When should the state intervene? RBS, Kraft & Cadbury and the Eternal Liberal Dilemma

by Stephen Tall on January 21, 2010

US firm Kraft’s proposed takeover of Cadbury’s has made headlines in recent days. First, because it’s a major, historic British brand being snapped-up by a non-UK business (or ‘foreign predator’, as Vince Cable labels them). Secondly, because of the fear that job losses will result. And, thirdly, because of the role of the Royal Bank of Scotland – in which the British government has a majority stake-holding – in lending the money to Kraft which will fund its acquisition of Cadbury’s.

The Lib Dems – in the shape of Nick Clegg and Vince – have sharply questioned the role of the Government in the takeover. At Prime Minister’s Questions yesterday, Nick asked Gordon Brown:

… there is a simple principle at stake. Tens of thousands of British companies are crying out for that money to protect jobs, and instead RBS wants to lend it to a multinational with a record of cutting jobs. When British taxpayers bailed out the banks, they would never have believed that their money would be used to put British people out of work. Is that not just plain wrong?

Meanwhile Vince has written to the Business Secretary, Lord Mandelson, arguing that:

It seems perverse that a bank still in receipt of large taxpayer support and majority owned by the state should be part funding a takeover of a British company which will likely put jobs at risk and hurt the British economy. We have seen today both Kraft’s and Cadbury’s credit rating lowered to the lowest investment grade on account of the highly leveraged nature of this takeover; so RBS’s decision seems particularly strange. Did RBS at any point discuss its plans with the Treasury and if so did Ministers express a view on its proposed funding of this takeover for the benefit of the UKFI directors on RBS?

The questions are wholly valid. But they beg the question: what would the Liberal Democrats do if we were the government having to make these decisions? The strong implication of Nick’s and Vince’s questions are that the party would have used its position as an RBS shareholder to veto the deal.

In doing so, they would have the strong backing of, among others, TUC general secretary Brendan Barber, who blogged today in praise of Nick’s “very effective” questions to Mr Brown.

The party is of course right to point out Labour’s hypocrisy on the issue – attempting to gain kudos for opposing the deal with words, while at the same time not lifting a finger to stop it with their actions. Labour MPs have been indulging in that kind of cant for years now, supporting Government decisions which mean hospital closures while campaigning against those same closures if they fall within their own constituencies. (Examples: here, here, here, and here).

But we need, I think, to be much clearer about why we think a Liberal Democrat government would intervene to stop RBS lending money to Kraft.

Is it because we think Kraft is an unsuitable ‘foreign predator’, and British jobs might be lost? This is a defensible position: after all, the costs assocuated with those job losses will have to be covered by the taxpayer. In that sense, the government would be looking after its own interests as a shareholder. But the implications for a government intervening in the market on those grounds go well beyond the Kraft/Cadbury deal.

Or would a Lib Dem government intervene because it thinks the deal itself is too highly leveraged, and skewed in favour of hedge funds with short-term interests? Again, it’s a defensible position: after all, the banks have not proved themselves to be experts in picking debtors able to meet their obligations, and it’s the taxpayer who’s picked up the bill. Again, in that sense, the government would be looking after its own interests as a shareholder. But are we really saying that politicians should be the arbiters of whether a takeover deal makes sound financial sense?

These are difficult areas for liberals, as the Prime Minister’s reply to Nick Clegg at PMQs acidly noted:

If the right hon. Gentleman is really suggesting that the Government can step in and avoid any takeover that is taking place in this country overnight, and then tell a bank that it has got to deprive a particular company of money by Government dictate, his liberal principles seem to have gone to the wall.

We cannot in any case be sure that, even if the Government had blocked RBS from lending money to Kraft, the deal would not have gone ahead: non-state-owned banks would have been able to lend Kraft the money without any possibility of government intervention.

Nick and Vince are right to ask the awkward question of Gordon Brown and Peter Mandelson: why is a state-owned bank funding a deal Labour says it opposes? But, equally, we need to be clear what our answer would be in their shoes.

And if the party is saying it would stop RBS from loaning the money, we will need to give precise answers as to why we’d intervene, and ensure we apply these reasons rigorously and consistently across every significant lending decision being taken by the state-owned banks. Sounds like a task for big government.