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Friday, 26 April 2013

Hodge Podge

The irrepressible (shame really) Margaret Hodge and her PAC has come up with what she claims is a damning report on the cosy relationship between the Big 4 and government.

True enough, while one side of the accounting firms is picking the pocket of government departments  advising on PFI and privatisations, another side is marketng tax avoidance to its corporate clients.  Reminds me of a story I heard about Glenda Jackson at a party in London before she was famous, but that dear reader, is a story for another day.

Anyway, the relationship between the Big 4 and government is not that cosy, simply because the respective government departments never talk, neither do the partners in the Big 4 talk across departments, or at least not very much.  On the one hand they have the audit departments who do pretty much wha it says on the tin, plus sometimes some generic technical accounting advice for non-audit clients.  And when companies can no longer get their accounts signed off as a going concern, the Big  have their Corporate Recovery and Insolvency practices.

Then there is the tax department, often with a legal bit attached, which is there primarily to review the tax accounting for audit clients, but also helps individuals and companies in tax compliance, tax disputes.  They also come up with tax ideas, tax avoidance if you will, and offer companies help in "structuring ther affairs".  Last of all comes the corporate finance arm, which also includes a bit of whatever consulting they can do without falling foul of Sarbanes-Oxley.

Note to David Cameron:  that last bit was where your hot whizz-kid "accountant" Chloe Smith, fast tracked into a ministerial position worked on a spreadsheet jockey desk at Deloittes.  She may not know about insolvency, which side of a T-account to put a debit, nor whether a liabilty to capital gains tax may be reduced by a brought forward deficit on non-trading loan realtionships, but she does know that cell C1 is probably equal to A1 + B1.

Anyway, back to La Hodge.  Her main complaint is that one of the tax spivs at KPMG worked for the gummint on a draft of tax legislation designed to incentivise R&D by giving tax breaks.  No complaints about the work that was done for the Treasury, but shock horror, when the bean counter went back to his old job, his firm started selling his services as an expert on the subject, putting out marketing materials asking clients "What's in it for you?".

God forbid that after the government has decided to promote investment through tax breaks that any accountant should go round offering his services to explain how the new legislation actually works.

Tuesday, 23 April 2013

A partnership of unequals

So Alec Salmond wants to use the British currency in an independent Scotland.

Go on, nothing's stopping you.  You could use the dollar instead, or even the euro, but if you go for sterling, don't expect us to take Scottish economics into account when setting interest rates.  No, the rest-of-the-UK politicians will set interest rates to set their poltical cycle, not yours.  If you want Scottish interests to be aken into account, then you will have to join a formal currency union, where by definition, if it is a seterling union, Scotland will be the junior partner.  If you think it should be a partnership of equals, look at Germany in the eurozone and think again.

So faced with the reality that the UK would only allow Scotland into a currency union on the UK's terms, Scotland accuses the Westminster of being provocative, and in the next breath, threatens to walk away from its share of the National Debt.  Actually we shouldn't be asking Scotland to assume part of our debts, because that isn't fair on the lenders.  They should be raising that amount of money on their own account and buying pack 10% of the National Debt from the market.

Walk away from that and we will take their oilfields if we haven't already sold them to the Norwegians.

Friday, 19 April 2013

Well I never

I watched the BBC report on Panorama about North Korea, although there was nothing to report except that Jon Sweeney's wife who works at the LSE obviously thought she could bring along hubby to make a vid for his work.

So nothing new to report .. except, hang on, according to Sweeney and his editors, The People's Republic of North Korea is .. wait for it .. run by a Far Right government.

Yes, that's right.  forget the pictures of Marx and Lenin, t the fact that their past allies have included China and Russia, you know, the ones who kept them supplied with arms and even went to war on their behalf in the 1950s, he political prison camps similar to the Russian gulags or the Chinese re-education camps, NK is in fact a far right state according to the BBC.

And how do they figure that?  Well it has a big army, so that makes it like Nazi Germany or fascist Italy.  Let's forget that the Russians actually had a far bigger army that Germany in the Second World War or that the Chinese Red Army is and has been for a long time, by far the biggest country in the world.

No, according to the Beeb, faced with the fact that NK are presently the bad guys, which runs contrary to the fiction they would like to peddle, North Korea is not a left wing state at all. Oh no.

You live and learn.

Thursday, 18 April 2013

Another tax scandal

Npower has admitted it has not paid corporation tax in the UK for three years - just months after increasing prices by around 9%. The company made the admission to the Energy and Climate Change select committee. Npower reported a 34% rise in profits to £413m last year. The admission came as the "big six" energy companies were questioned by MPs over issues including profits and how they treat their customers.

Which was enough to get Labour MPs jumping up and down, particularly as the company had reported a total of £800m in the last five years.

But not so fast. Chief Executive Paul Massara said: "Effectively we have invested £5bn in the last five years building power plants, creating jobs, creating employment and helping to keep the lights on."  A company statement added: "Looking at RWE npower specifically, our investment programme since 2008 has amounted to almost £3bn, which means we have seen a large increase in tax relief.

Yes that's right £3bn of capital spending which as any fule kno, gives rise to capital allowances at the rate of 20% on a declining balance basis compared to the 25 year straight line depreciation charged to the accounts (i.e. 4% per annum). In other words the capital allowances in the first year alone will reduce the taxable profits compared to the accounting profits by 16% of the capital expenditure (20%-4%), in the second year by 12% (20%x80%-4%), in the third year by 8.8% (20%x80%x80%-4%), which in just 3 years makes 36.8% of £3bn, which is more than enough to wipe out the tax on £800m of profits.

So where is the scandal?  The scandal is that there are Labour MPs paid £65,000 a year (and the rest) drawing up and voting on tax legislation that they clearly don't understand.

Worse than that they don't understand why a company like nPower would be investing so much in new capacity. The Large Combustion Plant Directive (LCPD, 2001/80/EC) is a European Union directive which requires member states of the European Union to limit emissions from combustion plants with a thermal capacity of 50 MW or greater, which means that a large part of our generating capacity has had to be replaced.

The current directive was issued in October 2001.  I seem to recall there was a Labour government at the time.

Friday, 12 April 2013

A word of thanks

I would like to extend heartfelt thanks to the many young people across the internet who have taught me so much about the vicious Mrs Thatcher in the last few days.  They may have been too young to young to have been around when she was wreaking havoc on this country, but they are all very eager to remind me of how she decimated the coal industry.

I say "decimated", but I am not sure that it is quite the right term for a reduction in output of 10%, but at least it has got a 10 in it.

Anyway, her cruel victimisation of the miners and the 160 mines that she closed was in marked contrast to the 290 mines closed by Wilson.  Mark my words, Thatcher wouldn't have dared to take on the 550,000 miners working in 1962.  It was only due to the unstinting efforts of the Labour Party under Wilson and Callaghan in reducing the workforce by 350,000 that Thatcher was able to take on the remaining miners in 1983.

And how she provoked them. In 1983 Thatcher and Peter Walker connived make the unscrupulous offer to every miner working at the pits scheduled to be closed the choice of either a voluntary redundancy package or a job at another mine. And to add insult to injury she offered to invest a paltry £800 million in the coal industry.  Scargill quite rightly rejected this, saying that there was no limit to the price the tax payer should pay to maintain the number of NUM members paying his salary.

Scargill was, of course, also correct in his thinking that it was better to extract coal at a cost of £40 a ton at the pithead than to pay South Africans, Americans and Venezuelans £28 per ton for coal delivered to any UK port.  After all, who needed any of this so-called 'high quality' foreign coal when there was plenty of the British stuff full of ash and sulphur?

Of course, when the strike was over and many miners had lost their jobs the devastation in Scargill's home area was tremendous, with wide scale unemployment in villages that had been mining coal as long ago as the 1930s.

And we have only just begun to realise the environmental impact.  The abundant growth of the Scandinavian pine forests was kept in check for many years by the naturally occurring acid rain, powered by sulphates and nitrates emitted by UK coal fired power stations. With the replacement of coal by so-called 'natural' gas, those trees now have to be felled using petrol driven (CO2 emitting) chainsaws.

Monday, 8 April 2013

One of the all-time greats

Sometimes when people pass away we are given to hyperbole, to exaggerate the importance of an individual, to overstate their relevance to modern life.  But today it has to be said that we have lost someone who changed they very feel of the 1970's and 1980's, without whose unstintining efforts the UK would not be the same today.

I refer of course, to the recently departed and sadly missed Andy Johns, engineer on Led Zep II, III & IV, Exile on Main Street and Goats Head Soup and a producer and engineer of a host of stars on both sides of the Atlantic for the last 40 years.

Saturday, 6 April 2013

A tale of our time

I know lots of young people who are going through a very tough time finding jobs after graduating, many of them with high quality degrees and ending up without work even after zillions of internships, but this article in yesterday's Evening Standard really struck a nerve/chord.
The family of an academic who fell to his death after he could only find a job in a call centre today spoke of their devastation.
Dr Philip Elliott, 31, who had recently completed a PhD in artificial intelligence at Reading University, fell from scaffolding at a block of flats.
The scientist, who was a qualified engineer, was described as a “high academic achiever”, but was “frustrated and unhappy” about his professional life, an inquest heard.In the weeks before his death he had received “a number of blows to his confidence” which had an impact on his morale, Westminster coroner Darren Stewart said.
On January 27, he climbed scaffolding in Cromwell Street, Kensington. Passers-by called the police, fearing he was going to jump and officers arrived within five minutes but were advised not to talk him down because it was too dangerous to get on to the scaffolding.
An hour later, he made a gesture with his arms and “dived” to the ground, said Mr Stewart.
Today, his mother Patricia, from Rossendale, Lancashire, said: “We are shocked and devastated at the news. Such a waste of a young life with all his future ahead of him. He was so well thought of. He would help everybody.”She said that he could only get a call centre job was indicative of “these times of recession”.
Recording a narrative verdict, Mr Stewart said he was not sure beyond reasonable doubt that Dr  Elliott meant to take his own life because the fall could have been a “cry for help”.
Now the bit that really touches a nerve is the last sentence  Here we have a fine example of someone on the public sector payroll who doesn't understand or doesn't want to admit that he is part of the problem.  Of course it isn't a cry for help.  The guy has gone through 25 years of education for no reward, and he knows that the speed that he will hit the concrete is sqrt(2gh) because he is an engineer, and he knows that is going to kill him.

He has also realised that he is not going to get a job worth having because nobody in their right mind is going to invest in Europe while there is a vast overhang of taxes that will have to be levied to pay for the deficits run up by the government, and that isn't going to go away until everyone in the public sector, and that includes the coroner, has taken a massive pay cut.

If they don't, expect many more Dr Philip Elliotts.

More in a similar vein at the Register here.

Crap bank, crap management, crap regulation.

I have posted about HBOS before, but it is good to know that the Parliamentary Committee on whatever pretty much agrees with my assessment of HBOS.  The bank didn't fail because of some unfortunate event in the markets.  It failed because it was run by a bunch of people who were either insufferably over-confident (Stevenson) or knew nothing about lending (Hornby and Crosby).

As I pointed out before neither Hornby nor Crosby had any background in lending money so how they ever got to run a bank that was basically dependent on lending and making a margin in that business is a complete mystery.

I did my credit training at an American bank famed for its credit courses and although I spent most of my career putting deals together without lending money the principles still stick in my mind.  First of all, banking is a very simple business. You lend money at a margin and you take in deposits at a cost.  Whereas some of your loans might go bad, all of your deposits will have to be repaid if you stay in business, so to be profitable in the long term you have to make damn sure that your losses on your loans don't wipe out the slender margins that you make on your lending business.

To put it in perspective, for every loan that goes bad you need 50, 100 or maybe 500 good loans in order to cover the losses that you make on the bad loan. And that means that you have to take a conservative risk position, lend carefully and be damn sure that you are going to get your money back.  Which makes most corporate lending pretty dull.

HBOS had a different mindset.  Attract retail deposits with TV adverts and then put the money raised out to borrowers to generate the cash flow to pay the retail deposits.  Almost arse about face, but if you were a retail manager at ASDA like Hornby you probably didn't realise that you were thinking the wrong way.  Fact is any bank can raise deposits and the retail end of banking is pretty straight forward.  All people want is somewhere to bank their pay and some pretty straightforward services to pay bills.  A bit of interest is noice, but there isn't a lot more that you can do.

Lending on the other hand is a different matter, and requires some skill and judgement, qualities that HBOS lacked in abundance.  Surely at some point you would have thought that the numskulls in charge of the bank would have sat down and wondered why the experienced banks at JPMorgan and Citi, Barclays and HSBC, SocGen and Deutsche didn't just copy their business model of lending more against less security than any other bank.  The answer, as the other banks knew and HBOS eventually found out, is that if you keep lending against nothing more than fresh air, eventually the whole house of cards crashes to the floor. Which it did.

So I have no qualms about the HBOS senior management all being kicked out of the City, but the bigger question that deserves more of an airing, is why hasn't the same level of punishment been given to the senior management of the FSA?  As often noted here, the FSA promoted a culture of box ticking to handle customer enquiries, money luaundering etc, but it failed abjectly in its supervision of banks.  In the case of HBOS, it failed to ask about the quality of the assets, the amounts lent against commercial property, and about the amount of residual risk taken on its books.

It is all right to write operating leases with large residual values on aircraft if you have a vast number of used aircraft salesmen and management who understand the risk like ILFC, but if you are just a bank based in Yorkshire, you are not only a fool for taking such risks.  You deserve to be shot, and so does your regulator.

Monday, 1 April 2013

You couldn't make it up - well they just did

Imagine you are a climate scientist.  perhaps you are already. You are probably making a pretty penny from the government working up ideas to explain how the tiny heating effect of infra-red absorption by carbon dioxide can lead to Armageddon - mostly, as the current thinking seems to be, through feedback effects rather than from the paltry degree Centigrade which is (a) probably am over-estimate and (b) neither here nor there in the whole scheme of things.

Now as anybody who has modeled anything in the real world, and in particular anything on a large scale with limited inputs (i.,e. in this case the heat from the sun), negative feedbacks are much more likely (e.g. the hotter the earth gets the faster it cools - basic black body radiation: energy flux proportional to T^4).  So it comes as a bit of a difficulty for the warmists when they find that not only is the temperature not racing away to infinity but has in fact been rather flat for the last 10 to 15 years, but worse than that the extent of the Antarctic sea ice is actually increasing:

Quick as a flash they fob us off with the ridiculous idea that the increased ice capo is due to melting. The abstract of a paper produced by a bunch of Dutchmen reads as follows:
Changes in sea ice significantly modulate climate change because of its high reflective and strong insulating nature. In contrast to Arctic sea ice, sea ice surrounding Antarctica has expanded, with record extent in 2010. This ice expansion has previously been attributed to dynamical atmospheric changes that induce atmospheric cooling. Here we show that accelerated basal melting of Antarctic ice shelves is likely to have contributed significantly to sea-ice expansion. Specifically, we present observations indicating that melt water from Antarctica’s ice shelves accumulates in a cool and fresh surface layer that shields the surface ocean from the warmer deeper waters that are melting the ice shelves. Simulating these processes in a coupled climate model we find that cool and fresh surface water from ice-shelf melt indeed leads to expanding sea ice in austral autumn and winter. This powerful negative feedback counteracts Southern Hemispheric atmospheric warming. Although changes in atmospheric dynamics most likely govern regional sea-ice trends, our analyses indicate that the overall sea-ice trend is dominated by increased ice-shelf melt. We suggest that cool sea surface temperatures around Antarctica could offset projected snowfall increases in Antarctica, with implications for estimates of future sea-level rise.
Which makes no sense at all.  To claim that ice forms more readily in unsalty water than in salty water is fair enough, but it makes no sense when the extent of the sea ice is greater than before.  Essentially there would be little or no unsalty water to freeze unless the extent of the sea ice was less than before.

You can fool some of the people all of the time, but I'm not falling for that piece of stupidity.

Sunderland AFC

Sunderland is a football club with a long tradition, linked closely to the working class and in particular to those fans living in the immediate vicinity of the stadium.  Now located at the Stadium of Light above the old Wearmouth colliery, their seventh ground, it still lies in the heart of its fan base.  I dealt with the club several years ago and the finance director explained that while the club had some of the lowest season ticket prices and a strong supporter base, long cup runs and European competitions would deplete their resources because most fans could not afford the extra tickets.

Not surprising then that the club have been roundly criticised for their association with an anti working class sadist, a man who according to many has never had any previous real work experience in his life and shows contempt for those that do. A man from a family of privilege who had no real connection with the Sunderland fans  or hard working people anywhere come to that.

STOP PRESS: No need to worry.  Sunderland FC have done the right thing and David Milliband has resigned