Opinion Editorials, February 2010

The United States Expects the World to Support its Lifestyle and Wars

By Christopher King

Redress, ccun.org, February 8, 2010

 

Christopher King considers the spurious foundations of the US economy and business relationships with the rest of the world, and argues that complacency and ignorance on the part of the British government – and the greed of business leaders – are letting the Americans have a free lunch every day.

After watching Anthony Blair’s performance at the Chilcot [Iraq] Inquiry I went to the Financial Times hoping for something cheering. The story  “Paulson claims Russia tried to foment Fannie-Freddie crisis” was intriguing. Ah, those unreconstructed Commies, I thought. But no! It seems that the Russians had trustingly invested their hard earned roubles in the bastion of free market capitalism and like Americans themselves were rightly concerned about their investment. Hank Paulson of course was the US treasury secretary who presided over the US-generated global financial crisis, of whom Time magazine said: “If there is a face to this financial debacle it is now his.” He has written his memoirs and apparently none of it was his fault.

The Fannie Mae and Freddie Mac scandal

We will recall that Fannie Mae and Freddie Mac are the engagingly innocuously named companies set up by the US government to make home ownership universal. To this end they gave mortgages to anyone who still had a pulse. Literally. On welfare? No problem. These mortgages were amalgamated into packages and sold on, generating more money and bonuses to stimulate granting yet more mortgages and bonuses.

As you may know, the mortgage packages were amalgamated again in various ways and sold in numerous stages to trusting institutions such as our own banks and new converts to capitalism such as the Russians and Chinese. They became famously known as “toxic derivatives” because the identities of the original mortgages had been lost in the re-packaging and they were worthless anyway because their basis was “sub-prime” mortgages made to people who had no chance of repaying them. They were, however, excellent for generating bonuses for Freddie and Fannie executives and their resellers.

Now, there was always a strong implication, although not in writing, that having set them up, the US government guaranteed Freddie and Fannie debt. This helped to sell it on. Unhappily, that was not the case. We can imagine the Russian minister of finance or his deputy flying to Beijing and saying to his opposite Chinese colleague” “Look, we’ve billions of dollars invested in these companies; their shares are crashing and their securities are worthless. We were told that the US government guaranteed them. How do we get our money back? Let’s start unloading. The American government will have to do something.”
 
Chinese: “We have more of this rubbish than you but their economy is on the verge of bankruptcy. If we start unloading, other countries might realize that dollars are worth nothing and we won’t be able to spend the trillion that we have on commodities in Africa and Australia.”

Russian: “We are now subsidizing the Americans. Everyone else is selling if they can find buyers. We have to get out of dollars. It’s outrageous.”

Chinese: “Sure. But slowly. The Americans have no style but they certainly have brass balls.”
Russian (glumly): “I might join the Communist Party. We used to shoot people for this sort of thing.”

Chinese: “We still do, tovarich [comrade].”

Paulson thinks that it’s fine for the companies that the US government sponsored and its banks to generate this fraudulent garbage and sell it around the world but it’s a scandal if Russia wants to sell it back into the markets or expect the US government to take responsibility. He calls such expectations a “disruptive scheme”. The shares in Freddie Mac crashed from over 60 dollars to around one dollar as at present without Russian or Chinese assistance. If they had unloaded and demanded compensation like everyone else it wouldn’t have been just Freddie and Fanny. He should thank them for propping up the US economy as they’re doing. I think that they’re worried about what this failed state would do if its economy were actually to collapse. They’re acting more responsibly than America.

Paulson also expected the UK chancellor of the exchequer, Alistair Darling, to allow Barclays Bank to buy Lehman Brothers, the infamous bank that collapsed with massive debts. Paulson was stunned, according to the FT, to discover that the UK Financial Services Authority would not comply with this. Mr Darling, he said, “... made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman”.

At last I can say that Alistair Darling did something right. Why he should apologise for refusing to let Barclays commit corporate suicide I would not know. Barclays was in trouble anyway and had to call on Gulf oil money to avoid taking a taxpayer bailout – largely due to its holdings of American toxic derivatives. Barclays nevertheless benefited indirectly from the taxpayer liquidity that the government injected into the system. Qatar made one billion dollars from selling its allocation of shares a year later.

What is stunning is the American expectation that the rest of the world should give them a free lunch – every day.

Kraft – microcosm of the US economy

Let’s look at the takeover of the UK chocolate firm Cadbury by America’s Kraft Foods.

Firstly, Kraft’s profits are declining year-on-year although sales are going up. They need some profits. Here are the figures from their annual report:

 This doesn’t look good so they sold off part of the business to boost 2008 net profits by 1.1 billion dollars to make the 2008 profits 2.9 billion dollars and gave shareholders a bigger dividend. In fairness, they sell off something every year – probably OK – but the 2008 selloff was much bigger than usual. The business isn’t doing well.

How sound is the business? That is, what is its capital position and net worth? The balance sheet, slightly reorganized, shows that for 2008 ( 2009 is much the same) it has:

Excellent, you say, but wait! There’s an item under assets called “goodwill” (in 2009 here called “cost in excess”) valued at 27.5 billion dollars. What is this? Well, it’s a hole. It’s not cash or anything that you can sell. It’s simply the figure that Kraft put in to make the figures look alright. If you deduct it from the shareholders’ funds, they don’t have any. The net worth of Kraft as a tangible business, cash, bricks and mortar etc is MINUS 5.3 billion dollars. Kraft has spent all shareholders’ money and owes 5.3 billion (yes, that’s billion) dollars in addition, to shareholders. Actually, any company that sets out its balance sheet like Kraft is trying to baffle you with big numbers and has something to hide. Has anyone not on a bonus noticed that Kraft has pension and post-retirement health care obligations to its current staff of five billion dollars that don’t exist?

Technically, the goodwill figure is what Kraft hope that they can earn in the future, that is, the value of its brands based on customers’ future willingness to buy its products, in this case valued at 15 years net earnings from operations. That’s high for a company operating on loans and with no capital whatsoever of its own. What does it do for capital? It borrows it. It’s operating entirely on borrowed money.

So where did Kraft get the money to buy Cadbury? The same place. It borrowed it. Kraft borrowed part of its purchase funds from the Royal Bank of Scotland that is almost completely owned by British taxpayers. Probably a great deal of the rest came from the US taxpayer funds propping up US banks. It’s on these foundations that the US economy is built and this is the way that the US is exporting its instability to the UK among other countries, just as it exported its toxic derivatives. Cadbury’s jobs now depend on whichever banks are propping up Kraft and the dubious management of capital-less Kraft itself. Worse, I suspect that the US banks won’t lend Kraft any more money with its declining profits. It needs Cadbury to stay afloat.

Irene Rosenfeld, Chief Executive of Kraft, said: "We acquired Cadbury because we believe it is a fabulous business and it is our intention to protect those assets." Of course they do. “We intend to invest in the business.” She said. With what? American taxpayer money?

Kraft therefore is unlikely to bring the virtues of good management to Cadbury. The reverse is true. It needs Cadbury as a crutch to help its falling profits and doubtless executive compensation. Rosenfeld’s package was worth 17 million dollars in 2008. Although Kraft has no net assets at all and exists on borrowed money, nevertheless from the viewpoint of the US economy, this is a good deal. US banks are evidently using their bailout funds which are just notional, printed money anyway, to acquire income from other countries when they can’t earn it in their own country. It’s not even economic imperialism. It’s economic fraud. The US government probably encourages this.

So why have the Cadbury directors and shareholders approved it? Well, they’ve been bribed with taxpayer cash. It’s the American way. You can see why Royal Bank of Scotland and the American banks aren’t lending to small domestic businesses that need the money. It’s a tremendous hassle to manage a lot of accounts, profits are tied to the general economy and bonuses are small and slow in coming. These big deals are fun to negotiate, easy to manage when set up and bonuses are large and fast.

Government ignorance

Because our politicians are completely innocent of business and economics knowledge and the interaction between these, they believe that it is a matter of indifference if a company like Kraft purchases one of our largest companies. That was the case with Ferrovial, the company that bought the British Airports Authority from the government, completely on borrowed cash. When I looked last at its balance sheet the company was worth exactly zero after removing “goodwill”. This precision is because “goodwill” can be any figure you like. It’s in trouble at the moment with the Competition Commission. So when we hear expressions like “end of the recession” we should recall that the gross domestic product figure is underpinned by companies like these and huge taxpayer funding on both sides of the Atlantic.

This is the reason why Alistair Darling should take the Royal Bank of Scotland into public ownership and use it as well as other banks that the public have bought into to get money into UK businesses that actually create wealth. Although I doubt that he can read a balance sheet it would not matter if he were to consult accountants and economists rather than bankers who have no interest in the economy outside the City of London and Wall Street.

Darling’s next trick will be to sell the Royal Bank of Scotland that taxpayers already own back to the taxpayers. If not bought by UK taxpayers direct they will be bought by pension and investment funds using taxpayer deposits. It’s a swindle piled on swindles. Here’s the present position. The government:

• Guarantees depositors funds to GBP 50,000, allowing the banks to take greater risks
• Has used taxpayers funds to make up for bank losses due to bad management and bad investments, also to insure them against future asset losses
• Is permitting banks to “rebuild their balance sheets” which means charging high lending rates to borrowers while giving almost no interest to savers.
• Is permitting “investment banking” which is gambling with depositors’ and taxpayers’ funds while the government protects shareholders and executives
• Is permitting the banks that are “too big to fail” to grow bigger through acquisitions whereas they should be broken up
• Is permitting a few dominant banks now to act anti-competitively as an oligopoly in fleecing the public on interest rates among other items – actually they have done this for years. Why hasn’t the Competition Commission acted?

The Americans must think that it’s taking candy from a baby dealing with Brown and Darling. No wonder Hank Paulson thought that Alistair Darling should apologise for not letting Barclays take the problem of Lehman Brothers off his hands.

Our once-independent country that invented the agrarian and industrial revolutions is being managed by fools, thieves and war criminals pandering to America, a bankrupt country operating on borrowed money while executing economic and strategic wars of aggression. Can no-one in government read a balance sheet? Have our chiefs of defence staff no conception of what a war crime is? Anthony Blair set the standard for subservience and subsequent payoff. It’s now the British way. The prospects for economic recovery and state security are remote.

I’m wondering whether to join the Communist Party or to emigrate.