Giant vampire paella

MF Global, run by ex-Goldman senior partner Jon Corzine filed for bankruptcy last week. Corzine led MF Global into large positions on European sovereign debt. As plays on margin/yields, these only worked because of the large amount of leverage that he used. At the end of June, MF Global had borrowed $44.4 billion on $1.4 billion of equity.

The essence of the strategy was that there were severe discounts on some European government paper, and that by leveraging up with debt the firm could make a profit. Many of the Italian and Spanish bonds held by MF Global will mature in the next 2 years and are trading at less than 2% below par, but the firms built its position on the back of short-term funding and when that dried up (at least at a rate that made the trades profitable) the game was up. But whichever way you look at it, the deals never made sense. If the firm held mostly European government paper why should its funders charge any less than the yield on that paper? Given the other costs and potential for screw ups, they should be charging more. Which was why the firm couldn't find funding and went bust.

Corzine was at Goldman Sachs for nearly 25 years, rising to senior partner before being thrown outin a boardroom coup in 1999. He was a star trader who made winning bets, but somehow he seems to have made an elementary mistake. How did a former Goldman star makes such an elementary mistake? The answer is probably that it was never the star traders at Goldman who made the money but the risk management. After all, for most of its history the firm ran as a partnership, and while there may have many on the trading floor who put themselves forward as masters of the universe, it was the partners who were putting their own capital at risk. Not making a lot of profit is no fun, but it beats losing your shirt.

The proof of the calibre of Goldman trading stars versus the Goldman risk managers shows up when we look at other ex-Goldmen. John Thain, former Goldman CFO was fired by Merrill Lynch after they disclosed substantial losses. Thain had gone through the ML books in detail and them signed off, buut less than 12 months later, Merrill was in peril, sold to BofA and Thain was shown the door.

Robert Rubin, another star trader, went from being co-chairman of Goldman to Treasury Secretary and then went back to Wall Street to sit on the board of Citigroup as a senior adviser in the late 90s. Rubin best demonstrated the value of advice from traders. His advice: "Take more risk". Citibank, let us not forget, was renowned for its training programme, for its foreign exchange trading and its pre-eminence in loan syndication. The other side of Citigroup, the ex-Salomon, Smith, Barney, Travellers etc, probably needed no encouragement to take more risk, but needed to be kept under control. While Rubin was at Citi, its share price fell by 70%.

Another famous ex-Goldman star was J C Flowers, who left Goldman Sachs to set up his own fund to invest in financial institutions. At first he did well, making more than $1 billion on LTCB (now Shinsei Bank), but his latest fund has lost $4 billion of investors money, including quite a bit on MF Global.

But hey, in most of these cases, it was all OPM, and a one-way bet that didn't pay off. At least for the equity investors like Flowers whose money is now toast, or rather lunch for the bankers whose loans will now be extended and paid out by the underlying bonds.

Mandelslime's friend on corruption charges

The Serious Fraud Office have arrested and charged businessman Victor Dahdaleh with corruption offences relating to the supply of aluminium to Bahrain. Dahdaleh, who has British and Canadian nationality, is alleged to "have made payments of bribes" between 2001 and 2005 to officials of Aluminium Bahrain, a mainly state-owned smelting company in the Gulf state. The charge follows a two-year investigation by the SFO in collaboration with the US DOJ and the Swiss authorities.

Dahdaleh, 68, who lives in Belgravia, central London, has donated money to Labour causes. He funded Labour-supporting thinktanks, including the Institute for Public Policy Research and the Policy Network, a group founded by former prime minister Tony Blair and chaired by Mandelson.

Dahdaleh paid for a pamphlet authored by Mandelson, while both Mandelson and Blair appeared at events sponsored by the businessman. Mandelson called him "Victor, my friend" and said he was "a business dynamo, a public-spirited figure and a big-hearted personality".

Dahdaleh has been released on bail and is due to appear at City of Westminster magistrates court next Monday.

Given that we now know Mandelslime has been backed by someone charged with corruption, when will we know about the funding for his £8 million house.

Schauble: (verb) To open ones mouth without engaging brain

Fresh from his announcement of an immediate inquiry to discover why German accountants didn't offset assets and liabilities as they should (prediction: because they didn't realise they could be offset), German Finance Minister Schauble says the EU should take the lead in setting up a Robin Hood tax to curb speculation, and if the UK won't join in, then the EU should go it alone.

This is just so wrong he should count himself lucky if he still has a job tonight.  First off, there is no such thing as a Robin Hood tax.  Robin Hood never paid a penny to the Sherriff of Nottingham.  It is just a tax. 

More seriously, the EU has never had the power to impose any taxes, nor to collect them.  If the UK wants such a tax then it can impose it.  The EU and other nations would like the tax because it would be imposed mostly on businesses operating in the UK and employing mostly UK nationals. The EU of course have suggested that this tax should be paid into their coffers.

But realistically, it won't work.  If I want to speculate on an asset I dont have to buy it any more than I have to buy a race horse if I want to back it in the 3:30 at Kempton Park.  I can get a payoff without buying the underlying, and the trouble is I can manufacture whatever payoff I want through derivatives,  If I want the same payoff as an interest rate swap on £100m notional, I can write a swap for 100,000,000 times the fixed and floating interest rates on £1m notional and the tax becomes disappearingly small. The only way to reliably capture the value of a any speculation is to tax the profiut.  We already do that.

But most importantly, the easiest way to avoid any tax is to do the trade offshore, or if necessary move the trading entire business offshore.  There will always be offshore banking centres willing to take on any business that the EU wants to tax.  All we have to do is throw it away.

Germany no better off after error at ‘bad bank’

Unlike most trade presses, the financial press are largely ignorant of the subjects about which they write. Other media outlets are no better. As Exhibit #1, I bring to your attention the BBC's continual outpourings on Big Bang in 1986 and their implication that this led to today's financial crises, although the media and in particular the BBC have failed to explain how the abolition of fixed commissions and the distinction between jobbers and brokers had anything to do with the liquidity of Bradford & Bingley, RBS' overpayment for ABN Amro, AIG's build up of a massive unsupervised derivatives book in its London office and the failure of Lehman Brothers.

 The funny thing is that if you go to another pink paper and cut and paste text from their articles you get the following text:

 High quality global journalism requires investment.  See our T&Cs and Copyright Policy for more detail.

 .. and it is hard to disagree with that. Except that most financial journalism is not high quality. 75% of the "news" in the financial pages is simply a rehashing of corporate press releases. Once the journalists step away from those to what they think are real financial stories, they start to flounder.

Exhibit #2 is the story in today's pink paper with the headline that says the German government is €55.5 billion better off than previously thought because of an accounting error at FMS Wertmanagement, the bad bank for Hypo Real Estate.

True enough, there was an accounting error in the company which involved the failure by the banks accountants to set off collateral against a port folio of derivative products, which resulted in larger amounts than necessary being reported on both sides of the balance sheet.

If the hack concerned knew anything about finance he would have realised that offsetting assets and liabilities doesn't make you richer, and if he wasn't even that smart, he should realised that when the bank adjusted its balance sheet to show a lower value of assets by €24.5bn ($35bn) for 2010 and €31bn for the year to June 30 2011, then it could hardly be getting richer. Fortunately for the bank and the German government it also reduced the reported value of its liabilities by €24.5bn ($35bn) for 2010 and €31bn for the year to June 30 2011.

Go and look at the other paper now and you will find that they have backtracked, and rather than saying that they got the story wrong, they report that "Wolfgang Schäuble, German finance minister, has demanded an urgent inquiry into how an apparent accounting mistake led to an embarrassing €55.5bn overstatement of the debt burden of a “bad bank”.

Which is true, but it isn't the same as being €55.5 billion better off.

Capitalism is alive and well and living in Guangzhou and Bangalore

I have meant to post something along these lines for some time, and it may seem unduly negative, but I hope that it strikes a chord or two. Every time a BBC or Sky reporter talks about the economy for more than 5 minutes they usually get round to the issue of whether capitalism has "failed", without explaining what they really mean by failure.

Do you want the good news or the bad news? The good news is that what we see in the financial markets is not a crisis in the sense of an abrupt event that will lead to uncertainty and a deterioration of the financial and social position of the civilised world.  The bad news is that what we are seeing is part of a continuing process that preceded the last financial crisis and will continue into the future.

But it is not capitalism that has failed. Capitalism is alive and well, but not in the West - it has gone East. The spirit of capitalism - risk-taking, saving, investing, hard work - are to be seen in China, India, Indonesia, Korea and Japan.  In the 1960's we thought that those countries would be stuck in poverty, but while the last has risen to Western standards of prosperity the other four are growing fast.

Capitalism hasn't failed. Rather, just as water flows inexorably downhill, capitalism seeks out the greatest return on investment.  That doesn't necessarily mean seeking out the lowest cost but it does mean seeking out the sources of production that give the greatest return.  In simple terms, the West will not be able to compete with the East in some industries because the cost base in the East is much lower.  Until standards of living have grown in the East (and fallen in the West), then those industries will take place in the East.

What sort of industries are we talking about?  Well, most manufacturing including high value goods such as electronics.  Show me a telephone handset that was made in Europe or the United States and it will probably have been built in the 1980s.  Any western finishing is likely just to be customisation.

Show me a large factory in this country that has been built in the last 10 years, and chances are it will be involved in food processing, recycling or a similar industry that has to function locally.

So what is the problem in the West?  On the one hand, Western banks though the economy would grow for ever and were proven wrong, hence the massive number of bad housing loans.  But the bigger problem, which now hangs over Europe is the fact that politicians who were happy to open their borders for free trade failed to spot that this inevitably meant that their countries' own standard of living would inevitably be undermined.

At first it was easy to turn a blind eye, and just think that Eastern countries were backward places that were unlikely to compete with the West.  But inevitably, with their immeasurably higher populations and their improving standards of education, the West was going to be put under pressure by the lower costs in the East.  Westerners who were complacent about their prosperity failed to understand that although they were in the richest 10% of the world population, their position was not guaranteed.

The real failure, of course, and you won't hear this on the radio or TV, is not Capitalism but Socialism. We all learnt at the time of the collapse of the Berlin Wall that Socialism was unsustainable.  Unfortunately Western politicians on the left side of the spectrum didn't listen.  They found that companies didn't invest  when they put up taxes, and in fact moved all their new investment to other parts of the world.  In order to keep their captive voters happy, they borrowed heavily to finance present government consumption, which they erroneously called "investment". Leaving aside the Italian Cosa Nostra basket case, Greece, Portugal, Ireland and Spain,  the most heavily over-borrowed of the Eurozone countries, have all had one thing in common for the last 10 years: left of centre governments.  Just like the UK, currently the most over-borrowed of the lot.

You won't hear it on the BBC, but the real problem is that Western social welfare has placed an impossible burden on states, which is why the UK has a current annual deficit of €200 billion.  On its own this is 20% of the amount of funding sought by the EFSF, but worse than that, it is a recurring shortfall for which the UK government has to find funding every year.

How has this arisen?  Quite simply because in order to maintain the myth of never ending growth, Western governments have lavished stupendous salaries on their public sector workers and munificent largesse on welfare recipients, at the same time that private sector workers have seen their pay restricted largely by the pay levels of workers in the East.  Western workers naturally want to be paid more to maintain their living standards, but if they want to be paid more than their equivalent in Asia, their jobs probably aren't going to be around for long.

This was never a consideration for public sector workers who have long expected ever improving pay for the same productivity and performance, and have been largely insulated from and ignorant of the long term connection between private sector profitability and their own incomes.  Now that there is downward pressure on their pay because governments have really run out of cash public sector workers threaten strikes and riot.

Doctors expect to be paid hundreds of thousands of pounds to provide cradle-to-grave healthcare for many who have never and will never pay much into the state coffers, while civil servants expect six figure salaries, generous pensions and early retirement, all paid for by a private sector that is constantly undercut by overseas competition. In the long run, none of them should have any reason to expect to be paid much more than their Chinese or Indian equivalent as the economies of the East align themselves closer to those of the West. 

If the governments of Greece, Italy, Spain, Ireland, Portugal or the UK were companies, their respective cash shortfalls would have pushed them into insolvency years ago.  Their problems will continue until their spending is cut to realistic levels.

A few changes to the layout

I apologise to readers who may be experiencing disruption in visual quality, but I am experimenting with a new template.  I don't do CSS or anything webby for a living, so please bear with me for a few days as I tinker.

We have principles; if you don't like them we have others

According to press reports, China may contribute to the eurozone’s bail-out fund but the scope of its involvement will depend on European leaders satisfying some key conditions, according two senior advisers to the Chinese government. Any Chinese support would depend on contributions from other countries and Beijing must be given strong guarantees on the safety of its investment, according to Li Daokui, an academic member of China’s central bank monetary policy committee, and Yu Yongding, a former member of that committee. He added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners.

So there you have it. To bail out the cradle of democracy, Western leaders are being asked to turn a blind eye to human rights abuses.  The ancient Greeks had a word for that: eironeia.

The great Euro bailout that never was

A few years back when the UK last hosted the G20 boondoggle, the mentally deranged prime minister who chaired the meeting reported that the members of the G20 had agreed $5 trillion of stimulus measures.  That is a very big number.  Perhaps it was €5 trillion or £5 trillion, but in reality it didn't matter because the number was just a figure plucked out of thin air to satisfy the journalists and voters.  Most of the measures were not additional stimuli at all but programmes that were already in place such as export credit guaranty schemes or multilateral development banks.  The numerically largest measure involved the creation of SDRs, which didn't actually create any credit or stimulus at all, but was in effect like a bank printing lots of travellers cheques and putting them in a drawer until a customer used some cash to buy them.

I mention this because we are about to witness a similar exercise with the bailout of the euro.  Truly, none of the central political players have a clue, and the EU is putting out more desperate propaganda (e.g. "We are getting closer to an agreement" 2 days after the agreement was supposed to have been reached).

The reality is that there is never going to be a successful outcome until the governments change their attitude. Governments overborrowed, and they took that money from the banks.  Now the governments can't repay their loans, so the governments say they will have to write down their loans.  That would leave the banks very short of capital. 

"No problem", say the governments, "you will have to raise some more capital".  But where is a bank going to raise capital when it has 50% of the government backed assets on its books?  If private investors put up the money, they are likely to see their investment wiped out when the government default on the other half.

So who is going to put up the equity?  In the last resort, governments.  And where are they going to get the cash to do so?  From the banks.  You can see where this is going..

OK not the banks.  Let's try Mr Wen Jiabao's fast and easy loan consolidation shop. Cash within the hour and bad credit is no problem.  I don't think so.  And neither probably does Mr Jiabao, who can probably see that he probably wins if he lets the opportunity pass, but he almost certainly loses if he stumps up another penny to support European countries with a bad dose of fiscal diarrhoea.

But, back to the politicians, because the biggest pile of hype has yet to be fully disclosed.  The EU thinks that the banks should takje a 50% haircut on their Greek government bonds.  Fair enough because the current bonds are currently trading at a discount (i.e. for the innumerate at a higher yield than at issue).  A big discount, but hard to measure.  So what does the EU propose?  To swap the current bonds for bonds with a lower face value but a higher coupon. Some of the bonds will be backed by AAA rated collateral (yeah, until the rating on those European governments that haven't been downgraded gets fingered), but rather than taking a hit, it is likely that the position of the banks is unchanged. 

They get a hit in theory but they don't have to pony up any cash, and the yield on the new bonds will likely give the same value as the lower yield bonds they replace.  So what is the point? Beats me, but I guess Hermann Van Rompuy, and all the European leaders are none the wiser too.

One bum missing from the sofas

As we watch the post-Gaddhafi chat on early morning TV it strikes me that one perma-tan coloured smiley face is missing from our screens, an expert on all things Libyan with plenty of potential reminiscences about his dealings with the great man.

Unless he is prepared to give us some straight answers on Gaddhafi (and any dodgy money that flowed from Libya) why should we be interested in his views on other matters. It would be nice to think that we have seen the last of Blair, at least for a while, but that is probably too much to hope for from the BBC.

Do your homework

I have nothing against a good demo.  People need to let off steam from time to time, and I am quite prepared to see people do just that, with placards and the works, even if I don't agree with them.  A good demo shows that we still have free speech. Bad behaviour should not be tolerated, but if you have something to say, I am quite happy to listen.

Which is where the Occupy London Stock Exchange has got it so wrong, but ever-patient I am here to explain. So hear me out. You might learn something

• The London Stock Exchange has very little to do with the current financial crisis.  OK, I am sure you could come up with some claim about corporate greed, but that doesn't really ring true.  The current economic problems have been caused by a combination of (i) lending to poor credits and the securitisation of such assets, (ii) western governments holding down interest rates to fuel borrowing and consumption over many years, (ii) large and growing deficits.  Those at least, in no particular order are the biggest three.  There may be others, but none of them seem to related to the brokers at the London Stock Exchange.
• The London Stock Exchange is located at 10 Paternoster Square, but there is no exchange there.  The old Stock Exchange building was round the back of the Bank of England, but the trading moved out of there many years ago and switched to screen based trading way back.  So by all means, if you think it helps your cause, go ahead and upset the chief executive of the LSE, various compliance bods and the IT department, but you can bet your bottom dollar (if you actually have one), that trading would carry on seamlessly under some backup system if necessary.  They probably have systems on hot standby in Lewisham, Uxbridge or Enfeld waiting for just such an eventuality and they might welcome a test.
• The Church of England, and in particular St Paul's Cathedral has had remarkably little to do with the financial crisis.  I am sure you can try to drag them into the issue as "members of the establishment" or similar twaddle, but the rest of us don't see them as anything other than some of the lowest paid workers in the City of London.
• Don't put up pointless placards like "It's wrong to privatize the profits and socialise the losses", because that isn't what happened.  Private sector investors lost their shirts in 2008 when the banks went tits up.  Where governments stepped in they got shares for their cash.  They didn't just throw the cash away.  In theory the governments held the upper hand in negotiating bailouts because as well as being the equity provider of last resort, they were also the regulators determining how much equity the banks needed.  Private sector investors were unable to fix a fair price because they never knew from day to day whether their holdings would be forcibly diluted.
• And don't put up placards like some Americans saying "We want our money back from the banks".  First it wasn't your money, it was the tax payers'.  Second, it was paid back. In 2009, at a $4billion profit to the government and an annualised return of 15%. Asking for more is just plain greedy.

More on amateurism

I don't know whether it is the truth or the end result of a meme started by my last posting, but Paul Waugh of the Evening Standard has blogged today that Cameron appointed Chloe Smith to a Treasury ministerial post under the misapprehension that her 4 years at Deloitte entailed qualification as a Chartered Accountant.

According to Waugh, she disabused him of this idea .. before accepting the post, trusering a considerably higher ministerial salary than she could have ever expected as a spreadsheet jockey at Deloittes.

Still, with Cameron's "real world" experience limited to PR, we can hardly expect him to understand.

Amateurish isn't the word

Politics is often called show business for the ugly, and in one sense it is easy to understand why. Show business people are quick to grab a TV spot to tell us not just about their latest show, but also how they feel about things (as though we should care), or even going so far as to harangue us about feeding the poor whilst they avoid tax.

Politicians too seem to become more vain and self regarding as soon as they are elected, not really appreciating that all they did was worm their way into a position that had to be filled in any event and most people would choose to not suffer the indignities and hardships that go with becoming an MP.  The consequence is that MPs tend to be singularly witless and untalented bunch. There was a time when a number of talented professionals would grace the back benches, holding down a reasonable professional practice whilst attending parliament and representing a usually compliant constituency.

In these times of economic complexity we need some talented MPs to run the economic side of government.  What do we have?  First off there is Mr Osborne, whose total economic experience was working in the private sector, folding towels at Selfridges.  Then we have Mr Danny Alexander, who did a year of E in his PPE course at Oxford, but has no experience outside politics apart from 2 years of  PR for the Cairngorms National Park Authority.

Ah but, next came Justine Greening who was an accountant!!!  But not much of one compared to the many thousands who qualify every year.  Before parliament she worked for PricewaterhouseCoopers, GlaxoSmithKline and Centrica.  At the time that she was supposedly at the last firm, I advised them n several deals including the year long negotiation of 2 UK power stations.  I dealt with the FD, Head of Legal Affairs and his offsider, the Treasurer and his team, the Head of Tax and his team, and never once heard or saw any one called Justine Greening.  Straight from bean counting grunt to #3 in the Treasury team is not a bad move, but it speaks volumes for the competence of the rest of parliament.

But Ms Greening is now off to the Department of Transport (no doubt on the basis of Centrica's ownersip of the AA), and who takes her place?  Step forward the fragrant Chloe Smith, 29 year old alumnus of Deloitte Touche Tomatsu, another accounting firm.

But Ms Smith's career doesn't seem to have amounted to much.  She didn't work on the accounting side, but on the management consulting side where her financial experience will have been next to nothing.  In her 4 years at Deloitte it appears that she reached the giddy heights of "Analyst", and her page on the Treasury website says she used to work for "a leading international firm which advises private business, government departments and public bodies."  Sure they do.  And they also advise on choo-choo trains and doctors and nurses. But in her 4 years there following her degree in English Literature Chloe Smith probably did no more than prepare the spreadsheets and Powerpoint presentations and hand round the biscuits in meetings. That is what management consulting analysts do - not that I would want a management consulting partner anywhere near the levers of power.

What is most depressing is that with the western world in a financial mess and probably terminal financial decline, the best that the UK has to offer is a bunch of third rate lightweights.

So what are they going to say when Don Estridge dies?

Having spent all day listening to people blubbing about the newly iDead Steve Jobs, and how he "literally changed people's lives", although he "never actually met them", I despair of the tiny minded piss-poor lives that some people must lead.

I am not one of those Apple-haters, in the same way that I am not a Mercedes driver. I simply have different tastes, and my tastes in technology aren't really apple flavoured. I have never owned anything made by Apple, although I did work briefly for a Californian-based investment bank that used Macs for word processing. iPods have never produced a better sound than any other box of electronics with a $5 Digital-to-Analog converter, and the iPhone is just a phone, and probably not as good a phone as the competition - certainly not for the price.

I did have an i-thing once.  But it was an iPaq, a PDA from HP, and a useful thing it was too, doing most of the thing an iPad does now (web browsing, WIFI, reading documents, streaming video, bluetooth, MS Office applications etc) on a hand held device, only I bought this in 2003 for about £300.  Fast forward 8 years, and Apple gives me not much more on an iPad for 50% more price.  Where is Moore's law when you need it?

The truth was that since the early 1990's Apple has been less of a technology shop than a design shop with a less-is-more visual appeal.  While the rest of the world tried to cram as much technology into its boxes,. Apple's designs were nothing special tech-wise, but their look and feel gave them an edge with some buyers. Which is why, when IBM, Motorola, HP, Samsung and the rest have cupboards full of patents, Apple chooses to sue their competitors for selling rectangular boxes with rounded edges.

Still, if a man in black turtle neck jersey can cause such a stir, what are people going to say when Don Estridge goes to meet his maker?  Mr Estridge, after all, led the team that built the IBM PC.

A letter in today's Telegraph

Health Bill concerns 

SIR – As public health doctors and specialists, we are concerned about the Health and Social Care Bill. The Bill will do irreparable harm to the NHS, to individual patients and to society as a whole.

Of course, it will do no such thing. The NHS is a public organisation and can be reorganised at will. No change is irreversible, and no "harm", if any, is irreversible. 

It ushers in a degree of marketisation and commercialisation that will fragment patient care; aggravate risks to individual patient safety; erode medical ethics and trust within the health system; widen health inequalities; waste much money on attempts to regulate and manage competition; and undermine the ability of the health system to respond effectively to communicable disease outbreaks and other public health emergencies.

All of which is total nonsense. If we wanted to strip out the self interest from the NHS we would stop paying doctors salaries. Unfortunately for the rest of us, it seems that doctors are unwilling to work without financial compensation, so we have to pay them. Likewise, in order to get health organisations to provide the services we need, we have to pay them too, but in order to source those services on the most competitive terms we have to have some .... competition. 


All of which does nothing to stop the NHS responding to outbreaks of communicable diseases and other public health emergencies. If anything the process becomes more efficient.  And in case anyone thinks that is an exaggeration on my part, the response communicable diseases and similar health scares is handled by the Health Protection Agency which reports directly to the Department of Health.

While we welcome the emphasis placed on establishing a closer working relationship between public health and local government, the proposed reforms will disrupt, fragment and weaken the country’s public health capabilities.

No evidence given for this position. The reason for closer working is to give a better overlap between health and social care. It is well understood that one of the biggest future costs and also one of the current areas where productivity has to be improved is in care of the elderly, and this means getting the elderly out of hospitals and caring for them at home. 

The Government claims that the reforms have the backing of the health professions. They do not. Neither do they have the public’s support. The Health and Social Care Bill will erode the NHS’s ethical and cooperative foundations and will not deliver efficiency, quality, fairness or choice. We ask the House of Lords to reject passage of the Health and Social Care Bill

[Usual list of scores of self interested medics]

What they are really saying is that "Public Health" has long been the medical wing of the Labour Party with more interest in equality of outcomes than in maintaining the health of the nation per se, and best of all, the NHS pays them handsomely. NHS reforms would of course change a lot of that, with the abolition of the SHA's in which these Public Health types thrive.

But then we would hardly expect turkeys to vote for Christmas.

More morons from Brussels

So the EU wants to implement a Tobin tax on banks.

Algirdas Semeta, EU commissioner for taxation, customs, anti-fraud and audit, says: "Our project is sound and workable. I have no doubt this tax can deliver what EU citizens expect - a fair contribution from the financial sector." The unelected EU executive also points out that financial services are "in the majority of cases exempt from paying VAT (due to difficulties in measuring the taxable base)"

The EU forgets that the "contribution" from the financial sector was to take massive losses, costing shareholders but also losing a lot of jobs and bonuses in the process.  Many banks had equity injections from governments, but the governments got shares, and in many cases control of the banks.

The one entity that didn't actually put up any cash or take any losses was the European Union, but which now thinks it is due an extra £50 billion a year for doing absolutely nothing.  But then it has done that ever since its formation.

All hands on Dexia

Nice to hear the BBC comment on the plight of Dexia, the Belgian bank this morning, as its share price fell by 40% on rumours of a credit downgrade. This, they and their experts assured us was because Dexia was like another Northern Rock.

Well, up to a point. Dexia is a fairly recent creation formed from the merger of Crédit Communal de Belgique and Crédit Local de France.in 1996. The two predecessor banks were very similar, although they had very different histories, CCB going back to the 1860's and CLF going back to the 1980's.  What they both had in common was the fact that they were state owned and that they both specialised exclusively in lending to local authorities.

After their merger they expanded their focus to Italy and Germany and then to the United States and the rest of Europe, but all the while sticking to their knitting and sticking with credit activities for local government.  This led them to acquire FSA, a US based monoline credit insurer with a track record of wrapping municipal bond issues.  In 2008/9 they incurred large losses in FSA through their exposure to housing finance and also on their exposure to Depfa a German bank that also lent to local authorities.  This led to a bailout.

Which brings us up to the present,where we have a bank that has already been recapitalised, yetr is in deep trouble.  And its main exposure, in fact almost all of its risk assets, are European government entities that have overspent.  That is the real reason for the downgrade, not that you would ever hear that from the BBC.

Out of their tax-payer funded minds

Brussels has just come up with its proposal for a tax on interbank transactions: 0.1% annual fee on all inter-bank exposures and a 1 bp fee  on all derivative deals.

They must be out of their minds.  Only a few years ago, 10bp was the up front fee for a syndicated interbank financing / guarantee / standby letter of credit, while 1bp was the spread on a simple derivatives deal, and Brussels want to take that as an annual spread for themselves, effectively doubling the cost of doing the sort of plain vanilla business that they ought to be encouraging in order to stimulate the economy.

Let us not forget that the euro zone crisis was not caused by the same sloppy banking as we saw in the UK, US and some of northern Europe.  In the rest of the euro zone it was caused by overspending pork barrel politicians such as Mr Barroso, and their failure to collect taxes.

Moreover, a tax on British state owned banks is nothing more than a cost imposed on the UK tax payer in order to bail out the rest of the EU.

Goldman Sachs rules the world

I am not a trader, and I don't have much time for them.  There again they don't have much time for me.  But I take my hat off to Alessio Rastani, the self-styled City trader who stripped away the jargon and bluster of the financial world and summed up our woes in just three minutes.

"I go to bed every night dreaming of another recession," he explained in a BBC interview. "It's an opportunity." The soundbites won Mr Rastani instant fame.

He became a viral hit and was trending on Twitter. BBC business editor Robert Peston was among his many fans. "A must watch if you want to understand the euro crisis and how markets work," Peston told his army of 82,000 followers on Twitter on Tuesday.

Trouble was, Mr Rastani was nothing of the sort. Mr Rastani works and lives in a £200,000 semi in Bexleyheath, south London as a public speaker. The house belongs to his partner.

Peston and the BBC have now retorted that they have checked him out, but it seems that nobody bothered to check the FSA register.  Strange, you would have thought they would have thought about that one after Michael Brown, the Lib Dem wonder donor.

OK, all you morons out there who have no idea how to check out if someone really works in the City. Drop me an email and I will let you have their bona or non-bona fides in 10 minutes.

The Cold Custard Party: yellow and thick

Not a fan of the Lib Dems. Never have been and never will be. Too stupid and it's in their genes.

Last week I was in a discussion with one of the yellow peril about whether the taxes one private transport were more or less than the amount the government spent on roads.

"Ah, but", replied the bearded twit, "the cost to the country of congestion is £30 billion and the cost of road accidents is £20 billion".

 Which kind of misses the point. When we say that the cost of congestion is £30 billion we are not comparing the cost against life without cars, but lagainst life with cars, but without congestion. Most of that £309 billion is the value of the extra outputs we could produce if we weren't stuck in traffic, implying that the fact that we do travel has a far greater financial positive outcome than the opportunity cost created by congestion.

 Similarly, the fact that people die in car crashes with direct and indirect costs (loss of future earnings) which somebody puts at £20 billion overlooks the economic benefit of private motoring, and the fact that in any event the costs of death will arise eventually, so it is not the cost per se that we are interested in but the relative cost compared to the other likely ways of dying and losing future income.

Still as I said, it is in their genes, and as if to make the point at their party conference, the Lib Dems were adamant that they would stand up against Tory tax cuts for the rich and in favour of lifting the low paid out of the tax net altogether.

 Superficially it sounds good, but like much of their global warming theorising, it doesn't stand up to a lot of scrutiny. Raising the personal tax allowances increases everybody's tax allowances and reduces their taxable income, if any, by up to the amount of the increase.

The amount of tax saved depends on their marginal top rate of tax. For somebody well into the 50% tax band the extra cash in hand will be equal to half the amount of the increase in allowances, but for a very low earner paying only a few pounds in tax, the saving will only be those few pounds. Does that sound particularly "fair" or "egalitarian"?

 Nor to me either.

If I were a rich man

Labour are back to their dishonest ways again at conference. Yesterday we heard about their £6,000 tuition cap. Only it turned out this wasn't a policy at all, merely what they would have done if they were in power. Similarly, today the BBC obligingly launched Ed Balls' 5 point plan. Only this wasn't a policy statement either, another statement of what Labour says it would have done if it was in power. Not that we will ever found out the truth, because they are not in power. So they say such things knowing that they will never be held to account. Mere hypothetical musings.

Why Britain should join the Euro

Not my suggestion but that of Richard Layard, Willem Buiter, Christopher Huhne, Will Hutton, Peter Kenen and Adair Turner and published by the Gaddhaffi School of Economics in 2002.

Download it here for a good laugh at the pomposity of the puffed up idiots who lecture us on how we should lead our lives, and note how all the arguments against (One size does not fit all, Europe is a failing economy, Tax harmonisation, Britain’s financial system is different, Europe’s unfunded pension liabilities, The euro will fail) all turned out to be correct.

Also note how the three political types (Huhne, Hutton and Turner) not only offer us the benefit of their wisdom on economics, but also share with us their profound insights on thermodynamics and fluid mechanics to inform our thinking on climate change.

Euro trash

A few months ago European bank regulators, not necessarily the finest specimens of humanity in public service, ran stress tests on all the major banks in the EU and concluded that most of those banks were basically sound and had adequate capital.

This was notwithstanding the fact that many of those banks held substantial amounts of government debt.

Now those same governments have started to firm up on how the euro might be rescued.  This involves the banks taking a 50% haircut on all the Greek debt that they hold.  Now, hang on.  Where was this 50% haircut when the stress tests were run?

Ummm. nowhere.

So do the banks have enough capital?

Well, if they don't, they will have to raise some in the markets.

But what if the markets won't put up more equity because of the way European governments threaten to default unless the banks take a 50% haircut?

Then the banks will have to be supported by their own governments.

How does that work?

The governments buy new equity for cash.

Where do they get that cash?

They borrow it from the banks because it is 0% risk weighted paper and thus does not add to their capital requirements,  even though the banks will have just taken a 50% write-off on government debt.

Hang on.  I think we have a problem of Enron-esque (Enronic, Enronian?) proportions.

Pulling yourself up by your own bootstraps

The IMF seems to think it might have invented the fiscal equivalent of a perpetual motion machine.to tackle the eurozone debt crisis and support the global economy.

In a communique on Saturday, the global lender said it would review the resources it had available to tackle the crisis. The statement added that eurozone nations would do "whatever necessary" to resolve Europe's debt crisis.  However, the communique, issued during a meeting between G20 finance ministers, the IMF and the World Bank, did not give specifics on whether extra funds would be available to the global fund. "Our lending capacity of almost $400 billion looks comfortable today but that pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders," said IMF managing director Christine Lagarde in an action plan presented to the fund's policy steering panel.

Well excuse me, but the problem here is that the whole of the Western world with the notable exception of a few countries such as Norway and err,,.. Norway, have been running their governments at various levels of deficits, which just look worse when the implicit or explicit support for their banking systems are factored into account.  The banks of course are looking shaky because of their exposure to governments.

So what is the IMF's potential solution? To use its financial muscle to stand behind those governments if necessary and help them out if necessary.  And where are the IMF going to get their funding?  By calling on their funders in accordance with their subscription agreements.  And who are those funders?  Why, the whole world, but mostly very same countries that they will be bailing out.

Don't mess with the first or second laws of thermodynamics. It will only end in tears.

UPDATE: The International Monetary Fund (IMF) has warned it may not have enough money to bail out larger eurozone countries if the debt crisis were to spread. IMF chief Christine Lagarde says the global lender can meet its current obligations but this could change if the crisis worsens.

Clearly Mme Lagarde reads THE FINANCIAL CRIMES.

Yeah, that's gonna work, not

Labour plan to cut the maximum university tuition fee from £9,000 to £6,000.  The implication, although they don't say so explicitly, is that the difference will be funded by the government.  In other words, and extra £3,000 funding per university place - mind you, those are my words not theirs.

So how is that going to be paid for?  By charging a higher rate of interest on student loans for those earning over £65,000. As though any young person earning that much (note more than an MP's salary) would actually leave a loan with a high rate of interest outstanding.  The most likely scenario is that by the time any whizz kid had pushed up their £25 k salary on graduation to a figure three times as much, they would have set aside enough cash to pay off the £18k loan balance.

Funding source number 2, and this is another play right out of the new Labour spin book, is to fund the measure by not reducing the rate of corporation tax.  Yes, you read that right.  Raise money by doing nothing. The whole thing brings back horrible memories of a time past when facts and numbers meant nothing and the country was run on myth and spin.

Which is probably why Mr Militwaddle nows says the pledge would apply if he were in office now, but might not appear in his election manifesto. Yeah, and if I was in government today I would guarantee abundant motherhood and apple pie plus unlimited sunshine, but it might not appear in my next manifesto.

High on a hill stood a lonely goatherd

I am not sure what the opposite of a fan (i.e. fanatic), but I have long been an "un-fan" of UBS.  This, let us remember, was the bank that managed in 2009 to come to a Deferred Prosecution Order with the US Department of Justice and book a $20 billion loss for the year.  To be engaged in criminal activity (tax evasion / money laundering) and still lose a shedload of money takes incompetence of the highest order.

Not that that was too surprising.  UBS has always had lousy head office management.  The original UBS was a combination of Swiss cantonal banks, who purchased Phillips & Drew, the London stockbroker, probably the only bit of quality in the organisation.  The bank was criticised by major Swiss investor Martin Ebner for its underperformance and lack of shareholder and after many years of harranguing by Ebner, UBS merged with with Swiss Banking Corporation, taking the U from UBS and the B and S from SBC to make a new larger bank called UBS.  This brought the additional merchant banking skills of Warburg, who had realised that merchant bankers braces and bullshit could be combined with commercial banks' balance sheets bearing to achieve the all important target: bigger bonuses.

The combined bank grew, acquiring Paine Webber and with it the former Kidder, eabody, and grew hoovering up talent from various second tier US investment banks, so that the US investment banking arm was like the Bolton Wanderes of Wall St., although the profitable part was probably the "Wealth management" (put all your cash in this holdall and we'll take it to Switzerland and hide the interest from Uncle Sam).

But all of these overseas mergers and acquisitions did nothing to improve the quality of the senior management back in Switzerland, who remained very much as though they were from the Aargauische Kreditanstalt or the Bank in Winterthur. While the world's financial press would lap up every word of JPM's Jamie, Goldman "partners" or the co-head of Pan Global Equities and Everything Else at Morgan Stanley, nobody gave a fig for the opinions of the Ulis, Hans-Ruedis and all the other spaetzli munchers, because all they knew about was the tax efficiency of bank secrecy.

Which is why the UBS risk management sytems were so bad in 2008 that the lost a bunch of money and decided to create a position for a "Chief  Risk Officer", which is probably something they should have had years ago.

Not that it did them any good. When the Kweku Adoboli multi-billion loss first surface, UBS Chief Executive said there would be a full investigation but he wouldn't be resigning over the issue commenting that “if someone acts with criminal intent, you can’t do anything.”

He got that wrong too.

The other way to make money in the Emerging Markets

• Tony Blair has been paid £2 million a year since 2008 by JP Morgan to source business from country leaders and other contacts.  Don't believe the guff about "advice".  The man has such a poor grasp of such terms as truth, honesty and morality that no sensible bank, howver venal would trust Blair's objectivity. 
• Blair writes letters to set up his marketing trips by sending out letters on notepaper headed "Office of the Quartet Representative", although his business trips had nothing to do with his so called peacekeeping role.
• Blair made 3 trips to Libya, 2 before the release of Abdelbaset al-Megrahi, and one after.
• JP Morgan now manage more than $500 million of assets for the Libyan Investment Authority.  This is probably worth at least $10 million a year to JPM in management fees (2% of assets under management). They probably also earn more in upside sharing arrangements.  A typical arrangement is 2% + 20% of upside.
• You, dear tax payer, get to pick up the cost of security with Blair's police entourage and accommodation at the British embassy for Blair while he is on his business trips.

If the whole exercise were above board (I doubt it), then it ight be excusable if Blair was trying to win business for British companies.  But he isn't.  Rather than applying his British taxpayer funded experience to help British companies, he sells out to the bank that will fill his pockets with the most gold.

No doubt he will claim that his dealings were above board and had nothing to do with the release of Megrahi.  On the other hand the LIA had no particular reason to put any business JPM's way, except that it might influence Blair to press some friends on the matter.  More iportantly, it showed the more money grubbing members of the British government that there was a source of ready cash in Libya in return for favourable deals, which goes a long way to explain how the Megrahi deal might have happened and Mandelson's new £8 million house, not to mention TB's big house in Connaught Square (and the house at the back) and a lot of other property.

In an interview with a Libyan TV station at the time of the Megrahi release, Gaddafi's son Saif Al-Islam claimed that the issue of Megrahi had been raised repeatedly by Blair. He said: "In all commercial contracts, for oil and gas with Britain, (Megrahi] was always on the negotiating table."

A senior Labour source suggested at the time that while Blair would not have laid down the offer of Megrahi's release formally, he may have given that impression to Gaddafi. The source said: "Gaddafi wouldn't be the first person to have walked away from a meeting with Tony thinking a deal was on. Just ask Gordon Brown."

Blair visited Libya in May 2007 just before his resignation, during which UK energy giant BP signed a £450m exploration deal. He visited Libya on business on behalf of JPM in 2008.  It is likely that Saif Al-Islam's remarks in 2009 referred to the later visits as much as the visit when he was in office.

Mandelslime said in 2009 he had also met Saif twice in the previous 12 months and acknowledged that the imprisonment of Megrahi had been raised.. He added: "As I have already stated, on both occasions Mr Gaddafi raised the issue of the Libyan prisoner in Scotland's release as all representatives of the Libyan government do. They had the same response from me as they would have had from any other member of the government. The issue of the prisoner's release was entirely a matter for the Scottish justice minister. That is how it was left, that is how it was well understood."

Mandelslime also said it was "implausible" to suggest that a UK Labour minister would simply ring up the SNP administration in Edinburgh to urge them one way or the other. Well yes, o greasy one, but we would hardly expect you to be so blunt.  Rather we would expect the Labour administration in London to make a generous pre-election financial offer to the SNP run administration in Scotland so that both parties could boast to the electorate of their generosity, when all the while it was actually coming from tax payers down south.

So next time you hear a politician being retained for their international consulting skills, go figure that it is nothing more than open ing a few doors and probably using their contacts at home rather than abroad to help fix deals. Foreigners rarely do deals out of kindness to our retired politicians.  In all likelihood the ex-politician is really earning big money for the influence they have back at home.

Make money fast #94

You too can become one of the wealthiest people in the country if you follow these simple steps:

1. Find something you are good at, preferably where there isn't too much competition.
2. Work hard at it, very hard, for a long time.
3. Get lucky.

Follow these tips and you may end up like Mark Coombs, who this week paid himself £45 million in dividends from his share of the public listed company, Ashmore.  Mind, you that was only half of his share of the £245 million profits for the year, and peanuts compare to the £1.2 billion market value of the shares that he owns. And all that in little more than a decade. Well not quite, because while Ashmore may have only been around since the late '90s, Coombs has been building up his business model for the last 20 years, and a very simple one it is too.

Coombs is in the Investment Management business, but he is no Warren Buffett.  Buffett and his hordes of analysts scour the developed world looking for mature companies with strong underlying businesses and investing in them to maximise their potential.  Coombs on the other hand is no MBA analytical type.  Nor is he a barrow boy trader, but a Cambridge law graduate who got into banking in the 1980's, a while before the Big Bang and yuppie frenzy.  Nor did he join one of the long disappeared UK-focussed merchant banks of the time nor one of the incoming US investment banks, but Grindlays Bank, a relic of earlier times with a  a vestige of a reputation but not much more in many UK colonial outposts.  Grindlays was owend jointly by Lloyds and Citibank, but operated largely independently of both banks.

Grindlays did have an appetite for foreign country risk unlike many of their larger UK counterparts who if they did any business in exotic climes were more focussed on export finance or banking the cash for foreign subsidiaries of UK multinationals.  After a few years Coombs was given trading limits to buy and trade distressed government debts.  Holding Sudanese government debt at 4% of face value can be smart if you think it is going to jump to 6% next week on some good news, and the interest payments can be even better news if they ever happen. While various groups campaigned for debt amnesties on subSaharan government debt, Coombs and other speculators had already bought those debts at a substantial discount, making the protests largely in effective.

But Coombs didn't just buy into those markets, but also into whatever were were termed the emerging markets of the day, South America, Asia and Eastern Europe, trading paper based on the political events of the day.  By this time, Grindlays had been bought by ANZ, a Melbourne bank, who eventually sold the Grindlays overseas business to Standard Chartered in 1990, but whilst they saw Coombs and his team operating a $200m book in London quite profitably, they were a relatively conservative bank and were reluctant to expand their proprietary trading.  

In 1992, Coombs started EMLIP, the Emerging Markets Liquid Investment Portfolio, an open ended fund which "which targets high total returns through specialist  active value management of a highly diversified portfolio of primarily liquid emerging markets debt" (i.e. trades high yield paper)

http://www.ashmoregroup.com/fileadmin/uploads/ashmore/pdfs/funds/EMLIP/EMLIP_September.pdf.  This allowed his business to expand and eventually outgrow the small and capital base that ANZ could provide. Rather thatn taking the obvious step of taking the operation to a larger financial institution, Coombs preferred a buy-in, which suited both ANZ and the management team, and created Ashmore, with Coombs holding a substantial stake.

And the rest is history; Ashmore's assets under management have grown to $65 billion. How did that happen?  The simple answer is that in the first decade of the new millenium, the relative importance of emerging markets in the world economy has grown enormously, and hence so has the investor appetite for exposure to those markets.  Now any old investment bank could set up its own emerging market fund, and many of them do, but very few of those talking heads have the appetite for research and analysis that is undertaken by Ashmore, and while many of Wall St's finest brains may spend their days trying to shave milliseconds off decision making on exchange based trades or figuring out pricing anomalies in exotic securities using fancy models, Ashmore's decisions are driven largely by an understanding of foreign country politics and economics, knowledge which they employ on behalf of their investors for a management fee.

So there you have it kids.  You too can be a billionaire, just like Mr Coombs.  Did I mention that he works very hard?

Finders Keepers

A piece of space junk, a 20 year old satellite, is due to fall to earth next Saturday. Nobody quite knows where, but it has a higher than normal chance of causing serious damage. However, the US government says "Members of the public are not allowed to keep pieces of the satellite that may fall to Earth, or sell them on eBay, as they remain the property of the US government." Oh yeah? As far as I am concerned the US government threw it away. If it lands in my back garden, I am clamping it. The release fee will be negotiable.

Quite a "quit quilt quick" quip

Will Hutton, a director of the Work Foundation and co-author of their latest report "Making the UK a Global Innovation Hub" , says: "Britain's patchwork of institutions, networks and public agencies is not fit for purpose. The state must take the lead on this because confidence among businesses is so fragile at present. The government has already recognised the importance of this agenda but the time has come to make it happen."

So what is his solution? He said the task was to "create a network of institutions, processes and methodologies that will spur both the magic of innovation and the tough task of its development and commercialisation".

Replacing a patchwork by a network? Yeah, that's gonna work. The real difference is state ownership.And if that ever made an improvement we would have gone down that route long ago.

Confidence amongst business is fragile because of the increased level of state interference since 1997. During that time state spending has risen from £350bn to £700bn, while tax receipts have risen from £350bn to £530bn, give or take a few billion in each case.  The £170bn difference is the reason business confidence is fragile.

Why would a company invest in a country where the state is going to have to raise all taxes by 33% to break even on an annual basis, and that before it starts to repay the money it currently owes?

All we have is nest-stealing cuckoos

The #1 country in the World Economic Forum Global Competitiveness Ranking is Switzerland. Last year it was also Switzerland.

The Swiss have policies of controlled immigration, low taxation and a policy of aligning their currency with the euro to facilitate without actually becoming members of the eurozone, and thus retaining control of their monetary policy.  Sounds eminently sensible.

Also they have lots of clean mountain air and cows with bells, which is nice.