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Wednesday, 29 February 2012

Back off, McCluskey

On the one hand, I would quite like to see public sector strikes during the Olympics.  It is after all nothing more than a glorified school sports day that has been worked up into a multi-zillion spending spree.  Sure enough, government ministers have announced that the project is going to come in under budget, an achievement reached by increasing the budget by a factor of four since the bid was won.  In a way, there would be some satisfaction in having the unions out wrecking the party that their boys had signed us up for (2 prepositions at the end of a sentence, ugh, ugh).

But that would miss the point completely. It comes down to an issue of national identity.  Why would we want to have an all-out public sector strike like they have every summer clogging up the streets in Paris?

Let us not forget that the only reason that we are prepared to waste so much money on a 2 week event such as the 2012 Olympics ... is because the French wanted so badly to host it.

Monday, 27 February 2012

A conspiracy of one

Christopher Tappin, a 65 year old businessman, has lost his two-year battle and landed in Houston last night on a plane from Heathrow. He will appear in court in El Paso on Monday and could face up to 35 years in jail if convicted of selling batteries for Hawk missiles to Iran, according to the newspapers.

Well the newspapers haven't quite got that one right, because it isn't illegal for a UK citizen residing and operating in the UK to sell equipment to Iran, unless he is restricted from doing so by UK laws. Which he wasn't. And in any event no equipment was ever sold to any one.

The grounds for his extradition were:

(i) conspiracy to export the batteries,
(ii) attempting to export, and aiding and abetting the attempted export of, the batteries, and
(iii) conspiring to conduct illegal financial transactions in transferring funds to pay for the batteries.

A fairly detailed description of the charges are found in the High Court decision approving the extradition request.

Now I have little sympathy for Mr Tappin reading the judgement it is clear that his intention was to sell batteries to Iran, but it seems to me that this is another example of the US authorities overstepping the mark when it comes to prosecuting businessmen when the business becomes political.

Readers may remember the Enron Nigerian barge case, where 4 Merrill Lynch bankers went to jail. At the 2004 trial, prosecutors alleged that Enron’s sale of an interest in three power-producing barges, located off the coast of Nigeria, to Merrill was a sham that allowed the energy company to illegally book a profit, although it was in fact a fairly straight forward off balance sheet sale and leaseback widely undertaken by companies reporting under US GAAP.

But that was only half the issue.  The basis for the prosecution was that the Merrill Lynch bankers were committing a fraud by depriving their employer of their "honest services", whatever that means, because in this particular case nobody argued that either Merrill Lynch or Enron lost out on the deal.  The prosecutors certainly didn't argue that Enron or Enron shareholders lost out, and unsurprisingly, when things had settled down a bit, the Merrill Lynch bankers won their appeal, not because they hadn't done the things of which they were accused, but because what they had done wasn't actually a crime. The Houston prosecutor tried to twist the law to create criminal offences where there was none.

Now let us look at Mr Tappin's case.  I think it is beyond doubt that Mr Tappin and his partner a Mr Gibson thought that they could procure batteries for Hawk missiles for their Iranian customer despite US export controls, but that in itself is not a crime, even in the US.  There has to be an actual conspiracy, otherwise all you have is two people outside US pondering possibilities.

So Mr Gibson set off for the US to look for a potential seller (see the decision referenced above for details) and came across Mercury Global Enterprises, a US company that said they could help out.  What they didn't make clear at the time was that they were in fact a front company for US Customs, but as soon as Mr Gibson told them what he was up to, they cuffed him and but for a minor misunderstanding in the 18th century Mr Gibson would now be turning Queen's Evidence.  As it was he agreed to help the US Customs catch his partner.

Now bear in mind that at this point Mr Tappin hadn't had anything to do with the US. Gibson gave the US authorities emails between Tappin and him detailing the negotiations for the purchase of Hawk Missile batteries and other licensable technology, and the problems of ordering the batteries in the United States. Gibson told the authorities that he was to purchase the batteries and the appellant was to arrange the shipping.

So at this point, having not actually done anything, Tappin is actually acting on his own.  Gibson and Mercury pretend to set up all the arrangements for the export, but actually they are not really doing anything of the sort.

Even when Gibson contacted and visited the US exporter, there is nothing more than a potential business transaction that the US exporter could choose to decline. Indeed, such enquiries are frequently made because suppliers may know of alternative sources of supply or uncontrolled but compatible parts. But when an exporter decides to accept the business US legislation places the onus for compliance with the export rules on the exporter not on the foreign importer. If the exporter has any doubts about whether the exports might be controlled, they are under an obligation to submit an export licence application to US Customs. In situations where the final destination is in doubt, the exporter will usually ask for written confirmation from the end-user.

This is where the story becomes somewhat troubling:

  • If Gibson and Mercury were both acting for US Customs and had no intention to export any batteries, who was conspiring with Tappin? The idea that Tappin was a party to a conspiracy to export goods is a little preposterous, when all the evidence suggests that his relationship with the exporter was as a purchaser of goods and the exporter was, as far as Tappin was aware, ignorant of the final destination. If the conspiracy was to procure a third party to commit a fraud, then Tappin was in a conspiracy of one, which under UK law would mean that there was no conspiracy. If the conspiracy was a conspiracy between US Customs and Tappin, then we have the ridiculous assertion that US Customs was trying to defraud itself. If the conspiracy was between Tappin and Gibson, then the conspiracy was broken before anything happened.
  • If Mercury was in fact an agency of US Customs, how can it be a party to a conspiracy to defraud US Customs?  US Customs not only knew the facts but were the main party to the fraud on themselves. Tappin may have supplied incorrect information to Mercury (not to US Customs), but it was the obligation of the exporter to establish whether these were controlled exports. 
  • If Mercury was made aware by Mr Gibson that goods were ultimately destined for Iran, they should have either raised the issue with Tappin, declined the business or filed an application for an export licence. The fact that they did none of these, despite being aware of the likely destination implies criminality on the part of the customs agents themselves.

The fact that a US government agency is prepared to break its own rules to perpetrate a fraud on itself to substantiate a charge of a conspiracy to defraud itself has to be one of the most convoluted legal arguments for criminality that I have ever seen, but after the Nigerian Barge case and the US conviction of UK bankers depriving their UK employer of their honest services, I fail to be surprised by the US criminal justice system.  

Thursday, 23 February 2012

Seriously Flawed Office

I see Vincent Tchenguiz has received an apology for the SFO for the SFO's issue of a search warrant and investigation into Mr Tchenguiz's dealings with Kaupthing all because the SFO didn't understand the documents they were reading.

When they went to court to obtain a search warrant, the SFO alleged that Mr Tchenguiz had misled the bank over the value of properties used as security for a loan. They also claimed Mr Tchenguiz had failed to tell Kaupthing that there was other more senior debt secured on the property. As it turned out, both statements were wrong and the facts should have been evident from the loan documents which made the position quite clear, but not to the dimwits at the SFO, who according to SFO management were “extremely busy” with a “very large amount of complex information”.

Which doesn't surprise me at all.  I once tangled with the SFO as a witness in a supposed "tax fraud" in another European country (names withheld to protect the innocent). What it actually was was a tax deal which was being challenged by the authorities, and the tax payer won, but somehow the SFO got involved.  What got there beef was that one one day a bank lent a sum of money to a company that bought some equipment from a seller who then deposited the sales proceeds in a deposit at the same bank ... and then the equipment was leased back over several years.

What got the SFO in a stew was that "the money" went round in a circle on day one, with the same amount ending up back at the bank.  This in their view was indicative of a fraud, although they failed to let me know under which statute this felony arose. I tried in vain to make the point that one party had borrowed money and bought an asset, while another had sold an asset and taken it back on a lease and acquired a deposit, while the bank was party to a new loan and deposit, so all parties had radically different balance sheets.  I ended up having to spend quite a few hours in the witness box with the same questioning from counsel for the prosecution, although the judge seemed to think my points were quite acceptable.

Tuesday, 21 February 2012

BBC spinning for the left again

This time in France.  Listen to the report off tonight's PM, starting at 46L:50, as Christian Fraser the BBC Paris correspondent deflects possible critical thinking away from DS-K and onto the upcoming French elections.


OK, so far so reasonable, but then the BBC try to turn this event into a positive for the left (certainly they can be relieved that DS_K wasn't arrested while running for president), but then they go one further and try to make out that this is actually good for the left because Francois Hollande looks "normal", whereas Sarkozy looks "bling".

Sorry, but where did Sarkozy come from?  It was the serial pervert at the IMF who was caught with his trousers down, but in the BBC world of impartiality it is OK to ignore the news and twist the story to denigrate the right.

How to tell

Dominique (stupid name for a man) Strauss-Kahn wants us to believe that he is innocent of all charges of consorting with prostitutes and accepting sex as a gift because "At these parties, people were not necessarily dressed, and I defy you to tell the difference between a naked prostitute and any other naked woman".

There are two simple answers to this not very difficult problem:

  1. You ask them what they do for a living. Perfectly normal question, hardly likely to offend.
  2. You see the women with no clothes on?  They are the prostitutes. Other women don't get their kit off in public to fool around in public with fat 60 year old politicians.  Believe me. They really don't. You have to pay them.  It's called Price Equilibrium.
Obviously not much of an economist.

Sunday, 19 February 2012

Do as I say, not as I do #94

Chris Grayling in HMTelegraph:

"The critics are job snobs. The Guardian newspaper publishes stories attacking big retailers for offering short-term unpaid work experience placements for young people."
"But that same Guardian newspaper advertises on its website - yes, you guessed it - short-term unpaid work experience placements for young people."
"The BBC's Newsnight joined in the attack on big retailers offering unpaid work experience. And on the BBC website? Yes, you guessed it again – an offer of unpaid work experience placements. It's time we put an end to this hypocrisy."

Tuesday, 14 February 2012

Bloody foreigners

... coming over here, playing for our football teams, making racist comments. We should send them all home.

We'll have that Carlos Tevez on next, telling us about his work ethic.

Bettencourt quits L'Oreal according to the FT

Should have stuck to what he does best.

And since it's Valentine's Day, here's Nuno:

A bit of Euro-symbolism

How are the Greeks going to liberate themselves from the shackles of their government debts?  According to some German pundits, they will have to work to set themselves free.

Angela Merkel: Does this uniform make me look fat?
A: No, it makes you look like a Nazi.
Angela Merkel: Can I have a second opinion?
A: Ok, you're fat and a Nazi.

Why France lost its AAA-rating

It's run by a bunch of idiots.

First of all they propose a Tobin tax - ostensibly a tax on all financial transactions and payments which they say will stabilise the markets.  But then we find out that what they are going to pioneer in Europe is a completely  new tax on share transactions. So novel in fact that it is based on UK stamp duty although it will only apply to companies with a market value of more than €1bn (although how that is measured is a moot point).

Best of all they expect to raise €1bn a year with a tax rate of 0.1%, even though the London market which has higher volumes raises only 3 times as much with a tax rate of  0.5%, so somebody's sums don't add up.

So not a Tobin tax, and not so novel, and putting a tax on share trades is hardly going to punish the banks if it is based on UK stamp duty (technically Stamp Duty Reserve Tax), because SDRT provides a specific exemption for "qualified intermediaries" (i.e. market making brokers who are generally owned by banks).

So it is highly unlikely to stabilise the debt markets, doesn't bring in anything like the tens of billions that had the EU foaming at the mouth, and doesn't "punish" the banks, although it hits their customers. So what is really going on?

Mr Baroin says he hopes the French will agree to the tax because “Everthing is taxed – when you buy an apartment it’s taxed, when you buy a kilo of tomatoes it’s taxed, when you buy a television, it’s taxed. So why shouldn’t buying a share in a company be taxed?”

Good point.  Fresh air isn't taxed, neither is sunshine.  We haven't really got very far on taxing breathing or blood flow. And there is no tax on taxes.  Nobody likes tax, so let's discourage it by putting a tax on it. Same on poverty and social deprivation. That'll get rid of the problem. See, I could be a French minister.

Monday, 13 February 2012

Beware of Greeks baring their souls

I wrote a post a few months back that got a few twits twittering about how capitalism was doing fine in Bangalore and Beijing.  One of the premises was that the average European didn't really merit the difference in pay between them and the average Asian, and that inevitably the wages of one part of the world would trend down as the living standards of the other side of the world increased.

Greece is a case in point.  It might have seemed a fine idea to qualify for a full civil service pension after 20 years, although you can't draw it until age 60 (still better than the 65 required for the general state pension), but that is increasingly hard to justify when the other side of the world is doing all the work and not getting any such perks.

Still it seems that there are some who think that this is just a scam, even on the right. There is one far right party voting against the reforms, called the Laos party.  Appropriate because that is where the Greeks will end up if they don't face up to reality.

Friday, 10 February 2012

A whole load of fish eggs.

Big noise on the  news at the BBC today is Bob Diamond's bonus and those at the rest of Barclays.

Profits are down slightly, bonuses down even more, but Mr Diamond is said to be in line for £3 million whereas in the past he has got even more, but the BBC as ever misses the real issue and goes off on its meanderings.

The big issue is ROE.  That isn't capitalised fish eggs but return on equity.  Last year's ROE at Barclays was somewhere around 10%.  They are targeting 15%, but this year with profits down slightly they hit 5.9%.  The low number is because they had to increase their equity base,.so investor returns are diluted, even though profits are slightly lower.  If anything, if assets stayed broadly the same more equity should have meant higher profits because equity displaces some borrowing, but the fact that it didn't shows that costs are too high.

Now call me old fashioned, but if I was a majority owner at Barclays here wouldn't be any bonuses if the return on equity was only 5.9%.  I can get 4.1% from 30 year Treasuries, and I get the principal back in 30 years time, so an extra 1.8% for the dubious pleasure of letting Barclays play with my money doesn't sound like a great deal. hey I could probably get some sort of deal of Barclays swap desk that paid more than 5.9%.

So this may be the end of the big bonuses for many at banks.  Investors aren't going to put equity into banks for such poor returns.  The trouble is that too many traders were too used to building books on minimal capital after Basel II.  Trouble is that with new rules,.that regulatory arbitrage doesn't work so well, but the traders haven't yet learnt that some thing has to give.  With investors getting 6% on their money, it looks like traders will have to shed a bit of bonus (or lose their capital).

Tuesday, 7 February 2012

A very illiberal idea

The Liberal Democrats are reported to be about to press for a very unwise measure at their conference next month, one that deserves to be cut off at its roots.  Their idea is to limit tax relief for pension contributions to 40%, even for those paying a higher rate of tax.

I have long argued against this sort of top slicing on the basis that income tax is a tax on income (and capital gains) and any amounts contributed to a pension pot are not income at the time they are made, but at the time they are paid out with interest.  If a person makes pension contributions for 40 years and then drops dead at the age of 64 instead of after 65, he or she gets zip, nada, nichts & rien from the pension fund, so why should they be taxed on any deemed income before they die?

Ah but, say the would be taxers, making a pension contribution buys you the right to a pension, so it must be worth something and that should be taxed.  You can see where they are coming from but their logic is flawed.  A pension right buys you absolutely nothing until such time as the pension may be drawn and any rights you have in the fund have no value until such time as you reach the retirement age because the pension fund doesn't owe you anything until you do.

And anyway it is the most empty tax measure ever considered.  If it isn't actually possible to set up pension arrangements without passing them through salary  arrangements, the double taxation is avoided by taking the taxed salary and investing it outside a pension fund.  The return on capital is taxable (like the pension) but the return of capital is not taxed, so the investment is taxed only once, not twice.

Do as I say, not as I do

Last Novermber, the government did something that was long overdue and published accounts for the whole of government, drawing them up[ on commercial principles.

Today the chairman of the Public Accounts Committee said that the £10.9 billion of unpaid tax that was written off and the potential £15.7bn cost of medical negligence were "gobsmacking".

And she's quite right.  The only fly in the ointment is that she is Margaret Hodge, and the accounts under consideration relate to the last year of office of the Labour government.

Monday, 6 February 2012

Untimely ripped

A friend had a hysterectomy last week, for sound medical reasons.  As I pointed out to her, because she missed the news while in hospital, she wasn't the only one to have something removed last week, although hers was by necessity, whereas Mr Goodwin's humiliation was totally unnecessary. According to some reports the Queen voiced misgivings before signing the order annulling Mr Goodwin's knighthood, not least because he was a trustee of her Silver Jubilee Trust, and had previously been active in The Prince's Trust, a well trodden route to curry favour with the biggest family in Berkshire.

Don't misunderstand me. I am no fan of Goodwin, who all accounts appears to be a self-seeking careerist who built up a lousy company (RBS) with a dreadful culture in his own image, which by all accounts had a management structure full of self seeking careerists with no great ability and even less consideration for their colleagues, customers or the rest of society. His Glaswegian chippiness meant that he though his team was excluded from the Premiership because he was based north of the border, but the reality was that, like the Old Firm,  his team didn't have the talent to get through the first round of the Europa League.

But whilst I might not think much of him as a banker, I have to say that I think the way he has been treated over hi knighthood is a bit shabby.  We might like to think that knighthoods are handed out to worthy people of standing in public life, and while that may be true of many recipients, there are just as many time serving civil servants, loyal (boring) backbench MPs, party donors and game show hosts who wangle a gong and a trip to the Palace, so what did Mr Goodwin do to deserve his medal and then deserve to lose it.

The first answer was that he was the managing director of one of the largest banks in the country, although that isn't a wholly satisfactory justification.  Sir James Crosby, the equally inept MD of HBOS may have got one, but John Varley, the quietly spoken MD of Barclays managed to avoid getting one, although if 90% of your profits come from either avoiding tax on your banks profits or assisting others to do the same, the outcome is never going to be hard to guess. But Goodwin and Crosby has the advantage of running nominally Scottish banks at a time when the economy was supposedly run by Scotsmen, so Goodwins gong was a racing certainty.

Indeed Goodwin's case was improved when RBS made a hostile bid for NatWest 1999, turning RBS from a regional also ran into one of the biggest balance sheets in the known world.  Of course making a hostile bid isn't always very wise, particularly when bidding for a bank.  Banks aren't that much differentiated so the profit margins tend to be very slight compared to the asset or capital base, and in a hostile bid, there is a good chance that you might pick a wrong'un.  Fortunately for Goodwin, NatWest was in a fairly sound condition, so tha by the time the marauding Scots had shoved their sgian-dubhs into the careers of the NatWest middle management, there was enough free cash to make the takeover a success and allow Mr Goodwin to book his trip to the palace.

Part of that success would have been attributable to the conservative nature of the previous NatWest management, and part would have been down to the proper supervision of NatWest.

Now the FSA may have changed its name in 1997, but it didn't take on its current regulatory powers until 2001, whereas the NatWest takeover took place while banks were still supervised by the Bank of England.  One of the options not really open to the BoE was to say to RBS "hang on a minute, before you blow a wad of cash on NatWest, do you really know what you are doing?".  Why?  Because the BoE supervised NatWest, and as it turned out, seemed to have done a good job.

Now fast forward a few years and the acquisitive Goodwin tries to pull the same stunt on ABN, albeit that this time Goodwin makes a joint bid with other banks, aiming to split it up.  As we all know by now, it all went horribly wrong, but we can still ask some questions about who was responsible.  Sure enough Sir Fred deserves his share of the blame, but he wasn't able to commit RBS without the approval of his board.  Where were they? And it should also require some sort of nod from the new regulator, the FSA.  Where was John Tiner?  And where was the question about "Do you really know what you are doing?" and the follow up "And who do you think is going to pick up the tab when your blind gamble goes belly up?", because this time the regulator didn't have a clue about what might be lurking under the ABN balance sheet - as it turned out a whole lot of nasties.

So Goodwin has some sympathy from me, not least because he wasn't the only one to blame, but mostly because he has obviously been used and abused by the politicians and public sector staff who are trying hard to divert attention away from their own shortcomings.