Zombies, everywhere!

And not just in banks, but throughout business and government!

As the sign says!As the sign says!
If you are looking for 'growth', that something promised by politicians but, so far, yet to appear then you will also be disappointed by the world of business. Recently the Daily Telegraph ran this article. And very interesting too, for a number of reasons. The basic information comes from the accountants Ernst and Young with direct quotes from Alan Hudson and Alan Bloom. The summary of which is -

that the financial crisis had created an environment where it is "too difficult to fail", with businesses being kept afloat to the detriment of the broader economy.

That's the sort of tease remark the man atop the Clapham Omnibus could savour, 'common knowledge', his every day language, has long held that there's something funny about the business world. Could this be it? E & Y go on to add -

so-called "financially undead" companies are clinging on, despite the recession, making markets and the economy inefficient. The expected jump in the number of companies falling into administration has not materialised

Then the article points the finger at the banks suggesting that they are 'under pressure'. We are left to make up our own minds up about this 'pressure', let's not forget that so far the banks have, with few exceptions, successfully resisted any pressure to do something about the pay and bonus regime for their senior staff. But back to the main point, the government and creditors also get a mention. The end product of this is the banks are reluctant to call in loans to the zombie companies. Now that's really funny! Zombie business held up by zombie banks. The too big to fail banks in spiritual cahoots with the undead too difficult to fail business world. And all supported by a mix of the long-suffering shareholder of these businesses and the general public. For what this description omits to mention is the effect of Quantitative Easing. Which is suspicious.

The E & Y report says that based on past experience the actual number of business failures is lower than projected. In the past a financial downturn did cause bankruptcies but then there was no QE. So could this be the magic ingredient? And if this be the case then E & Y, while taking no position on QE, suggest that overall the outcome is bad.

while zombie companies were still operating, they were taking market share from viable companies that should be growing and boosting the economy

E&Y argues that because lenders continue to fund these businesses, capital is not being recycled and reinvested as it should be. Although it said the number of zombie companies was difficult to estimate, R3, the business distress specialists, said around 30% of companies are regularly reliant on their maximum overdraft facility, a good gauge of whether a company is viable.

Again this is rather funny. First via mismanagement of business, banking and government we create a crisis, then, and using the same ethos and with another act of mismanagement we prolong it! But to be described as 'anti-business' is a serious insult. The truth is business likes crying foul at every opportunity, loves to portray itself as downtrodden, misunderstood and hard-done-by.

But this article in the Telegraph follows an earlier report on SMEWeb, an online organisation for small and medium sized companies.Their post is called ' Zombie Companies threaten to drag UK back into recession.' So what to make of that? For you might have thought that any such organisation would have gone along with the pity-me rhetoric. You might also wonder if the Telegraph copied them because of their similar article title! So two reports both using the same terminology and both with quotes from experts. SMEWeb have Oliver Ward-Jones, and also quote Government insolvency statistics suggesting that company insolvency is indeed on the rise, contrary to what is suggested in the Telegraph. So who is right? Certainly the SMEWeb makes the better case using data from Higgs and Sons, an insolvency specialist law firm.

They set out a similar story, zombie companies make no profit so cannot either pay back loans to banks or profits to shareholders. In this state they act as a brake on the whole market place. However, it's the SMEWeb that has the attraction of a 'what should be done' section.

These companies limp on using capital and skills that would arguably be better placed in a growing business. At the same time, the company remains in a perpetual 'closing down' sale, dropping prices to attract customers, and potentially harming otherwise more profitable competitors.It appears that we can take one of two options, either a shot in the head, or a shot in the arm. Ultimately, some of these companies are beyond resuscitation and, as a result, need to be wound up by a creditor. However some are viable businesses which need investment and potentially new management to move forward.

But then there's another difference between the Telegraph and SMEWeb. In the former we see -

Insolvency is becoming such a difficult thing to carry off that well-advised borrowers are now in a stronger position than they used to be. They know they can push their banks further," said Alan Bloom, head of global restructuring at Ernst & Young. "Everything is becoming complicated and making insolvency a difficult option.

This rather contradicts the latter who suggest that zombie companies lack independent advice. Its never been easier, so we are told, to set up a company, go bust and walk away from the mess and then start all over again. So what is going on? You do wonder if the Telegraph and SMEWeb are talking about the same sectors of industry. For it's true that on the grand scale of things the number of large companies failing does not seem so great. So does this make 'too big to fail' true? For at the lowest level of business, the sole trader and very small companies with less than five employees, things appear to be stable. The reasons here are that these people have low overheads tend to be family businesses and so can lean down and survive. Not for them the madness of over optimistic borrowing and business projections.

So where is there trouble? It would seem the mid-sized companies are up for it. It's always difficult to take a company up in scale, and very risky if the assumptions that simply borrowing money is all there is to do. And in this respect the banks have not helped, rather the reverse.

The 'mis-selling' by banks has only recently been recognised and is being analysed. Yes it's true that many mid-sized companies behaved stupidly, but we can also now see that so did a lot of large sized banks! Their aggressive selling techniques have done them now favours as their reputation takes another fall.

With still more trouble to come, the Libor scandal goes beyond the world of business and banking right to the heart of government. As always with these things just as soon as we had learnt that it was the, London Interbank Offered Rate, then there were calls for a public inquiry. How depressing is that! The Leveson inquiry into the press grinds on and on and all we have learnt so far is that judge is a good deal less than competent. Do we really want more of the same?

However, there are problems so solutions must be found, especially as we are told to expect the financial crisis to also grind on and on. There is no relief from this domestic misery either. As on an EU level poorly performing banks need bailing out at regular intervals. What makes it all worse is that the poor performance stems from incompetence. In one sense the domestic and EU problems are the same. The delusions of the EU, grandeur built on funny money, are mirrored by the UK's reliance on quantitative easing.

This sort of madness filters down to lower levels too. Our public services also perform poorly and seem incapable of cutting back on waste. But by contrast, are always good at expanding their remit and loosing touch with reality. So where does this leave the man in the street? Quite probably out on the street too as EU-wide unemployment is over 11%.

No matter, we know the deluded decision makers at global, EU, domestic and in fact, all levels, will carry on as before. It's all they can do!