Lincoln Drill Hall

Lincoln Drill Hall
Lincoln Drill Hall

Thursday, 8 October 2009

The deficit

In a much earlier blog I observed that what had happened was that public borrowing, which had previously been used to power the economy through recessions, had been replaced by private borrowing on an unprecedented scale. The dramatic reduction in the availability of credit has through the consequent recession caused a very large number of borrowers to default. The anticipation of this stripped banks' balance sheets of value sending them cap in hand to government who have poured in money like water. Government now wrings its hands at the deficit it is running and its own need for borrowing.
I can't help feeling that an economy which places sensible controls of private borrowing but which is realistic about the need for cyclical public borrowing is likely to end up healthier than the free for all which has got us into this very much larger mess.

Wednesday, 24 June 2009


I am convinced that the single factor most responsible for the banking crisis was loose regulation. Gordon Brown almost admitted it in his interview with the Guardian; his excuse was the the rest of the world was de-regulating and he didn't want London to miss out.

Lord Turner, in his evidence to the Treasury Select Committee, voiced concern that the mood for regulation may be running out of steam. The suggestion of re-introducing the separation of retail banking from its investment counterpart has fallen on deaf ears. Turner is arguing for tougher capital requirements based on size and, presumably risk.

My question is: will regulation based on capital requirements work, when the experience is of massive values evaporating overnight?

Tuesday, 16 June 2009

Bad old ways?

The Observer (14 June) offered in its leader a stark warning to the city and those concrned with its governance that it must not be allowed to slip back into its bad old ways. I am probably not the only person who would wish to take issue with the word old; the bad ways were new, the bad ways were post big bang, the bad ways emerged because light touch regulation allowed them to. A most telling comment was that the old (I would say new) way of doing things made some people very rich.'

Vested interests are thus very strong and very powerful. In exactly the same way as it was not in the interests of the city to say the emperor had no clothes, neither is it in their interests to question the substance of what might look like the green shoots of recovery. Anything which shows that the city is working is good news.

The tragedy is that just when strong government is need, we are having to live with a lame duck. It is sadder still that when a change in government does come, the forces which demand a strong performance from the city will both be vocal and may well be basking in a recovery of their own making.

Wednesday, 20 May 2009

So, it was bonuses

I always remember a client years go who paid commission on the orders a salesman took. This was subsequently changed to giving commission on those orders which became actual sales delivered and paid in full.

The argument being made is that bonuses were paid when traders made money but no account was taken of risk. Well, the story would seem to be that when the traders made money, so did the banks and so did their shareholders. Without taking a risk none of it would have happened. So, does that make a risk OK?

Well, we can think of the RBS shareholders who received growing dividends and the value of whose shares rose dramatically for a long time. This was the upside of risk. The downside was when everything collapsed.

I'm not sure I understand what is proposed for the future. No risk, no bonus, dull dividends?

Sunday, 3 May 2009

Carol Ann Duffy

In his Holy Week talks in Canterbury Cathedral Rowan Williams quoted from Carol Ann Duffy's sonnet Prayer and praised the way she uses poems as places where new combinations of words and ideas spring together. Saturday's Guardian leader quoted the first four lines:

'Some days, although we cannot pray, a prayer
utters itself. So, a woman will lift
her head from the sieve of her hands and stare
at minims sung by a tree, a sudden gift.'

The leader goes on to quote Robert Kennedy's complaint that GDP failed to measure 'the health of our children, the joy of their play, the strength of our marriages, the intelligence of our public debate - and the beauty of our poetry...neither our wit nor our courage, neither our wisdom not our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.'

This is a timely reminder to put all of this finance stuff into some sort of perspective

Sunday, 26 April 2009

Budget Deficit

The budget speech and articles in the Guardian which followed spoke of a mammoth deficit. This is not small beer by any stretch of the imagination.

If it came about because banks lent at high interest rates to people with no realistic means of repaying, we stand back and wonder. If these mortgages, sub-prime mortgages, were cleverly packaged with better fare and traded on, we sit back and wonder. If banks around the world invested in these bonds because they believed what it said on the tin, we sit back and wonder. If politicians now come along and blame the bankers, we should not sit back but ask how come the banks could lend as they did, sell the bonds they did and invest in the junk they did. Sure, they could have said no. But when everyone else was on the bank(d)wagon, it is brave man who stands on the side.

Surely the fault lies with those who allowed the creation of a banking world where all this could happen. Who deregulated? Brown was not alone.

Thursday, 2 April 2009

G 20

The more you look at this whole business, the more obscene, but also the more complex it becomes. The headlines about bank bonuses talk to the protesters, but also to the thousands who have lost their jobs simply because borrowing, ordinary business borrowing, became so difficult; they talk also to the thousands more who lost their homes. Massive bonuses were wrong; but who was wrong?

As my character Ed puts it, in a University town which is the most popular pub? The one which doesn't chuck you out at closing time, of course; the one which has the loosest rule book. These tend to be the places where trouble is to be found. So too with banking, loosen the rule book and the bastards will push beyond even their wildest imaginings. The recent book City Boy would seem to confirm this in spades. It is Lord of the Flies, isn't it?

All this would be bad, but not horrific, were it not for two things. The impact is global and massive. It came about as a result of the policy of western governments to let markets govern themselves.

Surely in a civilised society we all need boundaries?

Monday, 23 March 2009

The Crunch by Alex Brummer

The interested reader of the financial pages will almost certainly have some idea of the causes of the woes that have hit the world economy. We all knew that borrowing had hit crazy levels; we all knew that house prices were defying gravity.

Words like toxic debt and sub-prime have been the stuff of bar room chat, but Alex Brummer has drawn the strands together and produced a coherent narrative. It is deeply depressing. It makes the calmest of men don the witch hunt uniform.

What is probably the worst of all, though, is that the cream of a generation, the very best brains, have been engaged in what is really the most enormous fraud. It is breathtaking stuff.

Wednesday, 4 March 2009

Tax Avoidance

The dust is settling a little after the Guardian's crusade against the evil tax avoiders. There are to me two points which need to be made.

In the UK, Public companies owe a duty to their shareholders. In exercising this duty it is generally considered reasonable that they should minimise costs and maximise revenue. If taxation, which is a cost, is not to be minimised then they would be failing in their duty. So the answer is not to wring hands, but to open a debate over the duties of directors of public companies. If, however, taxation is a distribution of profits in the same way as dividend then the tax needs to be maximised. But what then about employee remuneration; is it a cost or a distribution? What about local taxes? This subject needs proper debate.

The second point is banal, tax avoidance is as old as the hills. I spent most of my career advising clients on how legally to minimise their tax bill. But the question is the same; is tax a cost or a distribution?

Wednesday, 11 February 2009

I'm going on a witch hunt

Last night I sat and watched as the select committee questioned the four bankers who are being pilloried but also skapegoated for the banking collapse. This was poor drama, far too well rehearsed and so wide of the mark it was embarrassing.
I mean how convenient for RBS to have ABN to hand? How convenient for HBOS to have questionable lending decisions? How frankly undignified to have four unquestionably intelligent men in the dock.
Does anyone seriously believe it was their fault? As always on such occasions the metaphor is to be found in sport: if the rules permit it you do it, to do otherwise will guarantee defeat and defeat would serve no one admittedly least of all those set to gain most through their bonuses. The point though is surely that deregulation had made possible the fantasies of financial engineering that filled the balance sheets of financial institutions. So it was obvious that the brightest and best would be recruited to invent ever more fantastic devices and the banks would milk them dry of profit. Was I the only one to raise a slight eyebrow at the RBS results following the NatWest acquisition. I rather doubt that results like that didn't come just from cost savings.
The point though remains that the banks did what was only natural, given the environment in which they were allowed to operate.

Wednesday, 21 January 2009

Dot com - remember that?

Amid the really astonishing events surrounding the banks comes a thread of memory of quite why it was the FTSE last reached the 6,000's. The context is relevant and might well age me. Dear old Phillips and Drew, a massively respected name, stuck to the principle of value investment; you know, actually looking at what a company does and assessing the quality of its earnings. They fell in the league talbes whilst the flash boys all went for momentum investment; my favourite image of the round tray filled with water which sloshes to the side to which the trays is tipping at any one time; and the more it sloshes the more it tips've guessed.
Well, dot com was quintessential momentum, money piled in after money and values (what an odd use of a word) rose and rose. This is so like the other metaphor of the roundabout which spins for ever faster until some one blows the whistle and, another metaphor, the king is seen to have no clothes.
What strikes immediately as odd is how the banking sector seems to have taken the mantle of the dot coms. It is odd until we look more closely at what banking had become. Profits it seems came from clever financial instruments which defied gravity. So that they fell should be no surprise. The problem is that they were in the same banks which have serious job to do in any economy.

Monday, 19 January 2009


The Graduation Ceremony at Exeter on Saturday brought it home. It is no longer numbers; it is names and faces and on Saturday they were mostly post graduate degrees.
I return to a piece I wrote with tongue firmly in cheek, as indeed we all did, as we argued that higher education should be only for the rich. Outrageous and wrong, but...
But, is it fair to take people through three years as undergraduates and then one doing a masters or solicitors exams or some such, with no real possibility of work? Or do we play a longer game and accept that first time round the right job won't come, but that there are other opportunities which will add something whilst we wait? It is the prospect of so many people educated to a level which the jobs market simply does not require. Or, again, is government thinking of a longer game? Or, as I have argued before, is it a device to massage the unemployment figures?
An honest and informed assessment would go down well.

Friday, 9 January 2009

Will this recession pass?

Simon Jenkins in the Guardian of 9 January takes leaf out of the historian's file to assure us that all will be well.

As usual with Jenkins, there are buckets full of common sense slopping around everywhere in his argument. I'm with him in his jibes. I have to say the Bishops got my goat particularly with their hefty shutting of the borrowing the door so long after it would have done any good.

My question though is whether we are seeing something that has a substantial structural element to it. A friend told me that he had been away from Falmouth for the Christmas Holiday and returned to find third of the shops shut. This is an exaggeration, but the high street of smaller towns are beginning to look like mouths after a visit to the dentist. Retail is changing. My own village is awash with courier companies delivering on line purchases. It has been apparent for ages that the high street is made up largely of financial services, opticians, designer clothes and coffee shops. Soon surely it wil just be spectacles and cups of coffee.

But what does or should this mean for the economy? As pointed out elsewhere in Jenkins's article one third of workers are relatively untouched by recession, being on the public payroll; another cohort, those already taking their pensions, are in the clear. Those at risk are those for whom economic growth is a vital link in the chain. Many jobs go on from year to year simply because they need to be done; these surely are pretty safe. It is the jobs that come from someone taking risk to gain advantage that go in recession but even then not all of these.

But in the longer term, are these jobs less likely to appear in the future? I think not. the entrepreneurial instinct is firmly in place and will be bursting through any minute now.
The landscape though will change and this we must accept. Perhaps though the old labourites were right. An economy cannot exist happily on financial service and retail alone. some how, somewhere, someone needs still to make something.