Kraft Loses the Plot

Irene B. Rosenfeld - World Economic Forum Annu...
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Irene Rosenfeld, CEO of Kraft, Gives the World Economic Forum at Davos the Benefit of Her Wisdom

Kraft has announced that it is planning to split itself into two.

One part will be its core North American business, including Philadelphia, Dairylea and Capri Sun.

The other part will be an international snacks business, which will contain Trident Gum, Oreo biscuits and Cadbury’s.

Kraft said its business had naturally grown in two different directions, that

now differ in their future strategic priorities, growth profiles and operational focus.

Irene Rosenfeld, Chief Executive of Kraft, said:

We have built two strong, but distinct, portfolios. Our strategic actions have put us in a position to create two great companies, each with the leadership, resources and strong market positions to realise their full potential.

This comes just a year and a half after Kraft took over Cadbury’s. During the fight over the takeover, Kraft promised to keep open Cadbury’s Somerdale factory – in fact, they cited that as one of the key reasons for supporting the deal, since Cadbury’s had previously been planning to close it.

A few months after they completed the takeover, Kraft announced they were closing Somerdale anyway. They also moved some of the Cadbury’s headquarters jobs to Zurich, where they already had the Tobler chocolate business.

The costs of integrating the businesses can only be guessed at, but must have amounted to many millions of pounds. Beyond the actual integration costs – redundancies, IT system changes, branding and so on – the integration would also have caused major disruption to the businesses and distracted management from doing their real jobs.

At the time of the takeover, Kraft fatuously stated that they wanted to create

a global powerhouse in snacks, confectionery and quick meals.

And now that “global powerhouse” is to be dismantled, supposedly to create value, less than two years after it was created, supposedly to create value.

At the time of the merger, Kraft said that Cadbury’s

would benefit from Kraft Foods’ global scope and scale and array of proprietary technologies and processes.

But clearly all those benefits are so very yesterday and now no longer apply.

The whole approach of doing “deals” and shuffling real companies around like counters on a chequers board really is utterly fatuous. Obviously these deals make lots of money for the teenage scribblers who recommend them. But how much value do they really add to the companies concerned?

The answer is that mergers and demergers actually tend to destroy value, including shareholder value. They destroy wealth.

Wealth is created from managing businesses properly so that they make profits, employ people and invest for the future. It is not created by clever financial whizz-kids creaming off huge bonuses by pushing through deals like this.

And Ms Rosenfeld? Well, she’s achieved nothing in her time leading Kraft. A big fat zero.

I am so glad I don’t own Kraft shares.

Time to resign , Irene?

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Cameron’s Bank Loan Tax

David Cameron’s Proposals to Tax the Banks are Likely to be Counter-Productive

I commented earlier about the new Conservative plans for a banking tax.

It has now become clear that the Tories’ plans are for a tax on the balance sheets of banks.

The Swedish have already enacted such a tax. The Telegraph comments:

Neither the Tories nor Labour have yet explained how high they would set the charge, although based on the Swedish template, in which the charge is a mere 0.036pc of a bank’s balance sheet, the rate need not be high to generate a significant amount of cash. The Swedish government expects eventually to be able to raise an amount equivalent to 2.5pc of gross domestic product from the fee.

Just like magic, eh? 2.5 percent of GDP created out of thin air, with no adverse impact on the economy! The dream of alchemy is clearly alive and well in Stockholm.

There are a number of reasons for being less excited about the new tax than the Swedish Finance Minister, who is quoted as saying that targetting balance sheets rather than profits combats the possibility of banks moving their operations overseas.

“You can’t move your balance sheet out of the country so it’s a much more logical model.”

What nonsense. Of course you can move your balance sheet out of the country. That’s what happens when you move your whole company out of the country.

The tax would be on the banks’ overall balance sheets. A tax on banks’ balance sheets means a tax on loans, because the banks’ balance sheets consist largely of the loans they have made.

It would hit the banks equally hard whether they lent to a business to build a factory, or whether they lent to a speculative piece of financial wizardry.

That tax on the loan would be the same, in percentage terms, for safe but less profitable lending, and for risky but profitable lending. But in terms of the profits made, the tax would fall more heavily on the safe lending than it would on the prudent lending.

If you impose a tax of 1% on risky lending that makes the banks a profit of 20%, that’s a 5% tax on their profits from that lending. If you impose a tax of 1% on safe lending that makes the banks a profit of only 2%, that’s a tax of 50% on their profits from that lending.

In other words – the new tax would further encourage banks to lend to speculative and risky ventures with high profits, rather than sensible ones with lower profits. This means that the new tax would encourage reckless lending rather than sensible lending.

The tax would also encourage banks to find ways to lend off-balance-sheet, thus avoiding the tax. Many of the most damaging excesses of the Brown boom involved bank lending that never appeared on the balance sheets of the banks. The new tax would encourage off-balance-sheet deals.

There’s more. I said that the banks’ balance sheets consist largely of the loans they have made. There is another component of their balance sheets – their capital and reserves. Reducing the loans they made would reduce the banks’ profits. But they could reduce their exposure to the new tax without impacting their profits by reducing their capital base. So the new tax would encourage the banks to shrink their capital base.

There’s still more. As has been widely commented, such a unilateral British tax would encourage banks to move their operations overseas. So the new tax would damage the City and encourage the financial services industry to follow manufacturing in moving abroad.

So there we are. The new tax would:

  • encourage reckless lending
  • encourage the banks to keep the reckless lending out of their published balance sheets
  • encourage the banks to operate with the smallest possible amount of capital, and
  • encourage the banks to move overseas.

Not quite what Mr Cameron had in mind, then.

But let’s imagine for a moment that all these objections to the tax are wrong, that the new tax has none of these peverse effects.

Let’s assume that Mr Cameron is right that it would discourage reckless bank lending. What, then counts as reckless? Lending to an individual to buy a house, the value of which “can go down as well as up”? Is that reckless? Lending to a business to expand in the middle of a nasty recession and with public spending cuts likely over the next few years? Is that reckless?

And if things did settle down, let’s remind ourselves again. A tax on banks’ balance sheets means a tax on loans. Every time somebody borrowed to buy a new car, or a new television, or a house, they would, effectively, be paying the new tax. Unless, of course, you think that the banks’ shareholders would kindly pay it all themselves. Perhaps the bank tax should be known as “Cameron’s mortgage tax”, or “Cameron’s business expansion tax”.

The more you think about this Conservative promotion of what is basically a Socialist measure, the more you have to conclude that this is a massive own-goal by David Cameron. (Yes, it is really a Socialist measure – indeed, Gordon Brown has been scrambling to insist that he, too, believes in imposing new taxes on banking.)

We can’t afford any own goals right now with the election looming – and the economy can’t afford any more Socialism after the election, whoever wins.

Gordon Brown’s Speeches Don’t Get Any Better

1997: Yes, We really Did Deserve Better

Gordon Brown yesterday gave his big speech. He described the economic storm through which Britain has sailed, but said there will still be choppy waters ahead.

“I will not let you down”

he said. He’s been letting us down for a decade, though, so we should probably not take him at his word.

He also announced a pay freeze for the best paid people in the public sector:

“These measures along with the new controls on senior pay which I announced in December will save money immediately and by 2013/14 save more than £3 billion.”

Excuse me? Is he intending to freeze their pay until 2013/14? And is that figure of £3 billion credible? You see, with Gordon Brown’s figures, you do have to be careful. Read the phrase very carefully. It will save £3 billion by 2013/14. That is not please note, £3 billion per year. That is £3 billion over 4 years, or £750 million per year. And it’s not a saving, but an increase avoided.

This is not a serious proposal of course – it is just more Labour spin, designed to show just how hard he intends to work at cutting the deficit that he himself created.

Mr Brown’s speeches are not designed to enlighten, but to hide the truth.

Mr Brown has made a habit over many years of being less than truthful with the electorate. In his budget speech in 2000 he said:

“In this Budget I have decided that, beyond the automatic inflation rise of two pence a litre, there will be no real terms increase in road fuel duties.”

Which sounded fine. Except that an inflation rise would have been only 1.4 pence per litre. Until letters in the papers pointed out that the Chancellor was, in fact, increasing duty by more than inflation, it went un-noticed by the media. They had simply assumed that the Chancellor would not be so brazen as to produce wrong figures in a House of Commons budget speech.

It is worth going back to the budget speech he made as Chancellor in 1998. Here are some choice morsels from it, setting out his vision for the Labour Britain to come:

“The new ambition is long term economic strength and stability based on an unshakeable commitment to prudent monetary and fiscal rules.”

“Instead of punishing success by high taxation or offering the incentive of low taxation to only a few, the new ambition is a tax system that makes all work pay, that encourages skills and rewards enterprise and entrepreneurship throughout the economy. “

“The new ambition is a modern welfare state that, instead of trapping people in poverty, provides opportunity for all.”

“Instead of simply defending unreformed public services, or denigrating them simply for being public, the new ambition is to have modern schools and hospitals where investment and reform go hand in hand.”

Doesn’t all that ring hollow now?

How about this:

“Last year spending exceeded revenues by £23 billion, and when we came into power we inherited not only a cyclical deficit but also a substantial structural deficit in excess of 2 per cent of national income. Immediate action was required to secure long term deficit reduction.”

Well, this year spending exceeds revenues by around £180 billion, and there is a structural deficit, according to the Treasury’s own figures, of 9 per cent of national income. And yet Mr Brown reckons that this time, immediate action is unwise.

Or how about this:

“To balance the Budget for one or two years and then let it run out of control in the years that follow is simply to fail those who depend on public services being sustained year in, year out.”

How much Mr Brown, then, has failed those who depend on public services.

Here’s another quote from that speech in 1998:

“Just as we locked in our commitment to sound money through the Bank of England, it is now time to lock in a framework which guarantees sound finances.

Our code of fiscal stability will place a duty on this Government, and every future Government, to report to Parliament on a consistent basis and provide full explanatory information on how it is meeting the fiscal rules it has set.”

It seems the framework didn’t guarantee sound finances after all – or perhaps Mr Brown forgot to lock it in.

He stands damned by his own rhetoric from 12 years ago. During all those Blair years, Mr Blair ran Britain’s foreign policy, and Mr Brown ran the economy. He has now run it into the ground.

May 6th is coming, and his Gotterdammerung. He will leave Britain weaker than it has been in my lifetime – weaker even than in those disastrous days of the 1970s, when Britain was called “the sick man of Europe”. His, and Labour’s, defeat will be richly deserved.

Britain’s Shame on the Icelandic Debt

Time to Help the People of Iceland

Talks between Iceland, Britain and the Netherlands about repayment of the Icesave money have collapsed.

When the Icelandic bank Landsbanki (Icesave in Britain) collapsed in 2008, British and Dutch savers were protected by the Icelandic saver compensation scheme. However, the British and Dutch governments made the decision to compensate their citizens themselves, and they are now seeking repayment from Iceland.

The amount involved is €3.8 billion (£3.3 billion), split between the UK and the Netherlands.

Iceland has a population of around 300,000. So those debts amount to £11,000 per person, which is a pretty hefty amount to pay for the bailout of a single company. If you scale that debt up to the UK population, it is as if the UK had to pay a foreign debt of £660 billion to compensate savers in a single bank. Repayment of that debt would cripple the Icelandic economy for years to come.

Not surprisingly, the Icelandic people are baulking at the prospect. Their President vetoed the bill to pay the debt, and a referendum is planned on the repayment agreed with the British and Dutch.

The British and Dutch governments have claimed to be very supportive. They have offered to let Iceland repay the debt at “the same interest rate as their current loan from the Nordic countries” and have also offered to waive the interest on the debt for two years.

The spectacle of the British government, which has been so incredibly profligate with its taxpayers’ money in propping up Royal Bank of Scotland and HBOS, demanding repayment of this money in this way is nauseating. The offer they have made to Iceland is not generous at all. It is reminiscent of Shylock demanding his pound of flesh in The Merchant of Venice.

Iceland is a friendly European nation, and this crisis for Iceland should be seen as an opportunity for Britain to win a long term ally in the world, and especially in the EU if Iceland joins, as it probably will soon.

Britain has a foreign aid budget of more than £5 billion. Both the Conservatives and Labour have promised that this budget will be protected from cuts after the election, as they tackle our own deficit.

Simple calculations reveal that if the UK government were to forgive this debt, financing it by issuing 10 year bonds, the payments on those bonds would amount to substantially less than one tenth of that foreign aid budget. And that would make a real and demonstrable difference to the lives and prospects of 300,000 people, which is a lot more than you can say for most of our foreign aid spending.

At the moment I feel ashamed of the actions of my own country’s government in pursuing this debt. If they were to forgive it on my behalf as a taxpayer, I would feel proud. And it would be an action that wouldn’t be forgotten by the people of Iceland in 50 years.

Obama Bashes the Banks and Demeans His Own Reputation

It’s all their fault!

President Obama has announced a new tax on banks, to raise $117 billion over 10 years. The tax isn’t called a tax, of course. It is a “financial crisis responsibility fee”, which is a name worthy of our own government’s spinners.

Mr Obama commented:

“My commitment is to recover every single dime the American people are owed”

except that he isn’t recovering it from the banks that lost the money. He’s recovering it from all big banks.

It will only apply to institutions with balance sheets of over $50 billion. WHY? Is there any evidence that the big banks were any more reckless than the small ones?

It will apply even to banks who did not seek or need taxpayer assistance during the crisis. WHY? Is it fair to penalise properly run banks for the excesses of others?

It will apply even to banks that did receive assistance, but have since repaid it. WHY? Why should those banks be obliged to pay back to taxpayers more than they ever received?

Mr Obama claimed that the aim is not to punish Wall Street but to stop abuses and excesses from happening again. That was in the same speech in which he claimed that his commitment was to recover the money the American people are “owed”.

Neither of these conflicting aims is his real aim. The real aim is to deflect blame off the politicians and onto the banks. Politicians like Mr Obama are, of course, extremely keen to ensure that all the blame for the financial crisis goes to the banks, and none of it to the politicians or their regulators.

It’s not as if this ridiculous new tax will even raise significant money or hurt those banks to any significant degree. $117 billion is a large headline figure, but spread over 10 years (as it will be) is $11.7 billion per year. There are 50 institutions big enough to suffer from this tax, which means the average bill for one of these big banks will be around $240 million per year, which is a pretty small bill for them.

Most stupid of all, of course, the people who actually end up paying will be the customers of those banks, not the banks themselves. Those same customers, in fact, who are the voters that Mr Obama hopes will be cheering this measure.

This is the worst kind of stupid gesture politics and demeans a President who has made much of wanting serious change in America. If he carries on like this, the American public will be realising that he is, in fact, just a small-minded populist.

Mind you, the new tax on American banks will give our own British banks a small competitive advantage, so perhaps I shouldn’t complain. Just don’t tell Gordon. He’ll want his own “bash the bankers tax”.

More on the Secret HBOS Loan


Alistair Darling has today been defending the Bank of England’s “lender of last resort” loan to HBOS last October and November.

He has, rightly, said that this type of loan is a key duty of the Bank of England. He also pointed out that HBOS provided collateral for the loan, and that the loan has since been repaid in full. He also defended the decision to keep the loan secret, saying, “The Bank’s assessment at that time was that it was vital that their emergency liquidity assistance operations remained confidential.”

When similar “lender of last resort” support to Northern Rock had been leaked, it had caused a run on the bank, and its collapse. So Mr Darling’s arguments that the loan had to be made, and that it had to be kept secret, are persuasive.

The government are on less solid ground, however, on the issue of the Lloyds takeover of HBOS. Lloyds shareholders, remember, were voting on the takeover at a time when those loans had been taken out by HBOS. However, they were not told about the loans. The existence of them was very clearly material to the takeover.

We have been told that the circular to Lloyds shareholders referred to the bank’s reliance on Bank of England liquidity facilities. This is misleading. The document opaquely referred to the bank’s ongoing reliance on the “availability of Bank of England liquidity facilities”, but did not mention that HBOS had already made use of those facilities. In fact, the circular specifically stated:

“Save for the £4 billion net cash proceeds raised by HBOS in its rights issue in July 2008 and as disclosed in the sections headed ‘Group Overview’, ‘Divisional Review’ and ‘Outlook’ in Part XIII (‘‘HBOS Interim Management Statement 3 November 2008’’) of this document, which sets out the current trading, trends and prospects of the HBOS Group, there has been no significant change in the financial or trading position of the HBOS Group since 30 June 2008.”

The government have claimed that the Lloyds directors knew about the loans. If that is true, it implies serious allegations about the conduct of those directors. For they continued to back the takeover, and kept the loans secret from their shareholders.

If the government are not telling the truth, and the Lloyds directors did not know of the loans, then the spotlight would move to the HBOS directors. They clearly did know about the loans, and in that case did not disclose those material facts when opening their books to Lloyds.

I am not a lawyer. However, it is clear that either the HBOS directors or the Lloyds directors, or both, were in clear infringement of takeover rules at the very least. The government itself, I presume, was not in breach of those rules since it had no duty of disclosure to the Lloyds shareholders.

I believe the Bank of England were right to provide those loans. I believe the Bank and the government were right to keep them secret. But they, and more especially the directors of HBOS and/or Lloyds, were dead wrong to allow the takeover to proceed.

The takeover could have been very simply stopped by the government. There was no need for them to disclose the loans; they could simply have said that the situation at both HBOS and RBS was so serious that an immediate capital injection by the government was required. Then Lloyds could have simply walked away.

Of course the most serious concern of the authorities was to prevent a meltdown of the financial system. But they could have done that without stuffing the Lloyds shareholders.

The authorities have been very keen to prosecute mortgage and insurance brokers for “miss-selling” endowment policies and pensions.

And all the while they were themselves guilty of miss-selling an entire bank.

The Secret HBOS Loan – Will the Lloyds Shareholders Win Damages?


It has emerged that in October and November 2008 the Bank of England, as lender of last resort, made loans of £61.6 billion available to Royal Bank of Scotland and HBOS, to prevent their collapse. Of that, £25.4 billion went to HBOS.

The media are concentrating on the implications for how close the system was to collapse at that time. Clearly, to act as lender of last resort is absolutely legitimate and one of the Bank of England’s key roles. Given the state these banks were in, it was entirely appropriate for the Bank of England to provide those loans. It was also probably entirely appropriate to keep the loans secret, to prevent a run on the banks that might have been catastrophic.

What came after was entirely less appropriate, however.

At that time, Lloyds TSB was in advanced talks to buy HBOS. There have been suggestions that the Treasury, the Financial Services Authority, and even the Prime Minister himself encouraged Lloyds TSB to take on HBOS.

The Lloyds TSB shareholders voted on the takeover by HBOS on 19th November, and they approved the takeover.

It was clear even then that HBOS was in serious trouble, and this was a rescue bid by Lloyds TSB. However, those “lender of last resort” loans by the Bank of England were at that time secret. Crucially, they were not disclosed to the Lloyds shareholders as they approved the deal.

It is therefore clear that material facts were withheld from the Lloyds shareholders. Indeed, the circular issued to shareholders of Lloyds TSB, produced on 3rd November, says:

“Save for the £4 billion net cash proceeds raised by HBOS in its rights issue in July 2008 and as disclosed in the sections headed ‘Group Overview’, ‘Divisional Review’ and ‘Outlook’ in Part XIII (‘‘HBOS Interim Management Statement 3 November 2008’’) of this document, which sets out the current trading, trends and prospects of the HBOS Group, there has been no significant change in the financial or trading position of the HBOS Group since 30 June 2008, the date to which HBOS’s last published interim financial information (which is set out in Part IX (‘‘Historical financial information relating to HBOS plc’’) of this document) was prepared.”

We do not know, of course, whether the Lloyds directors knew of these loans. If they did, then they misled their shareholders.

If the Lloyds directors were not told about the loans, then a signficant part of the HBOS accounts was being hidden from the potential purchasers – in which case, it was the government that was misleading the Lloyds shareholders.

If the Lloyds shareholders had known about these loans, it might have made a difference to their decision to back the deal.

The media are saying that those shareholders might feel aggrieved at being misled in this way. The BBC, for example, say that “shareholders might be unhappy at not being told earlier”.

Let’s be clear. It is much more significant than that. It is now evident that Lloyds has been hobbled by the takeover of HBOS. Therefore, shareholders have lost money as a result of the deal. If those Lloyds shareholders were misled about such a major part of the deal, then they have clear grounds to sue. This could get interesting.