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Any other business

London house prices are a better guide to how the world sees us than Moody’s ratings

2 March 2013

9:00 AM

2 March 2013

9:00 AM

‘There are two superpowers in the world today,’ said the American columnist Thomas Friedman in 1996. ‘There’s the United States and there’s Moody’s bond rating service. The US can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds.’ Well, not any more. Last Friday’s removal of triple-A status from British government debt may have made for a tense weekend chez Osborne and provoked short-selling of sterling by traders who thought it an obvious bet at a time when the Bank of England would clearly prefer a cheaper pound to boost exports. But even Ed Balls had to admit that ‘it would be a big mistake to get carried away with what Moody’s or any other credit rating agency says’, given their culpability in the subprime boom, in which they awarded triple-A ratings to all manner of mortgage-backed trash.

The downgrade was widely expected, brackets us with the US and France, and has had little immediate impact on gilt yields — which for shorter dates are fractionally lower than they were a year ago. The pound’s slide is bad for inflation prospects (because prices of imports will rise) but I don’t believe it jeopardises the UK’s ‘safe haven’ status. On that front, the time to worry will be when London property prices plunge because the Greeks, French and Spanish decide to move on. Of that, there’s no sign at all.

Hubris personified

‘Rothschild declares victory in Bumi showdown’ said a Sunday Times headline before last week’s meeting of shareholders in the Indonesian mining venture which stands accused of besmirching what’s left of the City’s reputation, having lost much of the capital it attracted when it listed in 2010. ‘We’re going to win by a convincing margin,’ Nat Rothschild told the paper. ‘It’s almost arithmetically impossible for the other side to win.’ His proposal to sack 12 of the 14 Bumi directors in a bid to regain control of the company went on to fail spectacularly. The biggest ‘no’ vote was against the return to the board of Rothschild himself, with more than 63 per cent against — 87 per cent if you subtracted the pro-Nat ‘concert party’, as Bumi chief executive Nick von Schirnding took pleasure in pointing out, having himself been on Nat’s list for the chop. Hard to think of a more excruciating example of hubris in the corporate world; no wonder Rothschild ‘declined to comment this weekend on what his next move might be’. At least Bumi’s senior director, Sir Julian Horn-Smith, heeded my call for the board’s non-executive grandees to make themselves heard, but his remarks to the FT hardly count as atonement: ‘We’re not selling branded beefburgers, we’re selling a commodity which has a global price… so from that perspective, brand damage is less relevant.’ Oh really? Sounds like a pile of horse by-product to me.

Apple-y Ever After?


There’s an established pattern by which ‘alternative’ brands end up as badges of social awareness in the portfolios of giant conglomerates. So it’s no surprise that Coca-Cola, purveyor of nutritionally worthless beverages to the world’s poor, is increasing to 90 per cent its stake in Innocent Drinks, purveyor of sustainable smoothies to middle-class consumers who seek virtue through shopping choices. Innocent’s founders are stepping back from day-to-day management, but one of them, Richard Reed, says ‘it will still totally be the same company… It’s exactly what Coca-Cola wants and what’s right for the business.’

Innocent has achieved a hefty sales increase without dilution of its ethical stance since Coca-Cola first bought into the business in 2010. But still such pairings look uncomfortable. Pret A Manger has taken years to live down its association with McDonald’s, which bought into the additive-free sandwich chain in 2001 but sold out to a private equity firm in 2008. Another case is Ben & Jerry’s, the hippyish New England ice cream brand whose founders sold to Unilever for $320 million in 2000 and seem to have been regretting it ever since.

Under Unilever, Ben & Jerry’s dropped its egalitarian pay policies but continued to burnish its radical credentials, most recently promoting gay marriage through ice cream flavours called ‘Hubby Hubby’ and ‘Apple-y Ever After’. Co-founder Jerry Greenfield spoke of ‘the tail wagging the dog’ — the subsidiary changing the behaviour of the parent — but in truth this is about multinationals finding ways to tick ‘social responsibility’ boxes through brands that can otherwise be conveniently held at arm’s length. We shouldn’t be cynical about high-minded entrepreneurs collecting big cheques — often these deals are about taking the business to a level it could not otherwise reach, as well as enriching the founders — but let’s recognise the pattern for what it is.

Frank speculations

Who’s this Moody fellow, whose ratings still cause political ripples? Born in New Jersey in 1868, John Moody produced his first Manual of Industrial and Miscellaneous Securities in 1900, lost his business in the Wall Street panic of 1907, then rebuilt it by specialising in analysing railroad stocks. He developed a ratings service for all US corporate and municipal bonds in the 1920s and achieved a far better predictive record as to which bonds were safe during the Great Depression than his successors in did in the recent financial crisis. A deeply conservative Roman Catholic convert, Moody was also a biographer of Cardinal Newman. Among his famous remarks was: ‘More money is probably lost by people who attempt to invest conservatively and sanely but ignorantly, than is lost by those who enter into frank speculations.’ A thought to bear in mind for next week’s Investment Special, which will look at the property market as well as the buoyant stock market — where shares began the week by emphatically ignoring Moody’s UK downgrading.


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