Rating agencies are still far too soft

Allister Heath
MANY people have been outraged by Standard & Poor’s downgrades of so many countries, including France and Austria – and last night, of the European bailout fund itself, now no longer backed by enough AAA-nations to be deemed safe. But those who are angry are deluding themselves. The only scandal is why it has taken S&P so long – and why its competitors haven’t done the same. The whole concept of AAA is out of date; everything and everybody is risky. Far from being too extreme, the rating agencies remain too soft and behind the curve.


IT sometimes seems as if I could write a column every day on Nick Clegg’s pronouncements on business and economics. His latest idea is that employee share ownership is a good idea and needs to be promoted, including via tax breaks. He calls this building a “John Lewis” society, though as usual this is largely spin. Fortunately, he is not really advocating the abolition of the joint stock company and the mutualisation of all firms to turn them into cooperatives; in fact, he is merely expressing a personal view, rather than announcing government policy.

I am very sympathetic to the overall idea that it is a good thing for staff to be given equity stakes in their firms, as it aligns their interests with those of management. In the 1980s, this idea was closely associated with Thatcherism and mass privatisation. But until now nobody seriously proposed that this could be replicated for all companies – most firms are closely held and owners understandably don’t want to be diluted. It would certainly be totally wrong to try and make it compulsory or tax-advantaged.

The biggest problem is that there is a glaring inconsistency at the heart of what Clegg says. One category of firms already hands over vast amounts of equity or equity-like instruments to staff, a practice recently made compulsory – yes, I’m referring to financial firms, which Clegg loves to hate and wants to tax out of existence.

All bonuses paid out by investment banks sensibly include a large chunk that is made out of restricted stock units. Goldman Sachs, for example, awarded its 95 London employees categorised as Remuneration Code Staff under FSA rules millions of restricted stock units in 2010. These awards will pay out under certain circumstances over several years depending on what Goldman’s stock price does. Is Clegg saying that Goldman should be given tax breaks because it pays staff primarily in shares? How ironic.

For more reasons why Clegg’s views are full of holes, take a look at our lead commentary in our Forum on page 20. As to me, I wholeheartedly support an ownership society with as many workers as possible having a stake in capitalism. But you can have too much of a good thing. Just as it was wrong for the government to promote sub-prime lending, as happened in the US, to boost homeownership, it would be wrong for it to artificially promote share ownership. Equity – like housing – is a risky investment; it is not right for everybody. It is not always sensible to encourage employees to put all their eggs in the same basket. Yesterday, Peacocks and Past Times, two retailers that employ thousands, went into administration. Those shop floor staff who lost their jobs will have lost their income – but at least they haven’t lost all their savings and assets too, which might have happened had they owned shares in their firms. Clegg needs to think before he speaks.

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