Some thoughts on the credit crunch

About two years ago, I sat round a dinner table with senior accountants working for a large building society, a major motor insurer and a leading consumer credit business. I argued that there was something wrong with the global banking industry if banks could deliver record profits whilst lending mortgages at below base rate and paying interest on current accounts above base rate. I felt that it didn't matter how clever the instruments were, basic common sense had to apply.

Essentially if money was being lent cheaply, and deposits encouraged expensively, then there was a bad debt charge waiting to happen. If profits continued to grow, then the banks were in denial of this problem, and it was going to bite in the next couple of years.

Of course, back then I didn't understand the full extent of the problem. I do now..., and I'm frankly amazed at the herd mentality and crass stupidity shown by highly intelligent, massively paid people.

I have read extensively journalists' assessments of how and why the credit crunch occurred. This slideshow (with some strong language) is the best explanation I have seen. Enjoy.

Entrepreneur Action: a trickle of answers

We have been following the failure of Entrepreneur Action closely. Sion Barry, writing in today's Western Mail, has taken us some way towards understanding what went wrong. However there's still no indication of what is going to be done to help those companies hardest hit by this failure - those who were relying on the Welsh Assembly, through Entrepreneur Action, to help them make their business dreams a reality, and in many cases had parted with £5,000 for the privilege.

The following paragraphs have been taken from the Western Mail article as we continue to seek answers to our four fundamental questions on behalf of all those who have lost out. Of most concern is the assertion that it is the Assembly's failure to support a rescue plan which led to the liquidation. In our view, the Assembly had no obligation to help Entrepreneur Action survive, but we are concerned that the Assembly has known for some time that failure was likely, and should have prepared an action plan to help those companies who were going to suffer as a result. Whilst there may not be a legal obligation, we would argue that there absolutely is a moral obligation.

Entrepreneur Action, which ceased trading last month, owes creditors £330,000. It has a total of 88 creditors, from HM Revenue and Customs to a host of small and medium-sized companies across South Wales.

The two businesses, holding company Entrepreneur Action and the company established to administer the £11.4m contract awarded in 2004, Entrepreneur Action High Growth Services, (EAHGS) are now in the hands of liquidator Begbies Traynor.

Its creditor report shows that EAHGS has liabilities of £330,000 with the biggest creditors in financial terms including Barclays Bank, which is owed £64,583 and HM Revenue and Customs with nearly £100,000.

How much money did Entrepreneur Action and its associated companies receive from the Welsh Assembly over its life?

Unknown

What remuneration did its management team receive in that period?

The liquidator’s report to creditors shows that in the financial year to the end of March 2007, EAHGS made a loss of £190,000. The accounts also show directors’ remuneration of £77,261.
The directors of the two companies are Deborah Hackett, Robert Carter and Ian McPherson. It is unclear as to the nature of the split on directors’ remuneration and whether they were in addition to any salaries.

However, the directors’ loan account of Entrepreneur Action indicate that both Ms Hackett and Mr Carter are creditors to the value of £56,600.

Why was liquidation the only course of action available to the Board, and how did they allow the company's financial position to deteriorate to such an extent that this became the only option?

In Entrepreneur Action’s director report to creditors, criticism is made of the Welsh Assembly Government regarding its “management style” over the project. The report added that EAHGS back in 2006 expressed “serious concerns to WAG, including “the development of bureaucratic ‘13 stage’ sign off process for invoices”.

Between October last year and January the report says there was a significant deterioration in the financial performance of EAHGS. This, it is said, was due to what it described as an acceleration in the general economic slow down.

“There were fewer ‘quality’ inquiries being received that would meet the eligibility requirement of the high growth programme,” it added.

With a decline in clients, EAHGS attempted to broker a rescue plan with the Welsh Assembly Government, which resulted in an accelerated payment of £132,000, which “briefly staved off a negative cashflow and a breach of the companies’ overdraft facilities.”

However, the report said the failure of WAG to support a subsequent rescue plan meant it had no alternative but to cease trading on February 19th, when steps were immediately taken to liquidate both EAHGS and Entrepreneur Action.

What action is being taken to protect the interests of those companies which paid £5,000 but had not received the full extent of the support they were promised?

No answers forthcoming.

Entrepreneur Action - the deafening silence continues

Let me remind you of the four questions we asked two weeks ago:

• How much money did Entrepreneur Action and its associated companies receive from the Welsh Assembly over its life?
• What remuneration did its management team receive in that period?
• Why was liquidation the only course of action available to the Board, and how did they allow the company's financial position to deteriorate to such an extent that this became the only option?
• What action is being taken to protect the interests of those companies which paid £5,000 but had not received the full extent of the support they were promised?

These questions remain unanswered, primarily because journalists and the Welsh Assembly appear united in their belief that if they keep quiet long enough, it will all go away. Only Dylan Jones-Evans in his blog, reproduced (with a less inflammatory title, in my view) by the Western Mail, has voiced any concerns. An extract follows:

"Given the close links between the company and the Assembly’s Economy and Transport division, I would expect that Assembly Members will be looking for answers as to why a business with a cast iron contract for millions of pounds with the public sector could end up in such a position.

Certainly, the way that the Assembly has quickly washed its hands of the company should prompt an inquiry into why a £15 million programme of business support has failed. More importantly, it throws into doubt much of the current approach by the Assembly towards business support and, in particular, its strategy for the future."

Yet there is still silence. Where are the answers? Where is the commitment to an enquiry? Where is the accountability?

In my view, this kind of support model (at least in the way that I believe some of it was provided) has some fundamental problems:

• Let's suppose a support agency employs a large number of self-employed consultants, paid an hourly rate for their advice to start up and early stage companies. These costs, plus a margin, are recovered out of funding provided by the Assembly. What incentives are there to say "NO" to companies or individuals who lacked the fundamental building blocks of a good business? The incentive is quite the reverse, keep them on the books for as long as possible, even if there isn't a future for them, because this keeps money coming in.
• It is in the support agency's interest to overstate the prospects of each company coming through its doors. Not only could this strengthen the argument for a greater slice of funding, but which official would be brave enough to query this and potentially undermine the positive statistics about entrepreurship in Wales.

I'm certainly not suggesting that either of these things did happen, but I do believe that this kind of model emphasises all the wrong things. If a business has good fundamentals, then support should be forthcoming, whether financial, strategic and/or managerial. Each business needs three things - a good idea, a market for that idea, and good people who can make it a reality. The private sector already works on this basis, and the public sector should be reminded to work in the same way.

Collective Thought works precisely on this basis. We are able to deliver individuals with proven track records to work with your company, and we don't charge a fee. We take equity in the business - if your business doesn't succeed, we don't earn anything. We share your risks, and as a result are as committed as possible to making you a success. That's the model for business support.