The pub sector is suffering because entrepreneurs like Hugh Osmond, above right, made millions by borrowing far too much, says Wetherspoon founder Tim Martin, left
Hugh Osmond, the architect of Punch Taverns, who has long since fled the scene, lambasted Tory leader David Cameron in the Financial Times last week for his criticisms of bankers' bonuses.
Osmond said: "Bonuses are like Premiership footballers' wages. You can have a view that they incentivise the wrong sort of behaviour, but they're not at the root of the issue."
It would appear that Mr Osmond has learnt few lessons from the credit crunch, and indeed from the effects of binge borrowing on the economy as a whole.
The key point about bankers' bonuses, which have wrought so much damage on us all, is that they were paid when loans were made, and were not conditional on the loans themselves being repaid.
In a nutshell, the more you lend, the bigger the bonus, and if the loan is not repaid, then it's someone else's problem. Unfortunately for the public in Britain, Ireland and elsewhere, the non-performing loans holed banks' balance sheets beneath the waterline, and it's the taxpayer who has to foot the bill.
In effect, bank bonuses were paid out on a bogus basis, and this is the heart of the matter, which has not yet percolated through to recipients of massive bank loans such as Mr Osmond. By a quirk of accounting rules, loans made to companies (and fees earned by individuals) that do not subsequently get repaid first appear in the banks' books as a profit, and these so-called profits have been used to justify gigantic rewards for a select few bankers.
So the profits were illusory, and the most disturbing factor is that the first people to be fooled were the auditors of the banks, their remuneration committees and City analysts, as well as the various watchdogs set up by the Government to supervise such issues, including the Bank of England. It's as if a pub owner bought a barrel of beer for £100 and planned to sell it for £200 and paid a bonus to his manager when the beer was racked up in the cellar, or even ordered from the brewer, irrespective of whether it was ever sold.
Nowhere have the catastrophic effects of daft private-equity-style business "models", financed by mega debt, been felt more acutely than in the licensed trade. In the tenanted trade it became an accepted mantra that pubs provided stable streams of income enabling "entrepreneurs" like Mr Osmond and Guy Hands to "gear up" pub balance sheets to a huge extent and then sell them at vast profits to purchasers who borrowed even more. It was a dangerous game of pass the parcel and banks from Iceland to Tokyo, and their local citizens, are paying the price.
In managed houses, private-equity financiers combined over-large egos with over-
burdened balance sheets, and undertook massive capital expenditure projects across their estates to boost Ebitda (earnings before interest, tax, depreciation and amortization), hoping that the toxic parcel could be passed on to someone else at a higher price, which often happened until the music stopped in the credit crunch.
It's astonishing to note how many of these companies make simply colossal losses after interest, tax and depreciation, yet appear to believe that it is normal or legitimate to trade in this way. Try going along to your bank and asking the manager to ignore costs like interest and tax and see how long the meeting lasts.
Hugh Osmond made many millions from the pub trade by borrowing huge sums of money to buy thousands of pubs before selling them on to others, and bankers were no doubt paid huge bonuses for creating those loans. However, the loans have not yet been repaid, and Mr Osmond's successors at Punch — and their thousands of tenants — are doing their best to bear this burden.
Until these debts have been repaid David Cameron should turn a deaf ear to the Osmonds of this world — but if he really can't resist, Donny would be a better bet than Hugh.