MONEY Double, double, toil and trouble
NICHOLAS DAVENPORT
What a week! A sensational failure 'down under' followed by a sensational failure up north. The Stock Exchange reeled under the 'double blow. While everyone was talking of Rolls-Royce the brokers in Throgmorton Street were really more alarmed by the fail- ure 'down under'. Australia has been describ- ed as the Achilles heel of the London market. When the outrageous gamble in Australian mines collapsed, knocking more than £1,000 million off share values, some strained positions were revealed in London and two small firms of brokers were hammered. Just when it was thought the worse had been seen dealings were suddenly suspended last week in the shares of a well-regarded, if speculative mining house called Mineral Securities. Ap- parently underwriters had withdrawn from an issue of their preference shares and had upset their financial cart. When brokers get into financial trouble good shares as well as bad are thrown overboard and even respect- able firms can fall like nine pins.
The failure of Rolls-Royce is a much less upsetting affair for the stock markets. No City firm has been gambling in Rolls-Royce shares. The 'bear' writing has been for so long on the chart walls. Two years ago they were nearly 50s and even this year they were as high as 25s. The recent selling down to 7s was persistent and what is called 'well in- formed'. No doubt some good profits have been made by traders on the 'bear' tack. There are about 70,000 holders of the 53.7 million ordinary shares of £1 in issue and it is thought that 4,000 of them are employees. There is also £2.3 million in workers' shares of 10s. Some hardship cases are inevitable now that the shares have become virtually worthless—they are quoted over the counter in Wall Street at about 2s 6d—but the total loss is trivial by comparison with the billions of shares traded on the Stock Exchange. There is £54 million in secured debenture stocks which may come out reasonably well if the Government pays a fair price for the aero-engine and marine-industrial gas turbine divisions which it is taking over—and if the receiver gets a good price for the car division which he is selling off to some private enter- prise. The £2.9 million of unsecured loan stock will get little or nothing.
If I appear to set out these disagreeable facts in a cynical and unsympathetic way it is merely to emphasise that the stock mar- kets are used to failurei in the business world. The failure of the Penn Central Rail- road was far worse than Rolls-Royce but it did not disturb the Wall Street markets for very long. After this shock investors may be chary of buying the shares of companies like British Leyland or Albright and Wilson which they think may be having financial difficulties but they will not lose their appe- tite for good equity shares. The rewards on risk capital are what makes the private sec- tor work.
Keynes used to say to me repeatedly : 'Remember always that business is a bet'. What makes the Rolls-Royce failure so shocking is that these business men betted so unwisely. They took on a gigantic long- term contract in an inflationary period of rapidly rising costs and although they had an escalation clause to allow for some in- flation of prices it was not enough and be- sides they underestimated the basic engine price. True, they may have been egged on by Mr Wedgwood Benn, the starry-eyed Minis-
ter of Technology in 1968 but Mr Benn is not a businessman. They may have been led astray by the £20 million advance from the 1RC (£10 million paid), thinking that the Labour government would bale them out as it had baled out other uneconomic enter- prises. (The last offer of £18 to £40 million from the more business-like Tory govern- ment they never got because it was made dependent on accountants' certificates which were not forthcoming.) But there was never any excuse for entering into a long-term con- tract without getting the sums right. It was a thoroughly bad bet. It was the same sort of bet which bankrupted the shipyards. What
makes the Rolls-Royce failure so shocking is the sheer size of it. Each engine was go- ing to cost them £110,000 more than they had priced it in the contract. They stood to lose not less than £150 million. It was the biggest boob big bpsiness has ever made in this country.
Confronted with the collapse of the whole British aero-engine industry the Government promptly took the correct action, which was to appoint a receiver for Rolls-Royce. This immediately preserved the assets and cash of the company against seizure by Lockheed.
The aggrieved customer now becomes an unsecured creditor, ranking pari passu with the other unsecured creditors in respect of its claims for damages. These must be huge see- ing that the engines were six to twelve months late and may be irreplaceable. (Incidentally the preferential creditors are rates, taxes, em- ployees' wages and the secured debentures.) The fact that a Tory government pledged to 'disengagement' has had to nationalise the greater part of the Rolls-Royce business is certainly ironic, if not comic, but at least it shows that the Government is not as doctrin- aire as its Labour enemies have claimed. If the Lockheed Corporation can come forward with another contract for the aa211 engine. which is financially supportable, the Govern- ment might then gracefully retire and de- nationalise. But Lockheed is in dire financial trouble and needs official help to survive.
Apart from the unhappy equity share- holders who have seen their money disappear, some heavy losses fall upon the banks.
Lloyds and the Midland had extended advan- ces of £37 million, and £17 million of accep- tance credits had been arranged by Lazards with a consortium of banks and finance houses., While these financial losses are had enough the economic effects are much more serious. Over a hundred sub-contractors are involved—Short Brothers and Harland, Dow- ty, Lucas, Rotax and Decca. The labour re- dundancies are not yet quantifiable—out of a labour force of 80,000 up to 20,000 may be thrown out of work for the time being—but they come at the worst possible moment, for unemployment has topped 600,000 and is still rising. The 'truth is that the Government is now confronted with a growing industrial recession in spite of the boost to the con- sumer trades which may come from the ex- cessive rise in wages—and this is always checked by the rise in retail prices. Mr Bar- ber is clearly reluctant to offset this recession by a general reflation of the economy before he has stopped the inordinate rise in wages. Sooner or later he will have to reflate and the obvious first step—before he proceeds to a cut in indirect as well as direct taxation—ls to bring Bank rate down.
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