Only the crumbliest, flakiest chocolate

Most corporate finance teams in investment banks have periodic, usually weekly, meetings where they discuss the deals in progress, and more generally prospects and targets. In many organisations it is a time for posturing and discrete bragging in front of the whole group with a view to year end bonuses, but it is also time when the group management can spot the weaker members who may not have performed at the end of the year.

Apart from the complete no-hopers who never look like closing a deal despite frantic marketing and are gone at the end of the year, there are two categories of loser that are easy to spot. The first is the "Chamberlain", who turns up with a piece of white paper, a mandate. The trouble is that the mandate still requires board approval, which never happens. Or the salesman says "We have an exclusive. I have a written agreement from the CFO that the client is not going to do this deal with anyone else." The trouble is, he is not going to do the deal at all. If the client is in Munich, we all get to laugh.

The second type is the "flake" who says he has a verbal mandate, which of course is not worth the paper it is not written on. The flake will present a key sale as a done deal, but somehow it never closes. Nevertheless, by the time the customer's name begins to look a little stale in the transaction pipeline, the flake has come up with another near sale which he hopes will erase the memory of the last.

I am reminded of these characters by the news that Lord Mandelson says he is confident that jobs at Vauxhall’s UK plants will be safe after the business has been sold to Magna International and Sberbank.

Poking the substance of the deal we find that Magna has said that it will not close any of the 4 Opel factories in Germany as part of an agreement with the German government, but there is no such agreement with the British government over the Vauxhall plants at Ellesmere Port and Luton and the 5,000 employees at thoise plants.

Remember that the deal is actually an agreement to sell 55% of the shares in Opel and Vauxhall to Magna and their Russian firends, by GM with £4 billion of financial support from the German government. The UK government doesn't actually have any such agreement and the deal between GM and Magna does not depend on any specific agreement with UK government. It does have to be ratified by the Opel Trust, made up of representatives from GM, the German federal government and the German states that contain Opel plants, but I don't see any of those groups on Lord Mandelson's business card.

Not to worry says Lord Mandelson, because he has had assurances from Magna and its chief executive that it was committed to both plants. Better than that he has had four meetings with the chief executive of Magna.

At which point, I would be scribbling "Galaxy Ripple?" in the margin of my copy of the deal meeting agends, before piping up with "Do we have a written agreement on this deal?"

Err, no. "The government will now discuss our share of the funding.” says the snake-oil salesman.

I wouldn't blow your year end bonus just yet.

Layman Brothers

One of the most boring dramas on the BBC is available on iPlayer, but unless you are suffering from insomnia, you really shouldn't waste an hour watching it. With poor casting and characterisation of all parts, with the notable exception of James Cromwell as Hank Paulson, this has to be one of the most unrealistic documentary dramas ever made.

"Although some scenes and doialogue have been invented, this film is based on actual events and public record." runs the title at the begiining. In truth, the entire basis seems to be Lehman went bust, the management didn't want it, there were some meetings, it happened anyway.

Why anyone would believe that the Geordie James Bolam would look the part of a Mid Westerner running a coast to coast retail and worldwide corporate bank beats me, and it was a delight to hear so many fake American accents crack under pressure. Maybe the directors bought the post-9/11 nonsense from Blair and Straw that put the number of British missing at about 25% of the WTC dead.

Apart from the sub-Dallas script, the action was quite unlike the bearing and behaviour of senior bankers. For a start, like senior politicians, they tend to be tall, really tall. 6 feet 1 inch is small for a NY banker.

And American bankers wear American clothes: button down shirts, and if not button down, with steeper collars, not the wide splayed English shirts on display, and strongly coloured silk ties, reds, stong blues even yellows. Maybe not always Hermes, but usually silky, soft and sturdy, with a matte finish.

And the suits, don't get me started on the suits, but if a costume "designer" can't spot the difference between the style of Brooks Brothers suit and its European equivalent, they shouldn't be let out with the BBC corporate credit card.

With so many out of work bankers available to advise, there were no excuses.

Debits on the left and debits on the right

Maybe they think that one of the Big 4 is about to go under because of various claims and they are getting ready to step up to the plate, or perhaps they think one small fry in the financial world would be interested to hear what another has to say, but anyway their PR people sent me an email bigging up a report hectoring the political parties to come clean on their tax policies.

Fair enough, you might think, but since parties never really come clean on tax policies until Budget Day, why should they do so now? Well the beancounters at BDO say that the government needs to act to reduce the £175 billion deficit, and because they have a tax department they have suggested ways that the three main parties might raise £25 billion. With all due respect, £25 billion of tax isn't going to make much of a dent in a £175 billion deficit, particularly one that is due to rise to £200 billion, but accountants have rarely been renowned for their lack of timidity.

BDO suggest that all parties should be comfortable with a freezing of personal allowances, and some hikes in duties on booze, fags, fuel and insurance that would pull in £9 billion, but would differ in other respects:

• They suggest that Labour could push up NIC and abolish higher rate tax relief on pension contributions, both of which look sneaky enough not to be noticed.
• They think the Conservatives would be more up front but put the taxes squarely on consumption, by such measures as increasing the standard rate of VAT, applying full VAT to books and magazines, increasing VAT on fuel and other green taxes.
• Their ideas for the LibDems are just inappropriate. They match the Conservative green initiatives, but place the rest of the costs onto business and savers. At a time when business investment is down they suggest Lib Dems would be happy to cut the rate of capital allowances by 25% (i.e. to 15% having just been reduced from 25% to 20%), abolishings savings and investment reliefs and applying CGT at 10% on principal private residence. The latter idea has to be the craziest of all. The people that will hit will generally be the younger, more employable, workers who might wish to move house as they move jobs or move with their firms. Putting a tax on workforce flexibility is the last thing a liberal should consider.

Interesting thoughts, but they miss the glaring point that is well brought out in the report. Spending and taxation were roughly balanced two years ago, but have since gone their separate ways. The first big step is to tell every government department to revert to the budgets they has in 2007/8. It won't plug the gap, but it will get us most of the way to balancing the books.

Vampire squid face wrap

Lloyd Blankfein, the CEO of Goldman Sachs, has told a conference in Frankfurt that banks lost control of the exotic products they sold before the international banking. He repeated his earliercriticism of Wall Street compensation practices. He called the widespread anger over bankers’ pay “understandable and appropriate”.

Now before that sounds like humble pie, read Michael Lewis' comments on Bloomberg, satirising a fictional Goldman staffer's response to recent criticism:

"What small interest we maintain in the U.S. government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs."

"The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG -- all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman’s financial returns."

"For too long we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and the Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system."

The fictional Goldbug continues discussing the risks inherent in bailouts

"The real risk, when you think about it even for a minute, is the risk we take ourselves: that Goldman will cease to exist and we will cease to be Goldman employees. To flirt with such tragedy we obviously need to be paid."

Clearly, Mr Blankfein felt he has run considerable personal risks because in 2007 he "needed" to be paid $70 million. Goldman has already earmarked $11.4bn for employee compensation from the first half of the year. On a full year basis that would be an average of $770,000 across its 29,400 employees.

Recession over .. says the BBC

The Bolshevik Broadcasting Corporation today declared the UK recession over on their "flagship" Today news program. Rather than the traditional measures of GDP used by other economic commentators. the BBC base their assertion on a market survey from Markit Economics, finding "marginal increases" in both permanent and temporary appointments in August". Well not quite, guys, unemployment is still increasing.

So, the BBC come again with a comment from the NIESR to the effect that may be it feels a bit better than a few months ago, which is on a par with the sort of "Economy shrinks less than thought" spin we heard last week. The last published comment from NIESR reads as follows:

"The recession is on track to become the most serious since the 1930s as GDP declines by 4.3 per cent in 2009. There is a real possibility that GDP will fall more this year than in 1931. The pace of decline to date shows a remarkable resemblance to that of the depression of the early 1930s, though that similarity should be broken as a feeble recovery gets under way in the final quarter of this year. The economy will expand by 0.9 per cent in 2010, picking up to 2.3 per cent in 2011. Unemployment will carry on rising to a peak of 3.1m people – 9.6 per cent of the labour force in 2011. This year’s severe contraction is being driven by falling consumer spending and investment. Private consumption will drop by 3.7 per cent this year mainly because of a sharp rise in the saving ratio, from 1.9 per cent of disposable income in 2008 to 6.5 per cent in 2009. Business investment will fall by 10.3 per cent, private housing investment by 23.3 per cent and a vicious rundown in inventories will contribute 1 percentage point to the overall 4.3 per cent fall in GDP. The recovery in 2010 and 2011 will depend heavily on net trade, supported by a lower pound, as increases in exports outpace those of imports. Growth will be weak in 2010 as consumer spending falls further, by 1.1 per cent, and business investment also declines again, by 8.1 per cent. In 2011, the recovery picks up momentum as consumer spending rises by 1.3 per cent. The outlook for the public finances during the recovery is even worse than the Chancellor set out in the Budget because nominal GDP will rise less than he expects as both real growth and inflation turn out to be lower. Since money GDP is in effect the tax base, revenues will be smaller than the Treasury is projecting. Public sector net borrowing will thus fall only gradually to 8.6 per cent of GDP in 2013–14 compared with the Treasury’s forecast of 5.5 per cent. Further spending cuts and tax increases will be required to put the public finances on a sustainable footing."

Platini scores an own goal

A few days ago, I suggested that the case against Chelsea from FIFA was somewhat flawed. Now we hear that FIFA president Sepp Blatter has called Chelsea's action "child slavery" and UEFA President Michel Platini has called it "child trafficking".

What Chelsea actually did was to sign at age 16 a young French player who had signed a pre-contract with a French club at a much earlier age. Either that earlier contract was also child slavery or it was unenforceable.

You can't have your cake and eat it. A good lawyer at the CAS would run rings round Blatter and Platini.

Spinning like a top

The BBC spin machine is switched on again, saying UK manufacturing output rose at its fastest rate in 18 months in July, helped by a sharp pick up in car production, official figures show.

Better still the the Office for National Statistics said factory output rose by 0.9% from June, three times what analysts had forecast! Wow.

Except that putting it into perspective that uptick may be nothing more than a correction after a deep cut in manufacturing as dealers cleared their inventories. That plus a litle bit of an unsustainable push from cash for clunkers, which has pushed up car manufacturing by 14%, but when that's gone it's gone, and if anything all that may even have brought forward some car purchases giving a larger fall off when it stops.

The 0.9% uptick in the production index from 88.9 to 89.6 comes after a 15% fall between in the 12 months from February 2008 to February 2009, so current UK manufacturing production is still 14% below where it was 18 months ago.

Funnily the BBC described the 15% plunge as a "dip" in output, whereas the 0.9% growth is described in glowing terms. No lack of objectivity there, then.

Do you see that little blip on the right hand side of the graph? You are there. That is the latest "good news". So if you think that when GDP starts trending upwards we will be back where we were two years ago, think again.

We had joy, we had fun, we had seasons in the sun

Politicians heading for the next climate conference will be disappointed to hear that the pinup girl of the climate change world, the Maldives will not be attending. President Mohamed Nasheed of the photogenic country has said his nation will only go to the December talks in Copenhagen if someone offers to pay for the trip. No doubt, someone from the DFID or similar will be on hand to stump up the cash because the plight of the Indian Ocean islands is central to the cause.

The Maldives consists of a group of atolls about seven hundred kilometres south-west of Sri Lanka. The twenty-six atolls encompass a territory featuring 1,192 islets, of which two hundred islands are inhabited. The Maldives is the lowest country in the world, with a maximum natural ground level of only 2.3 metres with the average being only 1.5 metres above sea level, and is thus prone to flooding from global warming.

Woah! Hang on a minute, before we buy into all this guff let us look a little harder. Global warming studies on the Maldives make for attractive colour magazine inserts, but let's look a little harder at what is going on here. 1,192 islets all sticking between 0m and 2.3m out of the sea, surrounded by an ocean that falls away to a depth of a few thousand metres.

Coincidence? Not at all, because the islands sit upon coral reefs that push the land upwards. Upon occasions, storms and tsunamis hit the islands with large waves that will wipe every thing away, which explains why the land is no higher than 2.3m above the sea across the entire 100 square miles of the territory. If that doesn't sound flat, that is the same as the height difference across Lords cricket ground which is about 0.01 square miles and is supposed to be flat.

So whatever natural forces have created the Maldives, they seem to be quite powerful, and absent any radical changes, the presumption is that the natural equilibrium would be preserved over time. With so many islands at just a few metres above the level of the sea, it seems clear that the biosystem is able to adapt to any rising sea level.

What about the massive changes in the Arctic and Antarctic ices shelves which are melting away and will drown us all? Not so fast Mr Anti-Archimedes, those sea ice shelves are floating in the water and has been well understood since the third century BC, but not by global warming alarmists, they displace their own mass of water, and hence when they melt there are no changes in the volume of water, apart from minor, n-th order differences due to changes in salinity that are too small to mention.

Sea levels will only rise when ice sheets resting on land start to melt or the sea expands faster than the rest of the earth due to warming. The Antarctic land based ice sheets are formed by precipitation and as it is still likely to remain cold over the south pole we can expect thet to continue. Indeed with global warming we would expect more moisture in the air and hence more precipitation and a thickening of the ice at the poles, from whence it slides slowly to the shores. Climate change alrmists say that the disappearance of sea ice shelves will mean that the land based glaciers will flow more quickly to the sea, but the accretion of ice at the South POle suggests that we have someway to go before we have a net outflow of ice from over Anarctice land.

But going with the worst estimate of the alrmists, assume that we have an average 60cm rise in world sea levels by 2100 as they predict. Doesn't that swamp the Maldives, despite their apparent ability to adjust to the prevailing sea level? After all, if the land is on average 1.5m avove the seas, then losing 0.6m would probably be terminal.

No, that is more more bad science. An analysis of the geometry of the earth shows that the Maldives lie at a depression in the geoid surface of the earth, in fact at one of the deepest depressions, even though it lies in the middle of the ocean. You probably thought the earth is mostly spherical, squashed at the top and with some lumpy bits called mountains. You might think that the rest of the earth was pretty much regular, particularly the sea which is flat apart from the waves?

Apparently not. The part of the Indian Ocean where the Maldives sit is about 100m below the regular geoid, and that depression is caused as best as we can tell, by very high reates of evaporation of the sea. You read that right. 100m. The fact that the temperature in the area is say around 45 degrees above the melting point of ice means that the rate of evaporation causes a 100m depression in the shape of the ocean. Compare that with the 60 cm sea level rise supposed to happen if the ice caps melt.

So the real risk to the Maldives is not the melting of ice fields 6,000 km away, but the rate of evaporation of the sea around the atoll. In the extraordinarily unlikely event that the sun was switched off, the islands would be 100m under water.

In fact, if the world is heating up, if you remember the Clausius–Clapeyron relation in physics from school you might remember that there is a vaguely exponential increase in vapour pressure with temperature, so we could reasonabley expect to see expect more evaporation with higher temperatures. Indeed if say and average temperature of 40 degrees above the melting point of water leads to a 100m depression in the geoid, an extra 1 degree of temperature might be expected to distort the geoid by more than (100/40 =) 2.5m because of this exponential relationship, although there are clearly other factors at play. But anyway we shouldn't be surprised if sea levels decline in the Maldives.

And lo and behold, that is what has happened. In the last 30 years the sea level has actually fallen by 30 cm, and geological records indicate that in colder times 3,000 years ago the inhabitants of the island survived sea levels that were 50-60cm higher.

My guess is that newspapers, if they still exist in the future, will be paying for bikini clad models to go on photoshoots in the Maldives well past 2100.

Happy Days are here again

Congratulations to the good people of Edinburgh who have confirmed the Masterley Hypothesis, namely that when an arbitrary constraint is imposed, rational actors whose prior behaviour was rendered infeasible by the constraint will congregate at the constraint.

It seems that the new laws in Scotland regarding happy hours have had an entirely predictable result. The law attempted to restrict binge drinking by banning happy hours. Now I am not an expert in the economics of city centre drinking establishments, but I appreciate that pub owners do not give their drinks away out of charity, and are canny enough not to be driven out of business by a price war and chase to the bottom. I can appreciate that the bars have certain fixed costs and that profit might be maximised by some lower margin high volume business at what would otherwise be slack times. Perhaps bar owners find that a happy hour boosts business and increases later high margin takings. Either way, pubs are basivcally cash businesses and if so many bars had happy hours it must be because they found they had more net cash at the end of the week with happy hours than without.

So it is hardly surprising that after the Scottish parliament enacted legislation that drinks had to be sold at the same price for at least 72 hours, many pubs have done their arithmetic and announced Happy Days, selling beers and ciders at reduced prices for half the week.

So Monday night to Thursday night is the new party night in Scotland. Watch those sick leave figures soar.

The National Death Service

There was a disturbing letter in the Telegraph last week about the latest bureaucratic practices in the NHS. According to the authors, the Government is rolling out a new treatment pattern of palliative care into hospitals, nursing and residential homes. They say is based on experience in a Liverpool hospice. It sounds like it is based on a GCSE multiple choice paper

If all the boxes are ticked in the Liverpool Care Pathway, the inevitable outcome of the consequent treatment is death. In the year 2007-2008, 16.5% of deaths in the NHS came about after "terminal sedation". Whether or not a patient qualifies for such treatment appears to be a simple matter of ticking boxes rather than the decision of an expert.

As the authors point out, algorithmic decision making has caused problems in the financial world. I would go further and say that whenever a decision process is based on a "bright-line" measure where falling one side of the line or the other can have enormous consequences distorts behaviour - witness tax avoidance and structured finance arrangements. In medicine, the tick-box approach can be used to excuse incorrect decisions, or even a policy to shorten bed occupancy.

It wasn't always thus. About 20 years ago, I was called into a presentation to hear about an "Expert System" that had been developed at great expense to make corporate lending decisions. Expert Systems were all the rage in the 1980's, powered by mysterious "neural networks", "inference engines" and "fuzzy logic". Somehow they seem to have drited off into obscurity, but at the time they were going to take over the world. Perhaps they did but we never noticed.

Anyway, having sat through the 30 minute presentation as a junior banker (albeit with some knowledge of software) surrounded by senior credit officers more accustomed to fountain pens than computer keyboards, I asked the obvious questions: What happened when the credit applications for previous corporate loans were fed into the system? Did the system reject the same loans as the credit committee, and more importantly, did it reject loans that were passed by the credit committe but which subsequently went bad?

"Um, no" was the reply, "we haven't tried that." And that was the last I ever heard of that particular system.

Oh, the irony

Unison have always been quick to attack employers who have sought to scale back on final salary pension schemes, saying on their website:

It is no secret that many private sector employers have sought in recent years to look to close their final salary pension schemes and replace them with inferior career average or money purchase pension schemes. We expect this threat to remain and hence it is vital that we are prepared for such eventualities and seek to actively oppose such threats to our members pension schemes.

You see it is all those wicked capitalists who have to be opposed, but they have had more luck in the public sector where pensions are paid for with other peoples' money, defending local government and NHS schemes from closure to new members.

All the more surprising then that it has decided to be more amenable to change when dealing with the pensions for its own staff.

Chocolate and cheese

As has long been suspected, well for a few months anyway, Kraft foods has launched a £10 billion bid for Cadbury. Nothing to remarkable about that, but the potential conjunction of the chocolate and cheese firms comes with remarkable synchronicity with a statement from the British Chamber of Commerce that although they forecast eventual growth, any growth that eventually comes will be lower than inflation, i.e. real terms decline, due mostly to a complete lack of investment in the private sector. In other words a state of depression.

What is so synchronous about those two events? Well the fact that stories have started circulating originating from civil servants that Our Leader has been given a list of long items that he must not eat, including matured cheese and chocolates. The reason has not been given, but the list looks suspiciously like a ban on foods containing tyramine, which is usually given when a patient is prescribed monoamine oxidase inhibitors, a powerful antidepressant drugs, usually administered when the more modern SSRI (e.g. Prozac) drugs have failed.

Speculation about the Prime Minister's health problems are not limited to whether he will be able to see his way to the podium at the next Labour Conference, but his state of mind if he manages to get that far. The extended summer holiday from parliament may well have been due to the health of the premier and the need to keep him out of the public eye while a new course of drugs is tried.

But the statements coming from Downing Street have the air of violent mood swings. This weekend, in response to the damning report from the Sunday Times that it was Brown who blocked discussion of Libyan compensation for victims of IRA semtex, we hear, and the BBC duly obliges with its spin, that Brown is now in favour of such compensation. Let us not forget that Libya agreed three out-of-court compensation deals with American victims of IRA atrocities after lobbying by the last President Bush, which makes Brown look weak and is why gaddhaffi is happy to rebuff Brown's new plea for compensation

That followed the episode where Brown said there was no deal with Libya over Megrahi, whereas Jack Straw says there was.

Worse, after Brown compulsively obsessed about the $5 trillion stimulus to the heads of states that had already left recession, we had a statement from Liam Byrne that the government actually aimed to halve the deficit (7% of GDP? not nearly enough), and that the government was focussing on repaying the debt. Not if you are only planning on halving the deficit, you aren't. You are still borrowing £100 billion a year, not repaying debt. Perjhaps they think we are all on drugs.

If the stories about Brown's mental health are true, and if there is any truth to the list of banned foods opposition politicians should be asking questions, because someone under a severe depression is not fit to run the country, or in particular the armed forces or hold the nuclear key to our nuclear arsenal.

Still, if Kraft do buy Cadburys and the deal gets through the MMC and European Commission, then perhaps they could send a hamper to Downing Street: some cheeses, a few boxes of chocolates, potted meats and a bottle of Chianti, and Brown might get the message.

Contract blues

There has been much harrumphing about Lens complaint against Chelsea's "poaching" of one of their junior players, and unsurprisingly the partisan chairman of UEFA has actively promoted the decision by FIFA to award the London club a fine of €780,000, training costs of €130,000 and banned the plyer for four months and banned the team from buying any more players until 2011.

Chelsea look a very strong team this year (I am not one of their fans by the way), but their most potent weapon is still their chequebook, so it is worth asking what went wrong. On closer examination perhaps not much. Chelsea will be appealling to the Council for Arbitration in Sport in Switserland, and if that fails they have the option of further appeals to the Swiss Supreme Court. As one distinguished lawyer once told me, the great advantage of an multi-tiered legal system of a ppeals is that the higher you go, the more likely you are to find a judge who knows what they are talking about.

At the moment, we are hearing newspaper talk about Chelsea talking to underrage players. The actual charge against Chelsea is that they induced the young player to breach his contract with Lens. The player had trained with Lens since the age of nine, and he signed a pre-contract agreement with the club when he was 14 and a half years old that stated he would sign professional terms with Lens at 17.

French employment law, quite rightly, does not permit minors under the age of 17 to sign employment contracts, so it is a reasonable presumption that any contract to sign a contract at 17 would be unenforceable. In normal circumstances, whenever a hack lawyer from a small provincial French town puts a piece of paper under the nose of an immigrant family in an HLM promising unimaginable riches, not only will they sign it, but they perobably won't question whether they have signed a binding contract.

The same probably applies to a football club manager who probably understands as much about contracts as he does about particle physics.

So who was working for Chelsea? It is reasoable to assume that a company that has invested so much in players has a decent legal team, and indeed they do in Bruce Buck, the chairman and the only other shareholder apart from Roman Abramovich (he has one share, Abramovich has 84 million). Mr. Buck is not your average hick lawyer, but the senior partner in the European practice of Skadden, Arps, Slate, Meagher & Flom LLP. If you have never heard of Skadden, Arps etc, then think of them as the Merrill Lynch Pearce Fenner & Smith, or the Klynveld Peat Marwick Goerdeler of the US legal system. Or rather, of the world legal system because they operate in 24 cities around the world.

To put it frankly, Skadden is the sort of firm that knows a thing or two about contracts, and to be blunt, a little more than UEFA, FIFA and any lawyer working for a French football club.

Chelsea's legal advice appears to have been that the pre-contract was unenforceable, that it is not possible to breach an unenforceable contract, and hence it is not possible to induce someone to breach that unenforceable contract.

My hunch is that once this dispute goes higher than sport governing bodies and reaches real world lawyers, this may well go Chelsea's way.

Like a Virgin

Alastair Darling's announcement that government stakes in UK banks, including Northern Rock, Lloyds Banking Group and Royal Bank of Scotland, would not be sold to banks with big existing operations in the UK is worrying on many fronts.

The chancellor told a CBI dinner in Glasgow that as the government scales back and ultimately removes support in the banking sector, it would do so in a way “that proactively encourages new entrants”.

On the purely economic front, there is the simple fact that the more constraints are placed on the domain of projective purchasers, the more the objective (the maximisation of the realisation price) is likely to be limited (see George Dantzig:1953. Notes on linear programming. Rand Corporation.)

More importantly, since the likely new entrant is a former rock promoter and condom salesman in a woolly jumper, an equally woolly beard and a toothy grin, one wonders how the Geordie Footballers, Real Hard Men par excellance, will take to wearing logos thet proclaim their chastity.

I have some good news and some bad news

The Good News: Gordon Brown is willing to take a pay cut.

The Bad News: he wants to keep his job.

I guess that means he thinks we could get a better person for the same money.

Looks like we missed the boat

The OECD says the German economy will lead growth in the eurozone, but the UK economy would shrink by 4.7% this year, compared with its earlier forecast of a 4.3% contraction.

Remember yesterday's article saying that the forecast for UK GDP growth in 2009 had dropped steadily between April 2008 and July 2009 from +1.7% to -4.3%. Well it has just dropped another 0.4%, which makes 6.4% drop in the forecast in the last 17 months.

The OECD expects both the US and the eurozone to follow Germany, France, Japan and Hong Kong out of recession in the third quarter.

But not the UK. The British economy is likely to still be stagnant by the end of the year, shrinking in the third quarter and registering zero growth in the fourth quarter.

One day, I might be your boss

If you have a spare 30 minutes, you might enjoy reading the Kotz report on the SEC investigations into Bernie Madoff.

Then again, it might you might find it a little disturbing that SEC investigators could have been so easily put off their investigations, and equally that their bosses seemed so reluctant to go after Madoff even after several plausible complaints. The thought crossed my mind that perhaps US firms constantly make complaints about their rivals and it is all part of the business, but the accusations against Madoff seemed so clear and plausible and the fact that no checks that were made on whether Madoff was trading with third parties in the volumes he claimed, make it clear that the whole episode was a disaster.

The best bit comes when Madoff is interviewed by SEC inspectors and tries the "Do you know who I am" line?

When Madoff told the inspectors he was on the shortlist to be the next SEC Chairman, sadly they didn't respond that Joseph Kennedy had been on the same list in the 1940's, but that didn't mean he was clean either.

What a fool believes

Five months and one day ago, I dared to cast aspersions on the settlement reached at the London G20 meeting. The $1.1 trillion package supposedly agreed by G20 ministers was either a list of measure that had been in place for years (export credit agency backed finance), increases in limits for borrowing from the markets by multilateral development banks, increases in capacity for SDRs at the World Bank but no increases in World Bank funding from governments, and an increase in funding limits for the IMF, but only vague promises to actually provide funds.

That was spun by Gordon Brown into a "$5 trillion stimulus package", although it was never clear where the other $3.9 trillion had come from, which was why I asked two months ago what had happened to this magical $5 trillion, because apart from blowing a few million on cash for clunkers there seemed to be precious little spending, at least not in the 13 figure, GDP busting numbers talked about by Mr Brown.

Now we read in today's Times that the IMF funding leg of the $1.1 trillion package, the only part that actually required any government cash, is not going to happen after all. This includes a $75 billion funding package from the EU. Labour ministers have told the EU that they should increase the commitment to $500 billion, but as predicted here on Tuesday, the Germans are having none of it because they are out of recession and they don't need to provide any camouflage for the UK's debt binge.

So let's all learn a lesson and wise up on some financial vocabulary:

Millions

• low end: a CEO's base pay, bankers' bonuses and the value of some suburban housing;
• mid-range: the GDP of small island states or the cost of acquiring the services of some soccer players;
• high end: the annual overspend by middle ranking government departments and annual national benefit fraud.

Billions

• low end: the wealth of minor plutocrats, the annual profits of big banks in good years, the size of most hedge funds and the cost of major infrastructure projects;
• mid-range: the size of annual budget deficits in large developed nations and the assets of the largest pension funds;
• high end: the GDP of all but the very largest and wealthiest of nations and the off balance sheet liabilities in major banks.

Trillions

• low end: the GDP, national debt and total resources of the largest and most developed nations;
• mid-range, high end: does not exist in real currencies.

The simple fact is that nobody writes cheques for trillions and even commitments for tens of billions don't happen round a table at a G20 meeting. Only a delusional fool would ever believe, let alone announce, that there was ever an agreement over a $5 trillion stimulus.

Beware the dogs of hell

Cerberus Capital Management, L.P., one of the largest US private equity firms is going to bar investors in two new hedge funds from withdrawing money for three years to avoid a repeat of the large outflows that followed its lossmaking purchases of Chrysler and GMAC. The lock-up will apply to two multibillion-dollar funds to be raised later this year specialising in distressed investments.

Cerberus, named after the one, two, three or fifty-headed, depending on source, dog from Greek and Roman mythology has a history of dabbling with underworld investments, such as the two major car firms and BAWAG, the Austrian bank almost wiped out by fraudulent practices by some of its directors and their associates.

Investors with a smattering of classical education and a knowledge of the labours of Hercules should not be surprised at the lock-up provisions in the new funds. The multi-headed hound with a taste for live meat would happily allow dead souls to pass into Hades, but its main purpose was to prevent any live souls who had crossed the river Styx from ever escaping.

Just hand me an axe and I'll make some savings

I was just reading the Health Service Journal to find out about the cuts that McKinsey say could be made in NHS budgets, when my eye was caught by various stories about NHS managers sacked and jailed for stealing petty cash and lying about their qualifications, when I spotted a link to a job ad for "Workplace Transformation Directors" to be paid £90,000-100,000 a year.

So here is the job description:

Inspirational and influential are some of the personal qualities that define success in these new senior management roles to be based in each of the six NHS sectors across London. Using your strong leadership skills, you will drive the development and implementation of transformational workforce plans to realise our vision of world-class healthcare for London.

Fine, but what do you actually do?

Each Director will work with the sector Chief Executive to develop and implement localised versions of Workforce for London – A Strategic Framework, and will lead the activity required within the Sector to transform workforce capacity and capability to deliver a high quality, responsive, flexible and cost effective service.

Sounds like a rehash of a larger scale plan, but what do you actually have to achieve to justify £100,000 a year?

These are high-profile roles with the potential to considerably enhance your CV. Bringing a passion for workforce planning issues, you will combine resilience, political acumen, good influencing skills and outstanding powers of communication.

CV enhancing? Seems like a non-job for a politican. Is this job in fact nothing more than a stepping stone for NHS insiders?

An NHS background is essential and you must have a substantial track-record of leading organisational change, as well as experience in partnership and collaboration at a senior level.

I think I can save the NHS another £600,000 a year.

Soothsayers, shamen, economists and other frauds

It is interesting to look at the other pink paper's Economic weather map if only to see what appalling forecasts they have made. Look for example at the predictions they have made at various dates for the level of GDP growth in the UK in calendar year 2009.

Over the course of 15 months, they have managed to reduce their prediction by a full 6%. We must bear in mind that government spending has not dropped, but it represents approximately 50% of the spending in the country. That means the FT have effectively reduced their forecast for the other half of the economy, the private sector by, 12%.

Given that anybody can read the spending from the government's budget reports, these economic gurus only have any merits if they can judge the pulse of the private sector, which in this case the teenage scribblers have singularly failed to do.

So here are their forecasts for UK GDP growth in 2009 from April 2008 to July 2009.

April 2008:	1.70%
July 2008:	1.00%
October 2008:	-0.20%
January 2009:	-2.80%
April 2009:	-3.80%
July 2009:	-4.30%

Did you spot the trend? At that rate, a steady drop averaging 1.2% per quarter, can we expect a final value around -6% by the end of the year, or would that just be guesswork?

Planks, eyes, pots and kettles

I am not an avid reader of the Guardian, but they have run a story concerning the potential bankruptcy of the Cayman government. It seems that the Cayman government spent a bit too much on infrastructure and as a result is currently running a deficit of $81m against a budget of $557m.

The government has asked for permission from the UK government to borrow $310m from local banks. The Guardian portrayed this as asking the UK government for a bail out, but it is patently nothing of the sort. As a a British overseas territory, the Cayman government requires UK government approval for such borrowings.

Chris Bryant, former Conservative, now Labour, Christian but gay, MP and junior mister who upheld the dignity of his office by soliciting for encounters clad only in his underpants, has written to the Cayman government telling them that perhaps they should consider raising taxes on the $2.3 trillion invested in hedge funds on the island.

The reality is that there is plenty of money available to finance the government, not least from the hedge funds to whom the $81m (CI$1.2 = US$1) is a trifling amount. Last week Moody’s Investors Services last month maintained its Aa3 rating, but of course the UK government is trying to break the Cayman Islands reputation as a low tax jurisdiction.

Mind you, as a former accountant, Mr Bryant knows a thing or two about dodgy financial dealing, having flipped his second-home expenses twice, claimed mortgage interest expenses that started at £7,800 per year before rising (after flipping) to £12,000 per year. Doing so allowed he managed to claimed £6,400 in stamp duty and other fees on his most recent house purchase, a sophisticated form of tax mitigation. He also passed £6,000 per year in service charges on to the tax payer. He wasn't always that successful because a claim that he made in 2004 for £58,493.26, almost three times the annual maximum, was disallowed.

To the Cayman Islanders, lectures from Britain over a 14% shortfall in government spending must come across a bit rich coming from a government whose own annual funding requirement is 28.5% of government spending, but it seems that sort of contradictory behaviour comes easily to the Labour, but once Conservative, Christian but gay, responsible but irresponsible minister, Chris Bryant.

Green is for go

The Employment Relations Authority in New Zealand has ruled that Vicki Walker, an Auckland (New Zealand) accountant, was not fairly terminated from her position after sending the emails to co-workers. Her previous employers, ProCare, have now been ordered to pay NZ $17,000 (US $11,500/€8000/£7,000) for unfair dismissal.

ProCare claimed that Walker, who was fired in December 2007 after two years with the company, had “caused disharmony in the workplace by using BLOCK CAPITALS, bold typefaces and red text in her emails.”

Quite right too. Green ink on the other hand would be reasonable grounds for instant dismissal.

Die, verdammter Englischer Schweinehund!

This morning's Times tells us that Gordon Brown is "hoping to seize back the political agenda with a new focus on the economy". The Prime Minister will try to convince voters that the British economy is through the worst, and that it was a Labour Government that navigated the choppy waters. Alistair Darling, who is hosting the meeting in London of the Group of 20 finance ministers, will try to ensure greater international co-operation in response to the banking crisis.

The trouble is that this morning we also heard that the CIPS/Markit survey of purchasing managers in manufacturing, known as the PMI Index, fell from 50.8 to 49.7 in August – below the 50 mark which registers stability. Moreover, July’s figure was revised downwards to 50.2, reflecting efforts to cut costs and pare staff.

But then the Bank of England reported that outstanding loans to companies and individuals both declined at a record pace in July, in a worrying sign for the prospects of economic recovery. So perhaps this calls for more concerted effort from all parties at the G20 meeting?

No. Expect two fingers to any such proposal from the Germans, who have managed to keep their budget deficits in check and turned back to economic growth. Better still, while the British and Americans talk about spotting distant green shoots but facing years of high unemployment, the Germans have not only emerged from recession in the last quarter, but have also seen a fall in seasonally-adjusted unemployment, albeit by only 1,000 to 3.48m in August, but that followed a 5,000 fall in July.

Take that, Jonny Englander.

The puritans strike back

The biggest shake-up of the licensing system since the last big shake-up will take effect in Scotland tomorrow when the Licensing (Scotland) Act 2005 comes fully into force.

The main impact is supposed to be the banning of "happy hours".

Who are they kidding? Have they ever been in a Scottish pub? There hasn't been a happy hour in a Scottish pub since the battle of Bannockburn. Not even a happy minute.

Your bill, monsieur

Imagine the following visit to a restaurant. The maître d’hôtel escorts you past the pot plants and assembled diners to your table, seats you with consummate elegance and presents you with the bill.

"But what is this?" you splutter.

"This, monsieur," come the reply "is the bill. As you will remark, it is a little high, but there were eight people and there was the matter of the lobster thermidor, and we must not forget the two bottles of Chateau Yquem."

"But we haven't even ordered yet, and there are only two of us."

"Non, monsieur does not seem to understand. This is the bill for the customers who were at this table here before monsieur."

Absurd? Perhaps, but that is the way that we run our public finances. With a budget deficit running at 15% of GDP we are living way beyond our means. Put another way the government which accounts for 50% of the spending in the UK is only raising 70% of the cost through taxes.

The rest is funded by borrowing. Instead of bribing the electorate with money provided by the richer half, this government bribes the electorate with money to be paid for by their children.

But this is all investment say the government. Not true. The investment such as it is, comes mostly through the PFI, which in theory has nothing to do with government borrowing.

Some spending might validly be called investment and thus might properly be funded by borrowing and paid for over many years. This would include large on balance sheet projects such as Crossrail, West Coast Main Line, sea defences, non-PFI road building or large items of defence expenditure. The rest of expenditure outside the PFI is largely current spending on benefits, education, healthcare, defence, regulation, administration or other services, the cost of which should all be borne by the generation who are supposed to benefit from it and not passed on to the next.

If the government doesn't have the guts to raise taxes to pay for current services, it should cut the services that it can't afford. And that means paying the full cost, including full provision for the pensions, of current public sector workers.

"Ah, monsieur, this is a little, 'ow shall shall we say, delicate, but the people who were at the table before thought that you might care to tip their waiter."

More BBC economic spin

Two pieces of egregious spin on economics from the BBC:

Economy shrinks less than thought

On last night's news this was spun as indicating that the recession may soon be over. The upward revision was from a 0.8% quarterly decline to a 0.7% decline, so the difference might have been miniscule because of rounding , but of course the BBC did not go into that level of detail. They simply extrapolated from that small detail that our economic woes are over.

Back to reality. Let's put it in perspective. Inflation is over 0.4% per quarter, so a 0.7% decline in GDP is a morge than 1.1% drop in real terms. In how many quarters since 1990 have we seen a 1.1% real terms increase in GDP, which would be more than 1.5% increase in nominal GDP?

According to the BBC: none.

House price rise hits 5-year high

The is little nugget comes from the latest monthly report from the Land Registry that house prices in England and Wales rose by 1.7% in July compared with June, the biggest monthly leap in value since July 2004.

At first blush this might look encouraging, although it is only monthly figures, and based on substantially lower sales figures and thus a more volatile market where house prices are still 11.7% lower than a year ago. The methodology looks sound because the Land Registry compares the value of houses actually sold against known previous sales to compute an index.

The House Price Index is based on values of houses that were actually bought and sold in the relevant month compared with last known sales of the same property. The Land Registry database contains 15 million entries of which about 5 million are matched pairs giving 2.5 million price ratios between sales which can give a reasonable input to a regression analysis, but there are a number of problems with the method.

First of all the data excludes forced house sales from divorce settlements and reposessions. The latter might be sensible in a fair market, but it creates a material upward bias in the Land Registry report when repossessions are more frequent.

It also excludes new builds by definition, which will constitute a large part of the market at any time and where prices may become very depressed in a recession as developers try to clear their books to repay lenders, which would tend to bias the HPI higher than the real average price when developers are having a bad time.

Third, the index assumes that it is comparing a homogeneous distribution of house sales, but if we look at the price points where sales are ocurring we see that this is not the case. Sales at the upper end of the market are about a half of where they were a year ago. On the other hand sales of properties below £50,000 were very much in demand with numbers of sales up by 50% and no doubt higher prices being paid.

A 1% increase in the value of low cost housing stock would be given equal weight in the computation as a 1% increase in the price of high cost housing stock. It looks suspiciously as though the Land Registry methodology has pushed up the House Price Index simply because of a substantial increase in demand for properties right at the bottom end of the market, notably in Wales and the North of England, whilst the price of higher priced housing stock where the number of sales has actually decreased could well be static or declining, but because fewer of those houses have sold they have less impact on the results.

Not that the BBC would ever want to go into that level of analysis.

Cheap, nasty, smelly

That is the choice of housing that you get when you are poor, unemployed and living on benefits. It also describes the government's treatment of some of the very poorest in society.

At the moment people on Local Housing Allowance who cannot make ends meet are able to trade down to find accommodation that costs less than the maximum allowance available to them and keep the savings, up to a maximum of £15 a week. Believe me, this is not something that anyone does lightly. LHA is means tested so if anyone is claiming it, they are in a bad way. Many families cannot cope with the levels of income that are available to them and are forced to move to lower quality housing simply to take advantage of the extra £15.

Essentially this policy has cost the tax payer nothing because the families would have claimed the more expensive housing if they had no choice.

Now we hear that the Treasury says that the policy costs too much and that the ability to pocket any surplus should be scrapped from April 1. Someone living on £65-a-week jobseeker’s allowance would lose 18.75% of their income. The press and the government both kept quiet about it at the time and the measure was not a feature of the Finance Act. Details were hidden away in the text of press notices:

Local Housing Allowance

The Government is reforming the Local Housing Allowance (LHA) so that it is more equitable and promotes work incentives. From April 2010, households will no longer be able to keep any of the surplus if the LHA they receive is higher than their rent. For those already receiving LHA, this reduction will not apply until the anniversary of their claim. It is essential that the LHA represents good value for money for the taxpayer and as this measure will only affect surpluses, it will not produce rent shortfalls.

The truth is this will not save the government a penny because if the cash is taken away, families will simply move into more expensive accomodation to take up their full housing allowance, but will lose valuable cash.

So all I can do is suggest that you write to your MP, not that it will do any good and support your local food bank. If you really need convincing how tough life can be at the sharp end, pop round to see their "clients". Requests for help at the food bank in our nearest town have risen 40% over the last year. The situation is probably the same where you live and will be much worse if this measure goes through.

Crime of the Week: Multi-colored Swap Shop

UK readers may remember the style crime that was Noel Edmonds TV show, but they have probably never heard of Edward H. Okun, the former owner of The 1031 Tax Group LLP. The name of the company derives from a section of the US tax code, section 1031 as it happens, from which a minor industry peculiar to the US has evolved.

Under Section 1031, recognition of gains or losses arising on the alienation of property may be deferred on the exchange of certain types of property. Or in plain English, if a US tax payer buys a building for 100 which they decide to sell many years later for its market value of 200, they would pay tax on the profit of 100, but if they exchanged it for another property also worth 200, they would not recognise any gain, but they would carry over a "basis" of 100 in the new property.

In terms of tax policy, there is nothing particularly unusual about this as many countries operate what might broadly be termed reinvestment relief where the proceeds of the sale of movable or immovable property are reinvested in similar property. The US system is unique in that it requires the exchange of the old property for the new to qualify for the tax relief. There is no other mechanism under the US tax code for the vendor to achieve the same relief.

This creates a number of problems. First of all if you are selling one building and buying another, the buyer of the old proerty and the seller of the new property are almost certainly not the same person. Since those two other counterparties do not want to be involved in your tax affairs, it is necessary to introduce a third party accomodator who will enter into the buying and selling contracts with the other counter parties and exchange the properties with you to give you the desired tax effects.

Now the real estate market being what it is, the chances of being able to line up all your ducks in a row and contract a simultaneous sale and unconnected purchase are about as remote as Bernie Madoff chances of beatification. The solution was to amend the law to permit deferred exchanges, where you would enter into one half of the exchange with the intermediary who would sell the property and hang on to the proceeds, giving you 45 days to indentify and 180 days to complete on the purchase leg of the exchange. In order to make this work the accommodating party, called a Qualified Intermediary, had to be completely unconnected.

But in most cases, there were no requirements that the Qualified Intermediary should have any qualifications at all. Extraordinarily, the only place they have to be licensed is in Nevada, although that state does not require permits for unconcealed handguns. Elsewhere anybody who is fit to run a US company can set up as a 1031 intermediary.

Okun's business grew when the times were good, so that at any time his company would hold several hundreds of millions of dollars, but when the market peaked, volumes dropped and the group ran into a "liquidity problem", specifically because Okun had helped himself to $126 million of client monies, which is why he is going away until 2109.

Nice work if you can be bothered

There hasn't been a more abortive return from retirement since Michael Schumacher decided that driving in Formula 1 can be a bit of a pain in the neck, but Robert Benmosche, the new chief executive of bailed-out insurer American International Group Inc has told Reuters that he's getting a lot of work done from his massive villa in Croatia.

Robert Benmosche working hard at his Croation villa

In fact, the former head of MetLife says he agreed to come out of retirement one week earlier than planned, although anyone with their wits about them would have figured that this was simply to start work before he took his three week vacation in Croatia, so that the holiday would take place while he was employed. After all, his predecessor only lasted 11 months on his $1 a year contract, so with a contract for $3m in cash plus $4m in stocks and a bonus package that could be worth $3.5m, Mr Benmosche's service up to the end of his vacation would have earned him a pro-rata $600k for one week at the office.

Apparently it is not all sunshine and sand in Dubrovnik. Oh no, Mr Benmosche takes an average of 3 conference calls a day, which is not bad for a guy running a company that is trying to make disposals left, right and centre and which has been bailed out by the US government to the tune of $85 billion. And clearly he has the best interests of the US tax payer at heart:

"Some of us need to come out of retirement, who have done this before, to help deal with the crisis," says Mr Benmosche. "If I sit here, I just felt that there are going to be continuing problems. I felt I had some of the skills necessary to fix the problems of AIG in particular and it made sense to come back."

Or rather to disappear to his villa 5,000 miles away.