Mandelson, Friend or Foe?
The “Cult of Mandy” is seeping all before it. But is the business Secretary really batting for British companies?
Even by the standards of Bob Monkhouse Syndrome by Proxy, whereby the most reviled national characters inevitably come into vogue if they hang around long enough, the transformation of Peter Mandelson from rank underdog to national superman is remarkable.
Those who not long ago would rail about him in the least elegant of language now nod sagely and say that he is the only minister they trust on the economy, in much the same way they talk of Kenneth Clarke and Vince Cable. The man is a force of nature.
Having swept back from hobnobbing with the Rothschilds in Corfu to take charge of the country, the Business Secretary has certainly been out to woo the City. Reportedly dismayed by what he regards as Alistair Darling’s defeatist approach to European legislation that could “destroy the multibillion pound private equity and hedge fund industry”, he has promised to redouble efforts to fight off Brussels.
Mandelson’s championing of financiers is hardly surprising given his love of any well-connected circle where money, glamour and power mix. He is deemed one of the few senior Labour people with who the City identifies. Indeed, the eclectic group comprising “Peter’s Friends” includes a host of big business names: including former BP chief Lord Browne, entrepreneur Jamie Palumbo, and Wall Street Journal boss, Les Hinton. The powerful family behind the Indian Tata Group, owners of Jaguar Land Rover, are also close friends.
Much good it did them. How can Mandelson style himself a friend of business when he was prepared to jeopardise thousands of jobs at Jaguar Land Rover by refusing to all the Government to stand as guarantor to enable the company to secure funding. The episode reveals Mandelson’s feet of clay. He talks of a new industrial policy to help rebuild our economy but has produced nothing substantive to back it.
And it will take a genius even more steeped in the dark arts than Mandelson to persuade a sceptical public that the Government’s handling of the MD Rover affair was anything less than an unmitigated disaster. Motor industry leaders, it is true, are disillusioned, but Mandelson was right to play hard ball with Jaguar – the Government cannot bail out every private company that gets into difficulties.
Meanwhile, his reputation for delivering is growing in other sectors: tourism bosses are desperate to ditch the useless Department for Culture, Media and Sport to move to his empire. For better or worse, business leaders can’t get enough of Lord M.
Commodities Conspiracy?
Were speculators behind the wild swings in the oil marker, or have regulators embarked on a meaningless witchhunt?
Citigroup energy trader Andrew J. Hall is renowned for his art collection, his poor taste in garden sculptures and a penchant for practising callisthenics with a personal ballet tutor. Lately, however, this enigmatic British-born trader who runs Citi’s US Phibro subsidiary – has been embroiled in a public row over the payment of a $100m bonus. That, in turn, has led to questions about how traders like Hall make their cash by betting big on the movement of prices.
The conspiracy theories are flying. Could the bubble in commodity and oil prices have been caused by a conspiracy of traders, speculators and investment banks? And, with prices rising strongly again, are we in for a repeat performance?
We’ve always been sceptical of the market manipulation idea – mainly because the sheer size of the world oil market means that it’s impossible to ‘corner’. Yet some of Phibro’s activities give pause for thought. As The New York Times reveals, the company often wagers that the price of oil will rise so quickly that it can make money by storing oil in chartered supertankers until the price goes up.
In theory, we might say this doesn’t matter: a speculator buying up oil when prices are cheap and then selling it when there’s a shortage can actually even out prices. But this isn’t an economics workshop. Citi’s $100 Million Man bought oil and kept it off the market. When you consider the threat of regional bottle necks or – worse – the possibility that total supply could fail because speculators are tying up tankers, its doesn’t look good.
Regulators seem to agree. The US Commodity Futures Trading Commission (CFTC) will shortly release a report showing speculators played a significant roles in driving wild swings in oil prices - a move bound to intensify scrutiny on investors. Other watchdogs are falling into line. In Britain, the FSA has always downplayed the role of speculators. But – following warnings from Gordon Brown and Nicolas Sarkozy on the need to curb dangerously volatile oil prices – it has met with oil brokers, banks and hedge funds to review regulation.
More transparency might help, but a witchhunt for speculators won’t do much to alleviate price volatility, which is mainly down to the availability, of easy money. Plenty of factors affect the oil price, concluded mason, not least supply and demand; and most studies show that speculation causes only small swings. Yet it is worth discovering how this high-risk, high gains trading game is played – and the role it had in creating such a spectacular price bubble.
Double Dip Recession?
The Office for National Statistics says the bad news is far from over, yet the markets are buoyant. Who’s right?
Almost a year has passed since the Chancellor was accused of talking the economy down by suggesting we were living through the worst crisis for 60 years. Now we assuredly know he was right. The latest disastrous quarterly figures from the Office for National Statistics (ONS) show the economy shrank 0.8% in the second quarter, a stat so much worse than the consensus forecast of 0.3% that City analysts were reaching into their lockers of hyperbole to describe their surprise.
Economic output has now shrunk by 5.7% in 12 months – an annual collapse rivalling the worst days of the Great Depression. And yet the London stock market continues to sail serenely upwards, nothing up a remarkable rally of 11 consecutive days of gains.
If the economic news is so gloomy, why are markets so cheerful? One reason might be that those quarterly figures feel wrong – and may well be revised upwards as more data comes in. Monthly GDP estimates from the National Institute, for instance, suggest that the economy reaches a turning point in the second quarter, and definitely rose in June.
The figures are certainly contradictory. By the ONS’s own estimate, Britain’s high streets are in a state of rude health with sales volumes rising significantly in June – hardly the sign of an economy mired in a slump. But, at the very least, this latest data shows that talk of imminent recovery was premature. At a plausible rate of recovery, it will take until 2012 before the economy gets back to where it was when recession began in the spring of last year. The worst may be over but… there’s a long road ahead.
Fears of a double-dip recession are probably overdone. The consensus view is that the recession, both in Britain and globally, should be over by the start of 2010. Bu the recovery will be neither straightforward nor swift, meaning markets are set to continue their white-knuckle ride of ups and downs throughout this year and… well into the next.
That is certainly the conventional wisdom after a fall in GDP this steep, but history shows that very few recessions last longer than two years. And most recoveries, once they start are strong… The pattern of duration is virtually identical, regardless of the size of the initial shock.
When a recession reaches a certain size or duration, recovery is harder and more sluggish. But it takes an awful lot to depress Keynes’s animal spirits for more than a couple of years. Markets are probably right in their upbeat outlook: capitalism seems a pretty resilient beast.
Walker’s 39 Steps
Is Sir David Walker’s review of banking governance tough enough to head off another disaster like RBS?
In John Buchan’s The Thirty Nine Steps, the hero, Richard Hannay, attempts to piece together a mysterious assassination plot that leads him to seek refuge in Scotland. Given recent events there, it might be unwise to head north of the border if you’re a banker. But now Sir David Walker – a stalwart of Morgan Stanley – has proposed his own 39 steps to better bank governance in the hope of averting future disasters on the scale of the collapse of Royal Bank of Scotland. Has he pulled it off?
Hopes weren’t high. Walker was dismissed by many as a City old boy who would never turn on his own. But what he has to say is both sensible and useful. He proposes beefing up boards to counter over-powerful executives by putting non-executives in charge of new shareholders with pressure from regulators id they fail to exercise proper stewardship.
Pragmatic, certainly, but the most striking thing about this report is that so banal a set of recommendations were necessary. It’s all great in principle, but there are big cultural barriers to practical application. The risk function in most banks is so low status, for example, that it is hard to imagine even the best practitioners stomping around in hobnail boots when the chief executive comes up with a whizzy M&A transaction. You can hear the next lot in front of the Treasury Select Committee already. “Well, our head of risk said, go right ahead…”
Given the British public’s one-point agenda to punish the banksters, it’s not surprising that Walker’s most controversial proposals centre on bonuses. Some senior bankers claim the move to defer half the pot for three, or even five years, could prove as damaging to London’s competitiveness as the Sarbanes-Oxley reforms were to Wall Street.
And Walker was surely playing to the public gallery by calling for compulsory disclosure of the biggest packages which has nothing to do with improving corporate governance or preventing future crisis. In fact, given the failure of past voluntary governance initiates, there’s every reason to be cynical that the new reforms will make a lasting difference. The history of remuneration reform is littered with the corpses of do-gooders… steamrollered by market forces or bypassed by cunning advisors.
At least Sir David tried. But the real onus is on governments to push for higher standards internationally – and then enforce them at home.
Goldman’s Bonus Bonanza
After a record quarter, the controversial Wall Street bank is on course to pay out mega-bucks. Will the public stand it?
Even on Wall Street, the land of six-and-seven-figure incomes, jaws dropped at the news. During one of the worst six-month periods in the history of finance, Goldman Sachs squirreled away $11.4bn to pay its staff and has just posted the richest quarterly profit in history.
At that rate, bank staff could earn an average $770,000 this year, with packages for senior executives and bankers running well in to the high millions. It would be easy to forget there’s a financial crisis still going on, but Goldman should expect renewed political and public anger. It might insist it has to pay to keep the brightest and best, but it would be foolhardy to believe these arguments will placate a restive public.
Slurp – the great vampire squid strikes again!. It takes some sucking power to extract $3.4bn of quarterly net income within a year of a full-throated banking crisis. So how did they do it? The vast bulk of the cash came from plain vanilla stuff, like helping companies raise money from share issues, and Goldman has undoubtedly profited from the fact that so many competitors have either died or retrenched.
But are these huge profits a one-time wonder? Beneath Goldman’s gleaming mantle is cephalopod swimming with one powerful arm. The huge spring boom in client trading was no more business as usual than the events of last autumn; and Goldman’s other arms remain weak. And with $171bn in excess liquidity now in its coffers, the government could yet opt to cut this sucker down to size.
Goldman attracts admiration and loathing in equal measure: no bank seems better capable at looking after its own interests. But if more capital is required to make the banking system safer, returns are bound to fall. The goose that laid the Goldman egg could yet be killed by regulation, but the behaviour of survivors like Goldman suggests the opposite. They are hiring staff on salaries and bonus packages that make sense only if the days of mega-profits have returned permanently.
The question for governments is whether they are prepared to tolerate this state of affairs indefinitely. It’s time to ask whether exceptional profits deserve exceptional rates of taxation. If we, the taxpayers, are obliged to underwrite the banking system, it is surely right to extract a fair price for that guarantee. That’s how pricing power works – as Goldman would presumably understand.
A Useful White Paper?
Have ministers got the prescription right to protect us from future banking and economic crises?
After a difficult gestation, the Government’s blueprint for regulating the City finally emerged blinking into the cold light of day. Observers anticipated few surprises in the White Paper, much of which is based on the relatively uncontroversial proposal put forward by Lord Turner, chairman of the FSA, in March.
As expected, the Chancellor made clear that he did not favour splitting up big and complex global banks, dubbing such proposals “simplistic”. Instead, they will be forced to hold more capital to absorb losses and to have greater liquid assets to guard against a run on deposits. The riskier a bank’s operations are deemed to be, the more capital they will have to hold. There will also be a new “backstop” power to prevent them borrowing too much.
The initial reaction from the City was broadly positive. As well it might be. Investment banks, including Barclays Capital, are already inventing schemes to reduce the capital cost of risky assets on balance sheets to a practice BarCap calls smart securitisation. Some will see this as a sign that financial boffins have already found a way to run rings around rules on capital designed to make banks safer.
Certainly signs of life in the securitisations market should serve as a warning to regulators: the plan to impose higher capital thresholds will only succeed if the riskiness of the derivative products can be accurately monitored. What does the White Paper say on that? Not much. Little detail was given on how macro-prudential oversight is to work, or who will be in charge. As such, the Chancellor’s proposals are a wholly inadequate response to the banking crisis.
The bottom line is that Alistair Darling has plumped for fudge. Perhaps the biggest dollop is the new Council for Financial Stability, which is actually just a rechristened version of the old tripartite system, comprising the Treasury, the FSA and the Bank of England. The old trio failed miserably, largely because they couldn’t communicate effectively and things fell through the cracks.
In future, both the bank and the FSA will have slightly broader powers and the Council - chaired by the Chancellor - will be more transparent. But these are mere tweaks. The Chancellor has also deferred the important questions of exactly how counter-cyclical measures, such as jacking up capital ratios, will be applied.
Getting the details right is clearly important, but so is getting things done. There is some good stuff in this White Paper, but unless momentum is maintained, the Government could end up wasting a good crisis.