I was a zombie garden centre

One of the first things I did in banking was assess a credit application for a garden centre. Discussing the business with a more experienced colleague, he pointed out the owners would be better off selling it, paying off their debts and sticking what was left in a savings account judging by how much they actually took out the business to live on. Later, I looked at a credit for a farm. Reading the file I discovered the farmer had been struggling to make it pay for years so every so often had sold off assets to manage his debt; a field here, a tractor there until eventually he moved into a static caravan andm sold his house.

Picking out the general features of these examples provides a reasonable definition of a zombie company, it being one that generates a poor absolute and/or relative return on capital, has negligible prospects as it stands and is barely, if even, able to meet its existing financial obligations without gradually cannibalising itself; zombie companies exist rather than prosper. Moreover, when/if we ever move out of the current low-low interest rate regime many of them will finally expire.

I’m putting this definition forward in response to the growing interest in zombie companies. A recent radio 4 File on 4 on the subject made for interesting listening and included chats with some highly relevant people (and some others as well), but ultimately proved analytically far less than the sum of its parts largely because of its half-arsed "Austrian" capital mis-allocation aspects (much of this being provided by Jon - can the BBC please start calling him the private equity boy that he is and not an entrepreneur - Moulton for some reason). Despite this, the Treasury Select Committee subsequently saw fit to raise the subject, choosing once again to highlight its largely facile nature.  

Here’s why; the concern with zombie companies stems mostly from the Japanese lost decade. Rather than ‘fess up to problem loans, Japanese banks opted to extend them on the basis that a rolling loan gathers no loss. The only problem with this is a bank can only lend so much and if a big chunk of its lending is tied up in companies that aren’t going to grow or are problem loans involving undeclared losses, then more viable businesses get starved of credit, economic growth is impacted, ya de ya de yada.

Fast forward to the here and now and you’ve the Bank of England (BoE) getting all concerned about forbearance, meaning they’re concerned British banks have turned Japanese and opted to roll loans rather than ‘fess up to all the dreck on their books so as to avoid even bigger losses. This concern has taken an aggressive turn with the publication of the BoE’s latest FinancialStability Report, which explicitly goes on (and on) about Forbearance and how “the longer it continues, the more likely it is to be concentrated on weaker companies with less ability to invest and innovate. This might divert credit from potentially more productive companies, for example new business start-ups.”

Unfortunately, dull facts prevent any direct comparison between Britain and Japan being especially meaningful. Drat. One is the Japanese experience was predicted on fundamental differences in the structure of their economy, in particular the prevalence of keiretsus, groupings of companies spanning various industries typically centred on a bank and defined by cross-shareholdings and close familial relationships. Or as a Japanese bloke I knew explained when his family’s firm was invited to join a keiretsu, him marrying a senior banker’s daughter would seal the deal. So when a Japanese bank rolled the loan of a zombie company, there’s a good chance it was a father helping out his son-in-law at a company he part owned. By contrast the structure of the British economy just isn’t like that meaning it lacks the obvious incentives seen in Japan to prop up zombies. Another thing to bear in mind, given preserving Britain's AAA status is a lynchpin of current economic policy, is that when the Japanese banks finally started ‘fessingup to what they were doing, calling up securities and so on, taking the pain and finally declaring the losses that had been sat on their books for years, Japan was downgraded by the rating agencies.

Yet another thing is what the British banks have actually been doing. Here the BoE stability report helps by stating “the non-core disposal plans of LBG and RBS are ahead of schedule and targets for 2012 have been raised. Since 2008, these banks have shed £383 billion of assets”. Now just chew on that for a minute, £383bn. They have already disposed of assets i.e. loans valued at £383 billion and are due to get rid of even more. Fuck me.

To put that in perspective you could compare £383bn to the all new £3bn Green Investment Bank, except that would be to show up the latter's mediocrity. So here’s a better comparison; the total assets of the entire British building society sector as at June 2012 i.e. how much it’s lent, were £325bn. So between them LBG and RBS have already got rid of far more “non-core” assets than the current British building society sector has acquired in over 100 years. And the “non core” bit is important because it includes exactly the dreck the Bank of England is concerned about/Japanese banks once kept on their books.

Except perspective seems to be missing judging by the stability report’s chat about he European Banking Association’s findings on forbearance given this includes the "interesting" Spanish bank experience, which can be summed up as pantalones en el fuego liar liar, when it comes to their annual accounts and the losses they’ve been willing to declare.

Aside from these dull facts there’s the slight issue of monetary policy and the chat about how when interest rates start edging back to more normal levels, all the zombie companies currently being propped up will start keeling over, stifling any recovery. Except, one, the BoE is maintaining interest rates at record lows and two, via the funding for lending scheme, is inventing entirely new ways of cutting credit costs i.e. the institution doing more than any other to actively prop up zombie companies is the same one going on about them being a bad thing.

So  “What is to be done?” Well, this is the bit that needs spelling out very clearly - British banks are now being encouraged to start pulling the plug on thousands of businesses more aggresively than they already are.

This is a fucking stupid notion for all sorts of reasons.Practically, how the fuck does a bank know which business is a Facebook and which a Myspace let alone a FriendsReunited (besides which Facebook has already jumped the shark)? Anyone with that kind of Nostrdamus like insight would already have invested in the winner and retired somewhere lovely.

Politically, just think about it for a mo; zombie companies are servicing their debts, meeting their covenants and getting by doing their thang, then allova sudden a big evil bank pulls the plug cos its decided the customer doesn’t have a business model with exponential growth potential. Uh huh? And how much of a backlash would that generate? Like to get a sense of how cretinous the reporting on bank lending already is ignore the routine bollocks criticising banks that only sell debt for not providing start-ups with equity and read the following monumentally shite article; “Lending from RBS and Lloyds slumps by £117bn in less than three years” i.e. banks are already being criticised for doing what the BoE wants them to do.

Then there’s the economic impact; the main problem facing the British economy right now is a crisis of demand influenced by factors including falling real incomes and a lack of confidence. Now, would banks pulling the plug on thousands of businesses sort that out? Of course it wouldn’t, instead it would aggravate it, a lot, and that's without taking into account the potential impact of an asset fire sale. Like even accepting all these start-ups i.e. tiddlers, are being starved of debt, that’s so existing businesses can keep employing people and buying goods and services. Like see that hand, the one with a bird in it? Cool, that’s what we’ve got right now and its worth a damn sight more than the two that may or may not be in a bush in 5 years time. Oh and then there’s the potential for companies to suddenly shit themselves/rein in spending even more than they already are when they realise banks are more likely to pull the plug.

Finally, there are the examples I started with and what they actually mean. The reason the farmer struggled on was so his eldest son could inherit some land and maintain a family tradition. Similarly, as for the garden centre, who the fuck is the BoE, the current fiscal policy in favour of bunch of cock that it is, to strong-arm anyone, tax payer owned bank or otherwise, into destroying a business a husband and wife had built from scratch and were continuing to make a living from?