Is the UK really anti-business?

The backlash against the backlash has truly begun. Fred, formerly Sir Fred, mustn’t be able to believe his luck as the great and good pile in to tell us all that it is terribly unfair. Even Alistair Darling who savaged him in his memoirs has come out for Sir Fred!

Most worrying though is the concern of a number of industry leaders who have voiced the opinion that the ‘stripping’ of Fred (apologies for that little mental image) could be perceived as anti-business. I think there are a number of points to make on this one.

Firstly, this story and the anti-business claims need to be seen in their party political context. The Government was bounced into this following Stephen Hester’s bonus fiasco. It needed a sacrificial lamb to give the voters some raw meat and try and claw back the initiative from Ed Miliband who is gaining some traction with the ‘fairness’ line of attack. Fred was the lamb and the anti-business claims are a natural follow-on to try and discredit the Opposition’s motives and convince voters that Labour is vacating the centre ground of politics.

Secondly, the City of London is not UK business. It is a part of UK business (admittedly quite a large part) but there are other parts of the economy beyond financial services. The national media’s almost exclusive obsession with the City and publicly quoted companies obscures the fact that there is business beyond the Square Mile.

Finally, the most vociferous voices I have heard on the subject of bank lending and bonuses have come from business, particularly SMEs who continue to struggle with raising bank finance.

So despite what you may read, the answer to the question is ‘no’ the UK is not anti-business, but if the great and the good continue with this line of attack it could become a self-fulfilling prophecy!

Greed laid bare for all to see!

I spent last night reading (selectively, its 650 pages long) the US Senate Panel’s report on the financial crisis (yeah party on!).

It stands as a stark contrast to the interim Vickers report on the structure of the UK banking industry which was released in this country earlier this week.

Where Vickers was polite and diplomatic, Senator Carl Levin and his committee reach for the baseball bat. Levin describes the market in Mezzanine Credit Default Obligations (CDOs), which were made up of thousands of individual mortgages that were traded around Wall Street and further afield, as “a financial snake pit rife with greed, conflicts of interest and wrongdoing”.

Levin also believes Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. “In my judgment, Goldman clearly misled their clients and they misled the Congress.”

There has long been a suspicion that Goldman Sachs artificially pumped the market in CDOs, making a killing before exiting the market, knowing full well it was about to crash. In Michael Lewis’ words, author of The Big Short, it was the equivalent of starting a fire in a theatre, sprinting for the exit and bolting the door behind you!

The Senate report, called Anatomy of a Financial Crisis, confirms all this to be true and lays bare the conflicts of interest at the heart of the scandal, which ultimately led to the collapse of Lehmans and the global financial heart attack. In fact, for me, the best bits are not until page 648 of the report when Levin details a timeline of Goldman Sachs’ activities, helpfully labelled the Hudson 1 Chronology.

8/9/2006: "ABX (the CDO market) continues to perform well but firm thinks it has run its course and will reduce exposures”

9/9/2006: “Continuing to reduce volatile ABX position. Trading desk is working to reduce position by reducing ABX longs with shorts” (in other words, Goldman’s knowing the market was shaky bets against it by taking short positions)

19/9/2006: Planning of Hudson begins (Hudson is a massive book of CDOs – in other words, not only does Goldman’s now have short positions in the CDO market which it believes will crash, it now starts marketing the CDOs to its clients)

3/12/2006: Goldman issues (Hudson) offering circular to investors … does not inform them that Goldman’s has $2 billion short position

4/3/2007: Value of Hudson falls significantly. “I think their (investors) likelihood of getting the principal (money) back is almost zero”

15/7/07: A number of Hudson’s assets ie. mortgages are downgraded and trigger liquidation requirements

22/7/08: Hudson goes into default

This staggering conflict of interest, knowing that a market is about to crash, taking a short position in it and then encouraging your clients to get into it, lies at the heart of the financial crisis.

I have long contended that if the general public really knew what the banks (including many of those based in the UK) had really been up to, no banker would dare call for an end to banker bashing.

It's thanks to people like Levin for casting some much needed light on their practices.

The real point about Barclays’ Tax Bill

Barclays have paid £113 million in Corporation Tax which equates to approximately 0.97 per cent of the company’s pre-tax profits of £11.3 billion

£113 million still sounds like a lot of money until you realise that the UK’s Corporation Tax rates currently stand at 28 per cent. What, I hear you ask, happened to all the money?

Apparently, Barclays wrote it off against losses in American subprime mortgage trading. Barclays excuse is that under UK Corporate Tax law losses made in any business division can be written off against Corporation Tax. So, in other words, Barclays played in the casino of mezzanine credit default swaps, lost and now the Exchequer is out a lot of money. (Those interested in casino banking and how our banks got involved in all of this this should read The Big Short by Michael Lewis).

Whilst this is a clear violation of the principle of risk and reward, the foundation upon which investment decisions are made, the real point is that all of this is legal. Successive Governments consistently promise to close tax loopholes, but instead leave this gaping chasm open to abuse.

Why don’t they close this loophole? Because our politicians are scared stiff that major corporates like Barclays and HSBC, who have already threatened to leave the country, will up sticks and set up in a low tax economy like the one just off our shores. It’s called Ireland and it has a Corporation Tax rate of 12.5 per cent.

So the next time you hear an Opposition party say that they are going to close tax loopholes when they get into Government treat it with the scorn it deserves.

So the bankers want to be loved - it'll take more than a couple of press releases!

Fascinating story in this week's PR Week, namely that the entire banking sector is going to employ a PR agency to rehabilitate its reputation.

Apparently, there is great concern that bankers are no longer viewed as supportive by SMEs. That's probably because bankers aren't supportive of SMEs.

As a case in point, I recently visited a small precision engineering company in the North East which has won a major aerospace contract for the new Airbus. In order to fulfill the order more efficiently, the company decided to spend approximately £70-80,000 on new capital equipment, namely machine tools.

The MD made a big presentation to his bank (who shall remain nameless) and then nothing more was heard. Phone calls were not returned, emails were not answered. Finally, two months later the answer came back. "No, we think you are going to go bust."

There was of course no evidence of this, the bank manager concerned just assumed that every company in the manufacturing sector must be teetering on the brink. How massively supportive?

In the end the MD turned to his own savings, credit cards and Finance For Industry to help him invest in the equipment needed and fulfill the promises made to his customer.

My point is that it is going to take a lot more than a barrage of press releases to rehabilitate the banks amongst SMEs. What is required is for the banks to regain the trust of the business community and the public in general by making credit, namely the principle of buy now pay later upon which modern society is founded, actually available, in the form of loans for capital equipment and mortgages for you and me.

Much was promised by Project Merlin last week, but even a cursory read of the fine print demonstrates that the banks have inserted plenty of caveats, which the more cynical amongst us believe will be used to renege on the promise to deliver £190 billion this year in credit for business.

Time will tell.

Events dear boy, events!

I had planned to start the blogging year off (albeit belatedly) with an optimistic look forward to what we can expect this year, both economically and politically, but events have, once again, somewhat overtaken me. The shooting of a Congresswoman in Arizona certainly deserves a mention (an excellent article by Richard Cohen in the Washington Post can be read HERE) as does the Government’s refusal to take on the bankers at RBS over their bonuses (I mean we only control 70 per cent of it for #*%$’s sake!).

However, media reaction to the British Chambers of Commerce economic numbers have got on my goat today. Instead of concentrating on another set of outstanding numbers from the manufacturing sector we have more fears voiced about a double-dip recession and a bemoaning of the poor performance of the service sector in Q4 of last year.

Frankly, putting hyperbole to one side for the moment, this was to be expected. What we are hopefully seeing is, at best, a slow but sure rebalancing of the economy, away from services and finance and towards manufacturing (this is no bad thing) and at worst just a reaction to the weakness of Sterling. Consumers in turn are slowly deleveraging their personal debt which leaves slightly less money to spend on the high street, hence the 0.3 per cent drop in like for like sales.

I’ll go out on a limb. Barring a massive unforeseen shock to the economic system we aren’t going to have a double dip. I’ll go further, I can actually see the UK economy coming out of this fairly quickly by mid-year. Why? Because we have a very flexible labour market, we are not in the Euro and interest rates are at historic lows. All we need is for the banks to lend business some money and all will be right in the world.

Right, back to those positive thoughts!

SEC Harpoons Giant Squid

Just a quick blog on the Goldman Sachs news which came out Friday evening and allows me to return to one of my favourite blogging grounds, namely bankers.

The news that the SEC (the Securities and Exchange Commission, the American version of our Financial Services Authority) has charged the world’s biggest and most successful investment bank with fraud directly related to the sub-prime mortgage crisis is extraordinary. Apparently those lovely chaps at Goldman’s were ‘allegedly’ advising clients to invest in mortgage CDOs whilst privately colluding with a hedge fund client to short sell the market (ie. betting on its collapse). It’s like a billion dollar version of “do as I say not as I do”.

Goldman’s, famously described once as a “giant squid wrapping itself around the face of humanity” has, of course, strenuously denied the accusations, but we can learn one or two things just from the fact that fraud has been alleged if not yet proven.

Firstly, Obama is still listening to Paul Volcker the former Chairman of the Federal Reserve who badly wants to rein in the banks and has already got his own rule, “the Volcker Rule” which forbids the banks trading on their own account ie. using their own money and potentially destroying their balance sheets if they get it wrong.

Secondly, the SEC is back in the game. After being asleep during build-up to the financial crisis and totally missing the world’s biggest ever Ponzi scheme, courtesy of Bernie Madoff, despite being warned that a 15 per cent return year on year, regardless of market conditions, was impossible, this marks something of a return to form.

Thirdly, it appears that there is a growing feeling in the corridors of power that Goldman’s is out of control, not least because the bank is about to payout another £3.5 billion bonus pot for three months work to its 31,700 employees.

One to watch.

A Damascene Conversion

Interesting article in today’s FT by Martin Wolf which can be found HERE. Martin, arch-proponent of capitalism, is proposing a windfall tax on bank bonuses. This is the economic equivalent of Sir Alex Ferguson announcing at a pre-match press conference: “Premiership referees are the best in the world. I will never question them again.”

Much of what Martin says has been heard before, but it is worth revisiting, if for no other reason than to marvel at the sheer audacity of the global investment banking institutions. The banker argument, most recently espoused by Lloyd Blankfein, CEO of Goldman Sachs (who memorably told the Sunday Times a few weeks ago “I’m doing God’s work”) is as follows: “Yes, we took the money, but now we’ve paid it back so we can do what we want”. Blankfein is of course referring to the $10 billion of Federal Government money which kept the firm from going bankrupt in October 2008.

Of course, as Martin points out, this is a gross over-simplification. The institutions now making these enormous profits are effectively being underwritten by Governments around the world (the “too big to fail” argument). Secondly, the enormous profits are in large part due to the unprecedented amount of public money that has been pumped into the financial system, which investment banks are now happily, trading and hedging and collateralising. Thirdly, those making the enormous bonuses are exactly those who almost destroyed the financial system in the first place. Four, ordinary chaps (you and me) are hurting most and will be paying the bill for the bail-out for the next 20 years.

As Martin says “windfall support should be matched by windfall taxes.” However, he does miss out one other key factor in the investment bank re-birth, namely lack of competition. The banking crisis effectively narrowed the field considerably as Bear Stearns, Lehman Brothers, Citigroup and others, for different reasons, are no longer playing. So, in short, the likes of Goldman’s has a bigger, better playing field to play on and fewer opposing teams. Not bad is it?

In the past, the banks have been able to defend themselves against this sort of attack by shooting the messenger, but Wolf is highly respected. They might struggle with that strategy this time.

Too big to do anything about?

The Governor of the Bank of England’s use of Churchillian rhetoric a few nights ago in a speech on banking reform (“never in the field of financial endeavour has so much money been owed by so few to so many”) opened a new front in the on-going Battle of the Bonuses, on this side of the Atlantic at least.

We now have two of the biggest names in banking and regulation effectively wanting to break up the banks by splitting off commercial banking activities (clearing, loans, mortgages etc) from investment banking activities (trading, arbitrage etc) where the big profits and bonuses are being made. The other? Paul Volcker, former Chairman of the US Federal Reserve who advocates the re-enactment of the Glass-Steagall Act, first passed by the Roosevelt administration in the midst of the Great Depression.

How likely is this? Well, for a current Governor of the Bank of England to be talking this way is certainly a surprise and is probably the start of a Bank of England ‘land-grab’ which will be enacted if we get a Conservative Government, which has pledged to get rid of the FSA and return banking regulation the Bank.

However, our current Chancellor of the Exchequer has publicly said that a modern Glass Steagall is not on the cards and Volcker’s views are finding little traction in Washington (according to the New York Times).

My own view is that there is a lack of political will to do anything about this, beyond words. I’m not sure that these banks are now ‘too big to fail’. It’s more like they are so well connected, politically and economically that they are now ‘too big to do anything about.”

A very quick PR point. Banker confidence was on full display when the official spokesperson for the British Bankers Association was asked to comment on the bonuses. Apparently, we all need to “move on”.

The Pendulum Swings

I would like to write a blog about something other than News International or bankers but the opportunities for comment just keep coming thick and fast.

Yesterday’s pre-emptive strike letter, in advance of the G20 summit, from Europe’s Big Three (Brown, Sarkozy and Merkel) which threatens curbs on banker pay and bonuses will have sent a chill through the City of London. Lord Adair Turner, Chairman of the Financial Services Authority and a former banker made similar noises last week but was roundly derided as being out of touch and barking mad, but it now appears that our political leaders are thinking along much the same lines.

Turner suggested that much of our investment bank activities, such as credit derivatives trading, was “socially useless” and “trading for trading’s sake” in order to gain commission, before proposing a version of the Tobin tax to try and curb excess profits and, in turn, bonuses. The City was quick to respond with its usual defences. “If you do this all the equity capital markets activity, derivatives trading and arbitrage will flee to Frankfurt” followed by the inevitable “we make an enormous contribution to the UK economy.”

They clearly had not read Turner’s remarks properly because what he actually proposed was international not solely UK regulation and that is exactly what the Big Three are proposing to the rest of the G20. How will the banker’s respond? Well, if they go ahead with another round of inflated bonuses in a few month’s time you suspect that they will be just making it worse for themselves. On Channel 4 News last night Christine Lagarde (right)the French Finance Minister, was asked by Jon Snow if she thought the bankers would still take the money. “They better hadn’t” was her reply. It’s been a long time since our bankers were talked to like that.

The pendulum has now decisively swung back towards regulation and away from the laissez faire Anglo Saxon approach pioneered by Thatcher, Reagan, Blair and Clinton. The key issue now is whether the Obama Administration will get on board. There will certainly be intense pressure from the likes of Goldman Sachs to repudiate what will be billed as ‘European’ and ‘French inspired’ regulations. The next few weeks should be fascinating.