treatment of debt over equity encourages owners and management to take on far more debt than makes sense. They’ve done very little about it. What of the BHS pension fund trustees? Why didn’t they do something about the deficit sooner? The fund isn’t alone in being in trouble – but they seem to have been particularly feeble in their demands for more cash. What of BHS’s bankers? In 2007 the firm had a mere £62m of bank debt. What possessed them to keep lending until it was heading for a billion?
Finally, what of the world’s policymakers? Pages will be written over the next few weeks about how horribly everyone has behaved in this debacle. But there’s a good case to be made that interest rates were too low before the financial crisis and that they are too low today – and that this is one of the main things that has crushed BHS. If credit hadn’t been so easy to come by in the early 2000s, Green might never have managed to borrow so much in the first place. Nor would consumers have been able to borrow to shift their future consumption forward on the scale they did (all borrowing does is let you buy stuff today at the expense of buying it tomorrow). And if rates hadn’t fallen to 0.5% after the crisis and stayed there, the BHS pension fund wouldn’t look half as bad (the lower rates go, the higher pension fund deficits go).
This week, you can read the first part of my interview with former Bank of England governor Mervyn King, which covers some of his views on how low rates destroyed the financial world (although to be clear, he doesn’t think there is much central banks could have done about it…). Next week, we’ll talk about how on earth investors should deal with the current environment.
Elsewhere in the magazine, we talk about about why now is the time to buy oil, choose the pick of the best frontier funds, the small-cap funds that might help you avoid some of the global financial turmoil, and bring you David Stevenson’s views on emerging markets (approach with caution). Finally, we discuss one more thing low interest rates have given us – the “ageing bull” on Wall Street – and why you should avoid it.