Clawback needed to rescue Southern Cross

By This Is Money
Updated: 03:59 EDT, 7 June 2011

The excoriating GMB report on the Southern Cross scandal rightly spares no blushes.

What is really embarrassing for the union movement, however, is that the Labour Party - which it helps to fund - stood idly by while private equity grabbed control of such a vital part of Britain's care infrastructure.

Worse, as we report today Gordon Brown's Treasury put in place a tax structure which was ruthlessly exploited by the private equity princelings to enrich themselves and the investors in their funds.

Blackstone says it helped create 'a high quality care home operator of scale that was professionally managed and a responsible member of the community'.

This is, of course, the kind of self-serving rubbish in which the big players in private equity seek to clothe their affairs.

Anyone who knows anything about the 'care' business, especially one on the scale of Southern Cross with its 750 homes and 31,000 elderly residents, must know that it would be impossible to have produced the miracle which they lay claim to in the relatively short period of ownership.

Staffing, investing and turning around a portfolio of care homes takes decades not a couple of years.

Similarly, we have to treat Blackstone's attempts to suggest that its ownership of health home leaseholder NHP had nothing to do with Southern Cross with a huge lump of salt.

These were inter-related businesses, acquired in the same time frame, and sold off to separate buyers to maximise returns for Blackstone.

It goes without saying that investors bought into the Blackstone hype with eyes closed at the time of the flotation in 2006 and the NHP sale.

This was the moment of maximum self-delusion in the financial markets when credit was free and easy, property prices and rents were rising exponentially and Labour was building up the biggest debt mountain in history.

The sharpshooters at Blackstone knew they were calling the top of the market when they sold these assets so rapidly, as did the Southern Cross directors, led by Phillip Scott.

The report will not make pleasant reading for Number 10 either. The idea that senior civil servants should gain experience in the private sector is important. But one might have hoped someone of Jeremy Heywood's quality would have had the judgement to avoid anything involving care homes and private equity like the plague.

Indeed, perhaps he should have warned off his employers Morgan Stanley rather than embracing the transaction.

If ever there were a case for an old fashioned Department of Trade inquiry - of the kind conducted into Lonrho, the Maxwell empire and most recently the Phoenix Four at Rover - it ought to be this.

The role of Blackstone, the investment bankers who advised and the behaviour of the former Southern Cross and NHP directors and investors - including Qatari-backed Three Delta - needs examination.

In the banking sector it is now widely accepted that 'claw back' of unjustified rewards should be standard practice.

Stephen Schwarzman, chief executive of Blackstone, together with the former Southern Cross directors, should be required to disgorge their gains and the funds used to support the rescue of the ruinous model that they created.

That would be the really professional thing to do.

Plan 'B'

There was nothing more predictable than the wobble of a high-level group of economists over the government's fiscal strategy.

Recovery from recession is rarely in a straight line especially when a large chunk of the advanced world is still de-leveraging like mad and coping with a surge in oil prices.

So there is a certain piquancy about the timing of the IMF's annual inspection of the UK economy. The IMF reiterated its support for the government's fiscal plans, labelled the recent softness of growth 'unexpected' and encouraged the coalition to hold its nerve.

The idea that there is no plan 'B' if matters do not progress as forecast was always rubbish. The Bank of England made it clear on these pages last week that it still has further quantitative easing in its back pocket. If the speed of reducing borrowing does come down as fast as expected, because of slower growth, that in itself provides stimulus.

Finally, there is always the option of reducing taxes.

Sky signal

As the final decision on News Corporation's proposed takeover on Sky grows nearer, its chief executive Jeremy Darroch is expected to go on the offensive in a speech tomorrow.

He will note that Sky's homegrown UK production (excluding sport) will double by 2014 to around £600m a year - money flowing directly into the British economy.

Good try.