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Wednesday, 30 September 2009

A little technicality

There are press reports that the SFO may press criminal charges over BAE Systems’ arms deals. It seems the company won't roll over and plead guilty, which means that Baroness Scotland, attorney-general, may have to decide whether to proceed with the case. The case involved not only the large Saudi Arabian contracts (now outside the terms of the investigation due to a little Saudi diplomatic pressure, but also reportedly in Tanzania, South Africa, Romania, the Czech Republic and other countries.

A guilty plea on a corruption charge might have serious consequences for BAE. In the worst case it could be excluded from government contracts in the EU and the US. BAE has previously denied bribery and said that it is co-operating with the UK authorities as part of a policy of “allowing the ongoing investigations to run their course”.

If it does come to a conviction, BAe should feel no shame in quoting the Attorney General and saying their conviction was for “a technical offence comparable to not paying the congestion charge”.

The Sun Says: Labour's lost it

I may be one of the few who reads the Sun only for its editorials but this is worthy of wider circulation. The language is deceptively simple, but the universality of the condemnation exhibits a sound intellectual grasp of the situation.

This Labour Government has lost its way. Now it's lost The Sun's support too

TWELVE years ago, Britain was crying out for change from a divided, exhausted Government.

Today we are there again.

In 1997, "New" Labour, shorn of its destructive hard-Left doctrines and with an energetic and charismatic leader, seemed the answer. Tony Blair said things could only get better, and few doubted him. But did they get better? Well, you could point to investment in schools and shorter hospital waiting lists and say yes, some things did - a little.

But the real story of the Labour years is one of under-achievement, rank failure and a vast expansion of wasteful government interference in everyone's lives.

Who do YOU want to lead the country?

Nobody can doubt the dedication of Gordon Brown - or the love and loyalty of his wife Sarah, who delivered a moving plea on his behalf yesterday.

But nor can they disguise the failures of Labour in Government over the last 12 years, many of them embarrassingly laid bare by the PM's own words yesterday.

Britain feels broken . . . and the Government is out of excuses.

Blair took office with bulging coffers, an invincible majority and weak opposition, and he and Gordon Brown could have worked miracles.

But they FAILED on law and order, their mantra "tough on crime, tough on the causes of crime" becoming a national joke. Knife murders are soaring. Smirking criminals routinely walk free in the name of political correctness, while decent people live in a virtual police state of snooping cameras and petty officials empowered to spy and to punish.

Labour FAILED on schools. Yes, facilities improved - but four in 10 kids leave those shiny classrooms still unable to read, write or add up properly. We are plummeting down international league tables for maths and literacy, but every year "grade inflation" ensures record GCSE and A-level passes to fuel Government propaganda.

Labour FAILED on health - spending billions on clipboard-ticking target managers instead of on frontline care.

Labour FAILED on immigration, opening our borders without any regard to the consequences. Illegal migrants and bogus asylum seekers poured in.

Labour FAILED the children they claimed to have made their priority. After 12 years of Blair and Brown, Britain is officially the WORST country in the developed world in which to grow up.

Most disgracefully of all, Labour FAILED our troops in Iraq and Afghanistan, leaving them to die through chronic under-funding and the shambolic leadership of dismal Defence Secretaries like Bob Ainsworth.

As our forces in two war zones suffered, the scale of Government waste at home was mind-boggling and tragic:

  • Billions blown employing a useless layer of public service middle-managers like those who condemned Baby P to die.
  • Billions more spent, insanely, making benefits more lucrative than a pay cheque - creating a huge, idle underclass for whom work is a dirty word. And all along the Government has had one overriding concern: Itself.
  • Blair and Brown's puerile feud has long been a cancer at the heart of New Labour, their divisions often paralysing the country.
Labour's driving ambition has not been to improve Britain. It has been to retain power at all costs - with no lie judged too great in its ruthless and relentless self-promotion.

They promised a referendum on Europe. They claimed they had ended "boom and bust". They tried to con the public with promises of endless investment, when they knew they would have to cut.

At the 2005 election, we and our readers believed Labour had many failings but gave them one last chance over a lacklustre Tory party.

They have had that chance and failed.

That is a fact Gordon Brown cannot escape, for all his rhetoric yesterday - his rewriting of history, his absurd caricature of the "heartless" Tories, his tired promises to solve problems he has had 12 years to solve.

Britain needs a brave and wise Government to restore our self-respect, our natural entrepreneurship and the will of every family to improve its lot through its own efforts, without depending on handouts.

We need a Government that will cut the red tape strangling businesses, that will make affordable tax cuts to stimulate growth, that will reform wasteful public services.

We need a Government with a genuine will to win the war in Afghanistan and the commitment to give our forces whatever they need to do it.

This will not be a Government that merely talks the talk, as Labour has. It will ACT.

We hope, and pray, that the next Government will have the guts and the determination to do these things. And we believe David Cameron should lead it.

Between now and the election Cameron's Conservatives must earn voters' trust by setting out their promising policies in detail.

If elected, Cameron must use the same energy and determination with which he reinvigorated the Tory Party to breathe new life into Britain.

That means genuine, radical change to encourage self-improvers, not wasting time on internal party wrangling or pandering to the forces of political correctness. It also means an honesty and transparency of Government that we have not seen for years.

We are still a great people and, put to the test, will respond to the challenges we face.

The Sun believes - and prays - that the Conservative leadership can put the great back into Great Britain.

Tuesday, 29 September 2009

How Peter Mandelson saved the rest of the world

In the past I have described how the government's car scrappage scheme has been less generous than it may have seemed because the government insisted that VAT should be paid on the price before rebates. Now it seems, that for all its protestations of largesse, Stephanie Flanders reports that the UK car industry probably benefited more from the German car scrappage scheme than the UK scheme.

Earlier this week, the Minister for Everything-under-the-sun-and-then-some, announced an extension of the UK car scrappage scheme, to bring the total amount up to £400m, but as readers may be aware, of the £300m already spent, 80% has been spent on foreign cars, meaning that only £60m less dealer margins, so let's call it £50m has actually gone to the UK car industry. The other £250m of tax payer money has been mostly blown on overseas manufacturers.

The Germans on the other hand have spent €5 bn (let's call that £4.6bn) on its own scheme. On a per head of population basis that is about 8 times the amount of the UK scheme. Now Germany has a reputation for building large cars, but it seems that in these recessionary times users of the scrappage scheme have opted for smaller cars, and nearly two thirds of cars bought have been imported. For arguments sake, let us call that £3 billion of subsidies going to non-German cars.

Now I don't have the figures, but it is reasonable to assume that UK-based manufacturers such as Nissan, Toyota, Honda and Range Rover would have at least a 2% share of the German import market, or in other words sold more than £60m of cars through the scheme.

Still, that didn't stop Mandelson announcing yesterday that he was going to blow another £80m of tax payers' money on foreign jobs.

The falling pound drifts by my window

Since you came to power the days grow long
And soon I'll hear old winter's song
But I won't miss you at all, Mr. Darling
When New Labour starts to fall

Last week Mervyn King told us that a weak pound will be good for British exports, and this week, Kraft's offer for Cadbury looked more competitive because the relative value of Kraft shares was boosted by the higher value of the dollar denominated Kraft shares relative to the sterling denominated shares held by the Cadbury shareholders.

But that is only half the story, and in fact probably less than half the story because we don't export that much. Yesterday, the ONS released data on the balance of payments. The current account recorded a deficit of £ 11.424 billion for the last quarter, equivalent to 3.3% of GDP. We may export a few cars from our factories, but a lot of our manufactured exports are simply components. Rolls-Royce won't sell more aero-engines and Pilkington won't sell more car windscreens because of a weak pound, although their cost base will be reduced relative to their foreign currency based earnings.

The BoE's quantitative easing programme involves printing £225bn more pounds. The greater the supply of pounds, the less demand and hence the value of each pound will fall. But the real danger is that a falling pound makes the UK a less attractive place for international capital to invest. Kraft may want to buy Cadbury, but that is an international operation, albeit that the shares are priced in sterling. Kraft may decide that having bought Cadbury any expansion will be in more dynamic economies.

What incentive do foreign owned power and water companies have to invest if they see the value in their home currency of UK domestic revenues diminish? Better to expand and invest back at home.

Worse still, the budget deficit is as about as big as the QE programme, somewhere between £175 bn and £225 bn, around the 13-15% mark. When the borrow and spend party is over there will be the mother of all headaches, with the same 13-15% lopped off GDP, and foreign investors can see through the headline GDP figures to the smaller sustainable economy. No wonder they have been rushing for the exit,

How Gordon Brown saved the rest of the world

In June the Daily Mail ran a story that up to half of the fresh cash produced by the Bank of England under quantitative easing was going abroad. Blowing away all the tabloid froth, the story was that BoE statistics showed that half of the purchases of gilts in March and April were from foreign investors, not British institutions.

But because it was the Daily Mail, we all forgot about it and assumed that more cash would eventually find its way into British banks. It seems not because we now have an analysis from the more authoritative Michael Saunders of Citigroup, who tells us that although UK institutional investment rose to £23.5bn in Q2, net purchases of gilts by UK institutional investors in Q2 were near zero, reflecting the lack of net gilt supply caused by the BoE’s huge gilt-buying programme.

Net purchases of UK corporate securities by UK institutional investors rose to £4.3bn in Q2 from £3.2bn in Q1, but the biggest shift was into overseas assets, with UK institutional investors’ net purchases of overseas assets reaching £13.4bn in Q2 from £2.0bn in Q1 and an average of £2.2bn per quarter in 2008.

So there you have it. The Bank of England's Quantitative Easing programme may give a small boost to UK business, but most of the stimulus is flowing overseas. At least the outflow of cash will weaken sterling and promote UK exports. Shame then that we have very little industry and no credit capacity to finance expansion.

Monday, 28 September 2009

The Texas Jailyard Massacre

Sir Allen Stanford is learning the hard way that prison is not a cushy number. I won't accord him the title of "billionaire", former, disgraced or otherwise, because the courts have yet to decide how much of his wealth, if any, was acquired legally.

Nevertheless, Sir Allen, who last month complained to the authorities about the lack of air conditioning in his cell, seems to have fallen out with one of the other 10 inmates kept in the same cell where he is being held on remand. He has just been returned to his cell after a trip to the hospital wing where he was treated for "a concussion, two black eyes, a broken nose."

It was not reported whether his assailant had lost any money through investments with Stanford's firm.

Business screwed by the state again

The Daily Telegraph carries an interesting story today to the effect that if a medium sized company wants to borrow or extend its credit lines with RBS, they have to sign a letter to the effect that RBS will be mandated as their advisor for debt and equity issues. Now neither RBS nor NatWest were ever particularly famous for their advisory work, although they were both big players in sterling debt underwriting, although many people can do that with a big enough chequebook.

But the big concern must be whose interests will they look after if a fund raising is required in the case of a significant "credit event", a merger or an acquisition? Why their own, of course, because as a lender they can never give truly independent advice.

So a bank that was only a few months ago teetering on the verge of disaster is now able to hold the UK market to ransom, because its tax payer supplied funding makes it one of the few banks able to provide new credit to the market.

But is the government going to do anything about it? Of course not, because the flow of fee based advisory income will boost the RBS share price before the government sells its shares.

Sunday, 27 September 2009

My day with the Uber-Neets

Blogging has been light for the past few days, because I am still coming to terms with the day spent on Friday with a group of young people that I shall call the Uber-Neets. The term "Neets" has been used for many years by civil servants and policy wonks to young people driven to the margins of society who are not in education, employment or training.

Twenty years after the American sociologist Charles Murray warned that a big new underclass was looming, and five years after official studies and ministerial papers revealed the underclass had arrived in the form of the Neets, aged between 16 and 24, they number 2 million and are responsible for a social and economic drag on society that is vastly disproportionate to their numbers.

On Friday, I spent the day with a new and emerging subgroup. I met a group of 50 young people aged in their early twenties. Despite looking for jobs for the last year, only 10% had successfully found employment, while the rest were looking at life on benefits. Those who had been responsible for their education were doing their best to raise their self-esteem by recalling their achievements, but in reality the young people knew that for most of them the likelihood of any gainful employment was small to non-existent and the realisation drove many of them to total despondency.

Sadly, this wasn't a meeting at a dilapidated housing estate in Toxteth or Moss-side, but a graduation ceremony at Oxford University. Five years ago, Neets are far more likely to come from broken homes and to have spent time in care. In Gordon Brown’s Britain they come from “world class" educational establishments.

Thursday, 24 September 2009

The special relationship

Lest anyone should be fooled into thinking that the “special relationship” between the UK and the US is dead simply because Obama has snubbed 5 requests from Brown for a meeting should think again, based on the evidence below. The relationship is the same as ever. The snubs are personal.

The UK-USA Security Agreement
This agreement established an alliance between Australia, Canada, New Zealand, the United Kingdom and the United States.to share intelligence. Testimony before the European Parliament indicated that UK-USA systems are in place to monitor communication through undersea cables, microwave transmissions and other lines.

RAF Fairford
The biggest bomber base in Europe, one of only three forward bases (outside the USA) for B-2 Stealth bombers. It is a NATO designated stand-by base and from a low level of activity it can be 'turned-on' overnight, receiving and deploying bombers. US tactics for the attack on Iraq involve massive aerial bombardment in the first two days of the war. The B-2's will play an active role in this, their stealth capabilities will be vital in targeting Iraq's anti-aircraft defences. The base has had extensive refurbishment recently, the largest single NATO expenditure since the end of the Cold War.

RAF Feltwell
A space surveillance station almost certainly involved with Missile Defence and likely to assist in target acquisition for the expected US attacks on Iraq. Feltwell also plays an important role as an electronic warfare and surveillance site as part of an ongoing US National Security Agency effort to monitor commercial, personal, and military electronic communications (phone, email, and radio) worldwide.

USAF Lakenheath and Mildenhall.
Lakenheath is the largest US Air Force-operated base in England, and the most important tactical nuclear bombing base in Europe. There is evidence that around 30 B61 nuclear bombs are deployed there. It is home to the 48th Fighter Wing, used in the 1991 Gulf War and subsequently, and the only F-15 fighter-bomber facility in Europe. NATO and US leaders have asserted that if America is needed again in this region, the 48th Fighter Wing will be called out first. USAF Mildenhall is a staging post for US flights to Europe and holds nuclear weapons based in Europe under the NATO nuclear sharing agreement. Aerial refuelling, special operations, air mobility, reconnaissance and intelligence are run out of RAF Mildenhall.

Menwith Hill & Fylingdales
Located in North Yorkshire, Menwith Hill is a US spy stations and and Fylingdales is an early warning base. Menwith Hill is involved in military and industrial espionage across the northern hemisphere. The UK Defence Select Committee recently approved a request from the US government to use Fylingdales to support their National Missile Defence (Star Wars) project. They said "The factors in favour of that agreement [are] the importance of the UK-US relationship, the improvement to the early warning capability, the opportunity to keep open the prospect of future missile defence for the UK and the potential for UK industrial participation in the programme's further development-outweigh the arguments against."

Northwood HQ
This base in North London is home to two NATO headquarters as well as the British Permanent Forces Headquarters.

This US munitions dump is a bomb store for RAF Fairford. It is run by the 424th Air Base Squadron and the Atomic Weapons Establishment at Aldermaston.

RAF Macrahanish on the West Coast of Scotland
Tin foil hat time.

The spirit of Willie Sutton

.... lives on in Khazakstan, no doubt for make glorious benefit Swiss private banking system, and this time it was an inside job.

Police in Kazakhstan have arrested Abylkasym Mamyrbekov, ex-deputy chief executive of Alliance Bank, and charged him in connection with the theft of $1.1 billion moved into privately held offshore bank accounts.

How does the deputy head of a bank get into a position to move that kind of money? Easy, the former chief executive, Zhomart Ertayev, was also arrested in August.

With bonuses capped in the EU, I reckon that meant the pair came close to being the most highly remunerated bankers in Europe.

Brown stood up on a blind date

You may never have heard of Bill Rhodes, but for many years he has been on the board of Citibank/corp/group. He joined Citibank in the 1950's, a preppy's preppy straight from Brown University and at a time when US international banking mostly meant moving cash and handling the payroll for US multinationals and the odd bit of private banking for Latin American generals, Rhodes was was the man who did most of the glad handing.

After 25 years or so, Rhodes made his way onto the board of Citibank/corp/group, since when he has appeared in every annual report bearing a permutation of the words Senior, Vice, Executive, Director, Chairman and President. Rhodes' role in saving Citi in the Latin American debt crises of 30 years ago seems to have given him a job for life, and he now rejoices under the title of Senior Vice Chairman of Citigroup, whatever that means. How many grades of Vice Chairman or even how many Vice Chairmen does a board need?

In any event it seems that Mr Rhodes doesn't get to do much banking these days because apart from his role at Citi-whatsit, he finds time to be a Director of ConocoPhillips, a Director of the Private Export Funding Corporation, Vice Chairman of the Institute of International Finance, Chairman of the Hong Kong-U.S. Business Council, Vice Chairman of the Board of the National Committee on U.S.-China Relations, a Director of the US-Russia Business Council, and a member of South African President Thabo Mbeki's International Advisory Board andColombian President Uribe's Advisory Board, and a board member of The Africa-America Institute, Foreign Policy Association, and the US-Egypt Presidents' Council. He is also a member of the Council on Foreign Relations, The Economic Club of New York, the Hong Kong / U.S. Business Council and a founding member of the U.S. National Advisory Council to the International Management Center in Budapest, Hungary.

Mr Rhodes is also a past Chairman of the U.S. Advisory Committee of the Export-Import Bank of the United States, past Chairman of the U.S. section of the Venezuela-U.S. Business Council, past President of the Venezuela-American Chamber of Commerce and past President of the Bankers Association for Foreign Trade.

But it doesn't stop there, because he is also a Governor and Trustee of The New York and Presbyterian Hospital, a member of the Lincoln Center Consolidated Corporate Fund Leadership Committee and a Vice Chairman of the Metropolitan Museum of Art Business Committee and Chairman's Committee, Chairman Emeritus of the Board of Trustees of the Northfield Mount Hermon School and a member of the Board of Overseers of the Watson Institute for International Studies at Brown.

So all in all, we would have to say that despite being well into his 70's Mr Rhodes is still a redoubtable committee member and handshaker even if he doesn't seem to be one of the big swinging dicks in today's markets. So no surprise then that when Gordon Brown, saviour of the world economy, turned up on Wall Street yesterday, it was only Mr Rhodes, not Citi-CEO Vikram Pandit, who put in an appearance.

But then neither did the invited Blankfein, Dimon, Mack nor any other senior American banker. They obviously had better things to do. Like washing their hair. This after all is the man who wants to cap the bonuses of the staff in their London offices, but to tax them at 50% as well, destroying in one fell swoop the primary management tool in investment banking.

One can't help wondering whether they would have been so coy if it had been Brown's counterpart from India, China or even Switzerland.

Wednesday, 23 September 2009

Can you negotiate?

I mean really negotiate, not haggle, or cave in to reach an agreement as quickly as possible, but really negotiate? Do you know all the techniques and tricks, what to do and what not to do to get the best possible deal?

Neither does Gordon Brown. For many years, firms and organisations have sent their staff on courses to teach them to negotiate. They may or may not learn anything, but the biggest output from these training courses is to show that most people don't have a clue how to negotiate, and after such training many of them still haven't a clue.

There is the salesman or buyer who is so fixated on price that he or she gets a bad deal on everything else, the executive who is so intent on getting an offer acceptable to the board that they get a lousy deal anyway, but worst of all there is the person who just doesn't have a clue how to play the game.

At the end of the 1990's recession a friend told me of the terrible time he was having as co-lead manager on a property loan that had gone bad. Working with him as co-lead from Barclays was a manager who had been drafted in to manage his bank's position in several workouts, after several years winning promotions in the personnel department in the north of England.

It turned out that issuing staff memoranda was no preparation for negotiations with delinquent but avaricious property owners, and the former HR man couldn't open his mouth without blowing the bank syndicate's negotiating position. Every round of discussions would start with his announcement of the concessions the banks were prepared to make followed by an interruption from the borrower before he could say what the banks wanted in return.

Fast forward to today and we hear our Great Leader playing the world's worst poker hand. True enough, the government has previously mentioned that it would review the need for a fourth Trident submarine and that will have been heard and noted in Beijing, Moscow, Tehran and Pyongyang, and the reliability of the current nuclear fleet is probably well known in such circles. But today Gordon Brown surpassed himself by telling the world what he was prepared to trade away in negotiations without setting out what, if anything, he wanted to see in return.

"Hey guys, I have a nine of clubs. Oh. Perhaps I shouldn't have told you that."

Tuesday, 22 September 2009

The next ecoproblem: Man made global cooling

Watchers of the BBC's updated Tomorrow's World, which goes by the name of Bang Goes the Theory, may have seen the latest gizmo for energy production the infra-red radiation absorbing antenna.

Researchers in Idaho have printed billions of nanoantennas that collect heat energy generated by the sun and other sources onto plastic sheets. The technology, developed at the U.S. Department of Energy's Idaho National Laboratory, is the first step toward an energy collector that could be mass-produced on flexible materials. You could think of it as a photovoltaic cell, but in reality it is a collector of ambient infra-red radiation and would for example still produce energy at night from heat radiated by the earth and other not-particularly-warm-but-still-around-300-degrees-K objects.

The technology has a way to go before it becomes usable, not least because it requires high speed rectifiers to turn the multi-trillion Hz oscillations into something more amenable to our electric devices, but how long will it be before the eco-nuts start to complain that all of this absorption of infra-red energy and its use for processes that are not readily reversible (e.g. production of hydrogen by hydrolysis) is depleting the "natural" infrared radiation and thus leading to man-made global cooling?

Where is Mandelson's chequebook?

Union bosses have demanded a meeting with the new owners of car maker Vauxhall amid reports in Germany that hat 1,400 jobs would be cut in the UK.

Tony Woodley, joint general secretary of Unite, says the job losses announced for the Vauxhall plants in the UK were a result of a "disgraceful political stitch up" between new owner Magna and the German government. He added that the EU should "block the deal and block the deal immediately", adding it was unacceptable "if Magna get away with a disgraceful political stitch up that they've done unfortunately with the German govenrment prior to a German election."

No Mr Woodley. The Germans gave Magna the guarantees they needed to put their finance package together. Kill that deal and there is nothing else on the table for you, so the current deal will go through.

Your boys in Westminster have taken a hell of a beating, which is why they have gone into hiding.

They do things for less in the private sector

This mornings news of price rigging in public sector construction contracts comes as no surprise, and I would imagine that the cases of compensation payments and cover pricing are just the tip of the iceberg.

Cover pricing is the practice where many bidders deliberately structure a high priced losing bid in order to facilitate another bidder to make a lower priced bid that leaves them with a comfortable profit. A case of you scratch my back and I'll scratch yours, and probably not limited to the construction business.

A particular case that comes to mind is the difference in costs between two village halls built near Masterley Mansions. In the late 1990's the village a few miles to the north decided that they needed a new village hall to replace the scout hut size building they had used for years. They started a fund and very quickly raised over £250,000, an impressive feat and equally impressive was the brick building they built with a 100 foot hall, plus a stage, meeting rooms and a fully fitted kitchen. Picture below left, but perhaps a little deceptive bcause the full length of the hall is not apparent.

A few years later the good people of the village a few miles to the south decided that they also needed a new village hall, but instead of building a freestanding hall they would connect it to the village school, and add a few classrooms to the school, pictured right. Rather than brick, this was to be mostly pine wood construction, a smaller hall, no stage, a refurbished kitchen and a few new classrooms. 10% of the cost was met by local people because it is a church school, but the rest of the bill was picked up by the tax payer. The picture on the right shows part of the school, but the hall is not visible, although the wooden construction is clear.

The cost after the extensive bid process managed by a government appointed architect: £2,000,000.

Monday, 21 September 2009

The worlds 50 safest banks

Let's put an end to the lie that big is beautiful in banking. Here is a list of the 50 largest banks in the world. I added in the BIS to make up the numbers. If you live in the UK you can easily make a deposit in any of the banks in bold text by walking down the High Street of your nearest town.

Royal Bank of Scotland, Deutsche Bank, BNP Paribas, Barclays Bank, HSBC, Crédit Agricole, Citigroup, Lloyds, UBS, Mitsubishi UFJ, Bank of America, Société Générale, JP Morgan Chase, UniCredit, Mizuho Financial, ING, Banca Româneasca, Santander, Credit Suisse, ICBC, Fortis, Sumitomo Mitsui Financial, Commerzbank, China Construction Bank Corporation, Dexia, Intesa San Paolo, Rabobank, Agricultural Bank of China, Bank of China, Nordea, Crédit Mutuel, Wachovia Corporation, BBVA, Dresdner, Danske, Landesbank Baden-Württemberg, Groupe Caisse d'Epargne, DZB, Bayerische Landesbank, Hypo Real Estate, NAB, Wells Fargo, Nordea, Norinchukin Bank, KBC, Groupe Banques Populaires, Commonwealth Bank Group, WestLB, ANZ, BIS

If on the other hand you want to put your money in any of the 50 safest banks in the world determined by bank ratings, you have the following choices:

KfW, CDC, Bank Nederlands Gemeenten, Landwirtschaftliche Rentenbank, Zuercher Kantonalbank, Rabobank, Landeskreditbank Baden-Wuerttemberg-Foerderbank, NRW. Bank, BNP Paribas, Royal Bank of Canada, NAB, Commonwealth Bank of Australia, Santander, Toronto-Dominion Bank, ANZ, Westpac Banking Corporation, ASB Bank Limited, HSBC, Credit Agricole S.A., Banco Bilbao Vizcaya Argentaria, Nordea, Scotiabank, Svenska Handelsbanken, DBS Bank, Banco Espanol de Credito S.A. (Banesto), Caisse centrale Desjardins, Pohjola Bank, Deutsche Bank AG, Intesa Sanpaolo, Caja de Ahorros y Pensiones de Barcelona (la Caixa), Bank of Montreal, The Bank of New York Mellon Corporation, DnB NOR Bank, Caixa Geral de Depositos, United Overseas Bank, Oversea-Chinese Banking Corp., CIBC, National Bank Of Kuwait, J.P. Morgan Chase & Co., UBS AG, Societe Generale (SG), Wells Fargo & Co., Credit Suisse Group, Banque Federative du Credit Mutuel (BFCM), Credit Industriel et Commercial (CIC), Nationwide Building Society, U.S. Bancorp, Shizuoka Bank, Northern Trust Corporation, National Bank of Abu Dhabi

Spot the difference? Personally, if there was one to hand, I would put my money in the Clydesdale Bank or the Yorkshire Bank, both owned by National Australia Bank (NAB). Size isn't everything.

Who says bankers can't work in the real world?

A load of Balls

Ed Balls, Secretary of State for Children, Schools and Families says that Conservatives have a £10bn black hole in their fiscal plans.

"I thought George Osborne was caught red-handed today trying to pull the wool over the electorate's eyes. There is nothing in those plans that say there is hidden tax rises," he said. "They have got GBP10bn plus of a black hole to fill and that will be found in cuts in schools and hospitals".

Excuse me for laughing but there is a current black hole 20 times the size.

Sunday, 20 September 2009

Balls' cuts in perspective

Ed Balls says he thinks he can cut £2bn from the Education budget. What does that do for us? Nothing that you would notice. What would it take to balance the budget? I only ask because it is pointless thinking we can foist our costs onto the next generation if there are nearly 1 million 16-24 year olds out of work and this year's university graduates are all heading for the dole queue.

Let's start with the current budget numbers. Last year's outturn was £660 billion of government spending. Let's figure that with the stimulus etc. of 5% extra that will be about £693 billion this year, and with a GDP 5% down on last year's very almost £1.4 trillion, that means total GDP will be about £1,330 billion, so GDP less government spending will be £637 billion. Assume for the moment that the £637 billion doesn't change if we cut the deficit (not true but let's go with it). Capital Economics is forecasting a budget deficit of £225 billion, which implies taxes raised of about £468 billion, so we can use a working figure that total taxes raised are about 35% of GDP.

Now let us try to get rid of the deficit completely. We could start by having the government spend £225 billion less, but that would mean losing taxes equal to 35% of that spending, so a better figure to go for would be £ 225 billion / (100%-35%), which would be £346 billion or 52% of government expenditure.

That isn't entirely accurate, because income tax & NI receipts would fall more in proportion to current recipts than corporation tax and VAT receipts, but then we also discounted the effect on the private sector of a fall in government spending (e.g. fewer public sector workers buying cappucinos and newspapers), so £346 billion give or take £50 billion is probably in the right ball park.

Yes, you heard it right. A £346 billion cut would be required to balance the books, compared with Balls' paltry £2 billion.

Friday, 18 September 2009

A simple question: there may be more

If the Barclays/Protium/C12 deal was all about a sale by Barclays to an unrelated purchaser so that Barclays earnings could be reported without mark-to-market fluctuations, why did Michael Keeley see fit to register a UK LLP at Linklaters offices in the name of C12 about a month ago?


Company No. OC348082

Subsidy war: don't make me laugh?

Why the media, isn't hammering him over this, I don't know but the increasingly pathetic Lord Mandelson is whining to Brussels because of a perceived "susbsidy war" between EU countries over the Magna purchase of Opel.

Let's get the first thing straight. There are no subsidies as yet, not even loans, just loan guarantees, but let's not quibble. The truth is that the German government, who have been fiscally prudent, run a tight shop and have got their economy moving again, have some spare borrowing capacity, and can afford a contingent liability or two. More importantly, they have cut a deal with Magna that works for both sides.

The British, and for that matter the Belgians, have been caught cold, and anyway don't have the spare cash to come up with anything like the German offer without having hundreds of other companies, particularly those who can't get funding from backs, cry foul. So they do what any self-regarding politician who had spent most of their lives accumulating a small fortune at the expense of tax payers would do: they go to the EU and try to block the German/Magna deal.

Now any smart negotiator might question the wisdom of trying to kill another bidder's deal whilst simultaneously trying to add on your own. To do so misunderestimates the other party's position (they don't have to be there and they don't have to deal with you), which could backfire if and when Magna walks away.

But the most stupid part of the whole deal is to complain about a "subsidy war" when you haven't put in your own offer. There won't be a subsidy war unless Mandelson is able to outbid the Germans, but he can't and he is fooling nobody.

Mandelson can't come anywhere near the German offer so he is trying to kill their deal. Magna have no reason to take worse terms from Mandelson and since the Germans are not renowned for frittering away their money, the chances are that the deal would be off if Magna were forced to worse terms by the EU. I didn't see many other bidders bidding for the deal if Magna does get blown out.

Either way, Mandelson's parsimonious approach is likely to lead to big job losses in the UK. We should not see his efforts as an attempt to save jobs, but to project the blame elsewhere (onto the Hun) when the jobs are lost and the Vauxhall plants do close.

Yellow shoots?

You probably didn't spot the extra £250 the government stuck on your credit card bill last month, but that was the effect of their policies.

UK public sector net borrowing was £16.1bn in August, 62% higher than the same month in 2008 and another record, because spending continues unabated while tax receipts have fallen 13% year on year.

Public sector borrowing in the first 5 months of the financial year was 150% higher than the same time last year, so that the best estimates are now that instead of a £175 bn deficit for the year as forecast in the budget, or the £200 bn deficit talked about recently by the more bearish pundits, we could be looking at a £225 bn deficit in 2009-10, according to Capital Economics.

Income tax receipts fell approximately 15% year on year while corporation tax receipts fell by over 50% compared with last year.

Worse still, M4 money supply and M4 bank lending figurse from the Bank of England show that the money supply grew by only just 0.1% in August. Why is that bad? Because quantitative easing should have produced a much higher increase. Those disposed towards the government might say it has yet to take effect. The rest of us would say it isn't working. In fact we know that most of the money from QE, paid to the banks for their securities, is still sitting on deposit at the Bank of England.

Thursday, 17 September 2009

We are all Polish now

Do you remember this from June (Peter Schiff on The Daily Show with Jon Stewart)?

"But all we have is our consuming. We don't have a manufacturing base any more. We don't make anything any more. We don't do anything. All we do is buy stuff. You take that away from us and we're Poland".

Well now even the Bolshevik Broadcasting Corporeation says that UK retail sales are stalling. Pass me the monkey wrench, Jan, and that bag of washers. Do you want sauerkraut and horseradish on your pork sausage sandwich?

I had some feedback

"I have a theory that the skills required to structure good software programs are similar required to those required to structure and negotiate good financial agreements, but we can leave that for another day."

Yesterday, I made a throwaway comment about the similarities between software programming and structuring and negotiating legal agreements, but I let it pass because I thought no-one would be interested, but I was wrong, so here goes. The arguments here apply more to large software projects, not something you might knock together to play hangman, and similarly to the sort of big financing documents that fill boxes, such as project finance agreements, not your employment contract, although many of the principles apply

  • The endgame in programming is to create a piece of software that is fit for its purpose and is robust, the same is true for a set of legal agreements. The robustness of software is assured by testing and code walkthroughs. The robustness of legal agreements is assured by careful review and negotiation. Both are improved by good design.
  • Software programming depends on the use of a set of primitives and language. Legal documents are built on defined legal terms and principles. In both cases, the best results are obtained from the best and clearest use of the underlying tools and methods. Precise use of language can often be critical to outcomes in both.
  • Portability and reusability are key to both. Do you really think that the first draft of the 200 pages of documents that your lawyer rustled up in a week was drafted from scratch? No, it wasn't, but neither did he do a global edit of the names in last week's deal.
  • Design is often critical to maintenance and adaptation. A simple amendment in a poorly structured legal agreement may require several changes in many documents. The same is true in programming. In both cases the possibility of errors or omissions are significant, and the risks can be minimised by good design. Programmers call it encapsulation. Lawyers call it "chucking it in the Definitions section".
  • We all know of software geeks who stay up half the night writing code. The good ones can still write good code at half past three in the morning. Same for lawyers.
  • You can pick up "good" software and understand it from cold, find your way around it etc. The same is true for "good" legal documents.

I could go on, but I think you get the message. If there any lawyers or programmers who fancy a career change, I know at least one assembler/comms programmer who successfully applied to Harvard Law School and a QC specialising in intellectual property who enjoys writing software in his spare time, so I would say "Go for it", but Edgar Dijkstra probably wouldn't approve.

Wednesday, 16 September 2009

A bad case of indigestion?

There is a famous aphorism in Computer Science, reputedly from David Wheeler which goes: All problems in computer science can be solved by another level of indirection. It is surprising how often the same applies to finance. I have a theory that the skills required to structure good software programs are similar required to those required to structure and negotiate good financial agreements, but we can leave that for another day.

Barclays, however, appear to have excelled themselves in selling $12.3 billion of dodgy assets to a newly formed investment fund, Protium Finance LP, which has managed to finance the purchase by courtesy of a $12.6 billion loan .... from Barclays.

Let's be clear howver, when we say the assets are dodgy we don't mean to imply that the structured credit assets with a fair value of $3.6bn and monoline guarantees valued at $4.6bn, RMBS/Other ABS assets valued at $2.3bn and residential mortgage assets valued at $1.8bn previously held in Barclays Capital, are in any way likely to default. Oh no. Although monoline guarantees are worth $2.3 bn less than their face value.

The "fund" (initial investors not disclosed) will be run by 2 former Barclays Capital directors, including former SCM tax whizz, Michael Keeley. If you want to know more, you could always apply for a job because they're hiring careers@C12capital.com.

No, the real issue is one of price volatility. Honestly. By pushing the assets down into the vehicle which will be owned by outside investors who have contributed $450 m of equity, Barclays get to put a loan on the books instead of the securitised assets and thus record the asset at its amortised cost rather than its fair value. Students of financial history will remember the off-balance sheet SPV's used by Enron with the 3% minimum capital that allowed the Houston sleazebags (I say that without fear of a libel suit from a defunct firm) to move so many assets off their books - nice to see the boys at Barclays playing the same game to deconsolidate the fund even if they do end up with the loan on their books.

Strange then that the loan from Barclays is actually subordinate to the $450m of equity. How does that look to the SEC and FASB? Stranger still, the senior investors, the Protium investors, get a fixed 7 percent return on their capital contribution, while the Barclays subordinated loan is struggling on at 2.75 percent over LIBOR, about 4% at today's rates.

For a bank like Barclays whose recent post tax profits would be negligible if it wasn't for tax gains, revaluations of acquired assets and gains on their own liabilities, eliminating such variability of earnings would be crucial to preserving directors' bonuses. I mean, smoothing reported profits, but could there be more here? After all, reported 45 people left Barclays yesterday to join C12 Capital, the Protium manager, and avoid any banking bonus restrictions. Hardly surprising that they should all move across when Barclays has reportedly agreed to pay a $40m annual "management fee", which if true, is equivalent to a further 35 basis point haircut on Barclays margin. This does not smell right at all.

Let us not forget that in March of this year two out of three US banks terminated their involvement in a wide-ranging tax-avoidance scheme operated by Barclays. The banks had taken loans from Barclays amounting to $11bn, which they were due to hold for another year. But sources at Bank of America and BB&T confirmed that the loans were repaid. The banks' three loans, totalling $17bn, were made in 2007 and designed to generate tax benefits to Barclays over three years equivalent to approximately $270m a year, at the expense of the UK exchequer. The US counterparty banks were not avoiding US taxes but received a fee in kind from Barclays - in the form of cheap loans - in return for their involvement.

Under the scheme drawn up by Michael Keeley, a series of Cayman Islands and Luxembourg entities and partnerships were created. Three sets of triple entities were used, named Alymere, Claudas and Pelleas, according to accounts held in Luxembourg and at Companies House, through which Barclays was able to accumulate profits virtually tax-free in Luxembourg.

Could it be that Barclays latest $13 bn venture is simply trying to reproduce the earlier deal which went wrong. After all, if Barclays were just looking for someone to manage a fund there are no end of asset managers looking for distressed assets to manage. They didn't have to lose 45 of their own staff in the process, so the smart money would probably go with the notion that all is not quite what it seems and that there is something else going on that has not been made clear, and that is often a tax scheme.

Could that be why the fund is named after a brand of indigestion tablets?

This is my model. If you don't like it, I have others.

About a year ago, I spent many weeks trying to get to the bottom of the man-made global warming debate. I diligently wrote notes and performed rough calculations to understand the physics and broader arguments from both sides. I had a good grasp of the basic physics, of planets surrounded by gases blasted by solar rays, of Boltzmann and black body radiation, eletromagnetc absorption and the rest, but I must confess a lot of the climate models seemed to me to be overly complex (to the extent that I understood them) to be reliable.

The problem I had was that whenever I tried to do a back of the envelope calculation I could never come up with the same level of temperature increase. My simplistic approach would be, for example, to take recorded atmospheric CO2 levels and known average surface temperatures, and extrapolate from there using forecast figures for hydrocarbon consumption/CO2 production reduced by previous annual rates of natural absorption of manmade atmospheric CO2, to give a guess of average world temperatures.

The approach was probably naive, but I reasoned that whatever processes were involved in future global warming were already at work, so what could be simpler than making a prediction by extrapolating from historic data? The trouble was that whereas my worst case was a temperature rise of about 1 degree, climate scientists and their models were coming up with numbers between 3 and 6 degrees.

Now, this never made sense, and because I neither understood nor trusted these models, I left it at that, but deep down I always had a gut feeling that these results were wrong. Why? Well because going back to the basic physics, a 6 degree rise in temperature (2% in degrees Kelvin) would imply an 8% increase in blackbody radiation (there is a 4-th power relationship between energy radiation and abolute temperature), and the effect of extra CO2 in the atmosphere didn't seem like something that would stop 8% of heat loss.

Whatever was going on in these models seemed to rely on secondary effects, tipping points, etc, and whilst there were many explanations, they defied common sense. Why, if temperatures varied widely over seasons, or even over the course of a day, were these effects not currently active, or were these tipping points not reached in extreme conditions?

Moreover, there is a gut instinct that says that if a natural system has reached some sort of equilibrium over time, then when the system is shifted away from that equilibrium point, various processes may well come into play to return it towards the equilibrium point that it had reached. For example, more CO2 in the atmosphere might encourage CO2 consuming processes such as plant growth, perhaps not as quickly as the CO2 was being produced, but common sense (not always right I will admit) tells me that this sort of secondary process would predominate rather than a positive feedback reaction, simply because the earth has been in a high CO2/high temperature before and yet it naturally cooled to the state it is in today.

And thirdly, I am naturally sceptical about any physical system which seems to accumulate energy rather than dissipate it. An analogy to the solar radiation hitting the earth might be water flowing into a bucket with many holes. As the bucket fills with water it eventually reaches a point where water is flowing in to the bucket at the same rate that it empties through the holes. If some of the holes are filled, the water level will rise (analagous to the temperture) and the higher pressure at the remaining holes will force the water out faster through those holes.

But that is not necessarily the only way the bucket will empty. Perhaps the extra pressure will cause the holes to stretch, or the water will rise to a level where it leaks through higher holes, or it even rise to the top of the bucket where it flows over the edge (but it doesn't rise any higher than the rim of the bucket). To my mind similar processes would apply to the heating of the earth, and my gut feeling would have to be that any global warming from CO2 would not be a process that continues indefinitely.

So I took a great interest when I heard that Mojib Latif of the Leibniz Institute of Marine Sciences at Kiel University said earlier this month that we might be about to enter one or even two decades during which temperatures cool.

"I am not one of the sceptics," he told more than 1500 of the world's top climate scientists gathering in Geneva at the UN's World Climate Conference "However, we have to ask the nasty questions ourselves or other people will do it."

Latif is an author for the Intergovernmental Panel on Climate Change. He predicts that in the next few years a natural cooling trend would dominate over warming caused by humans. The cooling would be down to cyclical changes to ocean currents and temperatures in the North Atlantic, a feature known as the North Atlantic Oscillation (NAO). He added that NAO cycles were probably responsible for some of the strong global warming seen in the past three decades.

Latif says NAO cycles also explained the recent recovery of the Sahel region of Africa from the droughts of the 1970s and 1980s. James Murphy, head of climate prediction at the Met Office, agreed and linked the NAO to Indian monsoons, Atlantic hurricanes and sea ice in the Arctic. "The oceans are key to decadal natural variability," he said.

Now that has me really confused. On the one hand, climate scientists are saying that there are natural processes that will dominate the effects of global warming. Secondly, they are also saying that those effects are also responsible for historic observed warming, so any calculations I may have made in the past about correlations between CO2 levels and temperature rises may have overstated the link, and so even my 1% forecasts may be overstated. So where do these 6% increases come from?

It strikes me that Airfix enthusiasts aren't the only modellers getting high on banned substances.

Oh, and its bad news for the Maldives then, because by my reckoning, lower surface sea temperatures means less evaporation, so a smaller depression in the earth's geoid in the Indian Ocean than the current 100m, hence higher sea levels.

Unemployment closing on the 1 million barrier

And that is just the 16-24 year olds, rising from 928,000 to 947,000 over three months.

And the futility of higher government spending to employment in the public sector is shown by the fact that government jobs rose by 13,000 in the three months to June while jobs in the private sector fell by 230,000 over the same period.

Total claims for jobseeker's allowances rose to 1.61 million, with the figure for total unemployment pushing 2.5 million, but this is not the same as the number of people out of work and claiming all forms of benefits, which is now around 6 million, nor anywhere near the total number of people available for work and not in employment, which is probably closer to 7 million.

Enough to start a revolution.

Tuesday, 15 September 2009

HMRC: world beaters

Our economy may be messed up beyond repair, our cricket team losers at any game that doesn't run overnight and the remnants of our car industry sold to the Germans, Indians and Chinese, but there is still one field where Britain leads the world, and that lead is increasing year by year - tax complexity. Once again, Britain can boast the longest written national tax code.

The government has always said that it aims to simplifiy tax legislation, and what a poor job they have done. Every September or thereabouts Lexis Nexis publish Tolley's Yellow Tax Handbook, the reference set of choice for lawyers, accountants and other tax professionals. This year's 4 volume set will put you back £106.95, which may seem a little pricey, but is actually incredibly good value at less than a penny a page, because the whole set is a world-beating 11,520 pages.

You may have thought that the Labour government were out of their depth when it came to tax legislation, but apparently not, because in 1997 the 2 volume handbook was 4998 pages long. In the last 12 years they have managed to grow the size of the book by 130%. That must have been all those stealth taxes that didn't happen.

But don't be impressed by the Rowlingesque achievement of the publishers in printing a bigger volume every year, because tax compliance is an obligation of every business and as the number of pages in these books increases, the costs of compliance for firms also increases, and employers who might want to move to the UK are dissuaded from doing so.

Readers may be aware of Lord Wilberforce’s celebrated dictum in Aberdeen Construction v Inland Revenue Commissioners that capital gains tax is a tax on gains (or gains less losses); it is not a tax on arithmetical differences. The same principle could well be applied to income and corporation taxes. It is hard to see how any but the most incompetent of governments can turn such simple principles into 11,520 pages of rules for the computation of arithmetical differences.

John Hutton is job hunting

The former business secretary John Hutton, who is due to leave parliament at the next election with his cushy little demobilisation payoff, served as business secretary from 2007-08 and announced the government's decision to build new nuclear reactors. During his term as business secretary in September 2008, he was also responsible for the sale of British Energy, the nuclear generator, to EDF for £12.5bn.

According to the Guardian (we don't expect them to know much, but they seem to have a good nose for this sort of thing), Mr Hutton is talking to thr French government-owned group about joining as an adviser.

I wouldn't bother, messieurs. By the time Hutton leaves Parliament there will be a completely different set of decision makers in government, most of them trying to resolve the issues doged by the current government.

The mess we are in

I wouldn't normally link to a Will Hutton piece but since I am going to lift two paragraphs and shred him to pieces, it seems only fair. Hutton wrote in last weekend's Observer that there was no need to slash the budget deficit, because the National Debt is below historic levels. Indeed, writes Hutton, Gordon Brown was to be feted for stepping into the breach with one of the greatest ever Keynesian acts in the face of fecklessness from the private sector. He reserved the following criticism for Conservative economic policies:

Meanwhile, David Cameron and George Osborne, who had been developing an interesting argument, if with little flesh, for a high-investment, moral, environmentally sustainable capitalism, have decided that the national debt peaking at some 80% of GDP constitutes a national emergency. Never mind that since 1750 the national debt has always been proportionally higher than this, except for two 40-year periods – one at the end of the 19th century and the other from the 1970s until now.

From 1750 to 1870, Britain won wars, assembled an astonishing navy, built an empire and launched the Industrial Revolution to become the envy of Europe, yet the national debt was consistently above 80% of GDP. Nobody cared. High national debt was a precondition for winning two world wars in the 20th century. Periods when the over-riding preoccupation has been lowering the national debt have coincided with industrial, economic and strategic decline. So it will again.

Now excuse me, but the period from 1750 to 1870 was very different from today. For a start, measured UK GDP would have been very low compared to today's figures simply because most workers would have been paid the wages of manual labour. On the other hand, UK government debt was used to finance the whole of the British Empire, securing both economic power and a plentiful supply of raw materials. Very little of the overseas activity created in foreign mines, plantations and factories secured by a British Administration would have shown up in UK GDP figures, but the infrastructure financed by the national debt created a worldwide trading advantage that continued into the second half of the twentieth century.

More importantly, unlike today's government expenditure amounting to 50% of GDP, in the period before the first world war, annual government gross expenditure amounted to no more than 10% of GDP. This meant governments had a lot of leeway to raise taxes to correct any overspend, but they were able to service interest on borrowings out of receipts from duties and tariffs in the empire.

There were later periods when the debt to GDP ratio was higher than today's figures, mostly following the first and the second world wars. At the end of each war GDP dropped as the bulk of the working population switched to the war effort and the war came to an end, while borrowing soared to pay for material as tax revenues were depleted. The ratio stayed stubbornly high after the first world war due to the 1920's and 30's depresssions, but government spending remained below 20% of GDP.

After the second world war the debt to GDP ratio reduced rapidly before stopping at a rate around 80% of GDP, but at the time the national debt included the borrowings of the nationalised oil, steel, electricity, coal, shipbuilding, gas and airline industries. During the war, government expenditure reached 60% of GDP, falling afterwards to just 30%.

So here we are today with 50% of GDP being spent by the government (or 51.4% if you don't think working family tax credits are "negative taxation") compared with the 30% in post war Britain. The national debt is equal to about 60% of GDP and a budget deficit in the £175-200 bn range (15% of GDP) and set to remain that way for 4 years, which will add another 60% of GDP. But as often pointed out, this ignores the impact of public sector pensions (growing at £3 bn a month), PFI and a large number of other guarantees and contingent liabilities which would push that figure up by another 100% of GDP.

So let's call that 220% of GDP. Now that is a big number, and while we have a diverse economy to support it, we don't have expanding overseas territories to finance, we aren't involved in the sort of wars that should sap the resources of the nation. Yet we have historically high borrowing levels and historically high government spending as a percentage of GDP. So how did we get here, except by fecklessness? Indeed the sort of fecklessness that puts record numbers of students through university and at the end leaves even the best and the brightest unemployed.

As Hutton says, a lot of the government spending is Keynesian, or to put it another way, spent for the sake of spending money in the hope that it will stimulate the private sector. The fact is that the stimulus hasn't worked. Once government spending is deducted from the GDP figures, we find that the private sector has declined in real terms every year since 2003. It may well be that a lot of this spending is not Keynesian, but political, creating government funded employment levels at over 70% in some parts of the country, comparable with communist-era Czechoslovakia.

Indeed, the decline of the private sector may even be accelerating. Very roughly, government spending (about 50% of the economy) is up about 5% year on year and GDP as a whole is down 5%, so the other half of the economy must be down about 15% (50%*5%-50%*15% = -5%).

We are way past the point where a Keynesian "stimulus" would have been effective. That should have happened when private sector capital investment fell away at the start of the decade or when private sector production started to drop in 2003, but the Chancellor at the time didn't think we needed to worry about the private sector because there was so much bingeing on cheap debt and high house prices.

The economic nincompoops at the Treasury mistook the chiming of cash registers for robust economic health. Those in power in government, who didn't understand commerce, thought business would look after itself, no matter what costs they imposed on it. They were right. Business did look after itself and moved offshore.

Meanwhile our stimulus isn't working. Other major economies have emerged from recession in the second quarter of this year, while the UK economy continued to shrink by -0.7%. The UK is now the only major economy for which the OECD is predicting no growth at all this calendar year, and unemployment has risen faster here than in Germany, France, Japan and 16 other OECD countries.

Which is why the budget cuts are necessary. We need infrastructure and spending, but we also need to be competitive. From the 1750's, financing a growing empire was key to economic prosperity, but today we live in an unremarkable medium sized post industrial economy, and if we want to attract investment into our economy we have to encourage the global investment community to put their money here and not on the other side of the world. It isn't possuible for a government to prop up the economy with workfare schemes paid for by borrowing. The UK economy will only grow when real economic value is created.

In the 1980's and 90's the country improved its fortunes by being an easy place to do business, with effective but unburdensome regulations and low overheads. That has all changed in the past 12 years and very few foreign firms have invested here under the Labour government. They aren't stupid and are not fooled by headline rates of tax, but look at overall costs of doing business including forecasts of future taxation because of government expenditure.

Perhaps we should look at it another way. The ultimate source of wealth to repay the national debt comes from private sector activity, not from government employment. The tax from the Prime Minister's salary is merely a refund of part of his salary. It doesn't per se produce any cash flow to repay borrowings in the way that taxes on the profits from sales of manufactured goods would. So let us look at the ratio of national debt to GDP less government expenditure (let's call it private sector GDP).

In the period 1750-1870, the ratio of national debt to private sector GDP was 80% of GDP/90% of GDP, or about 89%. After the second world war it was 210%/70%, or about 300%. If the national debt grows as predicted in the 2009 Budget, with all the off-balance sheet items added in the ratio will be 220%/50% or 440%.

That is the mess we are in.

Monday, 14 September 2009

They're all special to me

This morning another pink paper saw fit to run the following following article:

Tories eye 'Tell Sid' style bank shares sale

By George Parker and Jane Croft

Published: September 14 2009 03:00 | Last updated: September 14 2009 03:00

A David Cameron government could sell slabs of shares in nationalised banks to ordinary investors, in an echo of the "Tell Sid" British Gas privatisations of the 1980s in which Margaret Thatcher tripled the number of UK shareholders.

What pray is an "ordinary investor"? To me, they are all special.

Well fancy that

Robert Peston has just interviewed the fast fading PM, including the following exchange:

Peston: It turned out that our banking system here in the UK was one of the two weakest in the world. The other banking system that was in as much difficulty was the American banking system. Do you have no personal regret about failing to spot that?

PM: No, I've been very clear. We should all have been supervising more. In fact, you know, you ask the question: Is the lesson of the last 12 years that we should have supervised more (which is my view) or supervised less (which is the view of our opponents)?

Funny that, because in 2005 Brown told the CBI: "The new model we propose is quite different. In a risk-based approach there is no inspection without justification, no form-filling without justification, and no information requirements without justification. Not just a light touch but a limited touch. Instead of routine regulation attempting to cover all, we adopt a risk-based approach which targets only the necessary few."

Forget Alan Turing. It seems we all deserve an apology.

What happened to the £5 trillion stimulus?

The BBC says that Gordon Brown, Lord Mandelson's deputy prime minister, is going to talk about the needs for cuts in public expenditure.

The big question that isn't on the tip of everybody's tongues is whether this is going to be before or after the £5 trillion stimulus.

Safer offshore banking in tax havens

The most recent Average Bank Financial Strength Ratings by Country produced by Moody's gives a good idea of where those long on cash might like to place deposits for a rainy day without landing up in an Icelandic debacle.

There are no countries with an average bank ratings (weighted by assets) at any of the top 3 grades (A, A-, B+), but there are 4 with the next rating (B), namely Canada, Singapore, Australia and Hong Kong. Although English is spoken in all these locations, the time zone may be inconvenient and the withholding taxes in all but Hong Kong might be unwelcome to some, while the "China risk" of Hong Kong might convince others to look for another home for their cash.

Dropping a grade to B-, we have Chile, a little out-of-sync timewise, but not so convenient for a friendly chat with the bank manager, even if you do speak Spanish. Closer to home, there are also the B- rated Norway, Sweden and Finland, all in approximately the right time zone, safe, free from withholding taxes on interest, but not renowned for their level of service to international clients, which leaves only 2 countries at this level of safety that tick all the other boxes: Liechtenstein and Switzerland.

For what it is worth, Britain's banks are rated 3 notches lower at C-; below Brazil and Jordan and on a par with Slovenia and Colombia.

Mandelson blows it

Last Friday, I called Lord Mandelson a flake because hedidn't have any sort of deal over British jobs at Opel/Vauxhall after it is sold to Magna. Now we see how true that is. Could it be that Mandelson speec on spending v cuts is designed to take away some of the flak?

Canadian car parts manufacturer Magna say they may cut as many as 10,500 jobs at Opel and Vauxhall in Europe. The Germans have agreed a deal with Magna that means some 2,600 job cuts in Germany.

That leaves another 7,900 to go elsewhere in Europe. The group employs a total of 54,500 workers across Europe, with 25,000 based in Germany, so by my calculation those redundancies will come from 25% of the 29,500 employees in the rest of Europe, or to put another way in Poland, Hungary, Spain, Belgium and the UK.

Now we don't know what the key decision factors are, but if I was looking at this dispassionately, I would have to say that Belgium and the UK were probably the highest cost centres, with both countries producing versions of the Astra.

Then again, Lord Mandelson says the two UK plants are secure. Perhaps, but does that include the jobs inside the plants?

Alan Turing: apologies required

At the risk of incurring wrath from many quarters, I would like to see some apologies from several people regarding Alan Turing. Not in this case from Prime Ministers who have no personal responsibility for Alan Turing's treatment in the 1950's, but from those who have grossly hyped Turing's achievements.

A typical example is this from the Daily Kos:

If the name Alan Turing rings a bell, it's probably because of the Turing Test. But creating the famous Artificial Intelligence mind experiment was only one of Turing's many accomplishments. In WW2, it was Turing who cracked the Nazi code, saving countless lives and bringing the brutal war to an earlier end. He went on to become the father of the computer age. Turing invented the program, what we call software today, and laid the cornerstones for a network that connected defense computers by phone lines that would one day be called the Internet. Today, as you type on your keyboard, populate spreadsheets, and surf the web, you will be working on a modern incarnation of Turing's devices. How was this visionary genius treated by the western civilization he so ably helped preserve and enrich?

Now let's get this straight. Turing was a bright mathematician who achieved much, but was never as pre-eminent as today's writers suggest. As a mathematician working in Computation Theory, which I would classify as a distinct subset of Computer Science, his most notable theoretical achievement was the conception of the class of abstract finite state machine known as the Turing machine, which perhaps bears a resemblance to early computers because of theirsimplicity and use of external storage media, but were in fact far removed from the computers built fifteen years later.

The Turing machine abstraction was in fact no more than an equivalent model to the general recursive functions developed by Kleene and the work on effective procedures by Alonzo Church slightly before Turing. Whilst the Turing machine feels like a computer, they give no further insights into effectiveness of procedures than other methods.

The Entscheidungsproblem, a challenge posed by David Hilbert in 1928, questions whether there is an algorithm that takes as input a description of a formal language and a mathematical statement in the language and produces as outputs whether statement is true or false.

The problem was solved by Turing's supervisor at Princeton, Alonzo Church in 1936 with the concept of "effective calculability" based on his λ calculus and again less than one year later by Turing with his abstract Turing machines. The pair later showed that the two models of computation are equivalent. Turing clearly did outstanding work in the field, but it would be wrong to name his successes without mentioning the work of people such as Church, Gödel, Post, Kleene and even Hilbert.

Turing's war work was also valuable, but again contrary to what might have been gleaned from reports he was not working alone. He ran one of the important codebreaking huts and his expertise in statistical cryptanalysis improved on the work of the Polish Cipher Bureau who had first cracked the Enigma in 1932, but the Enigma "machine" was in fact a family of machines subject to constant improvements, and 10,000 people continued working at Bletchley Park for 3 years after Turing left Hut 8. In the later years of the war the Germans used Enigma machines less for high priority messages, preferring the Tunny sytem using teletype machines. Turing and others worked on this and collectively they designed the Colossus machines built by Post Office Engineers for the purpose.

After the war, Turing worked on the design of early computers, but his efforts at the NPL and later at Manchester, initially based on the Colossus machine built by the Post Office, came after the earlier and more widely published papers of John van Neumann at Princeton who had discerned the need for stored program computing machines while working on the wartime Manhatten project. Now there was a truly great mathematician who made many significant advances in set theory, functional analysis, quantum mechanics, ergodic theory, continuous geometry, economics and game theory, computer science, numerical analysis, hydrodynamics (of explosions) and statistics.

Indeed when Turings' ideas were first presented to the directors of the NPL, the preface acknowledged the advice that had been received from von Neumann. The NPL director, John Womersley, explained the need for a computer and argued that the UK had advantages because it was designed by the users, mathematicians, rather than electrical engineers. As it turned out the American engineers managed to build their designs while Turing's design for the ACE computer was discarded for a simpler design completed after Turing had left for the University of Manchester.

The Manchester Computer Laboratory designed the SSEM and the Manchester/Ferranti Mark I, but contrary to what Turing's web biographies imply, Turing was not involved in their design or construction, although he was one of the first and foremost users. The machines were actually designed and built by electrical engineers, not mathematicians like Turing. Meanwhile the mathematicians at Cambridge, Maurice Wilkes, David Wheeler and others, built EDSAC.

The later treatment of Turing was worse than heinous, but the removal of his security clearance, and bar from working with GCHQ was quite understandable given the legal standing of homosexuality at the time. That is not to say that the law was correct, merely that the law being what it was, the potential for blackmail was clear and the security risks were obvious.

So in summary, Turing was a highly gifted mathematician and deserved to become a Fellow of the Royal Society. One might even call him world class, but let us not get carried away. The British have very few great men in this field. Turing's machines are certainly intriguingly elegant as thought experiments even if cumbersome as anything other than a conceptual abstraction. Turing was a fine mathematician of the first half of the twentieth century, but in the same league as other British mathematicians as G.H. Hardy, Freeman Dyson or Paul Dirac? Not in my view, but that may be just because I have a better grasp of Turing's work.

In Computer Science I would rank him above such illustrious figures and personal favourites as Donald Knuth and Marvin Minsky, but to say that he "invented the algorithm" is nonsense. Numerical analysis, the study of algorithms for the problems of continuous mathematics, has been around since Babylonian times. Turing's solution to the Entscheidungsproblem, involving his notion of "computability" came after his supervisor's equivalent proof using the concept of "effective calculabilty".

And as for the claim that Turing "laid the cornerstones for a network that connected defense computers by phone lines that would one day be called the Internet", all I can say to that is "Bolt, Beranek & Newman".

Today's story from the house of dumb

Today's story of improbable research comes from Canada where we hear that scientists who have undertaken a meta-analysis of previous research data have concluded that people with cancer who are depressed are more likely to die than are patients with good mental health, according to the science journal Cancer.

The study reported that death rates from cancer "were up to 25 per cent higher in patients experiencing depressive symptoms and up to 39 per cent higher in patients diagnosed with major or minor depression." The scientists say thet this demonstrates that there is a link between cancer survival rates and mental health, and it is hard to disagree with their assertion based on the evidence.

But their conclusion that alleviating depression might improve survival rates seems wide of the mark Terminal cancer is widely regarded as worse that a bit of a bummer and is likely to depress most people.

The scientists say the point is unproven and, naturally, would like funding for further research.

State broadcaster turns propaganda volume to 11

It seems the election season has already started with the BBC showing its colours early.

After the Conservative party have turne d the mendacious debate of "Labour investment versus Tory cuts" (now earnestly denied by Labour but on Hansard from June 17th for all to see) into one of the need for cuts, Lord Mandelson, who is supposed to be an unelected minister responsible for trade, but now looks as though he is running the whole show and speaking about the whole of government, is going to make a speech later today.

Fair enough you might say, he's quite entitled to do so, and if he wants to release it to the BBC, well fair enough, they could report the fact that he is going to make a speech.

But they don't, at 7:40 the Today programme on Radio 4 pretty much reads the executive summary about Labour wisdom (you must remember that, the policy of borrowing 28% of all the government expenditure) and Tory savagery. No right of reply for the Conservatives.

Then they bring on the General Secretary of the Trades Union Congress, who for the benefit of our foreign readers is not only a supporter of the Labour Party, but collectively by far their biggest funders. No right of reply for the Conservatives.

And at 8:10 they wheel out Mandelson himself, after a slightly sceptical introduction from Nick Robinson, to allow the Trade Secretary to give the ten minute radio version of today's propaganda message.

Did we then get an alternative view from the Conservatives? No, it's cut to a story about Dame Vera Lynn.

Saturday, 12 September 2009

Playing poker with a pair of 8's

Business Secretary Lord Mandelson may think he is a smooth operator when it comes to mixing with politicians, but to the rest of the world he often lacks depth. He may have blown his position on the directors of Phoenix Ventures by commenting on the procedures that may be taken against them. He says work has begun to disbar the Phoenix Four - John Towers, Peter Beale, John Edwards and Nick Stephenson - from running companies in the future.

"If they themselves don't voluntarily disbar themselves by going to Companies House and signing an undertaking- a binding undertaking that will disqualify them - then I will initiate proceedings in the courts to do so," he said.

But why would they want to spare the inconvenience of court proceedings by doing so? I can't think of a reason, so one has to consider why Mandelson would ask them to do so, and the only conclusion that comes to mind is that Mandelson doesn't have much of a case against them. After all it is for the courts and not the Secretary of State to decide whether any of the directors are unfit to serve as directors again. Neither the fact that directors paid themselves large salaries nor the fact that the Secretary of State doesn't like them mean that they will necessarily be disqualified.

If Mandelson was playing a strong hand, he wouldn't have blinked.

Clean air and low taxes

Switzerland's reputation for efficiency, stability and traditional values, not to mention its beautiful cities, mountains and lakes, continues to attract an increasing number of foreigners looking for the perfect family environment with the combination of scenic winters and a fantastic climate during the summer, with added cowbell.

Its central location in Europe, favourable tax conditions, stable banking system and political neutrality, blah, blah, blah, make it especially appealing to UK hedge fund managers looking for a safe bolt hole from Gordon Brown's 50% marginal tax rate, likely further NIC increases and possible EU limits on pay for bankers and asset managers.

Which is why the Swiss were in London this week encouraginging high income financiers to move to Zug. Did I mention the 50% tax rate?

Friday, 11 September 2009

Buy? I nearly threw up

Having wriggled through the US legal system on charges of aiding and abetting tax evasion, losing several hundred million dollars in the process, UBS have been back in the courts in a civil case brought in Connecticutt by Pursuit Partners, a hedge fund that claims UBS salesman dumped the certain CDOs on the fund without revealing that it had had discussed a potential downgrade of the securities with Moody's following a change of methodology by the rating agency.

Now is not the time or place to go into matters that have yet to be decided, although the judge has told UBS to set aside over $35 million to cover the cost of any potential judgement. That amount was the value of certain CDOs sold top Pursuit who had previously told UBS that they only wanted to buy investment grade paper.

The true quality of the paper was described after the sale by the salesman who sent an email saying "he had sold more crap to Pursuit", according to a pre-judgement report. Worse still, the report continues as follows:

The court finds that the problem was not confined to only the CDOs at issue in this PJR. For instance, on September 24, 2007, as the clock was running out on the investment grade ratings for its products, another UBS employee sent an email to a UBS director referencing another supposed “investment grade” rated CDO in their inventory, writing, “OK still have this vomit?”

Which tells you all you need to know about the ethics at UBS. It also speaks volumes about the quality of research and insight at some small hedge funds.

Why stop at the Phoenix 4?

It seems the government is intent on punishing the directors of the Phoenix consortium for helping themselves to £42 million by banning them from future directorships.

It seems that the source of much of this cash was not from the MG company but from the acquisition of 2 leasing companies from Barclays capital in transactions organised by Deloittes, according to the report from the BERR.

These transactions, listed as Projects Aircraft and Trinity, involved the sale to Phoenix ventures of aircraft leasing companies owned by Barclays Mercantile, the leasing arm of Barclays. Sitting on the Barclays side of the deal was Iain Abrahams. The idea behind the deal is quite complicated. During the opening years of these aircraft leases the transactions would have generated substantial tax losses from the potential value of capital allowances and the leasing company would have surrendered these losses to the Barclays group to shelter UK tax liabilities.

In later years the leases would have created taxable profits far in excess of book profits, creating substantial deferred tax liabilities in the Barclays accounts. By selling the leasing companies the tax liabilities could be avoided, giving rise to book gains for Barclays. Clearly any purchaser would want to be compensated for accepting the liabilities, but a group that had substantial losses that it was never likely to use would want a reduced amount and in this case, Barclays agree to allow for a discount in the price equal to 35% of the present value of the future tax liabilities to Phoenix Ventures. The balance was shared between Barclays and the respective lessees.

But that is never the whole story because Barclays and the lessees probably planned to terminate the leases anyway, so the present value of the tax actually avoided would have been much higher, and even if they hadn't, when Barclays started reporting undre IAS it would have hadto report the nominal value of future tax laibilities rather than their economic (discounted) cost it had shown under UK GAAP. So all in all, a very lucrative transaction.

Phoenix Venture Holdings didn't have any tax losses itself. Losses had to be surrendered by MG Rover to its parent. According to the BERR report, Barclays would not countenance a sale to MGRC bcause oif credit concerns, but were amenable to a sale to the parent. Now Barclays would have had a good idea about the position of the Phoenix/MG group. They have good reason to do so because if the tax liabilities in the leasing comapny had not been met, the law would allow the Revenue to go after the seller for any unpaid tax, unless the seller could iestablish that it was not reasonable to infer that the tax would not be paid at the time the company was sold. That means that Barclays and their advisers would have been all over the deal to establish where the losses would have been coming from.

As it happens, Phoenix managed to arrange for the surrender of the losses for no consideration, which appears to be a matter that the BERR appears to find objectionable, all though there have been no prosecutions from DTI/BERR nor from the SFO.

But if the Phoenix 4 are culpable of anything, why is no action being taken against Barclays, against Eversheds or against Deloittes the auditors and tax advisers to Phoenix who pocketed over £2 million in fees from these transactions and £30m from the group over the years 2000-2005? It is notable that only about £4m of that £30m was for audit work. Can Deloittes really claim to have been independent with so much fee income from non-audit work?

The suspicion has to be that the directors are easy prey and the others would be much more likely to see off Mandelson.