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Sunday, 31 May 2009

An amazing coincidence

What do Gillian and Barry from Port Seton and their young daughter Hanna, the Conniff Family from Wester Ross and the McDonald family from Sauchie have in common?

They were all quoted in various Labour Party leaflets for the European Elections as saying: "It's Gordon Brown's leadership that will get us through these tough times. Labour is the only party on the side of hard-working families, standing up for Scottish people nationally and in Europe."

Exactly the same words. What are the odds of that? I don't believe it (and furthermore I don't believe what they said).

Thursday, 28 May 2009

How they deal with politicians in Prague

The eggs are wasted on politicians, but as Tesco says, "Every little helps".

Wednesday, 27 May 2009

More free tax advice to MP's

All you MPs out there, read this very carefully. It was your ilk who passed it into law. I know politicians have a very short attention span quite unsuited to parliament, but please try to listen and stop thhinking that you can reduce this matter to sound bites, but I will try to keep this simple and explain that you are not entitled to claim the cost of tax advice against your taxable income.

First of all everybody knows that any allowances received by an MP to cover the cost of staying away from home are tax free (whereas such allowances would normally be taxable to the average tax payer but subject to tax relief for the expense), so let's look at that piece of legislation (s200 ICTA 2008):

200. Expenses of Members of Parliament.
(1) An allowance-
(a) which is paid to a Member of the House of Commons; and
(b) for which provision is made by resolution of that House, and (c) which is expressed to be in respect of additional expenses necessarily incurred by the Member in staying overnight away from his only or main residence for the purpose of performing his parliamentary duties, either in the London area, as defined in such a resolution, or in his constituency,
shall not be regarded as income for any purpose of the Income Tax Acts.

This isn't the whole section. I left out the rest because it isn't relevant. You don't need to worry about it, because I know you MPs aren't too hot on legislation.

But going back to the legislation, is it clear? You get your accomodation and overnight food paid for tax free but this section of the tax statutes says nothing about other expenses. So if you want to get tax relief for the cost of your personal tax returns you have to look for another provision. Sadly, at least for you, there isn't ione. Just like everybody else the cost of paying someone to complete your personal tax reurn is a personal expense and is not an expense associated with your profession. It is not incurred for the purposes of your profession, trade or vocation, but for your personal benefit to allow you to comply with your personal obligations as a tax payer. In this regard you are no different from any other tax payer.

But then let us look a little further at whether these expenses may be claimed under the Additional Costs Allowances. "Oh yes they may", says an unnamed Labour Party spin doctor with obviously limited grasp of the multi-level conditions often found in legislation and other rules, "the Green Book says MPs can claim for the cost of accountants and other advisers".

Well, the Green Book does indeed say that an MP may claim for "Professional advice, for example from accountants or solicitors" under the Staffing Expenditure allowance, but the Staffing Expenditure allowance is available to meet the costs incurred in the provision of staff to help MP's perform their parliamentary duties. The same distinction applies between MPs professional purposes and their personal expenditure as above. In other words, the completion of your personal tax return is nothing to do with your parliamentary duties, so you should not be claiming it back under the Staffing Allowance.

Of all the Labour MPs who have been running this fiddle, special mention must go to James Purnell and Meg Munn. Ms Munn distinguished herseld by paying her husband to complete here tax return and illegally reclaiming the cost from the tax payer, and fraudulently omitting to include the value of the benefit from her self-assessment.

Mr Purnell also paid an advisor to complete his tax return and claimed the cost of doing so, omitting to declare the value of the benefit on his tax return, but better still, he took advice on a tax avoidance scheme and charged the cost of the advice to the tax payer, again failing to declare the benefit.

But the prize for sheer ignorance of the law must go to David Miliband, or perhaps it was his spokesman, who suggested that because Mr Miliband had paid accountancy fees "out of his taxed income", before receiving the money back from the Commons authorities, "there was no liablility".

Um, no, Mr Miliband. You clearly do not understand how tax works. There was a classic piece of light entertainment in the reported case of Albon v Hinwood (HMIT), the tax law equivalent of Arbroath 36 Bon Accord 0, where the good Dr Albon argued fruitlessly that he shouldn't have to pay UK tax on a US pension because he had made pension contributions in the US out of income that had been taxed in the USA. Just like Mr Miliband's argument, this had no basis in tax law, but to the ignorant tax payer, seemed to be a justification. But that isn't how it works.

So let me explain. Mr Miliband paid for his tax advice out of his cash resources. Whether that is taxed or untaxed income or capuital or whatever is irrelevent. It was a cash payment and an expense in the relevant financial year, but unfortunately not an allowable expense. The reimbursement of the expense is an income item, presumable falling in the same year, but again unfortunately for Mr Miliband, not an item of income for which there is any exemption under UK statutes.

Hence Mr Miliband should have included the expense reimbursement in his tax return, although, of course, he should not have received any reimbursement in any event.

Tuesday, 26 May 2009

Crashing airlines

One of the best pieces of advice I ever heard as a young banker was “Never lend money to an airline run by pilots. All you see in the cockpit is blue sky, and you have no idea how the rest of the business is running.”

So it seems to be at BA under the management of former pilot Willie Walsh. I must declare an interest as a shareholder although I have sold a large part of my holding while Mr Walsh has been in his post.

BA chairman Martin Broughton told the press: “In the last twelve months we have gone from a record profit to a record loss due to the current tough economic environment. That only serves to underline the extremely difficult trading conditions that we are facing, despite our best ever operational performance, and any recovery is likely to take longer than initially envisaged. The revenue outlook continues to be weak during the current financial year but we expect lower fuel prices to reduce our fuel costs by approximately £400 million.”

One might ask what BA’s fuel cost surcharge on every ticket is all about? If they are charging customers more because of higher fuel costs, how do they manage to make a loss. Maybe passengers are going elsewhere because BA said the level of premium fare travellers had fallen by 13% in the second half of its financial year and it had seen a rise in fuel costs.

How strange then that Virgin Atlantic should report a sharp rise in profits in the year to the end of February, almost double the profit of a year earlier. The airline said the results had been helped by a rise in premium fare passengers. Virgin Atlantic chief executive Stephen Ridgway (former sales manager for a food company, teacher and business development manager for a powerboat company, but not an airline pilot) told the BBC: "We are winning market share from our competitors during the toughest trading environment ever." adding that successful hedging of fuel had helped the firm. Hedging involves buying fuel at set prices in advance to avoid fluctuations in costs on the open market.

In other words, Virgin got right all the things that BA got wrong. If Virgin have hedged their fuel costs, they don’t try to pass the higher cost onto their customers and they don’t switch like the former BA customers.

I am not a particular fan of Virgin. I was grateful 25 years ago when their brightly coloured interiors provided a welcome alternative to the drab BA service to New York, but my enthusiasm waned when I found out the ages of the planes they were using, some even older than the hostesses - always a bad sign, but I am even less a fan of Walsh and his policy of turning BA into a low-cost airline. He tried that at Aer Lingus, and the airline would have disappeared into the arms of Ryanair had the European Commission not blocked the merger on competition grounds. His main “achievement” appears to be to have battered the staff at BA into submission. Profits increased on relatively flat earnings, by squeezing employees salaries and pensions – never a wise move at a “premium” business. Inevitably, when Terminal 5 opened the grumpy staff were not motivated to sort out the problems. So Walsh was driving the airline down the low cost route, but with all the wide-bodied aircraft, early morning and evening premium landing and take-off slots and general overhead of a premium flag carrier.

Nobody wants to pay thousands of pounds to sit on an 8 hour flight to the US served by grumpy cabin staff. The market for premium travel is still there and always will be - even if one or two “business-only” airlines folded last year. Like the in-flight entertainment system that brought down Swissair 111, Walsh’s strategy is filling the cockpit with smoke, and although the business is still flying, it is only a matter of time before the Air Accidents Investigation Branch is called out.

VAT News (Sour Cream 'N Onion Flavour)

You may remember the court battles nearly 20 years ago between HM Customs and McVities over whether the Jaffa Cake was a cake or a biscuit. To cut a long story short, the Customs men said they thought the cake was a nothing more than a chocolate-cotaed biscuit, and subject to VAT at the full rate, whereas McVities classed it as a cake and thus zero-rated.

The clincher for McVities was that biscuits would normally be expected to go soft when stale, whereas cakes would normally be expected to go hard. Apparently Jaffa cakes become hard when stale. HM Customs missed a trick there, because it could be shown that in practice packets of Jaffa cakes are consumed quickly once opened, so the condition when stale is largely immaterial. Other factors taken into account by the court included the name, ingredients, texture, size, packaging, marketing, presentation, appeal to children, and manufacturing process.

Followers of VAT tribunal cases on snack foods will be interested in the latest Court of Appeal ruling in this area. Proctor & Gamble were at the High Court last year, where they argued that their best-selling product was not similar to potato crisps, because of their "mouth melt" taste, "uniform colour" and "regular shape" which "is not found in nature". This might be a surprising admission from a food manufacturer, particularly in these health conscious days, but perhaps it will have limited impact on the rest of P&G’sr product range, because Pringles are their one and only “non-pet” food product, the rest being a broad range of detergents, shaving goods, deodorants, dog food and feminine protection (whatever that means).

It seems the judge was not impressed. “There is more than enough potato content for it to be a reasonable view that it is made from potato," said Lord Justice Jacob (apparently no relation to the Cream Cracker of the same name). He gave short shrift to the argument that potato crisps were not normally packaged in tubes, and quite rightly too. Nor was he swayed by the argument (somewhat along the lines of the McVitie case) that potato crisps are made from real slices of potato and do not contain non-potato flours, whereas Pringles are more like a cake or a (non-chocolate coated) biscuit, it claimed, because they are manufactured from dough.

From memory, both Pringles and their natural rivals from Leicester (made from 100% English potatoes) lose their flavour and pass from crunchiness to brittleness to sogginess when stale. Indeed the Ig Nobel committee presented a nutrition prize in 2008 to Massimiliano Zampini of the University of Trento, Italy and Charles Spence of Britain's Oxford University, who tricked people into thinking they were eating fresh crisps by playing them loud, crunching sounds when they bit one, no distinction was made between Pringles and potato chips. Based on the facts and case law Proctor & Gamble never had a chance.

Thursday, 21 May 2009

What took you so long S&P?

Ratings agency Standard & Poor's has lowered its outlook on Britain to negative while affirming its 'AAA' long-term and 'A-1+' short-term sovereign credit ratings. These are the people who rated AIG credit default swaps at the same level not so long ago.

"We have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term," Standard & Poor's credit analyst David Beers said in a statement.

Clearly Mr Beers should have read this blog a little more. 100 percent of GDP? The public sector pension liabilities alone come close to that figure and they don’t show up in government debt figures. Then you have to add in all the other hidden liabilities, such as PFI and government guarantees thrown about like confetti. I really ought to update my video on Youtube, but the facts keep changing.

Beers said S&P had a more cautious view than the UK government of "how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow".

Too true. The IMF has the same view. The usual solution for countries faced with a deficit that is 12% of GDP is to increase banana production.

Wednesday, 20 May 2009

The Prime Minister speaks to the nation

And the Financial Crimes speaks back:

"Do you really want to see tomorrow in the midst of the recession, while the government is dealing with this, the chaos of an election? What you actually want is to get on with the job of sorting out the problem. "

No, I'll settle for the chaos of an election. It can't be much worse than the current situation. And don't bother telling me what I want.

"Most of my job is to get on with getting this economy back to work, making sure we can come through this recession."

Except you aren't dealing with any of those problems. People have lost their jobs. What have you done? Nothing. People have lost their houses? What have you done? Nothing. There has been a lack of capital investment in the private sector for the last 10 years, and an increase in economically unproductive public sector spending of 90%. Whose fault is that? Yours.

"The problem is high unemployment, that we are dealing with, mortgage problems that people have that we are dealing with, small businesses in difficulty that we are dealing with. There will be an appropriate time to have an election but at the moment people want us to get on with the job."

Incorrect. Most people, as measured by opinion polls, want your government to step down. Some people, but only 22%, want you to get on with your job. Most people would be happy to have an election tomorrow.

Tuesday, 19 May 2009

Next year's train fares

In response to a quibble about cheap train fares only being available to web surfers, transport minister Andrew Adonis said the government was committed to improving the railways and was investing £15bn on railways over the next five years.

"We will also hold rail companies to their contractual obligations and we will not allow most fares to rise by any more than 1% above inflation next year," he added.

Old news, but all the more relevant in the light of the news to day that RPI (the relevant measure of inflation for train fare purposes) was 1.2% below its level last year in April, having falled 0.4% in the year to March. If maintained to the end of the year, this would mean no train fare rises. Sadly, regulations do not force the train companies to drop their fares when annual RPI falls below -1%, but such is life.

Passengers might well ask why it is that when interest rates and thus RPI rise, their train tickets increase in price, but when mortgage interest rates fall and they have more cash in their pockets, their ticket prices stabilise.

The private sector is more efficient

An extract from yesterday's Hansard.

Leader of the House
Members: Allowances

John Mann: To ask the Leader of the House how many current hon. Members have redesignated their main home for the purposes of the additional costs allowance on three or more occasions. [276044]

Chris Bryant: It is not possible to provide this information without going through each individual Member's paper records as the information as requested is not held electronically and nomination forms, indicating where a main and second home are located, were only required from 2003 onwards.

The answer could therefore be provided only at disproportionate cost.

Personally, I would have just called the Daily Telegraph. They have it all on CD.

Lehman want to know if they were short changed

Lawyers for Lehman Brothers Holdings said they have become aware of “apparent material discrepancies” relating to Barclays’ obligation to pay employee bonuses and cure amounts, so they have done what all good Americans would do in the circumstances, and have gone to court. Assiduous readers of this blog may remember that they made a fuss about this in March.

It appears that the sale agreement had certain value adjustments relating to liabilities, taxes and bonuses, and the Lehman lawyers queried in March whether those liabilities were in fact honoured or paid. According to the lawyers the amounts in the contract were “significantly overstated or inaccurate and, further, that Barclays may not have actually paid these obligations.”

So the lawyers question whether “the purported assumption of up to $4.25bn in liabilities, an integral component of the sale transaction, was genuine, adequate and fair consideration for the asset purchase…” A US bankruptcy court approved the sale of Lehman’s US brokerage business to Barclays last September. There were no other offers. The creditors committee neither supported nor opposed the sale (more fool them, when it's gone, it's gone), saying that there was insufficient time to determine whether it was the best deal available, but a group of bondholders holding over $9bn of Lehman paper did object.

Were Lehman short-changed? Of course they were, but that's life.

Barclays booked a £2.6 billion gain on the sale, but probably because they could reverse deferred tax liabilities after the sale. We know that £400 million of the gain came from the writeback of a deferred tax asset (assume they were trapped US tax losses that became usable against Lehman liabilities after the acquisition), but the source of the other £2.2 billion of profits that Barclays booked as a gain on acquisition are less clear. Lehman says that there was an oblgation to pay $2 billion in bonuses which may or not have been honoured. This got Lehman really mad, because the court filing says

“The apparent large size of these discrepancies appears more troubling to the Debtor when considered in connection with Barclays’ recent announcement of its financial results for the year ending December 31, 2008. In that regard, Barclays announced that it had secured a £2.262 billion gain from its acquisition of Lehman’s North American business, just over two months after closing the Sale Transaction (and during a period when the global economy was essentially frozen), suggesting that excess assets may have been given to Barclays.”

Of course if Barclays hadn't booked such a large gain Lehman's wouldn't be after them. Nobody likes to look foolish, particularly investment bankers and there lawyers. But then as we have already discovered, without £2.6 billion of profits from this purchase and £1.6 billion of gain from the widening of credit spreads on its own debt, the rest of Barclays' businesses, its zillions of branches, employees, traders, managers, bankers, clerks etc. only turned a £2 billion profit last year, less than 30% of the headline figure.

The court filing is here.

Monday, 18 May 2009

Another government fail

Another day, another deal that goes wrong because ministers don't know what they are doing. The car scrappage scheme has failed on the first day with Ford and Honda pulling out because nobody has thought through the VAT.

The government approached the car manufactureres and said, "OK here's the deal. If you drop your new car prices by a thousand pounds,, we will add another thousand, so you can drop your price to your customers."

"A 50:50 deal?", say the manufacturers, "Great!", thinking they can pass at least 25 of their 50 onto the dealers, but when they looked at the detail the government put a stop to that.

But then someone in government realised that it wasn't a 50:50 deal after all, because if the price to the customer was reduced by £2,000, the VAT charged would be £300 lower, so the government thought they were contributing £1,300 for every £1,000 contributed by the manufacturer, which they probably weren't because the whole point of the scheme was to facilitate sales that wouldn't have happened anyway, but let's move on.

So the government decided to get some of their VAT back by telling the manufacturers that their contribution to the sales price could be offset against the value of their taxable outputs, but the money they received from the government could not be treated the same way, so that a new car with an ex-VAT sticker price of £10,000 would be sold for a price of £8,000 plus VAT on £9,000. Rather than subsidising every sale the government actually makes £1,350-£1,000 = £350 on the £10,000 deal.

No wonder Ford and Honda got upset.

Albert H. Gordon

I have been meaning to write a piece about a great man who died earlier this month, but which appears to have been missed by the British press who have been preoccupied with the affairs of far lesser mortals.

Albert H. Gordon, who helped rebuild Kidder Peabody after the 1929 Wall Street crash and built the firm into "a minor powerhouse on Wall Street," died on May 1 at his home in Gracie Square, Manhattan. He was 107.

Albert Gordon was born in North Scituate on July 21, 1901. His father, after working as a sheep herder in Wyoming, moved to Boston to become a successful leather merchant, supplying the British Army in World War I. He graduated cum laude from Harvard College in 1923 with distinction in economics. He ranked third in his class at Harvard Business School.

Gordon arrived on Wall Street in 1925, to take a job as a statistician with Goldman Sachs. He moved into the role of a commercial paper salesman and travelled an immense territory, on a train 12 nights out of 14, and later one of the first investment bankers to fly.

In those days, investment bankers strove for decorum. In an interview with National Public Radio in 2004 he described how the bankers of the time wore silk collars and hats. “We took ourselves seriously."

At his first job with Goldman, he won a $2 million deal from National Dairy Products, a predecessor of Kraft Foods. He was entitled to a substantial commission, but his boss took all the credit. Gordon learned an important lesson, he told Forbes in 2000, "You can't retain employees if you don't spread credit around."

In the business world, Gordon was known for his success on Wall Street. In 1931, he and a classmate took control of Kidder, Peabody & Co., an old Boston firm established in 1865 which was then on the brink of bankruptcy.

Kidder had been a respected Wall Street institution in the 1920’s. The firm had been prominent in the early financing of the American Telephone and Telegraph Co. But two years after the crash, it was broke. J.P. Morgan & Co. arranged financing that included a cash infusion from the Webster family of Stone & Webster, the engineering company. Frank Webster had led Kidder for most of the first third of the 20th century.

The reconstituted Kidder had three principals: Edward S. Webster Jr., Frank's grandson and Gordon's Harvard classmate; Chandler S. Hovey, who led a Boston investment bank, and Gordon, who, at 29, was the youngest.

They moved the firm to New York, and Gordon, who would go on to become the firm's senior partner and biggest shareholder, built up its sales and underwriting divisions. Gordon expanded across the U.S. and overseas, taking airplanes to see clients when his competitors were more comfortable on trains like the 20th Century Limited to Chicago, he says.

Gordon was the de facto head of the business, even if it was nominally run by Webster. Gordon pioneered the idea of having offices elsewhere in the U.S. and later in Europe and Japan to create a distribution network that would be both envied and emulated. He expanded the underwriting of high-grade securities and deemphasized private banking and foreign exchange. By the 1940s, Kidder rebounded as a top underwriter and prestigious investment bank.

“People wouldn't fly,'' he said. ``So there was virtually no competition.'' With the advent of jet travel, he flew to Japan with his wife ``to see if the people were friendly,'' paving the way for an expansion in Tokyo.

“We did a tremendous amount of business in Japan,'' he said. That followed expansions in Asia and Europe in the 1950s. Kidder was the first U.S investment bank to have an office in Hong Kong and in England.

Kidder bounced back. From 1960 to 1964, it ranked second among all investment banking concerns in a category of securities offering, The New York Times reported in 1965.

The firm grew from 200 employees to over 2,000 in the 1980s and became one of the world leaders in municipal financing, bond trading and public utility financing under Gordon’s chairmanship.

Gordon was chairman and a large shareholder of Kidder in 1986 when General Electric bought the business. Under G.E., Kidder floundered and ended up selling most of its assets to the competing PaineWebber Group in 1994. Hovey retired in 1952, and Webster died in 1957.

In 1960, Fortune magazine listed Gordon as one of the 10 most powerful men on Wall Street and as the financial community's most successful underwriter and salesman.

Gordon used his charm, powerful friends like Armand Hammer of Occidental Petroleum, and legendary energy to chase deals.

“He was a famous business-getter,'' said John Whitehead, former CEO of Goldman Sachs. “Work hard and never give up -- those were very valuable lessons I learned from trying to compete with him.''

Whitehead remembers vying for clients against the more experienced Gordon at St. Paul, Minnesota-based 3M Co., where Gordon's relationship was so close with CEO William McKnight that Whitehead says he focused instead on cultivating the next generation of executives. It didn't work right away, he says. When McKnight died, Whitehead says, his will stipulated that Gordon and Kidder should handle any sales of McKnight's stake in 3M.

Gordon lived to become an eminence grise of the investment community. Indeed his opinions were sought until his death because he was one of the very few living Wall Street investors who worked in the years leading up to the stock market crash of 1929.

But that is not why we remember Albert H. Gordon. Apart from his successful business career, he set a fine example as a human being.

The New York Times reported in 1989 that Mr. Gordon had imbued Kidder with "an air of positive gentility, giving employees a free hand to pursue deals." He gradually sold back ownership of the firm to its workers at discounted prices, to signal that he would not challenge the new management he had recruited. He did not want anyone to think of him as "that greedy old bastard".

When he ruled that the investment industry did not violate federal antitrust laws in 1953, Judge Harold R. Medina noted the industriousness of Kidder. He said Gordon's firm had "forged its way strictly on the merits from a minor position in 1931 to that of one of the country's leading underwriters."

Gordon was dedicated to physical fitness, which he believed explained his longevity. He took one puff of a cigarette in his life, he said, didn't salt his food, and limited his alcohol intake to a glass of champagne a year. In the 1960s and '70s, Gordon offered cash rewards to employees who quit smoking.

He began running marathons in his 80s and at his death was the oldest graduate of both Harvard College and Harvard Business School. He was twice the oldest participant in the London marathon and sometimes walked from airports to his hotel. He made cold calls to prospective clients well into his 90s. At 105, he was still working four days a week at Deltec Asset Management, a company run by his son, spun out of Kidder.

A student of health and nutrition, he correctly anticipated later neurobiological findings that mental exercise was as important as physical exercise, so he taught himself new languages, studied, and read voraciously.

Unconcerned about race, religion, gender, or even age, Gordon promoted a new meritocratic spirit in an old "blue-blood" merchant bank. "In Kidder, anybody that has an ounce of productive capacity, as measured by the bottom line, does not have to retire…. It is necessary, however, to give leadership responsibility to other people so that they can learn."

In contrast to the greed and sense of entitlement that characterize so many contemporary executives, Gordon evinced genuine frugality and concern for the bottom line. He flew exclusively in coach, and took the subway to work. Spotting a young Kidder executive in first class, he passed a note from his own coach seat: "What is the food like up there?"

He advised a traffic-delayed office visitor who complained about trouble getting a taxi in the rain, "You should have just hopped on a train—like I do—headed for Wall Street. Folks have heard of the stop!"

As a philanthropist, Gordon was generous but quiet about his donations. Gordon was a past president of the Harvard Club of New York, and his generosity to Harvard is evident in the Albert H. Gordon Track and Tennis Center there, as well as a professorship at the business school. The New York Road Runners named its library and an annual race for him. Today, one of the main roads into the Harvard Business School bears a plaque calling it “Albert H. Gordon Road'' in recognition of his advice and donations over the years.

Some said he was Harvard’s largest individual donor, and he was also a notable supporter of Winchester College in England, where he sent his sons to receive an education he no longer felt to be available in the US. Such was his generosity that the oldest school in England bestowed on him two unique honours, declaring him an honorary Old Wykehamist and later an honorary Fellow.

A bibliophile, his generosity delivered the only surviving copy of John Eliot’s 1663 “Indian Bible” to his alma mater, Roxbury Latin School, and helped to underwrite the acquisition of the manuscript of Trollope’s The Way We Live Now by the Morgan Library and Museum.

At a 2002 conference, Yale's president asked the centenarian Gordon, a long-standing Harvard donor, if he might want to give a little something to the Elis. Gordon, noting the "big to-do" made over Yale's 300th anniversary, remarked that perhaps the celebration was premature. "Now I am just one person, but I am already one-third of the way myself. Shouldn't we wait a bit to see if Yale makes it?"

He showed similar humour at the New York Stock Exchange in 2007 when he joined a CEO summit held in the august 101-year-old building, then designated a national monument. Gordon announced, "Unsure how to distinguish myself in so impressive a group, I thought I'd be the guy who didn't wear a tie."

A great man, whose likeness we rarely see.

It's tough at the top

According to the Daily Telegraph and the BBC, the Labour MP Ben Chapman paid off a lump sum on his mortgage but continued to claim mortgage interest payments on the prior capital balance for ten months.

The paper says it amounted to a £15,000 overpayment and had been done with the agreement of an official in the Fees Office. Mr Chapman told the BBC he had not yet seen the papers, but said all his claims had been agreed by the fees office. "Whatever I have done I have been entirely open and above board. I am obviously extremely distressed."

Well you would be, wouldn't you? Time for some tea and sympathy? Probably not.

Who are you going to believe?

According to the FT this morning:

"UKFI also confirmed its support for Sir Victor's re-election, praising his "unstinting" efforts to make the merger a success."

According to Pesto on Radio 4 this morning, they were going to vote against Sir Victor.

Sunday, 17 May 2009

Blank cheque bounces back in his face

Sir Victor Blank will step down as chairman of Lloyds Banking Group at the bank’s annual meeting in 2010, in an attempt to mollify the bank’s shareholders following the takeover of HBOS, for which he appears to have been the driving force. as mentined before, his chief executive seems to have been less enamoured of the merger, less tainted and has not resigned.

Another bad financial judgement by a lawyer/politician. For all his experience as an M&A specialist, corporate finance advisor and director of RBS and chairman of Lloyds, Blank doesn't seem to have had much of a track record of making credit decisions, which is essentially what the HBOS merger was all about. Contrast that with the successful chairmen of US banks: J.P. Morgan and Bill Harisson at JP Morgan, Walter Wriston at Citi, Amadeo Giannini at BofA and the Barclay, Bevan, Tritton, Tuke, Pease and Williams families who have dominated the board at Barclays over the years.

The most curious comment so far comes from the BBC's Robert Peston, who is either out of his depth in his understanding of the situation, or privy to the most scandalous aspect of the whole affair. The following appeared on the BBC website:

Lloyds' directors do not believe that Sir Victor would have been ousted by shareholders at the forthcoming annual meeting, according to the BBC's business editor, Robert Peston.
However, he believes that UK Financial Investments (UKFI), which manages the government's stake in financial institutions such as Lloyds and the Royal Bank of Scotland, was "acutely aware" of other shareholders' convictions that there had to be a change at the top of Lloyds.
"I am now persuaded that UKFI would have voted its 43% (that's taxpayers' 43%) against him staying on," Mr Peston said.

The FT reports that John Kingman, chief executive of UK Financial Investments, is preparing a strategy to sell the taxpayers’ stake in the bank and speculates that it will get a better price if Sir Victor is not there. In effect, the government is ditching Sir Victor because he had the poor judgement to give in to government pressure to support the HBOS merger.

Eric Daniels told the Treasury Select committee that Lloyds only needed government support because of the HBOS deal. On its own, Lloyds Bank made £800 million last year, 80% down on the year before but still solvent. On the other hand the Chancellor has never said the merger was a bad deal for taxpayers. Lloyds' pre-merger shareholders picked up a large part of the costs of bailing out HBOS that would, without a merger, have fallen on the taxpayer.

One might have expected the original shareholders to oust Sir Victor, but for the government to fail to support their man is shameful in the extreme. They shafted the Lloyds shareholders on the way in, and shafted the man who helped them to do so on the way back out.

Saturday, 16 May 2009

Improbability and Statistics

Have you ever wondered how the national statistics are compiled, such as for example, the retail sales that get quoted every month. I always imagined that there was once a team of researchers armed with clipboards, later followed by civil servant who would ring round all the major retailers. With a bit of technology and sophistication perhaps they could have cross-checked the figure with some numbers from the credit card companies and the bank cheque clearing systems.

Surely nothing more than a bit of totting up, and certainly not numbers that were calculated,e extrapolated or worse still made up?

It seems not, or at least not that simple because the Office for National Statistics has just admitted that the cheery retail sales that they have been passing to the BBC to regale us with over our Rice Krisopies have overstated the growth in retail sales for the last two years by 56 per cent.

Apparently many economists have expressed concerns in the past that the ONS numbers didn't look right, prompting Karen Dunnell, the national statistician, to write to newspapers last year, stating that the the ONS numbers were "the best available" and "not inaccurate”. She also said that many of these economists were linked to city analysts who "have a vested interest in not being proved wrong”. She also described statistics from the CBI or the British Retail Consortium as not “fit for purpose”.

The ONS have now reduced their figure for the growth in retail sales between August 2007 and March 2009 from 3.6 per cent to 2.3 per cent.

It seems that the problem was that the ONS figures did not take account of the fact that consumers were likely to switch between products where price differences had widened.

But hang on. What has the price of individual goods got to do with overall sales data? Surely retail sales is simply a matter of adding up, no? If M&S reports £15 of sales it doesn't matter whether it comes from 4 pairs of socks, 3 pairs of knickers or a bottle of Chilean red wine and a take away sandwich. Apparently not. The ONS seem to have devised a more complex method for making up the statistics than adding up the cash that passes through the tills, and fallen foul as a result.

Still, it looks like retail sales of humble pie should be up this month.

In praise of fatty foods

We may not all delight in the gastronomic delights of an all beef patty in a sesame seed bun, but few can argue that Mcdonalds is not a well run business. It is one of the best examples of a company that takes a simple idea and does it well on a grand scale. It is its performance that keeps it ahead of the company, and the credit for that must go to the people who work there. That includes the management team as well as the front of house burger flippers, or as we will call them next year, Oxbridge Arts graduates.

So it was refreshing to see the down-to-earth no-nonsense approach of Steve Easterbrook, UK CEO of Mcdonalds, who by a quirk of the BBC booking system shared a Question Time panel not only with three MPs but also with Ben Brogan of the Daily Telegraph. Mr Easterbrook cut the politicians dead with his castigation of their collective behaviour (a "national disgrace"), and expressed his amazement at their inability to get an expenses system that worked fairly for the "employer" and the "employee", always a simple matter in the private sector. It was a joy to watch the faces of the politicians.

Hats off to Mr Easterbrook. You are a credit to your company, your staff and yourself. Your country salutes you, even if we don't all choose to gorge on your ready to go packages of fat-laden cow renderings and deep fried carbohydrates.

Friday, 15 May 2009

You are here

OK, so what next?

Our government has borrowed more money as a proportion of our ability to generate cash than any government outside wartime. In fact the amount they plan to borrow is more than all of the money that British governments have ever borrowed.

The Prime Minister is as bad as any that can be remembered, an ineffective bully who is out of touch with reality.

The Home Secretary is widely seen as incompetent, petty and venal.

The Chancellor is inept. At least we don't see any eptness because his role is usurped by the Prime Minister. So the Chamcellor may be the worst, but he has competition from his predecessor and a 1960's Chancellor with the same surname.

The Speaker of the House of Commons and his supporters used to think he was making a statement by his lack of ability. Now he is seen for what he is: a corrupt inompetent.

And finally, the Opposition has failed to hold the Government to account over its many failings.

While the politicians boost their incomes with dubious deals on their expenses, house repossessions (up 50% year on year) are the only growth industry in the UK.

So onto our stock market recommendations:

Unfortunately all of the major piano-wire manufacturers (Röslau Stahldraht, Mapes, NewOctave) are privately held, so investors looking to profit from the unfolding political situation would be well advised to look at the lamppost sector.

Stainton Metal Company is the UK's leading manufacturer of stainless steel and galvanised street lighting columns, high masts, tramway and telecommunication poles, with over 30 years experience in manufacturing for the construction and street lighting industries. It was bought in November 2008 by Valmont Industries, Inc. (NYSE: VMI), a leading global manufacturer of engineered support structures for infrastructure, mechanized irrigation equipment for agriculture, and a provider of coating services and tubular products. We see upside in the group resulting from increased UK demand.

Thursday, 14 May 2009

It pays to read The Financial Crimes

The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40% of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers. The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan.

Does this sound familiar? Well it should if you read this blog on 24 March, 2 hours after the TARP proposals came out. If you didn't read this post.

Holy Moses! I am good at this game.

You know things are bad when ..

A major high tech employer such as BT announces that it is cutting 10% of its workforce and the BBC tries to spin it as not all bad news.

After all BT sacked 10% of their workforce last year, so apllying the logic of pro-government spin that has come from the Beeb and the FT this week on the economy, this is good news because .... the annual rate of decline in employment at BT has stopped increasing.

There you almost fell for it.

Wednesday, 13 May 2009

En-ron-ron-ron En-ron-ron

The Treasury has today decided that many private finance initiative projects will remain off the government’s balance sheet. It is not hard to see why. Public sector capital spending is budgeted to fall from £44bn ($68bn) this year to a £22bn a year in 2013-14. The billions of pounds of PFIs and PPPs that are in the pipeline would not be able to go ahead if they had to be included in those numbers.

Despite previous promises to move towards international financial reporting standards, the Treasury has now issued guidance to Whitehall departments indicating that, while PFI projects count on departmental accounts, a different accounting standard will apply for the Treasury’s budgeting purposes.

Yes, you read that right. The projects count on the balance sheet of individual departments, but when it coumes to drawing up the balance sheets for the whole government, they disappear. You could not make it up, but apparently they do.

About 60% by value of PFI projects lie off balance sheet, lie being the operative statement. Let us not forget that in many recent PFI projects the government has had to underwrite the project equity as well as contract as the end user. So if the contracting Department has successfully removed the risk in the contract it must have shifted the risk to the project (prop. HM Government). On the other hand, if the risk is not transferred and remains with the Department and is thus on the Department’s balance sheet (as per the Department’s accounts), it should consolidate onto the government’s books.

“Not so”, say the Treasury, “they don't because .... err .... because they don’t”.

Ken Lay would have been proud.

The King speaks

Some highlights from Mervyn King’s press conference after the Bank of England delivered its latest quarterly inflation and growth forecasts. For the record the BoE predict a 4.5% year-on-year decline in economic growth. It said that the economy won't begin to grow again until the middle of 2010rather than later this year as they had previously predicted. The forecasts are gloomier than the government's own projections for a 2009 decline in GDP of around 3.5%. Two government departments making the same forecast at tax payers expense, which gives us an idea about why growth may take some time.

Still here is some of what Swervin' Mervyn said:

It may get better, it may get worse, who can tell

"The chance that ... the level of output will be higher in the middle of 2010 is ... no higher than the probability that output will be lower in the middle of 2010. In other words, growth has just as much chance of being positive over the next 12 months as it has of being negative."

"The balance sheet considerations mean that you may well get growth over the next year, that may well happen ... whether that will be sustained depends on the adjustment to balance sheets."

"We may well get a recovery that proves to be sustained, then again we may not. At some point, growth will return to above trend levels in order to absorb the spare capacity that has been created by the very savage fall in output over the past 6 months..."

"There are real risks from the nature of the downturn and the role of the financial sector, that mean this could be a slower return to normal growth paths than we might have expected had this just been a normal business cycle"

It is going to take 10 years to fix the economy

"The likely impact for the next decade is going to be dominated by recovery from this financial crisis. I don't think the growth of productive potential will be permanently reduced."

"A lot will hinge on how quickly the banking sector gets back to levels of capital that will encourage it to lend on the same terms as before in terms of spreads."

"We should not assume that it's all doom and gloom. What I am saying today is that it's very difficult to predict the timing of a return to the historical growth rates that we've seen in the past."

but we have fixed the banks

"The actions that were taken to deal with the banking system have I think stabilised the banking system ... and removed the panic."

"These (fiscal) problems are manageable. It's a question of will."

"There's absolutely no reason for people to talk in dramatic terms at all."

by printing money

"We are certainly not disappointed. The exit strategy is very simple - it's a combination of raising bank rate and selling some of the assets we have purchased. We're ready to do that whenever we think it is appropriate to do so."

"What matters is the willingness of the monetary policy committee to do it, I can assure you that every member of the MPC is ready to follow the exit route when it is appropriate to do so."

"No one can know much about the effectiveness so far. We've only seen about 3 weeks worth of data ... It's far too early to judge."

Our initial assessment is

"We were certainly pleased by the initial impact on yields. Of course yields have backed up somewhat since then, but many other things have happened. What's hard to judge is the counterfactual ... I feel these actions are likely to have had some impact."

"It will take 6-9 months I think before we see more evidence."

we are all doomed

"It was helpful that the budget was extremely honest and open about the scale of the fiscal problems facing us."

"There certainly seem to us at least as many reasons to suppose that it may turn out to be a smaller deficit than a bigger one."

"There is no doubt that we will need to move back to a path for fiscal sustainability, that is very important."

Even when we try to see the bright side, things are getting worse

"The pace of decline has moderated and a number of indicators are picking up. This is not an artefact of the data."

I have never been here before.

"This is not like the typical business cycle of the post war period."

Do you have a number I could call?

A little service to MPs

.... who own more than one house and wonder whether they are or have been liable to capital gains tax on the disposal of one of their properties. The legislation is the Taxation of Chargeable Gains Act 1992 and you need to look a sections 222 to 226. The logic is a bit tortuous, but you foist this stuff on the rest of us, so I have no sympathy.

The actual relief for main residences is in section 223(1) :
"No part of a gain to which section 222 applies shall be a chargeable gain if the dwelling-house or part of a dwelling-house has been the individual’s only or main residence throughout the period of ownership, or throughout the period of ownership except for all or any part of the last 36 months of that period."

That gives a complete relief from all CGT where the house has been the main residence for all the time that it has been owned, although there is an exemption for the last 36 months on the basis that you may have moved out and been unable to sell the house for a while.

Subsection 223(2) tells you what to do if you live in the house for less than the full period of owndership:
Where subsection (1) above does not apply, a fraction of the gain shall not be a chargeable gain, and that fraction shall be—
(a) the length of the part or parts of the period of ownership during which the dwelling-house or the part of the dwelling-house was the individual’s only or main residence, but inclusive of the last 36 months of the period of ownership in any event, divided by
(b) the length of the period of ownership.

so it gets treated as your main residence for the last 36 months of ownership in any event, but you have to pay tax on that proportion of the gain equal to the ratio of the period of ownership before the last 36 months to the total period of ownership.

As a matter of law, your main residence is by default decided by the facts - where you spend most of your time, where you are registered to vote, registered as a company director, where your family live, but if you want to clarify the matter section 222(5) is your friend:

So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period—
(a) the individual may conclude that question by notice to the inspector given within 2 years from the beginning of that period but subject to a right to vary that notice by a further notice to the inspector as respects any period beginning not earlier than 2 years before the giving of the further notice,
(b) subject to paragraph (a) above, the question shall be concluded by the determination of the inspector, which may be as respects the whole or specified parts of the period of ownership in question

which is great, but it only lets you go back one financial year. If you wanted to give notice of a change of main residence today (13 May 2009), you could only make that effective from 6 April 2008 (6 April 2007 is more than 2 years ago), so don't think that you can tell the tax man that it was always your main residence. It gets treated as your main residence for the last 36 months anyway, so giving notice after the sale makes no difference.

So if you want to claim a CGT exemption for the home on which you claim second home partliamentary allownces, you can do so by notifying HMRC when you buy the second property, but if you think you can get away with it by your normal parliamentary bluster you have as much chance as Gordon Brown has of going down in history as a world statesman.

Tuesday, 12 May 2009

Unemployment up 12% in 3 months

The new unemployment figures slipped out a day early today, supposedly by accident but more likely because it was a good day to bury bad news.

The bad news is that the number of unemployed has risen to 2.22 million, up 244,000. Well that was where we were at the end of March, 45 days ago, but at that rate you can figure another 100,000 since then. And then you can add in all the economically inactive and those on incapacity benefits. I have lost count.

The Employment Minister Tony McNulty conceded that the figures were very bad, but took some comfort from the slowing rate of increase in the claimant count. Yeah well, duh! The fewer people there are in work, the fewer there are to be laid off, so of course the rate of increase in the claimant count will slow down. It's like an inverse exponential decay.

No doubt we will hear from the Prime Minister that there are more people in work than there were under the previous administration. Again duh! There are more people in the country, but a lower proportion in gainful employment.

More lack of objectivity from the FT who describe declining out put as "improving data" and that the UK economy is "past the worst of the recession", when in reality the economic indicators are merely not falling as fast as before.

They report that this is the first month that the monthly Gross Domestic Product estimate has not fallen since April of last year. Well, whoop-di-woo, with government spending in the current budget cycle 6% higher than last year and all the government departments rushing to spend their annual budget before the end of the financial year, you would have to have a private sector falling at something over 7% to give a flat GDP. Which we have.

NIESR estimates that overall output has fallen by 4.8 per cent so far in the recession, meaning that it is not declining as quickly as the 1929-34 recession, but is still sinking faster than during the recession that began in 1979, but then government spending wasn't pushing 50% of GDP 1in the 1930's.

The FT goes on to say the output of the UK manufacturing industry recorded its smallest decline in 13 months, helping overall industrial production to fall by a less-than-expected 0.6 per cent. Again, wowee, that is an annualised 7.2%, which is hardly boom time. Those 224,000 net job losses in the last 3 months didn't come from the public sector - expect those in the figures starting from the beginning of the new financial year in April - so don't expect industrial production to start increasing any time soon.

Another picture

Another thousand word graph showing the ratio of public sector activity to private sector activity, which explains why we are where we are, why we are heading for 10% unemployment (much more if you count the economically inactive and others exluded from unemployment statistics). Truly this country is a basket case.

Market crippled by heavy regulation

According to the BBC the world cocaine market is in retreat after a year of successful operations around the world. The Serious Organised Crime Agency says its undercover work has helped send wholesale prices from £39,000 per kilo in 2008 to over £45,000 (50,000 euros).

Street prices have remained stable, which is surprising in view of the weakness of the pound against the dollar, although discretionary incomes have fallen cutting demand.

This is obviously squeezing dealers margins, because figures obtained by the BBC suggest almost a third of police seizures are now less than 9% pure, the lowest recorded purity level.

Sounds like some prosections may be due under the Trade Descriptions Act 1968.

More on drug trade economics here.

Monday, 11 May 2009

Holy Shit Batman Corporation

So there I was listening to the HSBC results webcast of their interim results to find out what was going to find out how much their profits really were. The interim results contained no figure and throughout the call the directors would only say that underlying profitability covered the dividend.


“Our Global Banking and Markets business delivered record quarterly results with very
strong performances in foreign exchange and interest rate trading.”

Wahey, more trading profits which is the cause of all the bullishness! Surprising at these times no? But wait we have seen this before:

“Credit spreads widened significantly in Q1 2009, contributing to gains on HSBC’s own debt recorded at fair value of US$6.6 billion compared with US$2.5 billion in Q1 2008.”

So $6.6 billion of their bullish profits come from their own credit deterioration. And it gets worse

“In April 2009, credit spreads narrowed, leading to a significant proportion of these gains reversing.”

So expect the Q2 results to reserve much of this $6.6 billion gain.

“ These gains are reflected in the ‘Other’ segment, are not allocated to customer groups and are not included in regulatory capital calculations. They will fully reverse over the life of the debt and do not form part of managed performance.”

Listening to the webcast, the HSBC directors describe this as a one-time industry wide “benefit” that will disappear. So one might ask why this is included in the Q1 P&L?

More interestingly on the webcast we hear the FD of HSBC say that it is impossible to comment on profitability of any particular business line because so much of the funding comes from the wholesale markets through trading (i.e. accounting for all these own debt revaluations masks the true level of profitability).

Crispin Odey finds his feathers ruffled and flaps his wings

More on the 50% tax rate from The Sunday Times:

"Crispin Odey has threatened to move his firm out of Britain to avoid the 50% income-tax rate on high-earners. He joins a growing list of Britain’s wealthy businessmen and City financiers, including Hugh Osmond and Peter Hargreaves, who have become disenchanted at the new tax rate and the European Union’s proposed changes to regulation of private equity and hedge funds. “We are seriously considering leaving,” said Odey, who runs the £3 billion Odey Asset Management. “This government is not interested in keeping London alive as a financial centre. Hedge funds are not yet flying but they are fluttering. Everyone is thinking about leaving.”

It would be interesting to hear the conversations in Odey family get-togethers. Odey's wife Nichola Pease is a member of the Pease banking family, whose privately owned bank was bought by what is now Barclays way back in the mists of time. Her sister is married to the current managing director of Barclays, John Varley. During Varley's time at the helm of Barclays the bank has not been averse to enhancing its Tier 1 capital with some forward planning in the tax department. No doubt he will be telling Odey that the inconvenience of living in Grand Cayman or Guernsey will be worth it if it brings forward his retirement date.

Sunday, 10 May 2009

To the reader who reads in his working hours at the NHS/ tax payers expense.

You didn't understand why I compared the tax rate of a financial centre like Guernsey with that in London. It seems that Guy Hands, formerly of Nomura, now head of Terra Firma, / EMI (and a whole lot more) gets the point, because he is off to Guernsey.

It seems he didn't like working for the government between New Year and his summer holidays and working for himself between the end of summer and Christmas. He won't be the last.

Friday, 8 May 2009

More on the 50% tax rate: tax equalisation

For the benefit of those who read the previous post and think why should I bother about what somebody makes in the City, consider the following:

The firms operating in the City and many other multinational firms send their key staff overseas, including to London, to give them international experience, so the following applies as much to international pharmaceutical companies, software houses, advertising agencies and the rest of the business world as it does to banks.

Let us assume that a typical executive in one of these firms earns a salary plus perks plus bonus of £150,000, not a huge amount in today's world, but if he/she is to be encouraged to take his family from their comfortable life in Dallas, Rome or Singapore to work for several years on the other side of the world, the firm has to give them an equivalent lifestyle or slightly enhanced. That means paying for rented accommodation in the foreign country, say £4,000 a month for a short term lease, paying for education costs for children to keep them in the same academic system, annual business class flights back home for the family, removal costs and incidental costs and a whole lot more to keep the family sweet. For arguments sake let's call that somewhere around £100,000 of additional costs.

This has been the way these firms have operated for years and they aren't going to change that policy because of some Labour desire to make them pay what Gordon Brown thinks is a fair amount of tax. And therein lies the killer, because the deal with the employee usually runs that the employee is kept whole on an after tax basis. They are kept no worse off than they would have been if they had stayed at home simply because the tax rate is higher at their overseas post. So an employee in Singapore paying 20% tax on his normal gross of £150,000 would keep £120,000 at home. But if he moves to London the deal is that he still gets £120,000 net plus all of his additional costs (which are taxable benefits). So in London he has to be paid (£120,000+£100,000) grossed up (50% tax rate) to £440,000.

On the other hand an employee on the same gross salary moving from London to Singapore would only have to be paid (£150,000*50%+£100,000)/80% = £218,750, a 50.5% saving. As multinationals are generally taxed eventally on their worldwide profits with credits for foreign taxes on profits, the corporate tax rate in each country is largely irrelevant to the decision, but the imediate cash cost to the company is totally relevant.

Go figure. Whenever a multinational decides on an international posting they will see London as an increasingly unattractive destination, and possibly see the UK as a source of highly taxed employees who would jump at the chance of a foreign posting. Until now, the UK was in broadly the same position as many other European countries although London costs were higher than most, but only a fool what transfer their regional headquarters to London under the current arrangements. When the management structure moves elsewhere, so does the support staff and the business handed out to local suppliers.

One might question the validity of the Laffer curve when it comes to local workers and entrepreneurs, but when it comes to budgetting decisions made by dispassionate multinationals, expect them to make the economically rational decision every time.

Barclays and RBS at it again?

Let us hark back to a post of a few days ago about banks overstating their profits by virtue of fair value accounting, because it seems it is still happening. In Barclays quarterly results they mention some real write-offs:

The gross losses, which included £754m (2008: £598m) in impairment charges, comprised: £1,225m (2008: £1,830m) against US RMBS exposures; £884m (2008: £77m) against commercial mortgage exposures; and £504m (2008: £72m) against other credit market exposures.

which are offset by…

related income and hedges of £182m (2008: £270m) and gains of £279m (2008: £703m) from the general widening of credit spreads on issued notes measured at fair value through the profit and loss account.

Did you spot that? "gains of £279m (2008: £703m) from the general widening of credit spreads on issued notes measured at fair value through the profit and loss account" Yup, the writedowns are real enough, but the second part of the mitigation basically says Barclays is a lousier credit than it was 3 months ago, so the market spread on its issued debt has widened, so the present value of its liabilities measured at a market discount rate has reduced, so Barclays can book a £279m profit on its borrowings. Except that of course Barclays still has to pay the same amount as before and the £279m will show up as an increased expense between now and the date that the loans are paid off.

Indeed, if Barclays credit does improve that £279m gain and the £703m gain from this time last year (the figure for the whole year was over £1.6bn) will be booked as a loss as the credit spread reduces.

UPDATE: It seems the same is happening at RBS again. It should seem strange that while the world going to hell in a hand basket that RBS should be reporting an increase in profitability in its markets division. It seems the same is going on their with one-off gains in the fair value of own debt of £647m in the markets division and £384m in the treasury. Which means that in addition to handing shareholders a £857m loss for the quarter, they can figure that that number includes a billion or so of fictitious profits that only arose because RBS's credit rating has disappeared down the pan.

Thursday, 7 May 2009

City of London will be the most highly taxed financial centre in the world

If you are a high earner with international skills and don't like paying tax, then it may be time to leave the City of London. As the graph below shows, from 2011 the City will be the most highly taxing major financial centre in the world.

When the new 50% rate of income tax and taking into account social security payments, a banker earning £250,000 in the City of London will keep only half of their gross income.

This is a lot lower than other European centres such as Paris (58%), Frankfurt (60%) and Zurich (68%) and far less than Dubai (95%).

click on the image to enlarge

Wednesday, 6 May 2009

A right Horlicks of an investment portfolio

Anglo Persian business interests have not hit the head lines since David Mills became entangled with Iranian business interests, but Nicola Horlick's entanglement with Vincent Tchenguiz looks to be making some waves.

Horlick started out at Warburgs/MAM moving to Morgan Grenfell and was one of a number of high ego / low talent individuals who fell foul of the Deutsche management after the takeover when she was suspended for trying to take a team with her to another organisation. She left to form another fund at SG Asset Management, but after 6 years there she left to set up her own fund, Bramdean Alternatives.

One might have naively imagined that an investment manager with such a high profile in the national press would have garnered a substantial amount of funds. But it turns out that Ms Horlick's reputation is in the cloour supplements and the women's pages, not the financial pages, and one of the few investors she could hustle was the media courting Mr. Tchenguiz (check out the press cuttings in the reception at 35 Park Lane for the evidence of that).

Mr Tchenguiz had recently moved from a town house in Upper Grosvenor Street to an imposing 8 floor building on the Park Lane almost next door to the Hilton. Tchenguiz tried to fill the building with property companies and alternative and renewable technology incubators and was thinking about getting into und management, when along came Ms Horlick. Tchenguiz took a 28% stake in the company and installed them on the second floor of 35 Park Lane where they proceeded to manage there barely over £100 million pound portfolio at a loss.

In December last year Bramdean Alternatives let the world know that 9.5% of its assets were "invested" in two Madoff's funds, thus winning the Financial Crimes Crime of the Year award for lack of due diligence / investment appraisal / call it what you will. Horlick complained of being singled out by the media because of her gender, when in fact it was because she had always courted the media and has indeed set up a wealth management company exclusively for women.

Anyway, back to Bramdean (actually a small village in Jane Austen country in Hampshire): Mr Tchenguiz wants to replace the board as the first step towards realising the value of the investments in Bramdean Alternatives. Board members include a former chief executive of Allied Irish Banks, a former bigwig at Robert Fleming and the chairman and chief executive of Winchester Capital, a company I have never heard of but hopefully nothing to do with Winchester Commodities, who one might remember being involved in some wheeling and dealing in copper with Sumitomo, which lead to the Japanese trading house booking a $2 billion loss in the 1990's. Winchester after all is where Jane Austen died and was buried.

But the Hampshire connections do not stop there, because one of the largest investors in the Bramdean fund, holding 19%, is the pension fund of Hampshire County Council, whose affections Mr Tchenguiz is likely to have to woo if he is to be successful.

One can only look forward to the new Anglo-Iranian Mr Darcy's courtship of Hampshire County Council Pension Fund's Lizzie Bennett.

Tuesday, 5 May 2009

A drinking story

Suppose that every day, ten men go out for beer and the bill for all ten comes to £100.

If they paid their bill the way we pay our income taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7.

The eighth would pay £12.

The ninth would pay £18.

The tenth man (the richest) would pay £59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beers by £20.

Drinks for the ten now cost just £80.'The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers?

How could they divide the £20 windfall so that everyone would get his 'fair share?'

They realized that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid £2 instead of £3 (33%savings).

The seventh now pay £5 instead of £7 (28%savings).

The eighth now paid £9 instead of £12 (25% savings).

The ninth now paid £14 instead of £18 (22% savings).

The tenth now paid £49 instead of £59 (16% savings).

Each of the six was better off than before and the first four continued to drink for free, but once outside the restaurant, the men began to compare their savings.

"I only got a pound out of the £20," declared the sixth man. He pointed to the tenth man, "but he got £10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a pound, too. It's unfair that he got TEN times more than me!"

"That's true!!" shouted the seventh man. "Why should he get £10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered they didn't have enough money between all of them for even half of the bill.

And that, boys and girls, is how our tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much and they may not show up anymore......