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Saturday, 12 December 2009

A dun of iniquity

One of the commenters to a post early this week questioned why the bonus tax is iniquitous, so here goes:

  1. One of the principles of fair taxation is that it should apply to all tax payers equally. That doesn't preclude progressive taxation or even applying particular provisions to particular activities, but to discriminate against bankers and people working for banks smacks of vindictive victimisation.
  2. A further principle is that taxes should not be applied retrospectively, which is why the Budget sets out the tax rates to be applied for the financial year starting after the Budget. To create a new tax in the middle of the financial year to be imposed on bonuses to be paid for work already performed goes against that principle even if the bonuses have not yet been determined or awarded.
  3. The banking industry is very wide. Although there are many companies that might have acted recklessly before the credit crunch, most of those (Bradford & Bingley, Northern Rock, RBS, HBOS, Lehman, Bear Stearns, AIG) have now disappeared. The argument that the rest have all benefited from the bailout is largely incorrect. Many other financial institutions were not involved in investment banking activities. For example, the Australian banking system is very conservative, so that ANZ, Commonwealth Bank, National Australia Bank and Westpac, who have all in the past lost heavily through ambitious traditional bank lending largely avoided any exposure to losses on assets similar to those held by the British banks. Similarly, it is hard to see why Standard Chartered or HSBC who do most of their business in Asia and emerging markets should be penalised for the activities of banks exposed to the US and UK asset backed securities markets.
  4. The government says that it bailed out the UK banks and all the other banks benefitted as a result. To an extent that is true, but they only bailed out 2 UK banks and nearly crippled a third (Lloyds) in the process. On the other hand, they didn't bail out any of the foreign banks on whom they are imposing this tax. Those banks are in London for the international debt and foreign exchange markets. They are not in London to provide credit to the British markets, and many of them will have very few dealings with RBS, HBOS and the other failed UK banks. They are there to buy and sell international syndicated loans, letters of credit, to finance exports and projects, often in dollars and euros, not sterling, and in parts of the world where neither RBS or HBOS ever show their faces.
  5. Traders in banks are typically paid a far lower base salary than anyone would reasonable expect to be paid for the hours that they put in, and the better and more successful they are, the greater the percentage is paid in bonus. If the government doesn't like that balance they should regulate against it rather than tax the traders after the event.
  6. Believe it or not there are many people working for banks who do not use any capital. Typically they work in an advisory capacity, perhaps on mergers and acquisition, privatisations, PFI, project finance advisory work and private placements. The only risk to the bank is the overhead and base salary against failure to earn fees, yet the fees earned, entirely from the wits, knowledge and hard work of the bankers concerned can be substantial. To stop the bank paying these people bonuses is clearly wrong-headed.
  7. On the debit side of the balance sheet, the government failed in its supervision of 4 failed banks and 1 failed building society and they completely missed the fact that AIG was running a $800 billion credit default swap book unregulated out of its offices in Curzon Street that underpinned a vast part of the securities market. To turn round and blame all the remaining banks for the government's own failings is no more than we would expect from this clapped out administration.
So I am not surprised that the bankers are upset, but neither am I surprised that the government would use it as a smokescreen for a desperate Pre Budget Report.

Friday, 11 December 2009

Grouchy doctors can save the NHS

The PBR says that the NHS is ring fenced from cuts, but imposes NI costs on the service. But leaving aside the fact that we are run by mendacious headless chickens, what can be done to make savings?

One idea comes from the training of doctors, who these days are trained in their bedside manner, dealing with patients very differently from their older colleagues.

But that care comes at a cost, because the more high-handed older consultants cover more patients in less time than new trainees. Kindness costs nothing? Dream on.

You ain't seen nothing yet

The 1% increase (0.5%employer, 0.5%employee) in NI contributions will raise £3 billion. That's 1% of salary, not 1% extra NI. So it would take another 66% of workers' salaries to wipe out the deficit.

Sunday, 6 December 2009

One of my favourite cartoons

.. features two old soldiers, one of whom says to the other "Young people! Our generation fought so they could be free, and now they go and do what they bloody well like."

I was reminded of this by the talk that the government, in a fit of pique, says (through the Peston mouthpiece) that it wants to tax the banks or the bankers, well the British one, or maybe those that are in Britain or something.

After all, runs the government's line to the media, we bailed out the banks, so we deserve something back. Well yes we did. We bailed them some of them out, and got something back in the form of equity at a knockdown price. We guaranteed some of their assets, and they paid us a fee. The government negotiated these deals over many months, so are they telling us they negotiated a bad deal? Indeed, can anyone trust this government if they negotiate a deal in good faith only to find that the government stitches them up by changing the law shortly afterwards?

But, protest the government, if we hadn't bailed out the banks the whole system would have collapsed and all the banks would have gone under. So this justifies taxing not only UK banks but also those that operate here. Not so, the banks that would have gone under were the ones that did go under. The other banks had their own capital cushions and would have survived, in part because they have the capacity to rebuild their capital through earnings, which is precisely what the government wants to tax.

The idea that the government want to slap a tax on foreign banks in London just because they are making a lot of money, from amongst other things, advising the government on dealing with the bailed out banks, shows that the government doesn't really have a clue. Somebody should draw a cartoon about this.

I've got a little list

It looks like a mole at RBS has been feeding a line to the Times to try get their bonuses back, because the paper carries this story this morning

"More than 1,000 investment bankers have quit Royal Bank of Scotland to join rival firms for guaranteed cash bonuses and big salary increases, according to banking sources.

The staff exodus, which has cut a swathe through the senior ranks of RBS, has been gathering pace since the government first ordered it to clamp down on bonuses this year.

Although they account for less than 5% of staff in RBS’s investment division, the traders and corporate financiers who have been lured away are estimated to have earned it between £600m and £700m last year — almost 8% of its 2008 income."

Well hang on a bit because these numbers don't stack up, because that is £600-700k top line revenue per "investment banker", which would have been the minimum top line revenue to stay in your job as an investment banker 20 years ago - say $1 million, and that would be the benchmark for bankers who don't use the balance sheet (M&A, some corporate finance advisory). Touch the balance sheet and you would have to make far more in fees and spread to justify your seat. Personally I wouldn't be seen dead in a team that kept bankers who performed so poorly.

And the giveaway is that the 5% of staff made 8% of income. Well if you are only making 160% of the average when all the IT, operations, HR, PR, security, audit and management are factored in, then like the Poobah-before-Mandelson said, "They'll none of them be missed".

Friday, 4 December 2009

The Feds always get their man

Ben Bernanke doesn't get everythng right, but he is righter than most, and on the state of UK, yes UK, bank supervision he is spot on

"Over the past few years the government of Britain removed from the Bank of England most of its supervisory authorities. When the crisis hit - for example when the Northern Rock bank came under stress - the Bank of England was completely in the dark and unable to deal effectively with what turned out to be a destructive run and a major problem for the British economy.

So currently the trend in UK and elsewhere is quite the opposite of taking away those authorities - it is to give the central bank the authority and information it needs to know what's going on in the banking system... for financial stability maintenance I think it's very very important for the Fed to have that kind of information and insight into the banking system"

Thursday, 3 December 2009

Why the fuss?

Let's get something straight: there is nobody at RBS who is worth £1m a year even in a good year, and no US bank is going to rush out to grab their disaffected staff, but...

Why are the government having a go at the bank in the press for possibly paing out mega-bonuses? After all, RBS is 70% owned by the taxpayer, and will soon own 80%, so the Chancellor can tell the board what to do through a special resolution and they must obey.

So, if the government really wants to change the pay policy at RBS, they can.

Here's one I made earlier

Margaret Thatcher ruined the British manufacturing sector, right? Well, probably wrong. While it fell from 25.8% of GDP to 22.5% under the Thatcher government, the general increase in GDP meant that the size of the sector increased significantly.

There was another fall during the seven years of the Major government to 20%, but in the 12 years since 1997, it has fallen to ... 11%. Bearing in mind that a significant proportion of that capacity is actually food processing which is likely to be processed near the point of consumption because food doesn't travel as well as, say, ball bearings or machine tools, and we can see that it has fallen far faster under Labour, who as we all remember were critical of the size of the industrial base when they came to power.

Of course a simple look at Labour policies shows the reason, favouring the film industry, R&D (not tied to UK production) and the offshore shipping industry with investment allowances not permitted to the rest of business whilst reducing the rate of capital allowances and eliminating finance leasing. It is hardly surprising that there has been no investment in industry, and its relative importance in the economy has halved under Labour.

Monday, 30 November 2009

Lib Dems unfit to govern

The Lib Dems again show how incompetent they are by bleating about higher rate tax relief on pension contributions which they try to frame as a loophole.

Well excuse me,but income tax is a tax on income as and when it is actually received, not a tax on the accumulation of rights to income (should you actually live long enough to recieve it).

By way of example, take the case of a businessman who pays £1.5m into a pension fund and dies the day after retiring. The £1.5m is partially taxed as income, but it is never received

Next example, assume the businessman lives for another 20 years, and with accumulated earnings the fund pays out £3m. The £1.5m is taxed (partially) on its way into the fund, and again on its way out. If the £1.5 million had been paid into a bank account there would have been no tax on the withdrawl of capital.

So all this does is encourage higher rate earners not to use pension funds as currently structured. And oif course let us not forget that Mr Cable and Mr Clegg will not be taxed on the state contributions to their pension pot because it doesn't exist and their pensions will be paid out of future taxes.

Tuesday, 24 November 2009

Some choice cuts from the Chilcut inquiry

This from Sir Peter Ricketts , former head of the JIC and now head of the Diplomatic service as reported by the BBC:

Asked about the threat posed by Iraq in early 2001, Sir Peter Ricketts, who was the then chairman of the Joint Intelligence Committee - which oversees MI5, MI6 and GCHQ - said it was palpable.

Sir Peter, now Head of the Diplomatic Service, said there was a "clear impression" that Saddam had a "continuing intention" to acquire weapons of mass destruction, having used them in the past.

Despite there being no evidence of a direct link between al-Qaeda and Iraq, Sir Peter said there was a "tone of voice" in Washington after 9/11 that there would be "major implications" for Iraq if that was the case.

Oh, so that's alright then. Giving a clear impression of a continuing intention to acquire weapons of mass destruction is now grounds attacking a foreign country, even if that perceived intention is the perception of the country waging war? Military intelligence is, yet again, an oxymoron.

Freedom of speech exercised

For the benefit of anybody who has come this way, from Richard Murphy's blog (I wouldn't go there unless you have professional interest in hearing what sort of tax advice is fed t0 the TUC), I have had a comment deleted by the blog moderator. This a common occurrence and I find myself barred there from time to time and the occasional irate email from Mr Murphy, but no matter. I only mention it because he mentions the fact and comments that it was patronising and rude. Well that's his opinion, but for the benefit of the prurient who may have wade their way over here, this is approximately what it said.

In response to a question on alternatives to share ownership one poster commented "hmmm - the problem is the common ownership bit. How do you imagine that will work?"

To which I naturally replied "The state owns all businesses. You work for the state. The state owns you. You don't like it? The state shoots you in the back when you try to get over the wall. Simples."

Monday, 23 November 2009

I used to be a climate change agnostic

.. but now I feel myself drawn ever closer to the sceptical camp. And it is not because of the arguments of the sceptics, but in large part due to the emails of the global warming proponents. Sorry we are supposed to call it climate change.

For the benefit of those who have not heard my thoughts on this before, I am not a physicist, but I suppose I could have been, having won an award to Cambridge at a very young age to read Engineering, but I suppose it could just as easily have been physics. I just didn't fancy the beards and sandals that go with physics. So I think I have a good feel for classical physics, including thermodynamics.

Now it has always struck me as a bit strange that the climate could reach a tipping point where heat would accumulate trapped in the earth and its atmosphere. Thermodynamically, the earth is like a very leaky bucket, except instead of being filled with water, the earth is being blasted with radiation from a fusion reaction 93 million miles away, and the temperature of the earth has risen to a point where the rate of dissipation of energy through black-body radiation is in balance with the incoming. Putting more CO2 in the atmosphere is like plugging a hole in the bucket, but the bucket still leaks through all the other holes and it doesn't fill with water.

More obviously, there was never any real explanation of tipping points, and the very nature of physics suggests that they are very difficult to achieve. Take for example the melting of North Sea Polar ice, which the CC activists say would lead to massive warming as more light was absorbed. As I have said before, this seemed implausible because we know there is very little sunlight at the top and bottom of the planet because it comes in sideways rather than from overhead.

Think about it. That is why it is so cold, and a lot of any temperature they do have is due to the atmosphere, and in the case of the North Pole, the water below the ice (which explains why the North Pole is warmer than the South Pole). Don't believe me? Look up the temperatures on the sunny and dark sides of the moon, which is the same distance from the sun and thus should be at the temperature that the earth would be without any atmosphere/oceans.

OK, but if CO2 does have some effect, how is the CO2 absorption effect dampened or amplified? Well I don't know, but if scientists want to explain why there will be a tipping point they should be able to tell us where all the energy goes and where it comes from. One of my pet theories is that with higher temperatures there would be more evaporation of water which has a cooling effect on the rest of the atmosphere at the point of evaporation, probably not that much in the whole scheme of things, but the clouds formed by the extra evaporation would increase the albedo of the earth, and with a much more dramatic effect than any polar icecap melting because (a) clouds are less dense than ice so a little water vapour creates a lot more white cover than the same mass of ice and (b) water evaporates and clouds form in places where the sun is strongest, thus reflecting more light. So I guessed this might be a way that the rate of heating of he atmosphere is dampened with negative feedbacks.

So imagine my surprise when I read the following email at the CRU. Yes, some of their scientists think the same way. And what is more they think this may explain the reduction of average temperatures in the last 10 years, only they haven't really looked into this (which might be unhelpful to their position), nor indeed have they really considered how all the heat flows around the atmosphere and the oceans, which I would have thought was a prerequisite for any modelling.

But most damning of all is the following email which sets out the CRU's defences against requests to support their assertions by publishing their data. If you have nothing top hide, then why try to hide behind non-disclosure agreements?

The politicians keep telling us the science is settled. It is now blindingly obvious that it isn't.

Sunday, 22 November 2009

But at the length truth will out

So now we know why Tony Blair went so soon. The Sunday Telegraph tells us that secret papers show us that Blair "misled MPs and the public throughout 2002 when he claimed that Britain’s objective was 'disarmament, not regime change' and that there had been no planning for military action." They say that the papers show British military planning for a full invasion and regime change began in February 2002, which if I recall was after Blair had popped over to the US for a photo-op with George W.

Clearly, if he had hung around in parliament he would have been forced to explain his actions and matters might have gone so far as a forced resignation. But once he has left parliament, nobody cares and he is no longer answerable, so he can swan around America collecting his £150,000 a speech fees and telling everybody it is time to draw a line under the Iraq War and move on.

Friday, 20 November 2009

A fish rots from its head

Lest any one should doubt that the integrity of British politics has been corrupted by the venal nature of the political establishment they should look no further than the Electoral Commission's findings on Michael Brown's donations to the Liberal Democrats. If the Irish football team feel aggrieved about Thierry Henry's handball, that is nothing compared to the refereeing blunder by the Electoral Commission.

To save you having to look up the references, the Liberal Democrats received a donation of around £2.4 million from a UK company controlled by Michael Brown a Scottish "businessman" based in Switzerland, who nobody had ever heard of and who turned out to be a crook and the money came from his customer/victims in what turned out to be a Madoff type scam.

There is strong evidence that the donor company was merely acting on the instructions of its Swiss parent, mostly because the only accounts (draft) show that the UK subs were funded entirely by loans made from the parent and incurred a deficit on their equity accounts after the donations had been paid. I have a copy of the draft accounts obtained via Dominic Kennedy of The Times. The Electoral Commission has not published them, but I may do in due course.

But there is equally the valid question as to whether the company was engaged in business in the UK, a requirement to be regarded as a permissible donor.

The Electoral Commission say:

"The evidence indicates that 5th Avenue Partners Limited undertook a number of actions consistent with carrying on business including, opening bank accounts with a major high street bank, opening trading accounts with a financial services broker, contracting for staff/services and passing company resolutions"

Well blow me. My grandmother, god bless her, had an account with a High Street bank, but that doesn't mean she was in business. Companies have to pass corporate resolutions to be able to open bank accounts, not least because they have to show the bank what they intend to do, but that doesn't mean they are in business. And once they have opened accounts they are at liberty to accept funds into those accounts.

What the Electoral Commission neglected to say was that the High Court found that the options trades were merely executed to create the dealing slips to give the impression of a business to defraud further investors. In other words, as the High Court stated, there was never any business. And if you read the Electoral Commission report, they don't deny this.

There were no staff, no VAT registration, no FSA registration, and frankly no business. The "office" that the company rented in Upper Brook St was in fact a top floor flat in a residential apartment building that Michael Brown used when he came to London.

Did the Lib Dems bother to check that out? Of course not. And neither did the Electoral Commission, supposed guardians of our electoral system. That the Electoral Commission can only reach their conclusion by considering aspects of 5th Avenue Partner's behaviour that was intrinsic to their proven fraud show that the conclusion is wrong.

Well he would say that, wouln't he?

If it gets much attention in the press, we can probably expect Peter Mandelson to turn up on the airwaves pooh-poohing superannuated scribblers and Conservative party lackeys, butRichard Lambert, director-general of the employers’ group, endorsed Tory fiscal policy and welcomed the non-confrontational stance on Europe taken by party leader David Cameron. Mr Lambert stressed the CBI’s apolitical nature but his comments mark a significant shift by the business community.

Now the socialists will say that the CBI always side with capital and the bosses, although that didn't stop them appointing former CBI DG and of world's most boring after dinners peakers, Digby Jones, to the Labour Cabinet, but Mr Lambert is a different kettle of fish.

Having studied history at Balliol College, Oxford, Lambert joined the Financial Times in 1966. He edited the Lex column in the 1970s, becoming financial editor in 1979. In 1982 he moved to New York as the bureau chief, returning to the UK a year later as deputy editor. He became editor of the Financial Times in 1991 and during his 10 years in this role launched the US version of the newspaper.

He was a member of the Bank of England's Monetary Policy Committee from Spring 2003 until Spring 2006, after which he took up the post of director-general of the CBI in July 2006.

So an experienced business and well respected business writer and one of the former senior monetary economic advisors, says that the government is spending far too much. But given his acknowledged expertise, he would say that.

Thursday, 19 November 2009

Who on earth is Cathy Ashton?

There was a time when I though that the EU was a good thing because of free trade, movement of goods, freedom of movement employment etc, and those still are good points, but over the years, there are many aspects, including the lack of accountability, fraud, wastefulness etc that have made me realise the seamier side of the EU. To that we can add a story from the FT that a likely contender for the Brussels Grand High-Poobah for Dealings with Foreigners is none other than the British EU Commissioner.

For the benefit of any foreign readers who have not heard of this woman, here is her potted political biography:

From 1983-89 she was Director of Business in the Community working with business to tackle inequality, and established the Employers’ Forum on Disability, Opportunity Now, and the Windsor Fellowship. She chaired the Health Authority in Hertfordshire from 1998 to 2001, and her childrens' school governing body, and became a Vice President of the National Council for One Parent Families.

She was made a life peer as Baroness Ashton of Upholland in 1999. In June 2001 she was made a Parliamentary Under-Secretary of State in theDepartment for Education and Skills. In 2002 she was appointed minister forSure Start in the same department. In September 2004, she was made a Parliamentary Under-Secretary in the Department for Constitutional Affairs, with responsibilities including the National Archives and the Public Guardianship Office. She was admitted to the Privy Council in 2006, and became Parliamentary Under Secretary of State at the new Ministry of Justice in May 2007. On 28 June 2007 the new Prime Minister, Gordon Brown, appointed her to theCabinet as Leader of the House of Lords and Lord President of the Council. On 3 October 2008, she was nominated as the UK's European Commissioner in the European Commission.

But as far as anybody can tell she has never stood for election to any public office. I thought we were supposed to be living in a democracy. If this appointment goes through we can clearly claim to have unelected political leaders.

"Today my bird flew away" (October Song)

October is never a great month. It is when the weather starts to get cold, the nights are noticeably darker and it just has that bad feeling about it. But this year it has the added badness of being the worst ever October for the government finance, suffering a much bigger than expected shortfall of £11.4 bn, according to the ONS. The official national debt, you know, the one with all the unpleasant bits taken out, soared to 59.2% of gross domestic product in October, the highest since records began in 1974/75.

Worse still, the Bank of England has reported that the flow of lending to British businesses contracted for an eighth consecutive month in September as firms continued to use funds raised on capital markets to pay down bank debt. The central bank's Trends in Lending report showed lending to businesses fell by £4.6bn in September. That was more than the £1.1bn contraction in August but less than the record £15.6bn contraction in July of this year.

Even worse for the government, but good news of sorts for those of us still living in the land of the sane the OECD has warned Alistair Darling that he cannot afford pre-election a giveaway.

What the government will do is publish a draft Fiscal Responsibility Act, which given its record in mangling the public finances is like asking Fred West and Dr Crippen to have a bash at knocking out a redraft of the Offences against the Person Act.

Sunday, 15 November 2009

Empty thinking on empty houses

Part 2 of the TUC's suggestion for the pre-Budget report reported in the Observer nearly gets to a good idea. You may remember the first part where they suggested the rather stupid idea of taxing bank transfers at 0.05%, which sounds like a good idea until you think about it and realise that this wipes out the sterling money markets for up to 30 days, which would have been the major source of their putative revenue.

The next idea is to charge five time sthe rate of council tax on empty properties. This they say will raise £5 billion and resolve housing shortages. Well not so fast. You can't have it both ways. Either it raises taxes or it doesn't. But they haven't really figured this one out because this would appear to clobber second homes that are left devoid of furniture, but not those that are furnished. Such as MPs second homes which are still going to be with us for the next 5 years, although claims for Council tax.

Then the Observer says "It would like to see overseas landlords charged UK income tax on rental payments unless they can prove they are paying it in their home country." It is the TUC. Which doesn't sound right because overseas landlords already get to pay tax on their Schedule A income. The problem is that they gear up so much that with any expenditure on fixtures and fittings deducted as capital allowances, they probably don't pay a whole lot of UK tax. In fact they probably nly get to report a significant profit when they sell the property - which is outside the scope of UK tax although the TUC didn't go that far.

The TUC, or rather their tax advisor who has paranoid delusions about tax secrecy, ants to break the corporate veil of many offshore landlords because he thinks they are controlled by UK entities. He may be right, but instead of doing battle with foreign jurisdictions, the easiest way to do combat any problems is to put the gain on sale into the UK charge to tax, irrespective of the location of the vendor.

That is generally what happens elsewhere and is consistent with most of the tax treaties we have in place which allow the state in which property is located to tax any income from real property, but the UK perversely treats the income from the sale as capital. By contrast, for example, the US-Canadian treaty is very specific: The provisions of [paragraph] shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property. And of course most of these overseas investors are not in a country that has a double taxation treaty with the UK..

And it is not difficult to ensure the tax gets paid. UK tax law could be amended so that the sale of a building buy a non-resident would create an automatic first priority tax lien on the property. If the purchaser contracted to buy the building free and clear of all liens it would be up to the vendor to provide for those taxes so that the liens were lifted.

So close, TUC, but no cigar and no [Vic] Feather in your cap.

Saturday, 14 November 2009

Looking over the wall with rose-tinted spectacles

If you have never heard of him, Seumas Milne is a Guardian columnist and associate editor, and frequent writer of over the top political articles of a nature that would have been familiar to readers of the Morning Star.

This week Seumas has manage to out do himself once again. This time it is on the subject ofEast Germany before the Berlin Wall came down. According to Seumas, the German Democratic Republic wasn't all it was made out to be in the West. In fact it was a "country of full employment, social equality, cheap housing, transport and culture, one of the best childcare systems in the world, and greater freedom in the workplace than most employees enjoy in today's Germany."

Yup, pull the other one Seumas. It was the home of the Trabant and the Wartburg at a time when their western cousins were producing Mercedes, BMWs, Audis, Volkswagens and Porsches. It was also the home of the Stasi. Please remind us how many West Germans were shot trying to escape to the East.

Not that you would have appreciated that because while East Germans suffered oppression from the communists that you revered, you were growing up in a large house on Holland Park Avenue, sent to a prep school in leafy Kent and followed your father (DG of the BBC) and elder brother to Winchester College (current fees £27,405 per annum) and then to Balliol College, Oxford.

Not exactly a man of the people, when he was a young man he thought it was perfectly acceptable to where a lapel badge celebrating Mao Tse Tung, even after Mao had been responsible for the public execution of millions of landlords in the 1950's, the oppression of political opponents in the three-anti/five-anti campaigns and the Yan'an Rectification Movement, and the maladministration an appropriation of grain for party cadres that led to the Great Chinese Famine and millions of deaths.

But familiarity with reality was never a prerequisite for politicians on the left.

Friday, 13 November 2009

We're all going on a Spanish holiday

I never rated Iberia as an airline. It wasn't just about the last time I flew with them, when their cabin crew allowed their off-duty colleagues to smoke in the non-smoking section of Business Class. I think it was more to do with their FD of about 15 years ago. I went to a meeting in Madrid full of bankers, lawyers and advisers who had all flown into Madrid from London to finalise a deal that had been under negotiation for months. The Iberia FD strutted in, preening himself like a matador. He listened to the lawyer who went through the major terms of the deal and then said "No, this is all to difficult, let's do it my way."

So everybody stood up and went home.

Now we have British Airways, formerly the world's favourite airline but now a shadow of its former self has agreed a merger of equals with the Spaniards. Well, not quite equals. There will be a 55:45 split of the shares in the new company in favour of BA shareholders. It is a sign of the decline in the value of BA that that ratio is not the 75:25 or 67:33 that it would have been a few years ago, and that is due to the egregious management and poor strategy of its current boss.

However, there is still a large stumbling block to the deal in the deficit in the BA pension fund. The two BA pension funds are substantial, but the deficit is also a very significant deficit of around £2.5 billion plus or minus a few hundred million depending on whose valuation you go with. Amazingly, BA and Iberia have signed their MOU subject to satisfactory resolution of the issue.

One view is that the trustees may be prevailed upon to revalue the fund using a lower discount rate and thus reduce the deficit to a figure acceptable to Iberia. The theory might be that without the merger BA and hence the pension fund would be in more trouble so the trustees may choose to revalue the fund to ensure the deal goes though.

Which is another failure on the part of Willie Walsh. The trustees would be negligent if they overvalued the fund simply to facilitate a merger. If Walsh wants to push the deal through he should announce a pre-merger rights issue to plug the gap and satisfy Iberia. The pitch to the equity markets would be that the investment would lead to synergistic cost savings, plus the value of reduced future pension fund contributions that the company would have to make at some point.

Asked what would happen if agreement could not be reached on the pension fund, Walsh said the issue was entirely hypothetical. Well it isn't. The BA pension fund deficit is real, and it is an obstacle to the merger. Rather than solve the issue, Walsh has simply pushed the matter over to the trustees, because it is too difficult for him.

Don't be surprised if, this time, it is the Spaniards who pack their bags and go home.

Thursday, 12 November 2009

New Labour, new media, pneumonia

According to various media reports Gordon Brown called Rupert Murdoch earlier this week to complain about bullying in The Sun’s campaign against the government’s handling of the Afghanistan war. Whilst some may see the irony, the prime minister’s phone call to his old boss the NewsCorp chairman underlines the rapid deterioration in relations between the government and the Murdoch media group.

Murdoch clearly saw the writing on the wall for the Labour Party and jumped ship. Meanwhile over at the Guardian they have announced 10% job cuts as they try to reduce the £61m loss that they accumulated last year. Unless they were paying each of those staff £400k they are unlikely to wipe out their losses with that level of cuts and matters are only going to get worse if the Conservatives win power and cut the Guardian's primary source of advertising revenue by scaling back on public sector recruitment advertising. Clearly times are not good for the wood pulp based commentariat and Labour risks losing its loudest mouthpiece.

Of course it would have helped the Guardian's readership numbers if they avoided such pisspoor opinionated articles such as last Saturday's telling the world how unattractive the Lloyds rights issue was. Clearly the world does not read the Guardian for its financial insights because today we hear that the Lloyds rights issue has been increased to satisfy demand.

But enough of the Guardian's problems. Unlike Murdoch they do not have the flexibility to switch sides, but also unlike Murdoch they never had any leverage over the Labour Party. Guardian readers were mostly in the bag for Blair, but Sun readers needed to be convinced, but there may be even more to it than that.

I used to work in the city with Jon Norton, late husband of the late Mo Mowlem, before and during the '97 election. He he told me at the time that the then Labour Shadow Cabinet were terrified about a story coming out about Blair and a woman, probably Anji Hunter, from when TB and pals paid a trip to Murdoch in Australia in 1996 to talk about how Murdoch could stitch up the election for Labour. According to Mr Norton, Murdoch's henchmen saw Blair and Hunter, um, "frolicking" in or beside Murdoch's pool and caught it on video.

I have no evidence that this is true but at the time I was told the story the sainted Mo was in the Blair inner clique, and when I repeated this juicy morsel at a dinner in a London Club, one of my fellow diners said he didn't believe it, but he had "friends in Fleet Street" and would check it out. Sure enough, the story was apparently well known on the Street of Shame and probably true.

Then again another husband of a Labour government minister told me that his brother-in-law and tennis partner, Alan Rusbridger of the Grauniad, lunched with Spedding (MI5) and Dearlove (MI6) in early 2003 who told him they didn't have a clue why we were going to war with Iraq. Doubtless they told him full well knowing that it would never be printed.

P.S. I love to watch the ISP's that turn up in the log after a post like this.

Why the left is too stupid to govern

The TUC has decided that bankers need to be punished, so they have started writing their submission to this year's PBR.

Their idea is simple. Place a 5bp (0.05%) tax on every payment that goes through the Clearing House Automated Payment System (CHAPS). This they confidently assert means that the government will raise £37 billion in taxes.

Problem #1: If they raise that much tax, more than all the UK banks' profits in even the good years, then either the banks will lose capital or they will have to pass the cost onto their customers, probably the latter. If it is the former then the tax is a de facto nationalisation, although even this government says they don't want to be in banking.

Problem #2: A 5 bp tax might not seem very much, but if you are a bank or a big corporation that actively manages its cash, it is a bit of a bummer. If a company moves £100 m to an overnight deposit at 5%, they will earn 5%/365 or about 1.3 bp (£13,000). The trouble is they will pay £50,000 for the transfer, and if they want it back the next day that is another £50,000, compared with the £50 or so it would have cost for the 2 CHAPS transfers. So you can forget about the overnight sterling market, or in fact anything up to 7 days if you want to make a deposit at a profit.

If you are prepared to lock up your money for 30 days it gets better. You only lose 25% of your interest in tax, which kind of wrecks the short term money markets and because of that there is no effective market for 90 day deposits because where does a bank place its money overnight when it is looking for a home for its excess cash if it can't place it all on 3 month deposits? So forget sterling denominated floating rate lending.

In fact forget UK firms keeping their excess cash in sterling or in UK based treasuries. If they want to hedge sterling positions they can do that offshore and in other currencies. In fact there might even be a new dollar or euro denominated market for hedging sterling risks.

Problem #3: And probably the most significant is the fact that most of this tax is premised on the very large size of payments that pass through the system. Many of these payments are gross payments for settlement of margin exposures between banks. The cost of CHAPS is fixed so the banks don't care about the size of the amounts they transfer, but with a change in procedures the amounts could be reduced. For example, assume that the interest swaps desk at RBS holds an in the money cash collateralised swap with Barclays. Barclays are required to post cash with RBS as collateral. At the same time another part of Barclays holds an in the money cash collateralised CDS with RBS. Margin on that is also posted through CHAPS and for ease of administration and general simplicity they are sent gross.

If the cost of the CHAPS transaction became dependent on the amount transmitted, then whichever bank was responsible for the net amount would simply remit that amount under a bilateral netting arrangement and the banks would agree internally about the allocation of payments to cover collateral. That is a bit messy, but worth doing to save most of £30 billion.

Of course we would fully expect the lunatics on the left to then cry "tax avoidance" and then impute a tax on a payment that they consider should have been made but wasn't. At which point we see how pogroms, reigns of terror and great marches get started.

Frogs in murky waters

According to the Tuesday edition of what the Sun would call pinko-frog daily rag 'Liberation', Pakistan President Asif Ali Zardari allegedly received millions of dollars in kickbacks for the purchase of three French submarines for the Pakistani Navy in 1994.

The paper that Zardari received $4.3 million in kickbacks from the sale of three Agosta-90 submarines for 825 million euros (currently $1.23 billion). In addition, investigators are reported to believe that the non-payment of the full amount of the agreed kickbacks may have led to the deaths of 11 French nationals in a 2002 terror attack in the port city of Karachi.

A spokesman for the Pakistani government said the purchase of equipment by the Armed Forces of Pakistan is done through a proper competitive process under the supervision of the Ministry of Defence. No doubt, but with only a 30 bp fee it sounds like there wasn't much competition.

The spokesman pointed out that Mr. Zardari was neither the President nor the Prime Minister nor the Defence Minister when the submarines were purchased, which is quite cute, because at the time the Prime Minister was his wife.

Meet the new boss; same as the old boss

It wasn't all that long ago that eyebrows were raised here about the remunerations package at RBS for Sir Philip Hampton, who somewhat strangely for a non-executive chairman was being given an executive-style pay package of £750,000 salary and £1.5 million in options. This we were told was on the understanding that his job at RBS would be full time.

RBS said at the time: “Philip Hampton’s reward package is designed to align his own interests firmly with the long-term interests of all our shareholders. It reflects the scale and complexity of the job he agreed to do at a critical time for the company.

Some of the remaining 16% minority shareholders are protesting that Sir Philip Hampton has just taken a non-executive board position at Anglo American in addition to his supposedly full-time role at RBS. Of course RBS and UKFI were both consulted about Sir Philip’s new job, but unlike the other shareholders they don't seem to think there is much to bother about.

One might well ask with whose interest Sir Philip is now aligned? Could it be that he sees little value in am option to buy RBS shares at 30p, particularly after the value of those option rights have been watered down by the latest share issue?

The outside shareholders have been sat on, but the people getting hit with 84% of the cost of this bad deal are of course, once again, the tax payers.

Wednesday, 11 November 2009

Don't buy what you don't understand

It seems like less than 3 months ago that Robert Benmosche went on holiday for a month to his palatial villa in Croatia, a week after joining AIG as CEO, coming out of retirement to do so. That's because it was less than three months ago. Now he says he wants to quit because of the hassle he is getting from the government over paying market wages to his staff.

This is a fine example of the problems that governments get into when they bail out commercial companies and in particular banks and other financial institutions. This is over and above the "moral hazard" whereby a bank can act recklessly in search of higher profits knowing that the government will bail them out if it goes disastrously wrong.

This is the problem that once the government has sunk tax payers cash into the company as risk capital to rebuild the company, they are unlikely to be able to change the corporate culture and return the company to profitability. Bear in mind that the company that requires government support was probably not running an effective strategy and any recent profits may have been largely illusory on the bass that there were vast exposures that were not accurately recorded in the accounts (although technically probably not misstated).

The two options are broadly, to keep the same culture and competitive salaries and risk another failure, or to impose government constraints on pay and other practises and risk seeing all of the talented employees hired away. Either way the government stands to lose its shirt. This isn't like nationalising a naval shipyard that can be bolstered with a long-term order book. This is about putting cash into the most volatile industry in the world, where billions can be lost in an instant.

The lesson is that we don't want banks that are too big to fail because governments don't know how to manage them once they have been kept from failing. Now, on top of their problems, the US government may have to find a replacement for Mr Benmosche.

Tuesday, 10 November 2009

Barclays results - yet more smoke and mirrors

Remember the curious asset sale by Barclays to an SPV called Protium reported here? The idea behind this scamtransaction was purportedly to "smoothe profits" by transferring asses that had to be marked-to-market into a company that was 97% funded by a loan from Barclays, the loan being recorded at historic values subject to future impairment valuations.

It turns out that in the Barclays 3rd quarter numbers out today, we see another advantage. The very sensitive values for securities held by Barclays backed by monoline insurers and other crud have all been drastically reduced, becuase they are all sitting in Protium Finance LP. There is no separate breakdown of loans made by Barclays to thinly capitalised companies holding cruddy assets, so as far as reporting goes, these exposures have gone. Ha, ha!

But then Barclays baffles us all by including valuations of assets held by the supposedly independent and unconsolidated Protium Finance. There is some speculation that Barclays have avoided being required to consolidate Protium under IAS 39 because Barclays retain all of the downside risk in the company through the loan but they have given away any upside and hence are able to deconsolidate under IAS even if they can't do the same under US GAAP.

True and fair? Pull the other one.

BBC spin machine jumps into action

BBC Radio4 excelled itself in its support for the government this morning. They duly reported that David Cameron will announce Conservative policy measures designed to get people back into work, which would include the retention of transitional benefit payments, but no more detail than that. Of course the BBC hasn't seen the plans, but then neither had the Labour Party, but none of that was going to stop the reporting of the instant government reaction that this was a resturnn to Thatcherism.

For £60 million a week, the licence fee payer deserves a higher standard of journalism and editing.

Monday, 9 November 2009

Well that didn't last long

On Saturday Gordon Brown told G20 finance ministers meeting in St Andrews that a tax was the best form of defence against a failed banking system. The other ministers, who saw that the problem was largely a result of failed regulation and the solution was no to give more money to the government (the cost of which would be passed on to customers, but better regulation.

The idea was attacked by the US, Canada, Russia, the International Monetary Fund and the European Central Bank, so the next day, Brown backed down. End of story.And so it should be, because the Tobin tax was not conceived as a form of insurance, but rather as a levy on currency transactions in 1971 in order to reduce the volume of speculative trading which was thought to increase currency price volatility.

A Tobin tax on banking transactions in general would only increase margins. Price volatility is not the issue, so the idea will not solve the problem.

Lord Turner thinks it will shrink the financial sector, but in reality it will only reduce the size of the finanicla sector by reducing the demand for products. Mr Brown on the other hand thinks it will help to build up funds to pay for future bail-outs, but sincec (a) he has never saved and revenue in recent years, (b) he doesn't know when the next bail-out will be required and thus how much revenue has been set aside and (c) he doesn't know how much will be required, the whole exercise looks like a non-starter. The better solution has always been to improve regulation.

Saturday, 7 November 2009

RBS and stranger danger

Although £70 billion or thereabouts has been shovelled into RBS in our name, we the tax paying public know remarkably little about what we have bought, or more precisely, what the risks are in getting our money back out of the assets we have bought.

The stated purpose for the bailout is to protect deposits from UK depositors so that the entire UK financial systems does not collapse, but the UK tax payer might well ask whose interests they are really protecting. Who for example benefits from the cash that is contributed by the UK government. Well one way of looking at the issue is the identity of the borrowers whose loans are written off. OK they may be bust, but it is to their benefit that the loans are written off. Alternatively, where the loan is against real estate, the beneficiaries might be said to be the developers or sellers who got paid top dollar for their property by the buyer financed by RBS.

So where are these risky assets? Are they in the UK or elsewhere? The short answer is that RBS aren't telling. They list the source of many of the assets on which they have taken writedowns as being UK retail, US commercial loans, but large volumes are simply designated as losses from "Global Markets". For example, 87% of writedowns taken from the non-core division (i.e. the part they expect most of the losses to occur) come from Global Markets rather than specifically from the UK, Ulster or the US.

The interim statement is less than clear on the matter.

Similarly £160 billion of the approximately £240 billion of assets covered by the Asset Protection Scheme come from Global Markets or the non-core division. And that is just the dodgy part of the business. We have no idea how much non-UK risk has been assumed in our name, either through the APS or by the share purchase, but two things we can be sure about. First it is more than we are being told and second, neither the FSA nor the Treasury have any idea about the riskiness of the assets they have bought.

Thursday, 5 November 2009

Personally I blame it all on Tie Rack

That is to say the entire banking crisis, at least the London end of it.

And why is that? Look back forty or even thirty years ago, and the London financial markets were very clearly delineated. On the one hand there were the merchant banks, largely filled with public school and Oxbridge graduates, or perhaps former Guards officers or plain old Etonians without a university education but buckets of "polish" and family contacts, which came in useful when putting a deal together or looking for some assets to manage.

On the other hand, there were the staid commercial banks, largely populated by a less flashy class, but more conservative looking. As one merchant banker put it, "They live off their deposits, while we live off our wits". Things were different in the boardrooms, with banking families, such as the Bevans, Tukes, Peases, Lamberts, Seebohms, Gurneys and Trittons who ran Barclays and were a class apart from the rest of the management and staff.

Stockbroking and other trading firms were run by an alliance of old money and East End traders, Sloane Rangers and barrow boys to use two cliches. The most obvious difference between the two sides of the city, apart from the overbrimming self-confidence and upper-middle class habits and mores of the merchant bankers, was the attire. The merchant bankers wore tailored suits with the distinctive double cuff Bengal stripe shirts that could only be bought from Jermyn Street or one of the pokey little tailors' shops tucked away in some corner of the City. The merchant banker had worn these shirts from an early age, not least because the tailors had branches in Eton High Street. And then there was the crucial silk tie, often a Hermes classic, but also other similarly understated but reassuringly expensive neckwear.

The commercial banker, on the other hand, bought his suits ready made from Burton's, Hepworth's, Dunn's and Austin Reed, with a choice of shirts that were altogether less striking in colour and design, mostly plain whites and plain pale blues, and ties that could have passed as curtain material.

But round about the same time as Big Bang, there was Tie Rack. Suddenly every bank clerk and messenger boy could afford to wrap some silk around their necks, and while the material creased and the day-glo colours could cause retinal damage at twenty metres, the course was set. Soon commercial bankers were sampling the delights of mail order shirts from firms in Northumberland who normally advertised in the back pages of the Telegraph, and it wasn't long before these companies grew into the James Meades, Charles Tyrwhitts and T.M.Lewins of later years. Bankers embraced the Gordon Gekko look, and while the shirts from Pink never had the luxurious feel of a Harvie & Hudson, at a distance, the two were increasingly indistinguishable. Suddenly everyone was an "investment banker" and even the back office might turn up in a $150 French silk tie emblazoned with horseshoes, snaffles and stirrups

So what has that got to do with credit default swaps, securitisation and the credit crunch? Well quite a lot actually. In days BTR (Before Tie Rack), commercial bankers were staid and conservative. Merchant bankers talked flashy talk but didn't have much capital to play with. Then cash rich commercial bankers decided that instead of lending prudently to brokers and traders they could incorporate those businesses into their own. Rather than playing patsy to some merchant banker's fancy ideas, they could run their own merchant banking business or buy into one.

At first the merchant bankers resisted, stressing the value of their independence to their customers, but when they realised that the rest of the world thought they were nothing more than fast talking snake oil salesmen, they changed their perspective and told the world how much extra value they could add if only they were permitted access to a tame bank's capital, which is how such names as S.G.Warburg, Morgan Grenfell, Kleinwort Benson and Cazenove came to be owned by banks.

Meanwhile the clearing banks who hadn't bought much in the way of merchant banks, or where they had (Barclays, Midland), had adsorbed the merchant bank into the rest of the business, started their own "investment banks". After all, they had the same shirts and ties and surely that was the main qualification for being an investment banker. Some of them even wore braces, and the top traders, particularly those who inflated up their measured performance with tax deals, might even have a Saville Row tailor come in to measure them up for a suit in their offices.

The roots of the banking crisis lie in letting the people with the racy ideas control the banks' capital, with the bill for their mistakes passed to the tax payer. It didn't used to be this way, and I think we can put the blame for today's malaise on the purveyors of low-priced silk neckwear from a quarter of a century ago.

Wednesday, 4 November 2009

FT not fooled

"If it walks and quacks like a bail-out, is it a bail-out? With an injection of up to £37bn into Royal Bank of Scotland and Lloyds Banking Group, the UK Treasury says 'likely costs to the taxpayers and the risks [to] the public finances have been reduced'. That is an admirable feat of redescription."

So starts the editorial of the FT today, echoing the instant reaction here 24 hours earlier. If Mr Darling can be said to have achieved anything in his career, it must be that he managed to make a statement to parliament on the "restructuring" of UK government owned banks without mentioning the seemingly trivial matter of the £37 billion of tax payers money that he was "investing". After all what is £37 billion these days?

It takes an extraordinary perversity of logic (for that read "level of dishonesty") to claim that future costs to the tax payer have been reduced by taking the steps that had been taken, without actually mentioning the costs that had been incurred in taking those steps.

The other pink'un also picked up on the pint made here 24 hours ago that the RBS position is largely smoke and mirrors.

"The APS will still cover assets owned by RBS – although a smaller pool, and with a greater share of potential losses borne by the bank before the insurance kicks in..... Yet taxpayers are offloading less risk than meets the eye. Risk-sharing with private investors in RBS can only be minimal with the government’s economic interest at 84 per cent."

Tuesday, 3 November 2009

Radical spin operation underway

Ministers and BBC got busy this morning briefing the press about radical changes to the banking system. Lloyds and RBS are going to sell of "major parts of their businesses", including bits that you have either never heard of, or thought had ceased to exist long ago. All in all, according to ministers, this amounts to a major restructuring of the UK financial system.

Complete tosh, of course. Magicians call it "distraction". What they don't want you to focus on too much is the fact that the government is putting an extra £3.1 billion net into Lloyds and a massive £25 billion into RBS with a further £8 billion of standby equity, er, just in case. That amounts to as much as the government spent when they took over RBS in the first place.

On top of that the tax payer will take on £282 billion of toxic assets, but since the government will now own 84% of RBS, this might seem largely immaterial. Well no. Before the government took on the assets under GAPS the tax payer was protected by the limited liability of the banks and could in theory have walked away if the whole company had collapsed.

The taxpayer now has £65 billion of cash invested in RBS, £8 billion of cash committed to be invested in RBS if the bank requires it and £282 billion of assets that the tax payer is underwriting. In addition the Treasury has agreed to remove the restriction on claiming tax losses that it had agreed with RBS in February. I thought that wouldn't last long.

One item that Lloyds shareholders might be interestd in is the fact that RBS will pay £700 million per year for their asset protection, dropping to £500 million, whereas Lloyds were charged £2.5 billion for 6 months guarantees that were never actually agreed or put in place. Alternatively tax payers might be interested to know why RBS were being charged so little, effectively 10 times less.

But you want to hear the really good bit of spin? The Treasury and RBS agreed that the RBS first loss on the APS scheme would be increased from £42 billion to £60 billion, but with the government's stake increasing from 70% to 84%, that actually means the loss picked up by outside shareholders decreases from £12.6 billion to £9.6 billion. Or in other words, another £3 billion of risk for the tax payer.

Monday, 2 November 2009

How many "partners" do you have?

If there is one modern business term that I despise, it is the use of the word “leadership” when the speaker actually means “management”. I never rate managers by their leadership, but I might judge them according to their followership.

A close second is the patronising term “our people”, which is meant to mean the staff employed by a company. Actually they are not “your” people. They are the people who pro tem you employ, and who when the occasion suits you may well throw out on the scrap heap, but more likely they will simply decide they don’t want to be known as “your people” any more, and leave. They know it and so do you, so stop pretending.

But right up there is the word “partner”, often used by technology companies to exaggerate their relationships with suppliers, customers or shareholders who might flood the company with cash if business takes off but are much more likely to walk away when it burns. Get this straight, a partner is another company that enters into a joint venture with you with a view to sharing the profits with you. It is not a supplier or a customer whose interests are fundamentally different. What you save from your contract costs them money, and vice versa.

So when I read this part of Ryanair’s profit announcement this morning, my toes were curling.

I regret to report that we have made little progress in our discussions with Boeing for an order of 200 aircraft for delivery between 2013 and 2016. We won’t continue these discussions indefinitely and have signalled to Boeing that if they are not completed before the year end, then Ryanair will end its relationship with Boeing and confirm a series of order deferrals and cancellations. We see no point in continuing to grow rapidly in a declining yield environment, where our main aircraft partner is unwilling to play its part in our cost reduction programme by passing on some of the enormous savings which Boeing have enjoyed both from suppliers and more efficient manufacturing in recent years.

We would prefer to grow, but if Boeing doesn’t share our vision, then I believe that Ryanair should change course before the end of this fiscal year and manage the airline over the next three years to maximise cash for distribution to shareholders. If we cannot invest our surplus cash efficiently in new aircraft, then we should distribute it to shareholders.

For all Michael O’Leary’s bluster, I wonder whether Boeing really consider themselves to be his "partner". Indeed we can conly speculate whether they just see this as a preamble to a climbdown. Ryanair already operate 210 leased planes with a further 109 to be delivered before the end of 2012. The orders he referred to were a further 2000 to be delivered between 2013 and 2016. 150% growth over 7 years. That’s 14% annual continuous growth of a fleet that is already bigger than BA, although traffic at many Irish and UK airports has slumped, with Ireland facing a decline of 15% of its air traffic, and the UK set to lose almost 10% of its traffic according to the airline. Very easy then for Boeing not to share the vision of their “partner”. Particularly when “sharing a vision” really means “dropping prices”.

And don’t get me started on domains and spaces. These people know no maths.

The Pink Pravda

UK manufacturing hits two-year high

or so runs the headline on one of the articles in the FT. They gush further:

"British manufacturing rebounded in October to its highest level in two years, with the month-on-month gain in the headline reading of a key survey rising at a near-record rate."

So is output storming ahead as the headline implies? It turns out that this is only the CIPS/Market UK manufacturing survey of purchasing managers rose to 53.7, back above the 50.0 no-change mark. The 3.8 percentage point gain on September’s output is the survey’s third-highest one-month rise on record.

“It appears that the manufacturing sector has turned a corner and is starting to pull itself out of recession,” said David Noble, chief executive at the Chartered Institute of Purchasing and Supply, which sponsors the survey.

But digging a little deeper we find that companies have restarted some production lines, which is good, while clients were moving closer to restocking after a sustained period of running down inventories. And then we remember that a large part of the recession in manufacturing entailed a running down of inventories, so this is just the bottoming out of the run down of inventories, or perhaps the bottom of the recession. It doesn't necessarily imply unlimited continuing growth.

The survey also found a sharp rise in the number of companies reporting increases in input prices. A balance of 57.56 per cent more of those surveyed reported input prices rising rather than falling. A reading of 50.0 indicates that on balance as many of those surveyed see conditions improving as deteriorating, meaning no change in business overall.

Actually this is just plain misleading. The 57.56 per cent (more than what?) of purchasing managers reporting higher input prices has nothing to do with the 50.0 reading for the survey, but juxtaposing the two gives the impression that this is good news. In reality it is probably bad news resulting from a weaker exchange rate, but the FT won't let that get in the way of a good story.

Vampire squid squeezes Fannie Mae

You couldn't make this up. According to the WSJ, Goldman Sachs is in talks to buy millions of dollars of tax credits from government-controlled mortgage giant Fannie Mae. The tax credits are an incentive in US federal law designed to encourage spur investments in low-income housing. The law allows investors to receive tax credits for financing qualified housing developments. These credits tend to be drawn out over periods such as 10 years, and are attractive to companies that know they will be profitable during that span.

The trouble for Fannie Mae is that they lost $37.9 billion in the first six months of 2009 and the US Treasury has invested a combined $96 billion in Fannie Mae and Freddie Mac since the companies were taken over in September 2008. Eventually Fannie Mae will earn enough to wipe out all the losses it is carrying forward, but that time is so far out that the economic value of the tax credits, which can be used to reduce a tax liability but not increase a loss, will be miniscule.

Hence it make sense for Fannie Mae to sell the credits to a tax payer like Goldman Sachs who can use them now rather than in 15 years time. Actually what they may have to do is sell a company geared to the eyeballs with debt with all the free cash stripped out but effectively just the credits remaining. In 2007 Citigroup Inc.'s bank division bought a $676 million portfolio from Fannie Mae, consisting of funds owning 382 properties with 31,050 rental units.

Of course Goldman Sachs need to be incentivised to do this, and the incentive would be that they buy the tax credits at a considerable discount to their face value, although not as high a discount as the implied value to Fannie Mae if they hold them for 15 years. Nevertheless, the price will be high enough to convince the board of Fannie Mae that it is in the best interests of the company to do so.

But of course, not in the best interests of the US tax payer, who will see tax receipts from Goldman Sachs reduced by the full value of the credits. Some of that value will end up bolstering Fannie Mae, but the remainder, and probably the greater part, will end up bolstering the bonus pool at Goldman.


I have posted before about some of the ludicrous guff that comes from the pen of Will Hutton, but at the risk of boring you again I will point out this weekend's polemic in the Observer Guardian, where he seeks to question the doctrine that the private sector proides a better service than the public sector.

The article starts by comparing the service Mr Hutton gets from Virgin Internet with the service that he gets from his local GP surgery. He then goes on to criticise HSBC for calling him to enquire about his son's finances, clearly oblivious to the fact that his son has left his father's number as a contact, but let us leave that aside.

Yes, Mr Hutton, the service at your local GP surgery might be better than the service you get from Virgin, but lest you are in any doubt, they are both private businesses, and all the decisions about how you are served are made by private businessmen and women, some of whom happen to be doctors. It just happens that your local GP surgery is paid for by the bounty of the NHS, whereas the Virgin service that you choose to subscribe to has to compete on many factors, including price, to provide the service you require.

Then Hutton complains about the sloppiness of BAE Systems and Qinetiq in the Nimrod crash, conveniently downplaying the equivalent blame handed out by Mr Haddon-Cave QC to the RAF and the MOD. All government suppliers are often too close to government, but the relationship is often reciprocal, and I often question whether the best interests of either shareholders or tax payers are best served.

But then Hutton, supposedly an economist, criticises the level of service from Ryanair, and in particular the delay that he suffered when a flight he was due to take from Luton was delayed because an engineer had to be flown in from Ireland to fix the plane. Well, that Mr Hutton is what you get when you buy a cheap plane ticket. If you don't want to walk over the airside tarmac with your bags to the plane, be bombarded with adverts, have to fight to get to an unreserved seat, pay £5 for a sandwich and suffer the possibility of long delays when inbound aircraft are delayed on their hectic schedule, and land within 50 miles of your destination, then go with British Airways, but it may cost you three times as much.

And that is the nub of the problem. Hutton fails to appreciate that while his GP surgery gets lashings of cash from the government and BAE and other defence suppliers have always charged lavishly for their troubles because they know they have the government over a barrel, the rest of the private sector knows that they have to give value for money, or die. As a result, you generally get what you pay for and nothing more, but not much less. Private sector companies that make large profits attract competition, which drives down margins.

Most importantly, unlike government, companies cannot operate at a -40% gross operating margin (£500m revenue, £700m expenditure). It would be wonderful if all companies could trade at a loss and send the bill to our grandchildren, but life doesn't work that way Mr Hutton.

Sunday, 1 November 2009

People who bank with Glass-Steagall houses, don't throw stones

An article in this weekend's Telegraph from Liam Halligan, talks about the need for a separation of investment banking from commercial banking, and adds the name of George Soros to those who want "internal compartments that separate proprietary trading from commercial banking", although in Mr Soros' case, this could well be because proprietary traders such as himself don't necessarily want competitors funded by low cost deposits.

Mr Halligan goes further than the writers on the FT, lambasting what he sees as a conspiracy between politicians and the banks and their lobbyists. He cites Robert Rubin who moved from Goldman Sachs to the Clinton administration and then back out to a post-Glass-Steagall Citigroup where he was paid tens of millions of dollars for his services. He may or may not be right on that point but he demolishes some of the arguments against Glass-Steagall:

The universal banks now argue it's impossible to draw a line between investment and commercial banking. As King says: "It's hard to see why". The reality is that existing regulations already distinguish between different bank functions when determining capital requirements.


"Lehman was a pure investment bank," they say, "and that failed". Yes, but had the entire banking system not been riddled with bad bets and leverage, Lehman's collapse would never have posed even the slightest "systemic danger".

But most importantly, he states the blindingly obvious fact that is ignored by politicians, that proprietary trading and similar risk taking activities can only create systemic danger when commercial banking activities are systemically linked with them, either by lending to them or buy sharing in the same pool of risk capital. Break that link and we do not have to worry about banks that are to big to fail, and that is what was realised in the US in the 1930's.

Thursday, 29 October 2009

The wrath of Randall

Jeff Randall was one of the better financial journalists, but now that he is "editor-at-large" back at the Daily Telegraph, he is able to write on other matters, often politics, and there are time like today's article on Tony Blair's suitability to be EU President when he doesn't pull his punches.

"Mr Blair is a fake, a charlatan, a shameless twister. He is not "a pretty straight sort of guy". Who else would play down his faith lest it be seen as a vote-loser?

And if the quality of one's friends is a guide to personal integrity, Mr Blair's pick of Silvio Berlusconi as a holiday chum tells us a lot. Presented with a choice between luxuriating at someone else's expense and the path of righteousness, Mr Blair grabs the freebie."

Don't hold back, Jeff. Tell us what you really think.

Meanwhile, our German neighbours seem to have the measure of Blair and his chances of getting the backing of his Socialist colleagues in the EU. According to the Sud Deutsche Zeitung: "Gegen null".

Under the headline Sozialdemokraten torpedieren Blair, they say:

Die Chancen des ehemaligen britischen Premiers Tony Blair auf den Posten des Präsidenten des Europäischen Rates tendieren seit Donnerstag gegen null. Beim Treffen der sozialdemokratischen Regierungschefs vor dem Beginn des EU-Gipfels fand der britische Regierungschef Gordon Brown kein Gehör für sein Plädoyer zugunsten seines Vorgängers.

Die sechs anderen sozialdemokratischen Regierungschefs forderten für ihre Partei nun sogar ein ganz anderes Spitzenamt in der EU. Sie beanspruchen den Posten des Hohen Vertreters für die Außen- und Sicherheitspolitik.

Damit ist Blair faktisch aus dem Rennen, denn diese Aufgabe will ihm niemand anvertrauen. Der österreichische Bundeskanzler Werner Faymann, der spanische Ministerpräsident José Luis Rodríguez Zapatero und der Vorsitzende der Europäischen Sozialisten (PSE) Poul Nyrup Rasmussen wurden beauftragt, mit der christlich-konservativen Europäischen Volkspartei (EVP) Gespräche zu führen.

Kroes feat

Writing in the other pink paper John Gapper gives three cheers today to Neelie Kroes, the European Union’s competition commissioner, who he says is one of the few European politicians who understands the way to deal with the problems in the banking system. This comes after a similar article yesterday from John Kay,both of which go against the FT editorials which gave lukewarm support for the FSA/ Turner/ Brown approach of more regulation.

Gapper says that "by insisting on the break-up of the ING Group into its banking and insurance divisions – and on it divesting its US direct savings arm – Ms Kroes set a welcome precedent this week. She made a troublesome too-big-to-fail institution shrink."

Gapper says that there is a growing band of experienced hands following the Masterley line that banks should be broken up into at least 3 parts. That is actually one more than the Masterley approach because I hadn't really considered the insurance businesses found in many continental banks, but the same principles apply, and although I know very little about insurance except how to buy it, they are probably correct.

Along with Ms Kroes and his colleague Mr Kay, Gapper lists central bank governors Mervyn King, Paul Volcker and Alan Greenspan, and John Reed. Gapper says that Reed is an improbable advocate having had a hand in the creation of Citigroup, but Reed grew up in Citibank which was long restricted, but also protected by Glass-Steagall. Some might say he was pushed out by the ravenous hordes who joined Citigroup with Salomon.

Gapper says "Some politicians and regulators have argued that modern-day finance is too complex to be divided and those who suggest such divisions are being simplistic." We know this is hogwash. The attraction of retail deposits to people who want to make money from proprietary trading is obvious, as is the one way bet (heads the banker wins, tails the tax payer loses) that results from deposit guarantees. Separating the two would force the investment banks to raise their own capital and manage it wisely.

As for proposed UK and US bank reforms, Gapper quotes Terry Smith, chief executive of the broker Tullett Prebon and famously an equities analyst at UBS where he published a book debunking prevalent mishievous accounting practices, who says that Brown's plans are “like the designer of the Titanic arguing that the provision of extra lifeboats would solve the problem”.

US out of recession, UK mired in spin

Last week, I remarked that the press was full of reports from a "consensus of analysts" saying that the UK was going to be out of the recession by 9;30 that morning when the ONS announced its figures. All media outlets seemed to have independently cottoned on to the idea that everbody thought the recession was going to be over.

Why would they be so consistent? It turns out not surprisingly that they were all briefed by Labour party hacks, and this was to be a main thrust of the attack on George Osborne who the Labour Party see as a weak link. Op-eds and letters to the FT by Alastair Campbell had been prepared and were all set to go. Shame that nobody chose to get the facts from the ONS (prop. HM Government.

Incompetence doesn't begin to describe it.

Westminster house swap: N/S, no pets

The poor grasp of finance demonstrated by many MP's continues to astound me. They are currently whingeing about the upcoming Kelly report, which aaccording to leaks, will prohibit MPs from claiming interest expense on mortgages to cover the cost of second homes but they will be entitled to claim for the cost of renting a property. Some eagle-eyed observers have pointed out that the rental value of Westminster flats is higher than the mortgage interest cost at present, so they claim that this is not necessarily a good idea.

So we have hundreds of MPs who own flats in Westminster, who are moaning that they may have to sell their flats and lease another. Well not necessarily, they could always lease out their flats, perhaps to another MP and lease in a second flat. There may be plenty of flats available for leasing, probably from other MPs. The income from the flat they lease out covers the interest on the mortgage and the cost of the flat they lease in is reimbursed by the government.

OK, so that still requires MPs to move house, which some may find inconvenient, so why not resort to the old financing trick of the lease and leaseback, a mainstay of many tax and accounting wheezes. The MP owns the the freehold or long lease on a flat which he subleases to a third party, who then leases it back, maybe for a shorter term but perhaps not, it depends what the rules say. The third party leases the flat back to the MP. The MP receives enough rent under the head lease to make the mortgage payments, and the sub-lease payments, which will cover the head lease payments and a profit to the third party, will be reimbursed by the Fees Office.

Laying up treasures in heaven

The Wall Street Journal reported yesterday that Lazard will make a one time charge of $86.5 million in the fourth quarter related to expenses of paying restricted stock unit awards to the late CEO Bruce Wasserstein.

At which point the WSJ article breaks off into how that figure compares with Lazard's quarterly revenues from deal doing etc, which kind of misses the point. Wasserstein was top dog at Lazard and it is not surprising that he should have a big finger in the pie with lots of deferred stock - well not that much compared to his total wealth, but big numbers in absolute terms.

But what kind of crummy accounting is that? Lazard takes a massive one time charge because of accrued stock rights that crystallised when Wasserstein died. Was there a clause in his contract that said he got an extra $86.5 million of stock if he died? Of course there wasn't. That was restricted stock that Wasserstein had earned that was not booked as an expense because it hadn't vested.

So what exactly had to happen for the expense not to arise that meant Lazard didn't have to book it earlier? Is it really kept out of the P&L because the Lazard directors honestly though the CEO might quit and forfeit his $86.5 million? Dream on.

Wednesday, 28 October 2009

Burning other people's money

We know that government's are never good with other people's money, but a story emerging from the US on the AIG bailout takes the biscuit.

The story in brief: Before the NY Federal Reserve stepped in to bail out AIG the chief financial officer for the AIG division that oversaw AIG Financial Products negotiated with banks that had bought $62 billion of credit-default swaps from AIG, trying to persuade the banks to accept discounts of as much as 40% on the amounts due to settle the swaps.

By Sept. 16, 2008, AIG was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York opened an $85 billion credit line for AIG, and took a 77.9% stake in the company and effective control. After less than a week of private negotiations with the banks, the New York Fed told AIG to pay them at par.

The New York Fed’s decision cost AIG, and thus American taxpayers, at least $13 billion. The details of the Federal Reserve's deliberations have not been published. Well you wouldn't expect them to, would you?

Worth mentioning that the chairman of the board of directors ofthe NY Fed at the time was Stephen Friedman, a former chairman of Goldman Sachs. Goldman recovered $14billion from AIG on the swaps, although it was never clear whether Goldman had taken out a CDS as protection against an AIG default and thus got paid out twice.

Tuesday, 27 October 2009

Osborne: right or wrong?

George Osborne has spoken out against bankers taking their bonuses in cash, saying that they should be paid entirely in shares, all but a de minimis figure, probably around £2,000.

"I am today calling on the Treasury and the FSA to combine forces and stop retail banks paying out profits in significant cash bonuses. Full stop. That includes their investment banking arms.Then the cash that would have been paid out should be put onto banks’ balance sheets explicitly to support new lending. This should be a condition of continuing to receive taxpayer guarantees and liquidity support.

Well not quite George. The cash that the banks pay out in bonuses doesn't go anywhere it stays in a bank account, from where it might be spent, but it might be spent, but is generally neutral when it comes to boosting the economy. After all banks have no problem raising cash, even if it is at a price, but if there customers are desperate enough for credit those higher costs can be passed on. So 0/10 for your understanding of finance, on that score.

But that doesn't mean you are wrong. In fact, you have a very good point to make, although if I might make one small technical point, paying bonuses almost entirely in shares is not a good idea unless the bonus recipient is endowed with a large personal fortune, because the bonus will give rise to a tax liability that has to be settled in cash, unless you are suggesting that under a Conservative government the Treasury will accept shares in lieu.

But to get back to the main point, Osborne is right and the several City big beasts rustled together by the FT appear to be no more than an aggregation of free market absolutists and New Labour followers and snipers. The chairman of the IOD is not a City bigwig but a spokesman for a West End based business group representing those people in British business apart from bankers who normally extract the largest annual cash piles so we know where they are coming from.

According to another pink paper Osborne's plan would reduce the value of the state’s multi-billion-pound holdings in the banks, have no impact on the pure investment banks that lie at the heart of the bonus culture, fail to stimulate lending and unfairly disadvantage UK banks against overseas rivals.

Well that's wrong or irrelevant on all four counts, but typical of the shallow thinking that passes for financial journalism these days, so let's take those points one by one.

  1. Forcing the bank to issue shares in lieu of paying bonuses might dilute the government's shareholding but it saves the banks the same amount of cash as the market value of the shares, hence does not reduce the overall value of the government's stake in the company. Moreover, since the banks are currently constrained by a shortage of capital, putting in additional capital allows them to add incremental business against a fixed component of overhead, hence probably increasing profitability and eps. Indeed, we are always told by highly paid board members that large share allocations align their interests with shareholders. As an indirect shareholder through my taxes, I like that idea. And finally if the government really thinks this is a problem, they could require the bank to buy the shares off the government rather than issuing new shares.
  2. It may not have any impact on pure investment banks, none of whom are UK-based (Rothschilds - don't make me laugh), but that is no reason to stop less capable retail banks from pretending they are investment banks and making the same mistakes. A poor straw man argument.
  3. It is completely wrong to say that paying bonuses in shares will not stimulate lending. On the one hand it will ease one barrier to lending (Tier 1 capital shortages), and on the other, if value is tied up in the bank, there is more incentive to lend profitability to produce a return.
  4. As pointed out before, this is hardly likely to disadvantage RBS and Lloyds compared with foreign rivals. So what if a few traders threaten to leave? Where are they going to go when there are thousands out of work who could do the same job, and what makes them think they are anyone special? They could make money for their banks because the bank provided them with capital. The bank pays them a bonus to get them to work. A trader who doesn't need to work for a bank because they can source risk capital from elsewhere is called a hedge fund. Go figure.
So on this point, Osborne is more right than wrong.

Guaranteed to fail?

We all know that QE is not making any difference to the economy. How do we know? Well if the government prints an extra £175 billion of money and GDP still manages to fall by £5.6 billion, it should be fairly obvious that the £175 billion has had no effect.

It isn't to difficult to see why it has no effect. Part of the programme, announced in August was supposed to lend to non-investment grade companies by buying specially issued commercial paper. The purchases would be made against companies’ expected cash receipts from trade receivables, equipment leases and short-term credits to consumers, including credit card loans.

The Bank of England issued its quarterly report on Monday, saying that this particular may have got off to a slow start because borrowers need to create special vehicles to issue commercial paper, which the Bank would then buy.

The Bank also says that market conditions had improved in recent months, possibly reducing demand from companies for ready cash. On the other hand any business you talk to will tell yu that the banks are closed for lending business. Part of the problem is that the BoE will only buy paper issued by vehicles backed by financial assets with no more than nine months to maturity.

So if you think the government will guarantee the credit of small companies read here and weep.

Asset Purchase Facility


This page contains links to the results of individual operations for gilts and corporate bonds, as well as to longer-run time series for each of the APF schemes and facilities.

The table below show the outstanding stock holdings (on a settled basis, net of any redemptions) for each facility. These data are as at close Thursday 22 October 2009.

Commercial Paper
Corporate Bonds
Secured Commercial Paper

Quantitative Easing

A time series showing a running total of the quantity of assets purchased by the creation of central bank reserves is available in the Interactive Database(updated weekly on Fridays).

Commercial paper

Corporate bond


Credit guarantee scheme

No operations have been conducted as yet.

Sunday, 25 October 2009

Blood on the tracks

A driving tip. Apparently, if your car stalls on a level crossing and won't restart, you should be able to get it off the tracks by putting it in gear and trying to start the motor. I have no idea whether this works in practice, but I am reminded of it by the way the governmrnt is handling the downturn/ recession /depression.

Gordon Brown says the battle to prevent a depression was being won and has promised the economy will return to growth by the turn of the year, in his first reaction to news that the UK is still in recession.

His podcast was released on the Number 10 website a day after official figures showed the economy was still shrinking. The prime minister accepted times were tough but said the battle to stop "a second Great Depression" was being won.

Sorry, but I thought we had already been saved from recession, not. The truth is that if the government really wants to they could lift the economy out of recession by playing the game that Brown played before the recession. It was easy to claim zillions of back to back quarters of unbroken GDP growth when he simply put his foot on the spending gas pedal. The problem was that it was largely wasteful spending.

Sure enough he has promised to cut a some point in the future (not that he will be around), but it would be easy to create a upward blip in government spending to push the next quarter into growth, with a later collapse, perhaps by borrowing and spending, perhaps doing nothing more than a few accounting tricks getting PFI schemes to count as government spending or booking the payment of a defence contract in this quarter just to cook the books.

After all finding an extra 0.4% of GDP (£5 billion) can't be hard when the government is already overspending by 15% of GDP. Whatever it is done, it will likely be just enough to get out of the recession for a quarter, before falling into another recession.

Oh, and if you are caught on level crossing, forget the tip above. Just get out of the car and off the tracks as soon as you can.

Saturday, 24 October 2009

Hack hypes hock

Sometimes I really despair of the Guardian, who can't keep up with the delusions of the administration that they ostensibly support. This morning, when they heard the GDP statistics they marvelled that the FTSE hadn't dropped. This they said was a sign that things aren't bad at all. Sorry guys, you will have to do better than that. Do ty to keep up.

First of all we had the news that the FTSE was boosted by mining stocks. There in't a lot of mining in the UK, so this news had nothing to do with he UK economy and everything to do with world commodity prices, possibly connected with the declining value of the pound against the dollar and commodities in general, but that is not the main point.

The main reason the FTSE didn't drop is because it is already overvalued. Does that make sense? No, well then you weren't listening last week when Charlie Bean (of the Bank of England) told the world that the purpose of QE was not to fill the banks with cash, but to raise the value of the assets they held. This would boost their balance sheets and plug them full of Tier 1 equity. [As an aside, if that was the reason, I fail to understand why the BoE didn't simply subscribe for £175m of bank equity paid for in the same way, by printing electronic money transferred into the selling bank's account at the BoE, but I digress].

So QE is all about hyping markets and that spills over into the FTSE. More recession means more QE, and more QE means more cash chasing the same gilts and equity, which means higher asset prices (or lower value of money depending how you look at it). So the economy is still in a mess but the FTSE stays at the same price because the market expects more dodgy government money to be on its way any time soon.