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The tough truth of capitalism

02 November 2006


A LITTLE knowledge may be a dangerous thing, but it can also be quite revealing.

The furore among Manchester United fans this week over the takeover by the American tycoon Malcolm Glazer reminded me of something I encountered when I first attempted to get to grips with Third World debt. It’s what happens when lay people encounter for the first time practices that are taken for granted in the City, and subject them to a new kind of ethical scrutiny.

Fifteen years ago, when I was researching a book, Bad Samaritans: First World ethics and Third World debt, I asked financial experts a series of naïve questions about how the international banking system operated. It was a blundering process, but it worked.

What emerged was that many of the basic precautions that your bank manager would take before lending you the money to buy a car were thrown out of the window in the 1970s stampede to lend money to poor nations. As my questioning went on — Was that sensible? Is that fair? Is that ethical? — some experts became increasingly uncomfortable.

Man United fans have undergone a similar experience this week. They have looked at the procedures of company law and the conventions of takeover rules, and scratched their heads at the fairness of a system that allows someone to borrow money to buy their club, and then, when he owns enough shares to de-list it from the Stock Exchange, transfer that debt to the club.

So Man United, previously owing nothing, is to be saddled with £540 million of debt — an astronomical figure when you consider its average profits in recent times have been £27 million a year. To pay the interest on that loan, the club will have to find between £16 million and £46 million (depending which newspaper you read). The latter figure would mean £126,027 in interest payments each day.

To repay this, Mr Glazer has produced, insiders say, a very aggressive business plan, with rather optimistic assumptions about the club’s ability to generate the increased profits to repay the debt. Fans are incensed because they know this will mean higher ticket prices, as the club’s season tickets are currently cheaper than those of many other clubs.

But they also fear that Mr Glazer’s plans will not work.

What they have learned is that these kinds of goings-on are standard practice in the business world, even if Mr Glazer is at the more “exotic” end of the market in the costly New York hedge-fund devices he has employed to raise his loans.

Such calculated business gambles sometimes work, and sometimes don’t. If a widget factory closes after such a deal, it can be a tragedy for the employees. But the rest of the business community shrugs, and says that that’s the destructive creativity of capitalism. A shrewder widget manufacturer will be along in a minute. But Manchester United, say the fans, is a public company.

There’s a huge, if understandable, misconception at the heart of that thinking. For, legally, the loyalty of a public company is only to its shareholders. But the word public, to many fans, conjures up notions of wider society and expectations about the common good.

It’s a fond delusion. The hard truth is that if the club’s supporters wanted that, they should have combined to raise the money to buy Man United while they had the chance. They could have turned it into a trust or a sporting club like Real Madrid, which is owned by its members. They should have been as wise as serpents; instead, they were as innocent as fans.

Paul Vallely is associate editor of The Independent.

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