BP and Lloyds: We all pay for their recovery


BBC business editor Robert Peston on giants' rapid turnaround

Perhaps what's most remarkable about Lloyds and BP is not the magnitude of the mess they caused for themselves, their shareholders and many of the rest of us, but how remarkably quickly they have returned to profit - as today's quarterly statements from the wounded corporate giants demonstrate.

These businesses have such powerful positions in products and services that consumers can't do without that they simply can't be killed - no matter how much effort they put into self-immolation.

In the case of BP, the recent remarks of its new chief executive Bob Dudley to me, that the company may resume dividend payments in the new year, don't look impetuous.

BP is back in black, to the tune of more than £1bn in the three months to the end of September, in spite of incurring a further $7.7bn (£4.8bn) of charges relating to the Gulf of Mexico oil spill - which brings to almost $40bn (£25bn) the total provision that BP has made for the ultimate costs of the debacle.

It has benefited from a higher oil price, which boosted earnings in its giant exploration and production division by £1.3bn, offsetting a fall in the amount of oil produced.

That division is being broken up, as part of comprehensive efforts by the new chief executive Bob Dudley to rehabilitate this battered business.

His cure also includes shrinking BP, selling off up to $30bn (£19bn) of assets by the end of the year, to cover those huge oil spill costs.

Lloyds' reconstruction also involves major shrinkage - in its case, through reducing the size of its balance sheet by £200bn during the coming three years. That means lending and investing less, though Lloyds insists that customers with whom it has a relationship will not see a diminution in available credit.

On what it does lend, Lloyds, owner of the Halifax, is enjoying higher returns, a widening in the gap between what it charges for loans - especially mortgages - and what it pays for funds.

That interest margin arguably became too thin during the property-bubble years before the credit crunch of 2007. Mortgage banks systematically under-estimated the risks of providing mortgages.

But if borrowers feel grumpy about being charged more to rectify a problem not of their own making, can you blame them?

So the patching up of Lloyds and BP may be the occasion for two cheers rather than the full troika. Because in both cases, rehabilitation involves charging more for selling less, or widening profit margins.

That they are able to widen their margins is reassuring for owners of the businesses (including British taxpayers at Lloyds, and millions of us saving for a pension in both cases).

They'll both argue, of course, that the prices they charge are set and conditioned by competition in their respective market places. But whether through luck or design, prices have moved in their favour.

And because most of us can't avoid borrowing from banks, lending to banks or procuring energy, when they charge more for oil and credit, or cut savings rates, their salvation reduces the spending power of consumers and the investing ability of businesses.

Also when they shed jobs in order to generate more revenue for less overhead - particularly characteristic of Lloyds right now - then the costs of the rescue fall on largely innocent staff.

Which isn't to say that anyone - other than competitors and corporate predators - would benefit from keeping either BP or Lloyds in a chronically weak condition.

But it is to point out that when businesses of the scale and economic importance of Lloyds and BP run into difficulties, it is impossible to limit the costs of the clear up to the holders of risk capital, their shareholders.

It's not just the potential of BP to poison the seas and its role in meeting vital energy needs - or the pivotal role of Lloyds in the payments system, credit creation and the protection of saving - that legitimise ministers and regulators systematically sticking their noses into the affairs of big companies.

Can we be surprised that no major British political party or even an influential faction these days argues for minimalist government? The debate isn't between interventionist left and free-market right: for now at least, it's a dry managerial argument over what kind of intervention works best.‬‪

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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