A year best forgotten: A catalogue of economic woe ruined 1992 for the business community, writes Richard Thomson (CORRECTED)

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This year has been one that nearly everyone in the British financial and business community would rather forget. Its main events add up to a depressing catalogue of collapses, redundancies and plain, old-fashioned bungling, against a background of deepening recession and growing confusion at the highest levels of politics and business. The mood of drift and depression finally found a focus in the spectacular cock-up of Britain's withdrawal from the European Exchange Rate Mechanism in September.

It was the year in which the bottom fell out of the commercial property market. As always, nothing could beat Olympia & York for sheer scale. After weeks of rumours, the Canadian company went into Chapter 11 bankruptcy protection in March, and a consortium of bank lenders moved in on Canary Wharf. O&Y had debts of pounds 11.5bn and had already spent pounds 1.5bn in Docklands. It collapsed because of a cash-flow crisis, unable to service its vast debts as rents and building values plummeted. Nor could it find tenants for many of its largest developments, including Canary Wharf. Paul Reichmann and his brothers fought to retain family control of O&Y but lost. The unbuilt portion of Canary Wharf was cancelled by the banks, and the whole future of Docklands - once the pride of the Thatcher years - was thrown in doubt.

One blow followed another in the property market as companies were brought to their knees or went bust. Mountleigh, Speyhawk, Heron, Rosehaugh all suffered. The property crisis undoubtedly helped to prolong the recession. It affected business sentiment profoundly and influenced the way big banks handled their customers during the downturn.

The banks, after all, had billions tied up in property loans from a lending binge in the 1980s. Barclays, in particular, came up again and again as the main lender to many ailing property groups. In its half-year results, the bank was forced to make pounds 1bn in bad debt provisions and more rolled in later in the year.

Partly because of these huge losses, banks turned their ingenuity to finding new sources of income. Small businesses kicked up a fuss about what they regarded as outrageous bank charges and the tendency of banks to refuse further loans to ailing companies. A new complaint was added once interest rates started to fall in the autumn: banks were not passing on the reductions to their business customers. Bank relations with their customers hit a new low at a time when the weakness of the British economy demanded a closer relationship.

As recession bit deeper in 1992, company receiverships, running at thousands per month, hit record levels. Large companies that had survived the past two years finally ran into real trouble. Trafalgar House became a potential bid target as profits fell and write- offs mounted, until Hong Kong Land bought a 15 per cent stake in October. Lord Hanson had a crack at taking over Ranks Hovis MacDougall, only to be elbowed aside by his former protege, Greg Hutchings of Tomkins.

The year's biggest takeover was launched by Hongkong & Shanghai Banking Corporation, which offered pounds 3.3bn for Midland Bank in March. Midland's Brian Pearce recommended the offer only to withdraw the recommendation when Lloyds Bank, after much dithering, entered a rival bid. Despite the considerable merits of its offer, Lloyds lost.

In March, Richard Branson sold his Virgin music business to Thorn EMI for an impressive pounds 510m (its tangible assets were a mere pounds 3m). But the wooden spoon for corporate finance goes to GPA, the Irish aircraft leasing company, and its advisers Nomura and Goldman Sachs. Despite their insistence that there was adequate demand for its massive international share issue in June, the issue was pulled at the last minute after no one applied for shares in the US.

While the corporate finance market was becalmed by recession for much of the year, there was frantic activity in corporate boardrooms as old managements were elbowed aside by new men who felt they had the answers to faltering company performance. One of the hallmarks of 1992 was that while many eminent businessmen lost their jobs because of falling company profits, hardly anyone in the City or in Whitehall took the rap for their mistakes.

Among the unlucky businessmen, 'Teflon' Tom Frost stepped aside as chief executive of National Westminster Bank early in the year (but remained on the board) after questions emerged over his role in the Blue Arrow scandal.

Bob 'Hatchet Man' Horton, chairman of British Petroleum, was ejected in the summer after a non-executive directors' putsch and replaced by his long-time rival, David Simon.

Philip Green of Amber Day, Godfrey Bradman of Rosehaugh, Gerald Ronson at Heron, Gerald Ratner, Harry Solomon of Hillsdown, Tony Millar at Albert Fisher and Sir Nigel Broackes and Sir Eric Parker of Trafalgar House all either lost their jobs or were stripped of much of their power.

As usual, Tiny Rowland defied categorisation but appeared to signal his retirement when he unexpectedly agreed to sell his 14 per cent stake in Lonrho to an unknown German property developer, Dieter Bock, in December. No one, however, is taking Tiny's retirement for granted.

In the City, the story could hardly have been different.

At Lloyd's of London,estimates of underwriting losses seemed headed for well over pounds 1bn. Despite growing fury among Names, David Coleridge, the chairman, merely urged them to stay calm and trust the Lloyd's Council. Neither the Rowland report nor Sir David Walker's investigation into insider trading at Lloyd's produced much comfort for Names or much promise of change.

The Serious Fraud Office, meanwhile, suffered a series of astonishing humiliations as its two remaining Guinness trials and its case against the corporate defendants in the Blue Arrow trial collapsed. The convictions of four of the Blue Arrow defendants were overturned on appeal in July, after trials that cost the taxpayer pounds 35m.

According to the authorities, however, no one was to blame.

The Bank of England also rejected the heavy criticism in the Bingham report over its role in the Bank of Credit and Commerce International scandal. No one lost his job. Nothing changed.

At the other end of town, however, Norman Lamont, the Chancellor, was unequalled by anyone in 1992 for sheer tenacity in the face of demands for his resignation. From early in the year, the Treasury believed the recession was lifting. It proceeded to issue some of the most spectacularly misleading economic forecasts in its history. When the Tories unexpectedly won the general election in April, the financial markets celebrated by pushing up the FT-SE 100 Share Index over 2,700 during the first week in May. Inevitably, Mr Lamont declared that the 'green shoots' of recovery were visible.

It did not take the City and the rest of British business (which had never really believed in a recovery anyway) long to realise he was wrong. By the end of May, the long-awaited consumer boom had failed to develop, house prices continued to fall, and unemployment marched steadily towards 3 million. The stock market fell back, and Britain settled into the familiar gloom of recession. Yet no one at the Treasury, it seemed, was responsible for its lack of understanding of the economy.

In retrospect, the slide towards the September sterling crisis looks inevitable. For several months, high UK interest rates had been driving the economy from recession towards depression and undermining international confidence in the pound. However, Mr Lamont and John Major persisted with their policy founded on membership of the ERM, repeatedly insisting that withdrawal was out of the question. They also rejected realignment, despite an offer from the German Bundesbank. The markets were looking for a decisive move from the Government but got only vague assurances that the pound would be protected. The end came on 'Black Wednesday', 16 September, when, despite pounds 3bn to pounds 4bn spent in sterling's defence, Britain withdrew from the ERM two years after joining it.

The Government was left without an economic policy, but Mr Lamont promised he would think of a new one soon and remained at his post.

Industry begged for an immediate heavy interest interest rate cut, and Mr Lamont obliged. Rates dropped sharply over several weeks from 10 to 7 per cent. Exporters gained, but as the rest of Europe headed deeper into recession, the benefits were distinctly limited.

Black Wednesday provoked renewed demands for an overhaul of the institutional framework for guiding economic policy - particularly an independent central bank. But predictably, apart from the appointment of seven advisers to the Treasury, no significant changes are planned.

As if the Government were not sufficiently embarrassed, British Coal announced in October a plan to close most of the coal industry, with the loss of 30,000 jobs.

The national outcry against this took Michael Heseltine, President of the Board of Trade, completely by surprise. There were cheaper ways of producing electricity than using British coal, he said. Yet the decision was suspended, and the High Court ruled in December that the move had been illegal in any case. Mr Heseltine remains at his post.

Britain looks towards the New Year with a seriously weakened industrial sector, a mounting budget deficit forecast for 1993-94 at pounds 44bn, a widening trade gap, relentlessly rising unemployment and still little sign of returning consumer confidence. It is not a rosy picture. And yet there may be signs that the recession is bottoming out: personal borrowing is rising and the FT-SE 100 Index raced optimistically ahead to 2,845 before Christmas.

And yes, Norman Lamont has been heard to mutter about green shoots.


SIR HARRY SOLOMON has asked us to point out that his forthcoming departure as chairman of Hillsdown Holdings is of his own accord and without compensation. He therefore feels it was unfair of the Independent on Sunday last week in its review of the year to bracket him with a number of senior executives who were forced out of office in 1992.

(Photograph omitted)