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Saturday, 30 October 2010

BBC should put some of its reporters on hold

You would have though that with a budget of £3 billion or so, the BBC  would have been able to put together a more professional report on the pcketing of Vodafone shops than the student journalism on display on their website.

The simple facts are that Vodafone and HMRC won and fought a case through hte Revenue Commissioners, High Court and Appeal Court, plus a trip to the ECJ with each side winning and losing points on the way, but in the end both sides agreed to settle on a liability of £1 billion or so.

The story had been covered in Private Eye mentioning a liability of £6 billion, which is easily seen to be implausible with a bit of simple maths but is taken as gospel by a bunch of ignorant protesters, encouraged by the usual left wing suspects. An HMRC spokesman has said: "We can't comment on the details of the settlement but we can confirm that it was reached by HMRC following a rigorous examination of the facts. It was agreed that Vodafone's liability was £1.25bn and at no point was the liability greater than that", so it is very unprofessional of the BBC to give this story any prominence.  If HMRC say the figure at issue was never more than the amount Vodafone paid the protesters are not credible.

Amongst the poor reporting was the following claim that the issue "purportedly stems from Vodafone's purchase of the German telecoms firm Mannesmann, which was supposedly bought through a Luxembourg subsidiary to avoid paying tax in Britain."

Well no it doesn't.  If the German comapny had simply been bout by a Luxembourg holding company then there would be no tax payable in Britain if the profits remained in the foreign subsidiaries.  The issue was that the Luxembvourg subsidiary provided loans to the German and other subsidiaries which HMRC claimed provided low taxed passive income to the Luxembourg subsidiary which should be allocated to the parent under the UK controlled foreign corporation rules and which Vodafone claimed was a bona fide active part of its business and protected from those rules by the EU directives providing for freedom of establishment in the EU and non-discrimnatory taxation.

When Vodafone firsbought Mannesman they asked the Revenue whether there proposed arrangements wouldcauise the CFC rules to be disapplied.  The Revenue as is usually the case decided not to play ball, but as they usually do, told the company to do what they intended to do and file a tax return, which is what they did. After severalyears and a lot of haggling HMRC, the courts and Vodafone have basically determined what level of substance is required for the Vodafone treasury operations in Luxembourgf, which is why Vodafone now have an agreement that establishes that they won't be liable for any UK tax on their Luxembourg and other EU operations under the current UK laws, at least until they bring that income back to the UK. And quite right too.

Friday, 29 October 2010

Turning London into Paris

Chris Bryant has said that capping housing benefit at £20,000 a year risks turning London into Paris.  Now having lived in both Paris and London, that may be no bad thing.  Paris has an inner ring road that may be a death trap but it ensures that it takes no more than 20 minutes to get from the centre of town along one of the military boulevards to get onto the motorway and away.  Compare driving up the Champs Elysees and down the Avenue de la Grande Armee to get onto the Peripherique with the 90 minutes I spent last Sunday night getting from Battersea to the M4 and you will see what I mean.

But we shouldn't dismiss the idea out of hand, because Mr Bryant may have hit on an idea.  Instead of paying £2,000 a moth in rent in London, the government could save a fortune by sending the homeless to live in Paris. €2,025 a month gets a very nice 3 living room 2 bedroom apartment in Neuilly close to the shops and metro, and of course for EU residents would pass the cost of unemployment and health care onto the French. Plus they might learn to speak a foreign language.

Thursday, 28 October 2010

The (New Labour) police state we were in

101,248 people were stopped and searched last year in England, Wales and Scotland under Section 44 of the Terrorism Act.

506 of those searches resulted in arrests. None of those arrests were for terrorist offences.  I suspect many were for objecting to being stopped

Since July, the police are not allowed to stop and search people unless they "reasonably suspect" them of being a terrorist. It will be interesting to hear what those "reasons" have been so far.

Tuesday, 26 October 2010

Global Warming Update: coldest October night in 17 years

Do I hear "short term fluctuations", anyone?

Left wing wrong-footed by reality

The BBC set out its anti-government stall this morning by saying that a consensus of City economists took a dim view of the state of the economy.  These let us remember were the same economists working for banks that the BBC was happy to chastise only a few days earlier because of the size of their bonus pools.  That was enough to allow Lord Mandelson to grace the airwaves saying that the Coalition had failed, blah, blah blah..

But then we hear the news that the UK economy grew at a "faster-than-expected" 0.8%.  Faster than expected by the BBC, New Statesman, Guardian and their ilk, but not by anybody who has seen the recent growth in activity by UK companies following the election.  Nothing too dramatic, and pay is still restrained but companies are building headcount and expanding hence the 3.3% (annualised) GDP growth rate.

Of course that doesn't stop the BBC wheeling out their latest economics correspondent, the Shadow Chancellor Alan Johnson, who tells us that it is not as rosy as the figures tell us, because, err, because .. he doesn't want it to be. In fact according to the Labour Party the cuts (which of course aren't cuts in reality because actual spending is going up by more than RPI) should be reduced us to stave off the fall in GDP which ... isn't happening.

Alan Johnson even wentso far as to say that the government were still taking a "reckless gamble" with the economy, although he stopped short of saying why Labour's planned 1% extra cut was not even more of a gamble, and for the more economically astute, why government spending which is actually 3% more than last year is a gamble.  Well, he wouldn't, because it isn't.and more fool Labour and the BBC for thinking it is.

Meanwhile rating agency Standard and Poor's upgraded its outlook for the UK's triple-A credit rating, which is nice.

But how did the Labour Party get it so wrong? The main reason appears to be a poor grasp of reality.  The "cuts" aren't cuts in totality, merely a scaling back of the preposterous notion that we can boost our way to prosperity by ever greater borrowing and spending. 

What is more, while some government spending may be cut back. total government spending is still increasing.  This means that GDP, which measures broad activity in nominal terms, will not actually fall (because actual spending is not falling).  Add to that the reassurance to business that the new government has a dose of sanity about it (capping benefits at a figure significantly higher than the average wage is not meanness, but a recognition that while some do little to receive their weekly cheque from the state, many others work for 40 hours and pay taxes to receive far less), and the effect is a boost to the economy after several years with a negative outlook.

But if you really want to see the bizarre narrative of the Labour Party, you need look no further than Ed Miliband's speech at the CBI, which the BBC covered in much more detail than the Chancellors' (but there you go).  The problem in Britain, says Red Ed, is that we don't put enough emphasis on industry. 

True enough. I don't disagree, having spent much of the last 25 years trying to finance UK industry and its exports.  The problem is that the last government of which Mr Miliband was a member and previously a Treasury policy wonk, had a series of policies that acted against British industry more than any other government.

Leaving aside all the red tape, compliance costs and bureacracy, let us just look at the financial measures enacted by the Labour government from 1997:
  1. effectively preventing capital intensive companies from financing their assets through sale and leaseback in the second (i.e. post-election) Finance Act 1997, 
  2. effectively banning finance leasing (which had been used to finance all of the inbound industrial investment - think Japanese - in the 1980's and 1990's), unless you happen to be a foreign shipping company taking the UK tax payer for a rise in Giovanni Prescott's Tonnage Tax abortion, 
  3. the promotion of multiple film finance schemes using tax breaks snapped up by Hollywood studios, on the basis that it would stimulate the British Film industry, when in reality film crews pack their bags and move elsewhere as soon as the film completes and the subsidies dry up, while there were no such tax breaks for investors in British industry where an investment in plant and machinery would likely result in 25 years of employment, rather than a summer of filming; and
  4. the crassest of Budget manoeuvres where a reduction in the corporation tax rate from 30% to 28% is announced, to be funded by ..... a drop in the rate of capital allowances from 25% to 20%, or in other words, since there is no net cost to the tax payer, this is a movement of cash from the capital intensive, plant and machinery buying industry and utilities to the much less asset intensive advertising agencies, investment bankers and estate agents.
As buggers' muddles go, that doesn't just take the biscuit.  It ransacks a whole tin of Huntley & Palmers' finest.

Sunday, 17 October 2010

Cutting back to ... 2009

Many years ago (which in City terms means at least 3), I worked for a specialist corporate finance boutique that was linked to Tullett Prebon.  That little venture flourished and then several years after my departure grew like topsy before imploding in a big way down in Australia.  The Tullett Prebon connection was no less racy, being a money broker, whose trading floor it was unwise to cross in a skirt, nay positively dangerous.

Those days are long gone, with Tullett Prebon somewhat tamed by its acquisition by Collins Stewart, although the groups have recenly announced a de-merger, with the chairman of the former group, Terry Smith, deciding to go with the interdealer broker rathar than the stockbroker.

Those with long memories will remember Mr Smith when he was an analyst for BZW and issued a sell recommendation against the parent bank.  I can't say I would have blamed him at the time. Barclays was in a big mess.  Mr Smith went on to earn muchos kudos by penning the classic Accounting for Growth, an encyclopedia of UK GAAP accounting scams, which won him royalties from book sales to the likes of me, but cost him his job as head of research at UBS (see previous comments on UBS). It is surely because of Mr Smith's chairmanship that we should pay attention to a simply stated paper on the likely impact of the cuts from Dr Tim Morgan of TB who predicts a shower not a hurricane.

Friday, 15 October 2010


I'll admit I have never been a great fan of UBS. To be a major league investment bank, you have to have smarts, but to be honest, the typical UBS banker always had the whiff of mountain goats about him. They aimed to ape their cousins on Wall Street, but somehow they seemed to end up more ape than banker. Some would say that a lot of their presence owed itself to their "advice" to wealthy individuals and businesses who wished to avail themselves of the dicrete attractions of central European banking, but whatever it was, they always seemed to be copying the behaviour of the Americans without ever leading the way.
Which is why it is hardly surprising that we should read in a 69-page “transparency report” prompted by a Swiss parliamentary committee this year, that the bank's losses were attributed to the bank’s drive for growth in investment banking, notably by originating and distributing structured products that were based on US mortgages. The bank says its risk controls had been based too heavily on statistical models, while ratings supplied by external agencies were seldom questioned.
“The incentives in place at that time to generate revenues without taking appropriate consideration of the risks underpinned this strategy and facilitated losses,” said UBS.
So as I have said before, while stochastic models might be a good measure of something, perhaps fairness of pricing, they are no measure of the overall risk in a security. The Swiss relied on their models and the model based valuations of the rating agencies. But that risk management strategy, like a Swiss cheese, is full of holes.

Wednesday, 13 October 2010

Fantastic news from Chile

The ordeal will soon be over for the 25 who have been separated from their families for weeks.  Stuck in appalling conditions not knowing when their ordeal is going to end, and with their ability to escape depending on a tiny capsule hanging on the end of a 700 meter cable.

But it will soon all be over, and the 25 brave men and women of the BBC news teams will be ready for their next overseas junket.

Sunday, 10 October 2010

Life is full of surprises

Probably the last thing you would expect to here on the secular BBC, but the Radio 4 programme Americana features an interview with Harvard professor Robert Putnam who reports that in the US, and, but to a slightly lesser extent in the UK, by any of a number of measures, those who engage in some form of regular religious practice are more likely to engage in charitable activities, more likely to donate to charities, more likely to volunteer in their free time and are all round better neighbours.

Well, that's an observation that I make from life, and perfectly understandable - if anybody went to a weekly meeting where they confessed their misdeeds, expressed thanks for the good things in life and promised to lead a better life, then it is hardly surprising that, on average, they make for more congenial neighbours, but it is not something that you hear very often on the BBC.

Friday, 8 October 2010

Smart move by Miliband

Putting a former postman in charge of economic affairs.  First of all, since he knows nothing about economics he won't realise when he has lost the argument, and second, being a former postman he will know how to write what he does know on the back of a postage stamp.

Meet the new boss. Same as the old boss.

Of the 22 shadow cabinet members ten went to fee-paying schools and three went to grammar schools. If you include Ed Miliband, six members of Labour’s front bench team did PPE at Oxford and nine went to either Oxford or Cambridge.

If you think this is a "new generation" of Labour, then it is worth remembering that all of the shadow cabinet were on the government payroll before the election as ministers or whips.

New generation? Won't get fooled again.

More boutiques than Bond Street?

Interesting to see that the EU is getting the hang of the US extra-territorial regulation and is trying the same game on bankers' bonuses.  According to the BBC, the new bonus rules would apply to the worldwide operations of banks and subsidiaries operating within the EU.

Key points of the proposals include:

  • Cash element of standard bonus capped at 30%, and one-fifth for large bonuses;
  • New watchdog for European banks to define what is a big bonus;
  • 40% of normal bonuses deferred or paid over several years, while 60% of big bonuses postponed;
  • A clawback mechanism, meaning a star banker might not receive the full payout if investments unravel.

I like the idea of a 'malus', a reverse bonus that is due if the previously profitable trade goes wrong, but how do you enforce this when the bonus recipient may have moved to the other side of the world.  And how does the EU expect to force Yankee Bank Investments Ltd, the UK incorporated to react if its former employees are paid big bonuses when they move back home or elsewhere in the organisation.  If the EU goes against the London operation they will quite rightly have a case to take to the ECHR.

I reckon that over time this is likely to lead to the return of the merchant bank - little or no capital, but big fees for advisory work, mergers and acquisitions.  Why would a corporate finance advisor who has worked all the hours of daylight and more for months to earn a big fat fee for his firm, and at no continuing risk once the deal goes through, want to see his/her bonus tied up in shares where the value can be wiped out by one stupid trader?   All that goes away by working for an institution that is not a licensed deposit taker.

Wednesday, 6 October 2010

Are you doing your bit?

There has been a lot of discussion in the media, the internet and down the pub about whther £44,000 is a lot of money or whether somebody who earns that much should be getting benefits, or more importantly, whether somebody earning £15,000 a year should be subsidising the children of someone else earning 3 times as much.

SoI did what I usually do in these circumstances, and got out a metaphorical envelope to do some sums on the back thereof.  It trurns ot that there are about 60 million of us give or take a cargo ship of illegal immigrants and the government plans to spend £680 billion this year, but there is an additional £30 billion or more of tax xcredits that the gobvernment calls "negative taxation" and lopps off the tax receipts number but should really add onto spending, so let's do that.  That gives us an average spend in central and local government of £12,000.

Now I know that we all receive different amount at different times in our lives, and some of us are perfectly healthy until we drop dead while others make the localhospital a second home, but bear with me and let us just assume that we all draw the same average figure throughout our lives, and let's call that figure £12,000.

Well the good news for Mrs £15k Shop Assistant is that she isn't subsidising any one.  On the back of my envelope I made some broad brush assumptions about council tax and VAT, based on income and then came up with a figure for the total amount of income tax, NI, council tax, VAT and other duties that someone would spend according to their income (assuming it was all spent). Quite horrifically for Mrs Assistant about 40% of her gross income ends up in the government's maw, but that means she is only paying half of the value of services the government says she receives, and none of the cost of any dependent relatives.

To come close to breaking even for her ow account she would have to earn £30,000, and for 2, 3 and 4 people she would have to earn £55,000, £75,000 and £96,000. The situation would be slightly more in her facvour with a second earner earning rougly the same salary, because the government would be spending as much on them as they paid in tax for 2, 3 and 4 people if they both earned £16,000, £48,000 and £58,000.

Or to pu it another way, anyone with 2.4 kids who earns less than £125k is living off the state.

And who is picking up the tab for that?  Your grandchildren.

Tuesday, 5 October 2010

The fastest way off the dole and into work

Justice secretary Ken Clarke has said that a "regime of hard work" needs to be introduced to the prison system to reduce re-offending and to instill a work ethic in inmates. Speaking to the Conservative party conference, he confirmed plans to make prisoners work a full forty-hour week where they were likely to be paid the national minimum wage. He said: "If we want to reduce the crimes these people will commit when they get out... We need as many prisoners as possible to work hard for regular working hours."

So there you have it, for anyone who wants to get off benefits into work. Rob a bank and you will be put onto a minimum wage job in no time. Better still, for an OAP strugling to make ends meet on the full state pension off £97.65 per week (single) or  £156.15 (married couple) per week, get yourself banged up for sheltered accomodation and a job that pays  £185 a week.

Crime of the week: The sentencing of Jerome Kerviel

Jérôme Kerviel was sentenced to three years in jailon Tuesday. On the face of it, and without going into the details, that seems fair enough.  Acording to the three-judge panel,  “By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future was threatened.”

Fair enough, because the guy ran up €50 billion of unhedged trades that were un reported until they were discovered in January 2008 - the old trick of winning trades going into the book and the bonus pool, the losers going into the drawer (for more details see Joe Jett). And if it wasn't bad enough on top of the 3 year sentence, M. Kerviel was given a 32 year suspended sentence and a prohibition on further trading - as if anyone would let him near their trading floor.

But the real crime is that Kerviel has been ordered to pay Societe Generale the staggfering sum of €4.9 billion in damages.  The reality is that SocGen were probably aware of the risks Kerviel was taking but turned a blind eye, until things went wrong. It was the bank that was telling its traders to make short-term profits. That doesn't absolve Kerviel of any guilt, but the bank should be taking more of the blame, if for nothing other than the laxity of its controls.

Monday, 4 October 2010

Osborne's faux-pas

A big mistake from Multi-millionaire trustafarian George Osborne in promising to abolish child benefits for anyone paying tax at the higher rate.

First of all let me declare a non-interest. My children have grown up and have either left home or reached an age for which they are no longer eligible for child benefit. Now let me say why it is wrong.

First of all the restriction will apply to any household where one of the members is paying tax at the higher rate (roughly  £44,000).  But because of the crude way it is applied it will not apply to a household where there are 2 earners earning £43,000 each, fopr a combined family income of £86,000.  Others who would still qualify would include the private equity manager who can defer millions in gains and show little income on his tax return and the resident non-dom who has little UK taxable income and pays for his lavish lifestyle with a foreign credit card issued by his friendly offshore bank.

More seriously, the idea is poorly thought through for a number of reasons.  A family with 3 eligible children would receive £20+ 2*£13 or £46 per week, which is just slightly under £2,400 a year. That may not sound much to Mr Osborne, but to a family on a taxable income of £44,000 a year taxed at a marginal rate of 40% plus 2% NI, that represents the net income from an extra £4,135 of extra income.  Or to put it another way, earning anywhere between £44,000 and £48,135 makes them worse off that they would have been earning £44,000.

Of course (and at this point I warn you that I am not a regulated financial adviser), that any parent caught in this trap would be well advised to make additional voluntary contributions, or possibly to make donations under gift aid, to reduce their taxable income in order to retain their eligibility for child benefit. Alternatively, if you are an MP, you will still be allowed to employ your spouse as a secretary during this parliament.

But that misses the real iniquity. Originally child benefits were implemented as a tax allowance.  The logic was that a single or childless married coupleshould be granted individual personal allowances each, at some times transferable, at othe times strictly personal, because the first so many pounds of income is deemed to be required for basic personal needs such as minimal housing.  The logical extension of this is that further allowances are needed for additional family members because the income of the familt, effectively a single legal and economic unit, is stretched further.  Hence the availability of income tax allowances for children.

When it was realised that tax allowances benefitted high rate tax payers disproportionately - a factor that was less aparent before income tax rates increased after the second world war, the child tax allowance was changed to child benefit, with broadly the same impact for basic rate tax payers.

Removing the benefit for higher rate tax payers no means that a married couple with 3 children where the only working spouse will be paying tax at the higher marginal rate despite an average income per capita of £8,800 per person in the family, whereas a childless couple each earning £43,000 will be paying tax at a marginal rate equal to the basic rate, despite having an average income per capita that is 5 times higher.

Saturday, 2 October 2010

Eco-fascism and how to avoid it.

Apparently, Richard Curtis, Dawn French, the Guardian and a lot of spoon fed government funded greenies thnk that it would be a tremendous hoot to blow us all up if we don't reduce our energy consumption by 10% on October 10th.

In order to avoid any messy and traumatic personal injuries, may I suggest to all readers that they make it easier to ensure compliance by increasing their consumption of energy by 11.1111% on October 9th.