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Friday, 27 February 2009

Gordon Banks

The last time a one-eyed man was called on to make a double save, Gordon Banks was playing for Stoke. Now only 3 months after Gordon Brown single-handedly saved the world by injecting £20 billion in cash for ordinary shares and preference shares (which have since been swapped for ordinaries), the one-eyed son of the Manse is gong to do it again, but this time putting in up to £19.5 billion. That is £39.5 billion in the year. Remember that number because we will come back to it.

This is how it works. As part of the bailout package the government will guarantee up to £ 325 billion of assets, although if the pound devalues that number will go up. The government, ever eager to drive a hard but pointless bargain, insists that RBS take the first £13 billion loss. RBS reply that they don’t have £13 billion to lose, so the government say they will inject £13 billion.

Then the government say they aren’t going to do this for free. Oh no, they want a fee. 2% sounds good. Quite frankly they shouldn’t have bothered. This stuff is either worth very little or it's fine, actually the former. 2% is an absolute steal for the bank. It's a fraction of what they would pay for one year's insurance for this lot, forget about a once-and-for-all payment. In any event that means they have to pay £ 6.5 billion in premiums, which RBS say they have not got, so the government says they will put in another £6.5 billion if required.

So where does that leave us for the year? Well RBS say they lost £24.1 billion for the year, and they will have to pay out another £6.5 billion, so let’s call that a £30.6 billion loss, but on the plus side they have offloaded a net £ 312 billion of dodgy assets and they got equity commitments of £33.9 billion, so they are in good shape. They also lose some tax breaks for a few years, but as they probably don’t expect to pay tax in the UK for a while but I don’t expect that makes much difference.

The tax payers side of the story doesn’t look so rosy. Already a net £33 billion out of pocket and at risk for a further £ 312 billion against assets known to be worse than a bit iffy.

Who said crime doesn’t pay?

Thursday, 26 February 2009

You have to take me seriously now

My blog appears to be referenced in an academic paper by a Harvard PhD, Associate Professor at North Western University on SECURITIES REGULATION, MARKET CRISIS, AND NETWORK RISK. See footnote 254.

The Goodwin pension saga explained

Gordon Brown says he did not know details of Sir Fred Goodwin's pension. George Osborne says the Prime Minister's claim is "pathetic".

Alastair Darling says Goodwin should give up his pension. Sir Philip Hampton, who draws two salaries at Sainsbury’s and RBS, and no doubt has generous pensions accumulated from his time at Lazards, British Steel, BG, BT and Lloyds TSB, wants Sir Fred to think about giving up his £ 693,000-a-year pension from RBS.

Sir Fred said he would think about it, probably hoping he could keep thinking about it until everybody else has forgotten about it. Darling has admitted that the government could have stopped Sir Fred getting his pension, and could have prevented him from drawing it at age 50 rather than 60, but had failed to do so. Osborne said Darling's position was "pathetic" as well.

According to Darling "Lord Myners spoke to Sir Fred and put it to him quite simply - do you not think it is right to forego this. You cannot justify these excesses." Maybe not, thought Fred, but he doesn't have to justify them, so Darling added "We are exploring with RBS, and with lawyers what can be done".

Sir Fred has since realised that he won't get away with the money just by kicking the ball into the long grass, so he has said he isn't giving anything back. Referring to the fact that he has foregone 12 months pay and some share options which at the time were worth very little and probably even less now, Sir Fred says he has already "made a gesture", and if he is asked to do more he will probably make another gesture.

It is, however, customary these days that when asking for £ 325 billion of government guarantees on top of £55 billion of equity contribution, in the process of offering his resignation, a managing director should expect to forego any future salary, so Sir Fred's gesture was unneccessary. That RBS should have allowed him to "make a gesture" was surely a question of good manners on their part. Indeed in earlier times a knight such as Sir Fred might have been expected to fall on his sword, although back in the times when knights wore swords they had never heard of billions or trillions, let alone lost that much.

Sir Fred has written a letter telling the Treasury that ministers agreed to the pension deal. In response, city minister Lord Myners has said he was not aware at that time that the deal could later be altered. "That doesn't make sense," you might think. And you would be right. It doesn't make sense because a deal is a deal so it can't be altered.

So why say it? Probably to confuse the media, because it looks like Myners was trying to waft smoke over the fact that he had discussed and agreed the pension with Goodwin. He was also covering for his boss, who almost certainly knew about the deal, because when Sir Fred stood down from RBS, Darling announced that he (Sir Fred) had waived his contractual entitlement and had decided "to do the right thing".

If it was the "right thing" then why does Darling think it is not the "right thing" now, or was he wrong before? Anyway, Osborne should come out and say that Myner's position is also "pathetic", just like Darling's.

Labour MP John McFall has weighed in to say "This is an example of hubris on Sir Fred's part", hubris being a Greek term used in modern English to indicate overweening arrogance, often resulting in fatal retribution, although McFall has not explained whether he will deliver the retribution himself. Cue Osborne to tell McFall he is "pathetic" too.

And McFall's boss Brown has waffled about taking all necessary steps to recover money from those who did not deserve it, simultaneously riding roughshod over contract law, glossing over his own negligence in allowing Goodwin's pension to be enhanced and omitting to mention the name of a man he recommended for a knighthood in the Queen's 2004 Birthday Honours list.

Lord Myners, who, we should remember, chaired the Treasury's review into the good governance of pensions, has now denied that he approved Sir Fred's pension and has said such a "huge reward" cannot be justified given the bank's losses. In a letter to Sir Fred, released by the government, Lord Myners said the discussions he had with the former banker about the financial arrangements of his departure from RBS "did not amount to approval" of his pension payment. He added: "I do not agree with your rationale for declining my request that you voluntarily reduce your pension."

Lord Myners, who should understand Sir Fred's concern at losing his job from his time as chairman of the Low Pay Commission, may not agree with the rationale and may think his discussions did not amount to an approval, but the pension has been approved after consultation with him, so anything he says now should be taken with a pinch of salt.

The government say they may pursue the matter in the courts but Osborne says he doesn't "think the government's got much of a leg to stand on in the courts if they're going to take legal action." It sounds like he thinks that is "pathetic" too. He hasn't said that Sir Fred is pathetic yet.

Brown has subsequently insisted that the government would act to protect the public interest over the payment of Sir Fred Goodwin's pension."When the the government has a share in this company and has now discovered that discretionary payments may have been made its up to us to protect the public interest," he said, adding: "We're still asking Sir Fred to waive the pension that he has been given".

Sir Fred will no doubt be happy to make a gesture by waving his pension in all our faces.

However we should not forget that, even if on a lesser scale than Goodwin, Brown and Darling are in many ways equally culpable - and are also guaranteed generous final salary pensions.

And in the interest of balance, we note that Osborne equally failed to point out the error of the bank’s ways, but also hopes to be entitled at some point to 50% of his ministerial salary for life as future ex-Chancellor.

Confused? You will be. Particularly when you hear about the latest RBS bailout package.

British Pound Tumbles as BOE's Blanchflower Says Recession May Worsen 'Significantly'

`The British pound remains under pressure as Bank of England (BOE) Monetary Policy Committee (MPC) member David Blanchflower issued extremely bearish commentary on the UK economy. Blanchflower said that the UK recession may worsen "significantly" and that the downturn has not yet hit a "bottom," which left UK monetary policy "overly restrictive" with the Bank Rate at a record low of 1 percent. He went on to say that the central bank should cut rates to at least 0.5 percent, go neutral and then pursue quantitative easing "quickly," something that the UK Treasury has yet to approve. It is worth noting that Blanchflower is easily the most dovish member of the MPC, but his remarks obviously still hold some weight in the markets. 


Good riddance to Goodwin

Goodwin shares with James Crosby the distinction that both rose to the top of a large bank with very little experience of banking. And quite frankly it shows. Crosby came from investment management and operations whilst Goodwin came from accountancy and the BCCI workout, via Clydesdale Bank's operations. It may not be blindingly obvious but the skills required for investment management and accounting are very different from those required for banking.

There are parts of the financial press and most of the accounting industry who would have the world believe that an understanding of risk goes hand in hand with accounting. Well I am sorry it doesn’t. There may be many accountants wearing a hat labelled “risk management”, but they are mostly the cogs in the machine that ensures the risk management systems running smoothly rather than the risk decision makers.

And banking is very different from investment management. Investment managers hope that the very high returns from some of their positions will offset any of their losing positions. Bankers don’t have that luxury. There is very little upside in banking but a lot of downside. For every loan that goes unrepaid the bank needs the profit from 100 more to recover the loss. The decisions have to be very careful. The accountant can look at a company’s accounts and decide that a loan is likely to be repaid, but that view is a taken on the date the accounts are drawn up. If it goes bad ten days later based on some unexpected incident the auditor shrugs his shoulders. It wasn’t his job to consider. The banker on the other hand has to take a forward view and understand what lies behind the assets he holds, understanding the real probability of not being repaid and whether the earnings he makes from that asset justifies the risk.

Bankers know about company accounts. They may not know the ins and outs of every accounting standard, but they know enough to determine what really matters to them from the accounts: cash flow. A company can’t repay its borrowings out of accounting profits, only cash flow. But the other aspect of banking that non-bankers don’t get is the idea of business strategy in the face of competition, which is something neither the accountants nor, to a certain extent, the investment managers, who have the option of selling positions in the short to medium term,

The wizard of Competitive Strategy is Michael E. Porter, a Harvard Business School Professor whose writings are required reading for any MBA since the late 1970’s, but he is only one of a myriad of such thinkers. To someone like Fred Goodwin, Porter is just an academic exercise, but to a true banker Porter’s thinking (look it up yourself) makes most of Goodwin’s errors look foolhardy. Let’s run through a few:

  1. The $10.3 billion purchase of Charter One Financial, a Cleveland-based bank, expanding RBS's footprint in the Rust Belt.

  2. Why would anyone want to do this? Buying into post-industrial America’s ex-industrial heartland. What particular advantages did RBS have that would make it a better owner of these assets than an American bank? Answer: None.

  3. The $101 billion acquisition of ABN Amro

  4. ABN was in difficulty, so why pay a premium to acquire its assets? Why should RBS do a better job of managing the problems? Answer: Beats me.

  5. Massive commitment of capital to investment banking, securities trading, and poor credit controls?

  6. On the positive side, there was a risk that traditional loan syndication could be swept away by the capital markets, but let’s face it. RBS was always a sensible bank, but it was never going to match the calibre of Wall Street banks. NatWest Markets and before that County or Greenwich or whatever they wanted to call themselves was full of people who could never hack it at one of the top banks, so should it be different just because RBS throws money at it. It takes more than money to break into Goldman’s lunch box, and RBS was always going to lose.

  7. The Investment in Bank of China

  8. So what does this do apart from putting some money in a foreign bank. Sure it gives your shareholders some exposure to China, but do you not think they can’t do that themselves. You wanted exposure to the east because it is a growing market. Well now you have all the time you need to visit China. But I still don’t see what this has to do with RBS’s core business, and neither do the new management who are in the process of unwinding all such foreign ventures.

Goodwin should be a lesson to the business world. Accountants are useless at strategy, and to run a big company you don’t need bean counters, you need switched on strategists.

Turner spins

I was too busy yesterday to comment on the egregious statement by Adair Turner to the Treasury Committee. The man who has built a career out of Dilbert-style "Executive hair" said the FSA's failure to spot the banking crisis in advance was due to the style of regulation, and that the government had preferred a "light touch" approach. This had led to the regulator not asking enough questions about the strategies of certain banks which went on to fail.

All banks are regulated by their banking authorities in the country in which they are registered and to a lesser extent by the authorities in the countries where they operate.By all means the regulation on foreign banks operating in London should be light to encourage well-run and efficient foreign banks, whose general business risk is monitored and regulated elsewhere, to operate in the London markets.

UK registered banks whose deposits are guaranteed by the UK government should have beeen regulated to a higher degree, and in particular the overall business risks associated with the bank should have been monitored and regulated by the UK authorities, not least to protect the interests of the UK tax payer.

All this is not Mr Turner's fault. He came to the game too late but he is still paying bonuses averaging £7,000 to the FSA personnel who let this happen.

Wednesday, 25 February 2009

Fred the Shred is Dead (not yet but it rhymes)

“The World’s Worst Banker” (according to Daniel Gross of Newsweek, see article here), has trousered a £650,000 a year pension although he is only 50.

He says: "My pension is the same as everyone else in the bank who is in a defined benefit pension scheme. It is determined in the same way as anyone else.", except of course that everybody else's pension is calculated on the basis of payments until 60 or 65.

Goodwin doesn't seem to understand the time value of money, which probably explains his performance. A report in the Daily Telegraph puts the cost to the pension scheme of the earlier availability of his pension at an exra £ 8 million, which will have to be topped up by RBS, or in other words, you and me.

And it seems that the pension was not some historic arrangement but was agreed by UKFI when Goodwin was stood down in October 2008 and notified to Darling at the time.

UK private sector activity down 10% year on year?

The extent of Brown's fantasy economics are clear. 4 Q 2008 GDP is now estimated to be down 1.9% year on year, but with the rate of government spending going up at 6.8% that implies the private sector is doing really badly. How badly? Let's do the math.

GDP for the 4th quarter was down 1.9% at £ 314 billion. Lets say that on an annualised basis that is £ 1,256 billion annually, which implies it would have been £ 1,280 billion a year ago. Government spending for 2008 was £ 577.4 billion, which would have has grown 6.8% from £ 521.6 billion.

Doing a bit of substraction tells us that private sector activity in 2008 was about £ (1,256-577.4=) 698.6 billion down from £ (1,280-521.5=) 758.4 billion the year before which is a fall of just under 8%.

With inflation at 3%, the actual volume of goods and services is down over 10% according to the back of this envelope. What does it say on the back of yours?

Working long hours damages the brain

The stress and exhaustion of working overtime can harm the brain's ability to process information, a study suggests. Middle-aged workers putting in 55 hours or more a week had poorer brain function than those who clocked up 40 hours.

Their scores were lower on tests to measure intelligence, short-term memory and word recall, according to research at the Finnish Institute of Occupational Health. They tracked 2,214 British civil servants who signed up to a long-term health study in the mid-1980s. In the years since, volunteers have undergone a succession of tests to measure their wellbeing.

Two points:

  1. Probably fake. Civil Servants don’t work those hours.
  2. If the reduced performance is better than 40/55 of the 40 hour week, then you are ahead.

Tuesday, 24 February 2009

Through Glass Steagall darkly

George Osborne, shadow chancellor, has suggested splitting up banking groups between their commercial and investment arms, to prevent them from using high street deposits for more risky ventures.

The financial crisis has prompted some analysts to dust off the idea of so-called "narrow banks", which would enjoy taxpayer protection but face strict restraints on their lending activities.

Gordon Brown has explicitly rejected such a "rigid divide", along the lines of the Glass-Steagall laws, which were introduced in the US following the Great Depression in 1933 until they were repealed under Bill Clinton's administration in the late 1990s.

That is all the reccommendation you need to decide to do it.

Alex remembers when he was a VP at a large US commercial bank in the 1980's. The predecessor to the FSA (possibly the TSO, but I don't rememnber) required everybody working in Corporate Finance to take the Registered Representative exams which were all about the stock market, one of the areas in which we could not deal. The regulators were completely out of touch.

Some things never change.

RBS & Lloyds shareholders wiped out?

Robert Peston says taxpayers may become liable for £500bn worth of bad loans and investments made by Royal Bank of Scotland and Lloyds Banking Group. For Lloyds read HBOS, but the government is trying to blame the new owners for everything to avoid the blame falling on themselves.

This is what they call the Asset Protection Scheme. It protects the bank's assets, but not yours Mr Tax Payer. RBS has a Thursday deadline to agree terms, while Lloyds has until Friday.

The idea is to draw a line under bad assets to free up cash that the banks can lend to companies and individuals. If the deal is completed it will take the total support by British taxpayers to the banks to £1.3 trillion.

Did you hear that word? Trillion. It's a word from astrophysics not fnance. That is 13 followed by eleven 0's. Bill Gates as was multiplied by 26. About the same as the gross national product. Apparently the Treasury wanted the banks to take the first 10% of any loss, thus wiping out the equity they injected last year.

Oh, and a small issue if you are an RBS or Lloyds shareholder. You just got wiped out.

According to Peston "there would be little or nothing left forRoyal Bank's and Lloyds' private sector shareholders", after the government took its share of the profits, but I guess you can still keep the share certificates. If you get a dividend this year, maybe you can stick it in the Christmas pudding. No wonder Peston was trying to distance Brown from the Lloyds/HBOS merger a few weeks ago.

Taxi for Mr Daniels?

Monday, 23 February 2009

What would you pay for a 30% stake in a £5.9 billion pension deficit?

Well it’s probably more than that. The government wants to bring private sector investors into the Royal Mail, ostensibly to encourage finance and new methods, but it is looking increasingly likely that the real purpose is to plug a gap in the pension fund.

The Royal Mail pension fund deficit is "significantly larger" than the £5.9bn in the Hooper Review, according to BBC News, who say they have seen a letter from the pension fund trustees. In the letter the chair of trustees, Jane Newell, warns that the deficit is so big that the Pension Protection Fund would struggle to support it. She says that the part-sale of Royal Mail is the only way to save the fund. Or in other words if the government won’t fund it some other mug will have to be found. The government is about to discover that in the real world, companies aren’t that stupid.

The BBC call the shortfall “bigger-than-expected”, which is a shame because I seem to remember the directors of the Royal Mail declared a big profit and asked for bonuses all around the boardroom a few months ago. Last year’s profit was made in part by not providing adequate funds to make up the deficit on the pension fund. Of course one of the reason’s for the deficit is the fact that pension funds are no longer entitled to a credit for tax withheld at the basic rate on dividends. Somewhere in the back of my mind, I seem to recall Gordon Brown had a hand in that.

UPDATE: It looks as though the value over £5.9 billion is closer to £9 billion. Which puts the Royal Mail's £1 million a day profit in perspecitive. At that rate it would take 30 years to clear the pension deficit, not that the government will do so because they need the cash.

Brown saves the world with a website

Crime Financière de la semaine

You have to smile when someone pulls a fast one on the French government, even when it is French bankers. This story about French unemployment benefit comes from the Times.

Under French rules, the jobless are entitled to unemployment benefit equivalent to 57.4 per cent of their salary if they earned more than €1,845.88 (£1,640) a month in their last job and up to 75 per cent if they earned less than that.

Payments are made for 23 months and there is a ceiling of €6,366.80 (£5,650) a month.

In most circumstances, it is impossible for workers to receive French unemployment benefit if they have been employed in another country, but they need to do only one day of work in France to be able to make a claim there. And if they have worked less than 28 days, that claim will be based upon their previous salary.

In other words, traders earning hundreds of thousands of pounds a year in London need to do a few days' work in a fast-food restaurant or a shop in Paris to ensure a revenue of €76,401.60 (£68,000) a year for almost two years.

It must be the recession.

I have noticed that my engagement diary is looking a little empty for this year, so I have had my secretary prepare a list of suitable occasions should any of my clients be considering any corporate hospitality this year. Invitations by e-mail please, for any of the following:

Grand Military Gold Cup
, Sandown Racecourse, Surrey (Mar 6). Contact: 01372 464 348;
National Hunt Festival, Cheltenham Racecourse, Cheltenham, Gloucestershire (Mar 10-13). Contact: 01242 513 014; http://www.cheltenham.co.uk/
RBS (or what's left of it) Six Nations Rugby Internationals continue (Mar 14) Contact: 00 35 316 69 09 50; http://www.rbs6nations.com/
Trout fishing season starts in England (Mar 15)
Brown trout fishing season begins in Scotland (Mar 15)
Oxford and Cambridge Boat Race (Mar 29). Contact: 02089 71 92 41;

Polo season starts April 1 and continues through to Sept. Contact: Hurlingham Polo Association, 01367 242 828;
Grand National Meeting, Aintree, Merseyside (Apr 2-4). Contact 0844 579 3001; http://www.aintree.co.uk/
Coral Scottish Grand National Meeting, Ayr, Ayrshire (Apr 17-18). Contact: 01292 264 179; http://www.ayr-racecourse.co.uk/
April Meeting, Newbury, Berkshire (Apr 17-18). Contact: 01635 40 015; http://www.newbury-racecourse.co.uk/
Bet365 Gold Cup, Sandown Park Racecourse, Surrey (Apr 24-25). Contact: 01372 46 43 48; http://www.sandown.co.uk/

Royal Caledonian Ball
, Grosvenor House Hotel, London (May 1). Contact: 07506 650 181;
2000 Guineas, Newmarket, Suffolk (May 2-3). Contact: 01683 675 500; http://www.newmarketracecourses.co.uk/
Badminton Horse Trials, Gloucestershire (May 7-10). Contact: 01454 218 375; http://www.badminton-horse.co.uk/
Royal Windsor Horse Show, Berkshire (May 8-11). Contact: 01753 860 633; http://www.rwhs.co.uk/
Chelsea Flower Show, Royal Hospital, Chelsea, London (members only: May 19-20; general public: May 21-23). Contact: 0844 209 0363; http://www.rhs.org.uk/
Glyndebourne Opera Festival (May 21-Aug 30). Contact: 01273 81 38 13; http://www.glyndebourne.com/
PGA Championship, Wentworth, Surrey (May 21-24). Contact: 0800 023 2557; http://www.wentworthclub.com/
Blair Athol Highland Gathering, Perthshire (May 24). Contact: 01796 481 207; http://www.blair-castle.co.uk/
Coutts International Polo Weekend, Chester Racecourse, Cheshire (May 29-30). Contact: 01244 304 610; http://www.chester-races.co.uk/

Garsington Opera Season
, Oxford (June 3-Jul 5). Contact: 01865 36 16 36;
Grange Park Opera Festival, Hampshire (June 3-Jul 14). Contact: 01962 73 73 66; http://www.grangeparkopera.co.uk/
The Oaks (June 5), Epsom Downs Racecourse, Surrey. Contact: 01372 726 311; http://www.epsomderby.co.uk/
Epsom Derby (June 6), Epsom Downs Racecourse, Surrey. Contact: 01372 726 311; http://www.hellomagazine.com/agenda/calendar/www.epsomderby.co.uk
British Tennis Championships, Queen's Club, London (June 8-14). Contact: 020 8487 7000; http://www.artoischampionships.com/
The Royal Academy Summer Exhibition, Burlington House, London (June 8-Aug 16). Contact: 020 7300 8000; http://www.royalacademy.org.uk/
Aldeburgh Festival Of Music And The Arts, Suffolk (June 12-28). Contact: 01728 687 100; http://www.aldeburgh.co.uk/
The Queen's Cup Final, The Guards Polo Club, Windsor Great Park, Berkshire (June 14). Contact: 01784 434 212; http://www.guardspoloclub.com/
Royal Ascot, Berkshire (June 16-20). Contact: 08707 271 234; http://www.ascot.co.uk/
Wimbledon Tennis Championships, London (June 22-Jul 5). Contact: 020 8971 2473; http://www.wimbledon.org/
British Jumping Derby Meeting, Sussex (June 25-28). Contact: 01273 834 315; http://www.hickstead.co.uk/
Biggin Hill International Air Fair, Kent (June 27-28). Contact: 01959 57 22 77; http://www.bigginhillairfair.co.uk/
Summer Shakespeare Season opens in London (date to be confirmed). Contact: 020 7935 5756; http://www.openairtheatre.org/
Eton And Harrow Cricket Match, Lords, London (date to be confirmed). Contact: 020 7432 1000; http://www.lords.org/

Henley Royal Regatta
, Oxfordshire (July 2-6). Contact: 01491 572153;
Goodwood Festival Of Speed, Goodwood Park, Sussex (July 3-5). Contact: 01243 75 50 55; http://www.goodwood.co.uk/
Scottish Game Fair, Perth, Scotland (July 3-5). Contact: 01828 650 639; http://www.scottishfair.com/
Wimbledon Finals, London (Ladies final, July 4; Men's final, July 5). Contact: 02089 712 473; http://www.wimbledon.com/
July Festival meeting at Newmarket, Suffolk (July 8-10). Contact: 01638 675 500; http://www.newmarketracecourses.co.uk/
Buxton Opera and Music Festival, Derbyshire (July 10-28). Contact: 01298 70395; http://www.buxtonfestival.co.uk/
Open Golf Championship, Turnberry, Ayrshire (July 16-19). Contact: 01655 331 000; http://www.opengolf.com/
Veuve Clicquot Gold Cup British Open Polo Championship final at Cowdray Park, Midhurst, Sussex (July 19). Contact: 01730 813 257; http://www.cowdraypolo.co.uk/
King George Day at Ascot, Berkshire (July 25). Contact: 08707 271 234; http://www.ascot.co.uk/
Cartier International Polo Final, Guard's Polo Club, Smith's Lawn, Windsor Great Park, Surrey (July 26). Contact: 01784 437 797; http://www.guardspoloclub.com/
Glorious Goodwood, Goodwood Racecourse, Sussex (July 28-Aug 1). Contact: 01243 755000; Box office: 01243 755 022; http://www.goodwood.co.uk/

Cowes Week
, Isle of Wight (Aug 1-8). Contact: 01983 295 744;
Warwickshire Polo Cup Final, Cirencester Park, Gloucestershire (Aug 16). Contact: 01285 653 225; http://www.cirencesterpolo.co.uk/

Shooting season opens with the start of partridge season (Sept 1).

Land Rover Burghley Horse Trials, Lincolnshire (Sept 3-6). Contact: 01933 304 744; http://www.burghley-horse.co.uk/
Braemar Royal Highland Gathering, Aberdeenshire, Scotland (Sept 5). Contact: 01339 755 377; http://www.braemargathering.org/
St Leger Festival Meeting (Sept 9-12). Contact: 01302 304 200; http://www.doncaster-racecourse.co.uk/
Blenheim International Horse Trials, Woodstock, Oxfordshire (Sept 10-13). Contact: 01993 813 335; http://www.blenheim-horse.co.uk/
National Carriage Driving Championships, Windsor Great Park, Berkshire (Sept 11-13). Contact: 08456 432116; http://www.horsedrivingtrials.co.uk/
Ayr Gold Cup Festival, Ayrshire, Scotland (Sept 17-19). Contact: 0870 850 5666; http://www.ayr-racecourse.co.uk/
Goodwood Revival, Goodwood Motor Circuit, Sussex (Sept 18-20). Contact: 01243 755000; http://www.goodwood.co.uk/
Glorious Finale, Perth Races, Scotland (Sept 23-24). Contact: 01738 551597; http://www.perth-races.co.uk/
Ascot Festival Meeting, Berkshire (Sept 25-27). Contact: 08707 271 234; http://www.ascot.co.uk/

Prix de L'Arc de Triomphe
, Longchamp, France France (date to be confirmed). Contact: 0033 49 102 030;
Champions meeting, Newmarket, Suffolk (date to be confirmed). Contact: 01638 675500; http://www.newmarketracecourses.co.uk/

Lord Mayor's Show
, London (Nov 14). Contact: 01229 588098;
Open Meeting, Cheltenham Racetrack, Gloucestershire (date to be confirmed). Contact: 01242 226226; http://www.cheltenham.co.uk/
The Winter Festival, including the Hennessy Cognac Gold Cup, Newbury Racecourse, Berkshire (date to be confirmed). Contact: 01635 40015; http://www.newbury-racecourse.co.uk/
Salmon and trout fishing seasons end in Scotland (Nov 30)

Salmon fishing season ends
in England (Dec 15)

Sunday, 22 February 2009

Just back from church

Honestly. I go to Evensong once a month in our village church. Not many come. In fact, this evening 14.28714% of the congregation was the group chief executive of Barclays, who seems to come to church on the eve of the announcement of bad news, and rushes out before anyone can pin him down on the state of the financial system. It's not clear what the problem is this time, but here is an interview with the IHT from Friday.

Defending a bank's direction

Published: February 20, 2009

LONDON: As banks wrestle with the credit crisis, Barclays is also wrestling with a crisis of confidence. Despite having posted a profit of £4.38 billion for 2008, the bank is dogged by doubts about whether it will follow rivals in taking further write-downs or asking for British government help. In January, Barclays sent out an open letter asserting that it had no need for new capital and seeking to reassure investors that its assets were fairly valued.

At the eye of the storm is John Varley, group chief executive, who with Barclays's chairman, Marcus Agius, signed the letter. Varley spoke this month at the bank's headquarters in London. Following are excerpts from the interview.

For at least a year, the market has not believed that Barclays has marked down its troubled assets enough. Why do you think the market doesn't believe you?

Given the shocks that we have had in the sector over the last two years, I understand why people default to the most conservative view. The harshest test you can apply to the reality of valuations is the test of liquidation. Last year, we disposed of £9 billion of the sort of assets we're talking about at prices consistent with the valuations we had placed on them.

Why are you so intent on not taking government funds to increase capital?

When the government is committing British taxpayers' money, that creates, of necessity, a British taxpayer's agenda. Therefore, it's quite a different proposition for a bank that is British and has all of its activities in Britain to take government money. But for Barclays, 50 percent of our earnings come from outside the U.K. If we had taken capital from the government, it would have necessitated a significant change of strategy.

The French are just putting through legislation to limit bonuses for executives. Do you expect the same thing to happen in Britain?

I hope not. It is very important that banks are listening to the anger that's out there, but the idea that any industry has its compensation regulated is a distortion of the market. In France, it will influence the ability of the banks in question to run their affairs, particularly their employment affairs.

Many observers believe that lax regulation was, if not the cause of the current crisis, at least a major contributor. What is your view?

No amount of institution-specific transparency and no amount of institution-specific regulation or supervision would have prevented what happened over the past two years. The desirability of a more consistent cross-border review of systemic risk, not the construction of some super regulator, is one of the lessons we've learned.

Some see a new paradigm of financial services, where banks are essentially low-risk utilities and hedge funds and private equity, which are less regulated, take the risks. What is your view?

To me that would be a very bizarre outcome. Any material pool of money should be regulated. Banks as utilities is a sort of convenient rallying cry, but it's very superficial. Banks in the 1950s were elitist and they provided products to no more than 50 percent of the adult population in a country where they did business. The idea of the provision of steam-driven banking is a view that is completely out of date and inadequate to the needs of the world. Business customers want products to manage their risk and an aging population has investment and saving requirements.

Britain imposed a temporary ban on short-selling some financial stocks to calm the crisis. In the United States, so-called naked shorting, or selling a stock without buying the shares later, has been outlawed. Do you think the reaction against short-selling was justified?

Shorting is a desirable and natural activity in a normal market. But at a rather a sensitive moment, the maintenance of the ban in the U.K. would have been helpful.

UPDATE: It looks like it must have been the Citicorp equity injection from the US Government, either that or it could have been the announcement of a £ 3 billion government backed bond issued by Barclays and JP Morgan, 2 year paper priced at swap rate plus 35 bp.

Ah those were the days, when even a crummy aerial bus service such as the world's tawdriest airline could raise 10 year debt from banks at 27.5 bp, without any government backing, and long term gilts were 50 bp or more under theswap rate.

Let's look at ths government statement as reported on the BBC

The following was on the BBC website, so lets deconstruct it line by line:

UK may get cash injection 'soon'

Strange, no? You probably thought we had already had a ash injection. Apparently not.

The Bank of England could help increase the flow of money. A government minister has suggested that plans to inject more cash into the economy could happen "quite soon".

Now what could they mean by that? Banks after all have been promised lots more cash but they haven't started lending because that equity is wiped out by losses.

Treasury Secretary Stephen Timms told the BBC the government and the Bank of England were in talks regarding so-called quantitative easing.

Ah, quantitative easing.

Quantitative easing effectively allows the central bank to write cheques to banks in exchange for assets.

Sounds like free money. IOU's from the government. Does that mean the printing preeses are running?

The hope is that this would encourage banks to lend to consumers, who would spend more, helping economic recovery.

So this is just more cash going to the banks, which as we have seen already, hasn't got the economy going.

This method is seen as a way to help the economy, as the benefit from lowering interest rates is seen to be diminishing.

So interest rates didn't work (I am not surprised - why drop interest from 3% to 2% if the 100% outstanding is never going to be repaid), so the government is going to try something else.

Just suppose ...

... an independent auditor produced a report on MEP’s that showed :

  • assistants who were not accredited with the European parliament and of whom no record exists, awarded bonuses of up to 19½ times monthly salar
  • payments made to companies whose accounts showed no activity.
  • payments, supposedly for secretarial work, were made to a crèche whose manager happened to be a local politician from the MEP’s political party.
  • payments were made straight into the coffers of national political parties.
  • pay off payments paid to assistants of outgoing MEPs while receiving salaries from incoming ones.
  • MEPs claiming to have paid the full £182,000 staff allowance to a relative.

What would you expect the EU to do? Suppress it of course. Which is what the EU did. The report was based on a representative sample of 167 payments, out of a total of 4,686, made during October 2004, which suggests that it includes only a small percentage of the corrupt practices employed by some of the 785 members of the 27-nation parliament.

Over a full term, MEPs could easily bank almost £450,000 in staff allowances, even if they employed several genuine full-time assistants. MEPs could make £217,800 in office expenses by claiming their home was also their constituency office, without showing any receipts. On top of that MEP’s can claim the cost of first class travel, even if they travel more cheaply and they are paid attendance allowances for going to work.

The Politico-Economico-Sexual Award for 2009

I don't normally do profanity, but one reader as Comment is Free has submitted such an eloquent explanation of the current economic situation it deserves a wider audience. It can be found here.

Hats off to Bob Doney. He was replying to a discursive Polly Toynbee apologia for the Labour Party, which came as close as possible to, if not actually throwing in the towel, then picking it up and aiming it at the floor.

Face it Polly, just like your grandfather, you are history.


Gordon Brown is demanding a new age of sobriety in British banking, calling for the return of "prudent", old-fashioned high street banks.

Writing in The Observer, the prime minister said he wants people to save longer before buying a home and is considering curbs on 100% mortgages.

He also said banks should not dabble in complex international investments.

The funny thing is, I don't recall him saying this when he was chancellor. In fact I recall that he was openly critical of other European banking systems for their strict regulation and inflexibility.

And I think he needs to explain what he means by "dabbling" in complex international investments. Cross-currency swaps? Export-credit guarantees? Structured trade finance? Or is he trying to micromanage the banks by rules and legislation?

That is the sure fire way to get the London financial markets to move offshore. Well at least the women dress better in Paris.

Friday, 20 February 2009

Putting the pffffffffffftttt in PFI

An article in The Times says that the government can't find banks to fund
its PFI projects for schools. The £55 billion building programme has raised a
£300 million loan from the EIB, but they would like a little more because
that doesn't cover their needs. At the moment they are in a bit of a hole to
the tune of £10 billion. So now Partnership for Schools, the government
body responsible has decided that the best partners for their programme are
teachers and retired teachers who are sitting on a pension pot of £100
billion along with all the social workers, cleaners, refuse collectors,
lollipop ladies and town clerks in the local government wing of the private

When you take into account all of the loans to PFI projects that have come
from banks that are now owned by the government and are thereby on the
governments books, and the fact that the equity in these projects will now
ne coming from state pensions funds, PFI seems to have been a waste of time.

When the IAS and OECD gets the government to account for these things
correctly they show the assets and liabilities in these projects twice, once
as contractual liabilities with the PFI SPV, and again as loans from state
owned banks with the matching funding.

How stupid do they think we are?

On Tuesday the nominally estranged husband of Tessa Jowell was found guilty by an Italian court of accepting a bribe from Silvio Berlusconi in return for making false statements in a tax evasion case involving Mr Berlusconi’s companies., He was also convicted of bringing a high Italian public office into disrepute. Because of the equally disreputable way that Italy is run, Mr Berluscomi managed to persuade the Italian parliament grant him immunity from prosecution in the Italian courts. Nevertheless, the courts found Mills guilty, and thus it must be presumed that Berlusconi is just as guilty for paying the bribe.

Jowell on the other hand appears not to have wondered why her husband was suddenly in receipt of around £400,000 from an unexpected source. After all, Mills was only paid £85,000 for his work for the Iranians, (how do I know? well that's my secret), so £400,000 must have seemed a lot and apparently with no tax to pay on it because it went straight to pay off a mortgage on a property.

Mills answered the tax question by saying that in fact the money was only a loan, despite the fact that nobody has been able to produce a loan agreement and the apparent lender does not seem to think that it is a loan at all.

One might also wonder whether Ms Jowell should have questioned the wisdom of refinancing a long term mortgage by an undocumented personal loan of uncertain duration, but apparently Mr Brown does not doubt her financial sagacity, because yesterday he gave Ms Jowell, his Olympics secretary, a resounding vote of confidence yesterday during a visit to Rome, saying Jowell was "doing a very good job and I have confidence in her ability to continue to do that job".

And who was standing next to Mr Brown as he made this statement. Mr Berlusconi, of course. Why was he there? Because they were jointly planning a G20 meeting to be held in London. And what is one of the major themes of this conference?

The need for concerted efforts to combat tax avoidance. Honestly. YCMIU.

Net debt to reach 300% of GDP?

The ONS has announced that both RBS and Lloyds Banking Group will be reclassified as public sector from October 13 2008, when Government recapitalisation was agreed. Public sector finance statistics for January 2009 show that public debt currently stands at £703billion, which includes £50 billion from the bailout of Bradford and Bingley last year. According to some press reports, when the impact of Lloyds Banking Group and RBS are taken into account, the ONS predicts that the impact to public sector net debt could be between £1 trillion and £1.5trillion, which could bring the UK's total debt to more than £2 trillion.

This isn’t half of the story. The £700 billion of national debt excludes PFI, say £100 billion and about the same again in various other off-balance sheet wheezes such as Network Rail's debt and private sector pension protection. There are also about £1 trillion of UK public sector pension liabilities which other governments show as liabilities in their accounts.

For example, in America, to pay pensions the government issues debt securities to a Federal pension fund, so that pensions are fully funded albeit by a claim on the government. The net effect is that pension fund holds a tangible claim on the government and the liability ends up being properly recorded as part of the US National Debt. In the UK, the government hides its head in the sand.

Add to that IAS accounting changes which mean that RBS's liabilities are no longer the trillion or so in their 2007 accounts that the ONS probably used for their calculations but probably closer to £1.9 trillion, and we have no idea what the comparable ajustment is for Lloyds/HBOS.

So instead of the £2.2 trillion or so that the ONS is talking about, the real scale of true liabilities is actually around £4.3 trillion, or 300% of GDP.

Thursday, 19 February 2009

Recession reduces total tax paid

The recession has led to a £7bn fall in the amount of tax paid in January by individuals and businesses, official figures show.

Public finances are typically boosted by annual tax receipts in January, but these have fallen as unemployment rises and company profits decline.

Government borrowing for the full financial year is now expected to exceed its own forecasts of £77bn.

Gordon Brown is delusional - but so is Labour

This is what he said at his monthly press conference:

"There was a failure in the American regulatory system. Now I am very happy to say that our regulatory system has been a better system, but it is still not good enough to meet the changing challenges of the times."

The whole essence of socialism is that some politicians think that there is a better world that can be created and only they are able to take us there.  Actually it was a problem shared with Hitler and any number of despots.  What these people lose are the self-critical and analytical faculties that are needed to survive in the "real world" - the world where there is no executive power to keep control, where people may not necessarily do your bidding and you have no control over them.  Such is the world of business. 

To survive in the commercial world it is necessary to spot and correct the weaknesses in a business.  This implies the ability to make both critical, honest and realistic assessments of the state of play. Politicians do not always have these qualities, but think they can survive by browbeating their opponents, the population or both.  Socialists who have a notion of some ill-defined utopia, which they know they woill probably never achieve, but because this is their mindset they seem to lose, or perhaps have never had any ability to grasp back of the envelope calculations end estimates.  Have you ever wondered why there are so few socialist politicians with a background in science, mathematics or engineering?

The best example I can give is the example of the 9/11 death toll. In the days immediately after 9/11 when Blair was standing shoulder-to-shoulder with GWB, his ministers were spouting ridiculous numbers of British dead (over 700 from J Straw) when a little common sense and a reality check would have shown the extreme unlikelihood that more than 10% of a sample of thousands of people selected at random in Lower Manhatten would be British citizens.  Sure enough over the following weeks the number dropped to 600, 400, 300, 200 and then the government announced that there were "fewer than 100" British dead. 

There are actually 72 names on the memorial in Grosvenor Square, but once you discount the people Bermudans and Barbadians (technically British), the former Ugandan Asians who went to the US on British passports but never actually lived in the UK, the long term emigrants who took US passports etc, you arrive at a smaller number, perhaps less than 50.

In itself, perhaps the whole episode might not seem important. Perhaps the government deliberately inflated the figures, perhaps they let the press run with the worst estimates or perhaps they really did think there were 700 British dead.  What it showed was that nobody in the government said "Hang on a minute, do you really think that 10% of the people in and around the WTC were British.  That doesn’t sound likely. Look at the people on any New York street.  Does it really look as though 1 person in 10 is a British passport holder? It might be better to say that there would be thousands of British citizens in Manhattan at any time, but that the number in the WTC would be a relatively small percentage of those killed."

So it is an unimportant story, but it illustrates perfectly how socialists have never been very familiar with reality.

Wednesday, 18 February 2009

This just in from the CBI


Demand for UK manufactured goods is at its weakest in 17 years, and firms expect output levels to fall sharply over the next three months, the CBI said today (Wednesday).

Its latest Monthly Industrial Trends survey showed that, despite the weakened pound, export order book levels have continued to slide, and that manufacturers again expect their domestic prices to fall in the next three months.

John Cridland, CBI Deputy Director-General, said:

"UK manufacturers continue to suffer as the recession worsens, and their order books have weakened further this month.

"The weak pound has made UK exports more competitive, but this advantage has been outweighed by falling global demand.

"Moves to get credit flowing around the economy must bear fruit soon if job losses and further damage to the sector are to be mitigated."

Asked about their expectations for output volumes in the next three months, 12% of firms said they expected them to increase, while 56% said they would fall. The resulting balance of -44% was similar to that of the past three months, and still the lowest since September 1980 (-48%).

A balance of 56% of respondents said that total order book levels were below normal, up from the net 48% of firms in January. This represents the weakest demand for UK manufactured goods since January 1992 (-60%).

Export orders fell further below par, with a balance of 49% of firms reporting export order books below normal, which marked a deterioration from January (-39%), and is the weakest since November 2001 (-50%).

Manufacturing firms expect to lower domestic prices over the next three months, and the balance of 13% predicting a fall is similar to January (-12%).

Stock adequacy remained unchanged from January and the balance of 27% reporting stocks to be more than adequate is well above the long-term average.

Who the F*** is Mr Starbucks?

Lord Mandelson turned the air blue at a diplomatic residence with a four-letter attack on one of the world's most successful businessmen.

The Business Secretary reacted when Howard Schultz, the American tycoon behind Starbucks coffee, criticised the British economy. He said "Why should I have that guy running down the country? Who the f*** is he?".

The answer is a businessman who has set up a very successful franchise and is worth a billion or so.

Who the f*** are you, Peter Mandelson?

Molesworth 1 back in the jug agane

Gosh chiz, as any fule kno, tax frord is uterly weedy and wet, but Nigel Molesworth, dashing hero of st custards, aka David Mills, hav bin up in front of the beak. It look like he will get the kane chiz moan drone.

Mills sa 'he do not care so boo there is no difrence between st custard's and wormwood scrubs anyway' but his pater was a big cheez spy at MI6 in Gibralter, so his gran sa it will bring shame on whol familly, particularly gurls like his strange wife who liv in a cabinet with a minister and his bro's wife who was director of pubblic persecutions. 'That,' say his gran, 'explane why britain is what it is toda.'

Mills sa 'All girls are soppy. This fact is recognised by all boys and the message is clear but seme to become dimmer as they draw on to man's estate chiz.'

'Reality,' sa mills 2 , 'is so unspeakably sordid it make me shudder', but the gorila of 3B cudn't care becos mills 2 is weedy and uterly wet like fotherington-thomas who spend all day saying 'Hullo, clouds, hullo, sky' and he wil touough him up jus like mills will be tuoughed up in Italian detenshun oww chiz chiz.

'Keep yore bat strate boy and all will be all right in life as in criket.' so sa headmaster Grimes, but mills hav a slosh and is clene bowld.

Tuesday, 17 February 2009

I guess there won't be many more million dollar cricket matches

Texan billionaire and cricket promoter Sir Allen Stanford has been charged over a $8bn (£5.6bn) investment fraud, US financial regulators say. The Securities and Exchange Commission said the businessman, had orchestrated "a fraudulent, multi-billion dollar investment scheme".

Rule #1: If it looks too good to be true, it probably is.

Reverse spin?

I don't read the Guardian as a rule. They just don't understand markets or the idea that the government is only able to tax people if there is an active economy, but I was struck by the following in an article by Jackie Ashley, particularly because of the contrary spinning by Robert Peston last week.

"The personal involvement of Brown in the Lloyds-HBOS deal - and if it had to be fully rescued by the taxpayer we would be talking about one of the greatest corporate disasters in British history - comes at the worst possible time."

Monday, 16 February 2009

Is it just my opinion or do all the really thought proving articles get published in the Sun?

WHY is Gordon Brown still Prime Minister? After the events of last week, why has he not resigned? And if he won’t go of his own accord, how long before he is hounded out by voters whose homes, pensions and jobs he’s put in peril?

After all, he sacked his multi-millionaire banking pal and key adviser Sir James Crosby the moment he was exposed as a dud. Yet Crosby’s offence — destroying bank giant HBOS — pales by comparison with Mr Brown’s sins and omissions.

The career of Sir James, knighted by the PM and handed a top job at the shambolic Financial Services Authority (FSA), is a mirror image of Gordon’s. He was the bullying intellectual powerhouse behind the spectacular rise and fall of HBOS. He ruthlessly exploited weakness in his opponents and brooked no criticism. And he ignored warnings from his own whistleblower that he was taking too many risks with other people’s money.

Crosby pressed ahead regardless, leaving HBOS a crippled wreck and taxpayers with the £17billion tab for his reckless incompetence. How did he land HBOS in such a mess — leaving Britain needlessly exposed to the worst of the world’s economic meltdowns? Sure, this recession is global. Yes, it started in America. But there are many countries, unlike the UK, where prudently regulated banks will still be standing when it’s all over. We’ll be paying huge bills long after everyone else has pulled out of this slump.

The seeds were sown by Mr Brown on his first day as Chancellor, when he handed the Bank of England control over inflation — but took away their role as City watchdog. In a fatal error, he shared out that task between the bank, the Treasury and the new but toothless FSA. Nobody was in charge of this clattering train. Bank governor Eddie George warned Brown was putting the economy at risk of “systemic failure” — bank jargon for “boom and bust”.

Like Sir James Crosby, the Chancellor ignored him.

Instead, he threw open the casino, welcomed the biggest losers in UK banking history — and gave them our money to play with. Tories accuse Mr Brown of failing to fix the roof when the sun was shining.

It was much worse.

He demolished the load-bearing walls and propped up the rafters with broomsticks.

Why? Because he wanted those City high-rollers set free to make billions for Labour’s binge on public services. Even the timid FSA saw the risk. Each year from 2002 it warned Crosby that HBOS and other banks were over-lending. Did Gordon know? Like Sauron in Lord Of The Rings, the Chancellor watched everything that moved on the economy. In June 2006 — before Northern Rock crashed in flames — the Bank of England briefed journalists that High Street lenders did not have enough in the kitty to balance their books. Any jolt to the economy could bring disaster.

The Chancellor, who received regular Bank updates, would have known this far sooner than a bunch of newsmen. Yet, as HBOS headed for the buffers, he knighted Crosby and made him deputy chairman of the FSA... the fox in charge of the hen coop. When that “jolt” arrived with the credit crunch it was Crosby who persuaded Mr Brown to put up £100billion of our cash to bail out the banks — including his old firm HBOS.

It was Crosby who urged Gordon to bully Lloyds TSB into a catastrophic merger to save HBOS. Lloyds was Britain’s only really solid bank. Today it is just another wreck, dragged to the bottom by the dead weight of HBOS. Thanks to Gordon Brown, taxpayers face losses and liabilities worth countless billions. Take in the Royal Bank of Scotland and the sums escalate into trillions.

Co-conspirator Ed Balls predicts we will be paying that off for the next FIFTEEN years. If that’s true, today is not a moment too soon for Mr Brown to say sorry to the British people.

And walk out of Downing Street for good.

The state we are in

Japan's economy shrank at a quarterly rate of 3.3% (equivalent to an annual 12.7%) last quarter, the most since the 1974 oil shock, as recessions in the US and Europe triggered a record drop in exports, reports Bloomberg. GDP fell for a third straight quarter in the three months to Dec 31, down a quarterly 3.3%, the government said Monday in Tokyo. Exports plunged an unprecedented 13.9% from the third quarter as demand for cars and televisions collapsed.
Just thought I would mention it.

Sunday, 15 February 2009

Adair Turner on the Andrew Marr Show

Lord Turner spoke of the failures of the FSA to recognise the risks that were emerging when the review of HBOS was being conducted.

"The FSA at that time was more focused on the processes rather than looking at the whole business model at the time – the processes rather than the financial risk.

"With hindsight the FSA was focused on individual institutions not on the totality of the systemic risks across the whole system – that is a legitimate criticism.

"I am certainly sorry that across the whole world that there was a failure to focus on these risks – the FSA was doing a lot of good work – but failed to focus on these issues."

So is that an apology or a resignation statement? The FSA has shown itself to have not understood or acted on seriouw risks at Northern Rock, Bradford & Bingley, HBOS, RBS and AIG FP. As I have said many times before the FSA is not fit to regulate banks, and this is the admission of the same by the head of the FSA itself. Lord Turner's predecessor admitted the same in the FSA's own internal inquiry into Northern Rock by admitting that the FSA didn't look at the extent of and risk in NR's mismatched assets and liabilities (a standard risk in banking) and they thought that the Bank of England, who were not responsible for monitoring Northern Rosck, would step in to meet any shorfall in funding if there was a liquidity crisis.

How incompetent can anyone be and still get paid a bonus? And do the good people of Ecchinswell have to put up with a New Labour placeman and incompetent usurping their good name?

Friday, 13 February 2009

Pesto Browns, Pesto Thickens

This evening Peston was on the 6 o'clock news saying the merger between HBOS and Lloyds was nothing to do with Gordon Brown, which is strange because on the BBC website he said this on 17th September last year.

Our business editor said there was a real concern that any run on HBOS shares would create enough fear among the bank's financiers - providers of wholesale credit who give the bank its money - for there to be a withdrawal of credit for HBOS.

"Clearly the watchdog and Treasury will welcome a deal as it will put the bank on a sounder footing," he said. "The last thing they want is a fully fledged crisis."

He added that the deal was negotiated at a very high level, with Prime Minister Gordon Brown telling Lloyds TSB chairman Sir Victor Blank that it would helpful if Lloyds could end the uncertainty surrounding HBOS by buying it.

Of course Pesto omits to remind us that if Lloyds made a mistake when they merged with HBOS, the government must have made the same error when they put in 40% of the current equity into Lloyds.

Lloyds has an excuse because HBOS was a competiror prior to the merger. The government / Treasury / BoE / FSA has no such excuse because the FSA was supposed to regulate HBOS.

At this point, we realise that Pesto's analysis falls apart. After all, when Eric Daniels and the Lloyds board told the government and the FSA that they really didn't want to go througfh with the deal, the government put extra money into HBOS, which is why the tax payer now owns 40% of the merged group.

Far from distancing himself from the merger, it was Brown who pushed it through by ponying up several billion of tax payers cash to push the deal through. Having agreed to pump billions into HBOS Brown wanted it to go to a bank that could manage the assets properly.

Unfortunately, Brown and Darling appear to have forgotten to ask HBOS how many dubious assets they had before they pumped in any money. Assets don't go bad overnight, particularly not commercial proprty backed assets, so the £10 billion of assets that were written off in February 2009 must have looked pretty shaky in September 2008.

Earlier this week, Eric Daniels of LLoyds told the Treasury Select Committee that he thought the HBOS purchase was good for Lloyds shareholders and last month Victor Blank announced that all the bad news in HBOS had been announced, only to announce on Friday of this week that there was a further £10 billion of writedowns. One might well question the ability of these two men, and indeed why Andy Hornby is being retained by Lloyds on a substantial consultancy contract, although that is probably sensible in order to catch big problems before they get any worse.

But the biggest questions are for Mr Brown and Mr Darling. What were they doing putting billions of tax payers money into HBOS at the market price when there was another £10 billion of losses to be announced?

What a difference a day makes

Yesterday I woke up to hear BBC Radio 4 telling me that a UK consortium had won a vital contract to supply rolling stock for the East Coast Main Line and this was going to create or sustain 12,500 jobs, according to Geoff Hoon. By the end of the day, all this had been rubbished and it turns out that no more than 500 new jobs will be created and that this UK consortium is really Hitachi supplying the rolling stock, John Laing building a few sheds and Barclays supplying some finance.

Some of the assembly will be done in the UK, but you can bet your bottom dollar that this is to reduce the impact of EU import duties – the rate duty on the components will be smaller than that on the finished product and there is no duty at all on the component of the final sales price represented by the final assembly if that takes place inside the EU.

Undaunted, last night Geoff Hoon was spinning a new line. This was no longer a UK consortium but welcome inbound investment by Hitachi. Wrong again Mr Hoon. Inbound investment is when a foreign company makes an investment in plant and machinery in the UK to build up a business and make sales. What is happening here is sale first, capital spend later. If the government didn’t agree to buy the Hitachi imported train sets, there would be no money spent on building the maintenance depots. That money will come from Barclays and the bank market, not Hitachi.

Two untruthful spins on the same story from the same minister in one day. Is this a record?

Thursday, 12 February 2009

Factors stopping UK growth according to the World Economic Forum


Tax regulations ..........................13.3
Inefficient government bureaucracy........11.5
Tax rates ................................11.4
Inadequately educated workforce............9.9
Access to financing........................9.2
Inflation .................................9.2
Restrictive labor regulations..............8.0
Poor work ethic in national labor force ...6.7
Inadequate supply of infrastructure .......6.0
Policy instability.........................4.8
Foreign currency regulations...............2.8
Crime and theft ...........................2.2
Poor public health.........................1.8
Government instability/coups ..............1.4

SFO goes after AIG

Various press reports this afternoon along the following lines:

The Serious Fraud Office has launched a preliminary inquiry into the UK operations of US insurance giant American International Group's finance arm. The inquiry relates to overseas finance deals made by AIG Financial Products Corporation. The SFO is working with US authorities who are already conducting separate, independent investigations involving conduct at the firm.
SFO director Richard Alderman said: "It is right for us to look into the UK operations of AIG Financial Products Corporation to determine if there has been criminal conduct. "We will use our full range of powers to seek information and to speak to those with an inside knowledge of the company's operations." The SFO said both AIG and the subsidiary in question are cooperating with its inquiries.
City watchdog the Financial Services Authority is also involved in the investigation.

OK stop right there! The SFO should be looking at the FSA's failure to regulate AIG. AIG was writing credit default swaps in a UK subsidiary that was neither regulated as an insurance company nor as a financial trader. Size of the book? Several hundred billion. The SFO should pin this one on AIG, the FSA, the Bank of England and PwC (auditors). Since AIG’s collapse in September 2008, insurance regulators in various jurisdictions have played pass the parcel, all trying to distance themselves from the firm’s London business.

Adair Turner, the FSA’s chairman, has declined to answer questions about AIG’s London operation, AIG Financial Products (AIG FP), because he says it falls outside the FSA's jurisdiction. The FSA considers AIG FP to be an “internal treasury operation” and, like the internal treasury operations of other companies, is not regulated. The FSA does have regulatory oversight responsibility for a number of AIG units in London, including a company called AIG FP Capital Management registered at 1 Curzon Street.

There is no doubt that the US authorities consider London to be the cause of the AIG disaster. It was staffed by executives from Drexel Burnham Lambert. Remember them? Drexel’s junk bond king, Michael Milken, was investigated for insider trading in the 1980s and pleaded guilty to six charges. By the end of 2007 AIG had $562bn of CDS contracts on its books, and in their October 7, 2008 testimony before the House Oversight Committee company executives acknowledged that this business was based at 1 Curzon Street. In contrast to market practice, however, AIG FP did not hedge its exposure to a possible fall in the CDS market. In a footnote to AIG’s 2007 accounts, the company declared: “In most cases AIG FP does not hedge its exposures to credit default swaps it has written.”

In November 2007, when PwC asked the insurer to change the way it valued CDS’s, the world suddenly saw how little capital AIG FP used to build a mountain of business. The mortgage deals it was supporting with its CDS's looked shaky. The market took fright. AIG was downgraded from AAA to AA, and AIG's counterparties on the CDS's made cash calls (as they were entitled to do). AIG ran short of cash and the rest (including AIG's independence) was history.

How long did PwC fail to correct AIG's accounting?

Why did the FSA treat AIG FP as an internal treasury unit when it was clearly booking the unhedged risk on third party trades, and why didn't PwC point out this anomalous behaviour to the FSA?

How long will it be before the FSA turn round and say, "If only we had known about this"?

The world's favourite downgrade

Now that Moodys has decided that BA is no longer investment grade (down to BA1 from BAA1) should I be buying a CDS to hedge the risk on my 6-figure accumulation of BA Miles?

Pro-government spin on the BBC

This morning I heard the BBC this morning desperately spinning that a UK consortium had won a £7.5 billion order for trains for the East Coast mainline.

It turns out that the UK consortium members are Barclays (finance)and Laing (building the depots) but the trains come from Hitachi and are as Japanese as sake.

The losing bidder was a combination of, amongst others, Siemens and Bombardier, who run the only UK train factory at Derby (the old BREL works, later ABB, then Adtranz).

The FT puts a different gloss on the story.

Wednesday, 11 February 2009

Memorandum from Paul Moore, Ex-head of Group Regulatory Risk, HBOS Plc

1.My background and credentials

1.1I was Head of Group Regulatory Risk (GRR) at HBOS between 2002 and 2005. I reported to the CFO, Mike Ellis. I had formal responsibility for the bank’s policy and oversight of executive management’s compliance with FSA regulation.

... and so it goes on. I'd like to be nice about the guy, but he sounds like a police,an. You would never guess that he used to be a KPMG partner.

Crosby, Steals, Cash & Runs?

I never understood why James Crosby was made the MD at HBOS but here is how it happened:

He studied maths at Oxford. Now who studies maths at Oxford, although apolgies to all my friends who did, and Frances K who is a Maths prof. at Balliol?

Being of a mathematical bent he thought thet actuarial qualifications would be a good idea, so he started his career at Scottish Amicable, a pension fund, then moved to Rothschild's where he worked in fund management. He was clearly so good at picking stocks he got put in charge of IT.

From there he fluked the job in 1999 of MD at Halifax. Perhaps this wasn't so surprising because Halifax was not known for the calibre of its staff, so to get an Oxford graduate from the admin side of Rothschilds probably sounded like a good idea - but have you ever bnoticed how Rothschilds bankers always end up in soft jobs or government jobs, hey never seem to end up cutting it in the really top banks. But Crosby seemed good enough for a plain vanilla mortgage bank.

By a stroke of good luck, Halifax and Bank of Scotland decided to merge, with the chiefe executive at BOS, Peter Burt, deciding to switch to a Deputy Chairman role, amanging the merger, leaving Crosby to manage the bank on a day-to-day basis.

So after two years experience in banking in 2000 Crosby was running abank with a market cap of about £30 billion, which in those days was big bananas. The securitisation salesmen in all the investment banks in the City and on Wall Street must have seen a real patsy, because he then went on a property splurge funded by securitisation.

He buit the HBOS/Halifax mortgage business through TV advertising and funded it by issuing paper rather than attacting deposits, a risky strategy because there is always a risk that the wholesale markets will dry up, although the bond and commercial paper orginators will says that is a remote, very remote, highly remote possibility. About as remote as the M25.

Crosby and the other HBOS directors were warned in 2004 that the risks were becoming extensive and dangerous. He didn't like to hear this, so he sacked the messenger and gagged him with a confidentiality clause. Then realising that the game was going to be up pretty soon, he stood down, took a knighthood and made a hospital pass to Andy Hornby. He to a nice little earner with Downing Street on how to push ID cards on an uncompliant populace and for his troubles the Prime Minister makes him Deputy Chairman of the Financial Services Authority.

Having fluked it to the top of the UK banking industry without ever having to sign off on a loan (boards are not credit committees), he suddenly gets to be the de facto head of bank regulation, having a few banks on his CV, which is at least a step up from Adair "Executive Hair" Turner, the chairman of the FSA, management consultant and lobby group chairman, with as much experience in banking as a spotty graduate.

When the former Head of Risk Management at HBOS can tell the whole story under parliamentary privilege, it seems that not only did he tell the HBOS board that they were doomed, but he also blew the whistle at the FSA, who ignored him.

When Andy Hornby and Denis Stevenson met the House of Commons Treasury Committee, Mr Hornby told them that he had tried to undo the damage caused by Mr Crosby, reducing the HBOS share of the mortgage market and increasing the average term of their capital market liabilities, but to no avail because the Labour Party and the BBC contrived to kill the HBOS share price, cause a run on funding and and force HBOS to merge with Lloyds. Would it not be surprising if Brown hadn't been made aware of the problems at HBOs by Crosby, his financial advisor and until today, Deputy Watchdawg.

In all Crosby spent about 6 years in banking, but all of that at board level and away from the day to day banking decisions, so why he was ever appointed to the FSA or as Gordon Brown's advisor is a mystery, or rather a question of the blind leading the blind. But now he is caught like a rabbit in the headlights of an oncoming truck, and he has done what all rabbits would do in a similar situation, he has bolted down his barrow.

Tuesday, 10 February 2009

The Great and Good are now small and ugly

The Times has compiled a list of the ten people it holds most responsible for the New Depression. Remarkably for lists of ten people the list contains eleven names, but we won’t hold that against them. A fair list and hard to disagree with most of the names, although perhaps Fred Goodwin’s I would always hesitate to ascribe too much prominence to RBS. Fred “the shred” Goodwin’s stupidity in buying ABN was matched by equally appalling fecklessness at HBOS, Bradford & Bingley and Northern Rock. It is hard to understand why anybody would think that the administration of BCCI was good preparation for running a successful bank. As it was Goodwin took RBS to the verge of insolvency, where he would have been at home.

  1. Dick Fuld

  2. Hank Paulson

  3. Alan Greenspan

  4. John Tiner/Hector Sants

  5. Fred “the shred” Goodwin

  6. Gordon Brown

  7. George Bush

  8. Kathleen Corbet

  9. "Hank" Greenberg

  10. Angelo Mozilo

But the name I would put at the top of the list, without a doubt, and not something I would blame him for, is Bill Gates. Without Mr Gates and the IBM PC we wouldn’t have thousands of traders sitting in front of computerised trading desks designing, trading and hedging ever more exotic financial; projects. Computers would have been used for offline accounting, order entry and processing, but option pricing models would have stayed in theory books rather than on trading floors, skewness and kurtosis would have remained statistical concepts unfamiliar to financial analysts. For all the productivity of the personal computer, the New Depression may have wiped out many of the earlier economic gains.

Monday, 9 February 2009

A second opinion

It is good to know that Lloyd Blankfein shares my opinion on many matters related to the New Depression. For those who need to be reminded is the chief executive of an investment bank on Wall Street by the name of Goldman Sachs.

He has made clear some of our shared opinions in an article in the FT. For those too lazy to read the FT, here is my summary of his points:

  • He says
    “Risk management should not be entirely predicated on historical data.“
    I go further and say “Don’t rely entirely on mathematical risk models.” Those models are predicated on the assumption that markets and prices operate so similarly to the models that the models can be used a s a measure of value and risk. They can for most of the time, but sometimes markets break down and the models don’t work. It is better to have a risk management systems that work, perhaps imprecisely but all of the time than to have a system that is perfectly accurate for only 95% of the time and is completely useless the rest of the time. He says the industry needs to do more to stress test models. I say banking just needs more seat of the pants risk-averse common-sense decision makers.

  • He says
    “too many financial institutions and investors simply outsourced their risk management”
    which is true enough but in a sense they always did. Unlike for example the lead bank in a syndicated loan or a bond underwriter, the rating agencies have no money at risk, but this is not the biggest issue. What is different now is that so much of the creditworthiness (and now, in the particular case of banks, the capital allocation) depends on the say-so of the rating agencies. In the past agencies would have rated a few well known companies, but nowadays they opinr on the structure and documentation of deals rather than company performance. It was relatively simple to take a view on the value of say a big oil company and its likelihood of defaulting in its debts. Can a rating agency really show the same certainty about the risks on the assets and documentation of a special purpose funding vehicle?
  • He cites the
    “over-dependence on credit ratings coincided with the dilution of the coveted triple A rating”,
    which I mentioned a few weeks ago, but although he mentions that there were 64,000 AAA-rated structured deals but only 12 AAA corporates in 2008, he does not mention that this added to the pro-cyclicality effect of Basel II. When Basel II was first conceived there were very few AAA ratings and banks did very little business with AAA counterparties, so that there would be very little need for extra capital on a ratings downgrade of a AAA counterparty. The situation now is very different.

  • He says that
    “size matters”,
    or that it is easy to forget that although the risk of loss on $5bn of high quality debt is the same as the risk on $50bn, the consequences of loss are far greater on the latter. Well blow me! He doesn’t miss a trick this guy. Some prudent banks have always set limits on types of asset they hold, counterparties and other risks. It seems some did not. Perhaps this is really an Enron-type problem, more connected with off-balance sheet items and the assumption that what you don’t see is not really there.

  • He says that
    “many risk models incorrectly assumed that positions could be fully hedged”,
    which is the corollary of the assumption that risk models operate correctly at all times. The trouble is that hedging markets can breakdown just as easily as the market for the assets being traded, and there is no guarantee that the liquidity in the hedging market will be the same as the liquidity in the primary asset market.

  • He says
    “risk models failed to capture the risk inherent in off-balance sheet activities, such as structured investment vehicles”,
    but I would put it differently. If there is any exposure to risk in an asset or liability then perhaps it shouldn’t be off-balance sheet. This is the Enron effect. A bank or a company does a trade, perhaps the sale of an asset that isn’t quite a full sale, although maybe we can convince the auditors it is close enough to a sale to warrant sale accounting treatment. Remember the Enron Nigerian barges? Maybe not, but that is what banks do all the time to remove assets from their balance sheet and perhaps to book gains on a sale. Only the problem is there are some residual risks associated with those assets, but if we speak nicely to the auditor he won’t mind them being there, and after all it’s only one deal. Except that single deal is repeated and gets the same sign off as before and then after a few more repetitions the auditor can’t change his opinion. In fact he probably goes to the accounting standards board to get his treatment approved, and then the business really takes off.

  • He says there was
    "too much complexity",
    which made it hard to manage the growth of new instruments. I would turn the point around and say that there was too little regulation of new instruments which places some of the fault at the door of the regulators, but I would also put some fault at the door of the bankers who were profiting from the complexity knowing that there was inadequate regulatory understanding of the instruments being created.

  • His last point is that
    “financial institutions did not account for asset values accurately enough”.
    I would differ saying that some of the instruments were not capable of sensible valuation and that even if some valuations were perfectly accurate at the time they were made, they should not have been relied on immediately thereafter. A balance sheet might measure the risk in some straightforward instruments, but it doesn't come close to articulating the risk in some instruments.

One area that he misses completely is the "we never saw it coming" line that is coming from so many mouths today. What they are really saying is "yeah, we knew about it but we shut it out of our minds". The bankers of today's modern finance rely heavily on trading and securitisation, and by and large they have the trader's mentality. An asset is a risk until it is hedged or sold (albeit that there might be some ongoing risk in the asset). A liquidity exposure is a risk until some funding is put in place, although the risk doesn't go away completely. It all happens on an item by item basis and the "market" is often assumed to be almost infinite, or at least to the exnt that putting another trade into the market doesn't absorb all liquidity.

When risk assessments were made in banks the one question that was not asked was "What happens if X market goes away?" because the likely answer was "it ain't gonna happen, but if it does we all go to hell in handcart, you, me, the Governor of the Bank of England and the whole economy". The risk was put in the very low risk category, not factored into any pricing models and generally ignored. On a deal by deal basis that made perfect sense because the loss on that deal was limited to the values related to that particular deal. On an aggregate basis the numbers were so huge that no bank would contemplate the losses resulting from any individual deal, so deals got done and the market consensus was that these sorts of things did not and would not happen. Which meant that the market grew and grew and the issues that were ignored were precisely those that occurred because nobody was worrying abut them.

That apart, Blankfein has some good points and should go far.