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Archives for January 2011

Betting the bonus to scoop the jackpot

Robert Peston | 17:45 UK time, Monday, 31 January 2011


How reconciled is the City, its bankers and traders, to the new world demanded by regulators and politicians - a world in which bonuses are largely paid in shares rather than cash, where these rewards are saved not immediately spent, and where leverage (or indebtedness relative to net worth) is kept to a minimum?

Not very, if an advert that I have been sent captures anything like the mood in the corner offices and trading floors of Canary Wharf and Square Mile.

The ad is by Saxo Bank, the self-proclaimed "specialist in trading and investment", and in big bold letters the ad asks "PAID IN SHARES THIS MONTH?"

Apparently if that's the currency of your remuneration you can "deposit your stock directly into your Saxo Account and use up to 75% of its value for margin trading".

Or to put it another way, you can use three-quarters of the value of any pay or bonuses you have received in shares as security for any bets you wish to place in securities markets.

Now that's what I call leveraging up. You get your bonus, and then you immediately pledge it as your guarantee against losses as you try to multiply the value of that bonus through speculation.

And in case you think I overstate the risky nature of all this, Saxo helpfully adds small print to the effect that "complex derivative products traded on margin carry a high degree of risk and are not suitable for every investor" and "you can lose more than your initial deposit".

Or to put it another way, regulators may impose all the formal conditions they like on how bankers are paid (shares instead of cash, rewards deferred and subject to clawback rather than paid upfront, stock that can't be sold for years).

But while there remains a short-term trading culture in the City, all those restrictions may serve to do is create powerful incentives to find imaginative way around the new rules - so that share-based bonuses, underwritten by taxpayers, can be turned into fat wodges of lovely cash.

Davos: Where the battle for financial reform was lost?

Robert Peston | 10:49 UK time, Monday, 31 January 2011


The eminences at Davos aren't always that brilliant at spotting the next crisis, even when it's under their noses. I was at a meeting on Wednesday at which an intelligence specialist assured us all that Egypt would not turn into an inferno of protest, only hours before the portals of chaos opened.

Davos at night


That said, the response to the Egyptian crisis from Davos person - world leaders from government, business and civil society - was fast and coherent: President Mubarak was left in little doubt that he is an isolated figure, who would be spurned by the global elite unless he listens to the voice of his people.

But what about when crises abate, and we're left with the hard choices about how to make the world safe again for a generation? As you'll have guessed, in this instance I am talking about two of my obsessions: how to mend the banking and financial systems; and how to fix the eurozone.

Here, some would argue, Davos shows all the flaws in the world's system of governance for issues of significance for the entire world. Because as the great crash of 2008 has become a hateful memory rather than hard painful reality, and as there are signs of strengthening recovery in the US - still the world's biggest and most important economy - the voice of reform is increasingly drowned out by the voice of those claiming that everything is broadly okay again and time will be the greatest healer.

Two contrasting synopses of where we are: "The boom is back" said one of the world's more powerful bank bosses; "We're beginning to lose the battle for change", said an influential regulator.

Those two statements are connected: the more that some kind of apparent "normality" returns to economic life, the more that politicians fear a return to recession caused by the short-term effects of further measures to strengthen banks (for example).

It's this tension between short term prosperity and long term stability which could bring the reform train to a grinding permanent halt.

In that context, two of my conversations with decision-makers stand out.

First, a senior member of the French government told me that President Sarkozy would oppose any capital surcharge on Globally Significant Financial Institutions, or the mega banks.

The French reject the need to require the largest banks to hold more capital as a protection against potential losses than other banks - even though many central bankers and regulators now accept that the enormous interconnected balance sheets of the mega banks are the San Andreas fault of the financial system and global economy.

Why does the French government oppose any requirement on the biggest banks to hold more capital than the new Basel minimum? Well it's because giant eurozone banks are warning that if they have to increase the ratio of their capital to their loans and investments further than they're already being required to do, the likelihood is that they'll do this by restricting how much they lend - thus snuffing out anaemic eurozone recovery.

And an alternative for eurozone governments of their taxpayers injecting capital into eurozone banks to strengthen them is profoundly unappealing to most governments - especially at a time when some of these governments are struggling to fund and reduce fiscal deficits. That said, if eurozone banks were better capitalised, arguably investors would be less reluctant to finance not only those banks but the states standing behind the banks (though few eurozone ministers quite yet see how intimately connected is the perceived weakness of eurozone banks and the eurozone itself).

So why does opposition to a mega-bank capital surcharge from the government of a medium size economy like France actually matter? Well it's because agreement on a capital surcharge can only be reached if all the G20 countries sign up for it. And that looks highly unlikely, especially with France as current chair of the G20, able to control the agenda and priorities for the world's most powerful decision-making collective.

Now the second conversation that resonated most for me was with the head of one of these globally significant financial institutions. He was musing on the possible implications of any kind of attempt to forcibly separate investment banking from retail banking, either by the explicit break-up of universal banks or a requirement that universal banks (like his) put all their investment banking operations into discrete, separately capitalised subsidiaries.

What he said was that it was all very well for the UK's Independent Banking Commission to muse on the theoretical benefits of such separation of retail and investment banking, but the Commission was not on planet Earth: the interconnection of retail and investment banking is now so intense, thorough and complex that it would be impossible to unscramble.

There are two aspects to this. First, that it would be pointless for the British government to unilaterally mandate such separation, because a bank like his would simply transfer all its international investment banking out of the City of London to operations elsewhere in the world.

Second, and more importantly, such separation would be a legal, logistical and economic nightmare.

How so?

Well, hundreds of billions of dollars have been lent to mega banks like his on terms and at interest rates that were set on the basis that the loans were to the bank as a whole, not to just the investment banking part or the retail banking part.

So if the bank were split up, all of those borrowing agreements would have to be renegotiated - an almost impossible task, which would take years and enrich only the legal profession.

And, what's worse, the uncertainties created by the renegotiation could well lead to a funding freeze for all universal banks subject to the new stipulation that retail and investment banking should be separated. Which at best would prevent these banks from lending and at worst would bankrupt them.

So let's think about this for a moment. How likely is it that the Chancellor George Osborne would wish to call the bluff of Barclays, HSBC and RBS by ordering that they put an unimpeachable legal wall between their investment banks and retail banks, against their advice that to do so would risk destroying them and the British economy?

The chancellor could decide that the appropriate response to any recommendation from the Banking Commission for separation of retail and investment banking would be to argue for this in the G20 and at the EU Economic and Financial Affairs Council. But given that unease with the structure of universal banks appears to be a largely British pre-occupation, that would probably be to consign this kind of organisational and formal change in banking to the dustbin of history.

Perhaps I am mistaken. But I made my meandering escape from Davos largely persuaded that those arguing for a radical overhaul of the global banking system may already have lost the war.

The contrasting investment messages of UK and Germany

Robert Peston | 09:31 UK time, Friday, 28 January 2011


Davos: There is about $3 trillion of investment funds represented here in Davos by assorted heads of sovereign wealth funds, insurance companies, hedge funds and so on.

Shadows of participants of the World Economic Forum

Which is why the world leaders who throng this place become super-salesman for their countries.

So for example the President of the Bundesbank and member of the board of the European Central Bank, Axel Weber, looked those investors in the eye yesterday - in one of Davos's more interesting private meetings - and more-or-less dared them to short-sell the euro.

I am told by one of the investors that it was an impressive display of German confidence.

"He said that Germany had deployed the equivalent of its entire GDP on making a success of its national reunification" said the investor. "And he said we should assume Germany will do the same to save and strengthen the eurozone".

I am told that those who left the meeting were a bit less sure than they might have been that betting against the euro was a sure thing.

I should however point out that if those moneymen had - like me - spent a bit of time talking to individual finance ministers of EU nations and members if the European Commission, any belief they may have had that the eurozone's woes are behind it would have been shattered.

Because what emerged from my conversations was a profound unease with the way that Germany is bossing the process of deciding the size of the eurozone rescue fund and - more importantly - the conditions to be imposed on potential and actual beneficiaries of the rescue finance.

What's worse for investors, there still seems precious little recognition among Europe's political elite that the weakness of the eurozone's banks is arguably the more important cause of the eurozone's fragility than conventional government deficits.

On that analysis, Greece - whose crisis was a consequence of state profligacy and disastrously poor public accounting - would be the exception that proves the rule.

By contrast, Ireland and Spain were models of conventional fiscal rectitude in the boom years.

The point, as you know, is that Ireland went kaput because its government could not afford to recapitalise its bloated, lossmaking banks.

And Spain is viewed by investors as a possible accident waiting to happen because of its failure - in investors' view - to properly own up to how much capital needs to be injected into its savings banks.

As for Portugal, its difficulties are seen as a kind of "lite" hybrid of Greece and Spain - part intractable deficit, part banks that need capital.

But I digress from the simple uninteresting point that world leaders who come here tend to claim that their economies are doing brilliantly - or perhaps not as badly as some may have thought.

Those European finance ministers I've met may have incompatible prescriptions for bolstering the eurozone. They may be myopic about the weakness of the banks. But they refuse to countenance the notion - which is a commonplace among the bankers and investors - that the eurozone's woes may worsen.

As for the leaders of other nations, from Asia to South America, they're like market-stall traders offering bargain Rolexes: you would need locking up if you don't build your car plant or research centre on their soil, they say.

There is however one world leader whose message might be seen as refreshingly honest or chillingly frank. This is what David Cameron is saying here:

"Average government debt in the EU is almost 80% of GDP. Some countries are again borrowing five, six or seven per cent of GDP again this year. The figure for the UK is more than 10%. This is clearly unsustainable and action cannot be put off...
"Remember what we started with in the UK: an economy built on the worst deficit, the most leveraged banks, the most indebted households, the biggest housing boom and unsustainable levels of public spending and immigration. And now think of where we need to go: an economy based not on consumption and debt but on savings and investment; not on government spending but on entrepreneurial dynamism; not on one industry in one corner of the country but on all our businesses in all our regions, with a new emphasis on manufacturing, exports and trade."

As Mr Cameron says, correcting the structural flaws in the British economy won't be easy. And it's obvious why he is accentuating the negative: he needs to argue to a domestic audience that there's no alternative to public-sector austerity to remedy the deficit, and that the siren claims of the shadow chancellor, Ed Balls - that the cuts are excessive - are a straight route to the rocks of economic crisis.

But here's the thing. At a time when the UK economy has contracted again, the Davos money men (not my sexism, but the industry's) might not understand the politics of Mr Cameron's dour diagnosis of Britain's ills.

They might simply notice that the UK's structural weaknesses aren't trivial - and might feel there are less risky places in the world to deploy their funds. Some would see that as unfortunate, to put it mildly.

Update 10:22: This seemed to me to be the most arresting part of David Cameron's speech this morning at Davos:

"If you’re looking to set up a headquarters abroad, are you going to invest where your premises can be taken away from you? Where contracts are routinely dishonoured? Where there’s the threat of political upheaval?
"Or are you going to invest where there are property rights, the rule of law, democratic accountability?"

The British prime minister was making the case to global investors for placing their capital in Europe's liberal democracies - and he warned them against betting too much on what he called the "authoritarian capitalism" of China, Russia and other fast growing emerging economies.

Some will see this as a provocative statement at an event thronged with the so-called authoritarian capitalists.

But this was the prime minister doing what I said earlier all world leaders do here - which is try to flog their nations' or regions' comparative advantage to investors.

Money and health at Davos

Robert Peston | 08:35 UK time, Thursday, 27 January 2011


Davos: The World Economic Forum is all about contrasts.

This year's entrance is a hideous white plastic inflatable intestine.

Peter Gabriel


But the sun on the glistening snow-capped Alps is sublime.

I just collided with one of my teenage heroes, the original leader of Genesis, Peter Gabriel.

And later today I will moderate a session on the future of the eurozone where speakers include ministers from Greece and Germany and a senior member of the European Commission.

Yesterday I bumped into a senior executive of the US healthcare insurer and provider, Humana, who told me his business was pulling out of the UK - because the company was fed up with "all the changes taking place in the National Health Service" (in the words of this executive).

Humana felt comfortable working with Primary Care Trusts. But doesn't see how it can make a return out of the soon-to-be-implemented system of GP commissioning.

Which, some would say, raises a question for the British government about how much help it will receive from the private sector in implementing the new commissioning system.

From domestic health to global money.

I had a rivetting chat with the chairman of a mega bank. He suggested that central bankers and regulators on the Financial Stability Board may achieve the opposite of what they intend with their plan to impose a capital surcharge on so-called Globally Significant Financial Institutions (giant banks like Citigroup, Deutsche Bank, Bank of America, Barclays, HSBC, RBS, UBS et al).

This battle-weary banker believes that if the mega banks are singled out in this way with a requirement that they must hold more capital than other banks as a protection against losses - and if they are also regulated more intensively than smaller banks, which is already happening - then investors will see the mega banks as the safest banks in the world.

That would lead to capital and liquidity flowing out of smaller banks and into the mega banks over the longer term. Which means that the mega banks would become even bigger, relative to smaller banks and to the financial resources available to governments for bailing out banks in a crisis.

In other words, trying to make the mega banks safe with an additional capital tariff could have the perverse effect of making these banks bigger and more powerful.

Since almost no amount of capital can ever completely guarantee the safety of a bank, a mega bank capital surcharge could exacerbate the risk that these banks become so big that they are too big for any country to save, should they run into difficulties.

And of course there would be implications for the intensity of competition between banks and the political clout of these beasts - implications which many would describe as unhealthy.

To put it another way, if it is thought that size in banking brings incremental dangers, structural reforms - cutting them down to size, for example - may be necessary, whatever is ultimately decided on additional capital requirements.

Update 09:27: There is a bit of a divide opening here in Davos between the bankers and the rest (leaders of non-financial businesses, academics and so on).

The bankers are mostly saying that the banking system has been fixed, that they now understand all about risk (having apparently known less than an infant about risk before August 2007) and that regulators are meddling twerps who will ruin the global recovery.


The director of the LSE, Sir Howard Davies, in his FT Davos blog quotes one industrialist as saying that bankers are apparently not on planet earth.

That is a point of view that others are sharing with me this morning. "Do they have no idea how the rest of the world sees them?" is how one well-known business leader put it to me.

He was responding to an outburst by Jamie Dimon, chairman of JP Morgan, in a session this morning, in which Mr Dimon complained that his bank wasn't given enough credit for the good things it did and does.

Which may well be so. But becoming cross won't help.

As I pointed out earlier, the bankers have some decent points to make about possible perverse and unwanted effects of some regulatory changes.

But if they want to influence the debate on the future of the industry, implying that they know best and regulators, politicians, the media and the rest of the world know nothing may not help.

Update 10:23: Bantered with Mayor Boris about his looming choice between Spurs and West Ham for the Olympic Stadium, touched the hem of the garment of the blessed William Jefferson Clinton, told T Blair he's looking well (which he is).

I hate myself for being so shallow.

News International's new hacking evidence

Robert Peston | 21:27 UK time, Wednesday, 26 January 2011


I have learned that News International uncovered four e-mails indicating that the former News of the World news editor Ian Edmondson had full knowledge of the illegal phone hacking activities of the private detective, Glenn Mulcaire.

Glenn Mulcaire was jailed in 2007 for his role in trying to intercept voicemail messages left for royal aides.

Mr Edmondson had always denied to News International's bosses that he had any knowledge of hacking. So executives of the UK arm of Rupert Murdoch's News Corporation yesterday concluded that they had no option but to sack Mr Edmondson.

A source said that Mr Edmondson misled News International when originally asked about all this a few years ago. "He denied all knowledge," the source said.

News International is now expected to go on a hunt for evidence to discover whether other executives from that era are implicated.

"This is a new phase for News International in relation to the hacking," said a businessman close to the media group. "They want to know everything and root out anyone who obtained information improperly. It could get pretty messy."

Andy Coulson, the former director of communications for the prime minister who was editor of the News of the World at the relevant time, has always denied all knowledge of the hacking.

In investigating the involvement of Mr Edmondson, News International trawled through thousands of e-mails.

News International has passed the e-mails - described as "devastating" by a source - to the police, which has opened a new enquiry into the alleged illicit hacking of mobile phones of well-known individuals.

News International sacks Edmondson

Robert Peston | 16:33 UK time, Wednesday, 26 January 2011


I have learned that News International yesterday sacked former head of news at News of the World Ian Edmondson. His dismissal followed an investigation into his possible involvement in the illegal hacking of mobile phones.

After an extensive trawl of his e-mails, News International has found what sources described as "highly damaging evidence". This has been passed to the police and is understood to lie behind the decision of the police to reopen the hacking inquiry.

Update 1720: Here's a bit more information about the sacking of Ian Edmondson.

At 1000 yesterday investigators from News International found e-mails that allegedly show that Mr Edmondson had knowledge of attempts to hack into the mobile phones of prominent individuals by the private investigator Glen Mulcaire.

News International confronted Mr Edmondson with the e-mails and dismissed him at 1600.

The UK arm of Rupert Murdoch's News Corporation then sent the new evidence to the police. And it is this information which is the basis of the fresh police enquiry announced today.

There can now be no doubt that News International has abandoned its previous position that it had uncovered everything there was to find about possible malpractice in the way the News of the World tried to uncover information about the private lives of celebrities and public figures.

It now appears to be aggressively investigating the involvement of its employees in a way it didn't do hitherto.

How Sky News could be sold

Robert Peston | 09:19 UK time, Wednesday, 26 January 2011


I am going to write a bit more about News Corps' plan to buy Sky this morning, as I wait to board my plane to Zurich, the first step of the meandering journey to the World Economic Forum in Davos.

But I will digress at the start by quoting from the end of Mervyn King's speech of yesterday. What caught my eye was this resonant phrase:

"The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy."

You can guess what the governor thinks of banks paying huge bonuses in these circumstances.

But on to Sky - and the view in the City of London of yesterday's decision by Jeremy Hunt to give News Corp some time to propose remedies to the harm that Ofcom sees arising from its proposed takeover of all of British Sky Broadcasting.

Investors have concluded - as I mentioned yesterday - that News Corp will put forward a plan to spin off Sky News, since it is the independence and distinctiveness of Sky News that Ofcom fears is most in jeopardy.

This is more easily do-able than I may have initially thought. British Sky Broadcasting would - I am told - simply have to guarantee to buy Sky News's output for a very long time, probably a minimum of 10 years.

With that guaranteed income stream, which would have to be sufficient to cover Sky News's costs, there would probably be quite a few potential buyers of Sky News, both media industry buyers and financial buyers.

But there is an important wrinkle here about the timetable for such a disposal or spin-off of Sky News that the culture secretary might demand.

News Corp will almost certainly promise to separate Sky News just as soon as the takeover of BSkyB is completed. And News Corp would undoubtedly give legal undertakings that would satisfy Mr Hunt, his lawyers, and the regulators at the Office of Fair Trading and Ofcom.

But if Mr Hunt were to agree this post-deal cure, he would potentially pull the rug from under BSkyB's board and from BSkyB's unaligned shareholders.

Because in those circumstance, News Corp could simply slap its lowest credible takeover bid on the table, perhaps just 50p more than the 700p offer which BSkyB has already rejected - and News Corp would dare BSkyB's independent directors and investors to reject it.

But if Mr Hunt were to insist that the Sky News problem was fixed before completion of the takeover - a fix-it first process which is frequently employed in similar circumstances in the US - then the entire power relationship between News Corp and BSkyB would be altered.

Because News Corp would need the co-operation of BSkyB's current board to sell Sky News. And the undoubted price that the BSkyB board would extract for their help would be a significantly higher takeover price, something no lower than 800p a share and possibly higher than that

How much money is at stake? Well for those who own the 61% of BSkyB shares not already owned by News Corp, a requirement from Mr Hunt that Sky News is fixed first rather than later could mean they receive around £1bn extra for their shares (so perhaps £8.5bn to £9bn for their stake, versus News Corp's original offer of £7.5bn).

Here's what Mr Hunt should perhaps consider - that the small print of how News Corp plans to solve the Sky News issue may determine whether investors (looking after our savings) see him as a hero or something else.

Can News Corp salvage the Sky takeover?

Robert Peston | 11:02 UK time, Tuesday, 25 January 2011


Ofcom's verdict on News Corporation's £7.5bn plan to buy the 61% of British Sky Broadcasting it doesn't already own is unambiguous (as I said it would be on 13 January).

Sky button on remote control


Here is what Ofcom's report on the proposed deal says:

"The proposed acquisition may be expected to operate against the public interest since there may not be a sufficient plurality of persons with control of media enterprises providing news and current affairs to UK-wide cross-media audiences."

Which is why Ofcom recommends that there should be "a fuller second stage review of these issues by the Competition Commission to assess the extent to which the concentration in media ownership may act against the public interest".

Now under the 2002 Enterprise Act, as amended by the 2003 Communications Act, Jeremy Hunt, the culture secretary, does not have to take Ofcom's advice. But at first glance, his statement this morning suggests he is taking this advice.

Mr Hunt says that having had talks in recent days with BSkyB and News Corporation, he intends "to refer the merger to the Competition Commission".

Which seems pretty clear. Except that it isn't. Because Mr Hunt adds:

"News Corporation says that it wishes me to consider undertakings in lieu which it contends could sufficiently alleviate the concerns I have such that I should accept the undertakings instead of making a reference (to the Competition Commission). It is appropriate for me to consider such undertakings."

So what on earth does it all mean?

News Corporation has a couple of weeks or so to come up with a scheme to overcome the objection raised by Ofcom that the full takeover of BSkyB would reduce the number of providers of news and current affairs services to an unacceptable extent.

What kind of remedy would that be? Well given that Ofcom is primarily concerned that Sky News would not remain a powerful independent voice, News Corporation would presumably have to come up with a wheeze to demonstrate that Sky News's distinctiveness and autonomy would not be compromised.

How could News Corporation achieve that? Well the obvious thing for Rupert Murdoch's vast media conglomerate to do would be to sell Sky News - though I have no sense of enthusiasm on the part of News Corporation that it wishes to do that.

To be clear, selling Sky News would not be easy, because it is a consumer of cash, not a profit centre. Finding a buyer with deep enough pockets to guarantee that Sky News could thrive in the long term would be quite a challenge.

Anyway let's assume that News Corporation comes up with undertakings to guarantee Sky News' independence, what would happen then?

Well Mr Hunt would then ask for the advice of both the Office of Fair Trading and Ofcom whether News Corporation had done enough to maintain plurality or choice in the provision of news and current affairs. And he then would make the final decision.

Here's the thing. Mr Hunt insists he is simply acting according to the spirit of the Enterprise Act, drafted by the previous government. That gives him the ability to do such a deal with News Corporation to avoid the need for a lengthy investigation by the Competition Commission.

As for concerns that he might act in a biased manner or capriciously in making the ultimate ruling, he would say that his decision to ask the OFT and Ofcom to review any compromise put forward by News Corporation should allay those fears.

Except that critics of News Corporation's determination to own all of BSkyB won't see it that way. They'll allege that a government whose Tory ministers are on friendly terms with News Corp's senior executives is bending over backwards to help News Corp.

To be clear, it's pretty hard to judge whether Mr Hunt is being kinder to News Corporation than he needs to be, because we are in new territory. Although the law that set up the plurality test of media takeovers was enacted in 2003, it has never been used in a takeover of this size and importance.

Which means that it is altogether plausible that if Vince Cable hadn't been sent off the field of play by the prime minister following his injudicious remarks that he had gone to war with Mr Murdoch and News Corporation, he might well have given News Corporation less opportunity to manoeuvre around the Ofcom blockage.

But why on earth does it matter to News Corporation whether or not the planned takeover is put on hold for another six months or more by a reference to the Competition Commission?

Well, according to bankers close to BSkyB, there is a risk that the intrinsic value of the television giant would rise so much in the course of 2011 that BSkyB's independent directors would demand a price that News Corporation either could not or would not pay.

Those independent directors have already turned down a price of 700p a share offered by News Corporation. And BSkyB is apparently performing so well, and generating so much cash, that those independent directors could well reject a bid of 800p per share in a few months time.

So time is very much of the essence for News Corporation if it wants to acquire all of BSkyB at what it believes to be an acceptable price.

Which means that although News Corporation is hopping mad with Ofcom and believes that the regulators' recommendations, analysis and conclusions are prejudiced and wrong, it is probably going to have to swallow its pride by making credible concessions to ensure that Sky News' independence, impartiality and financial strength are seen to be guaranteed.

Update 12:22: Here are a one or two further thoughts about Ofcom's report and Mr Hunt's response.

First Ofcom makes an important point that is only tangentially related to News Corp's bid for Sky.

The regulator says that - with the technology of news distribution changing so fast, the rise of the electronic tablet (iPads et al) and all of that - there is a risk that one or two companies could come to dominate the provision of news and current affairs, irrespective of whether there are further takeovers.

But there are no legislative provisions for addressing damaging reductions of plurality or choice for consumers in those circumstances.

Ministers can only intervene when plurality is imperilled by a takeover (which is what Ofcom alleges could happen if News Corp buys all of Sky).

So Ofcom urges the government to consider whether it should take new powers to intervene in the market for news if it sees the creation of excessively powerful news providers.

Second, I should point out that Ofcom's statistical analysis of how News Corporation would acquire what it sees as too much clout in the provision of news through the Sky acquisition does highlight that there is only one true giant in news.

That is not News Corp or Sky - it is the BBC, whose share of "reach" and "share of reference" is massively greater than any other news provider. In fact the BBC's share is somewhere between 50% and 90% greater than even the combined forces of News Corp and Sky.

News Corp sees Ofcom's statistical analysis as fundamentally flawed, but I don't think it would disagree with that point.

Murdoch employs BP strategy

Robert Peston | 09:12 UK time, Monday, 24 January 2011


You might call it the BP strategy.

It goes like this: company suffers a disaster; company offers comprehensive financial settlement to victims of the disaster; company admits to its own shortcomings, but implies that an entire industry has also engaged in similar flawed practices.

Signs for the four News International newspapers


That broadly describes the response of BP to the appalling oil spill in the Gulf of Mexico. It also describes the new strategy adopted by News International - the UK arm of Rupert Murdoch's News Corporation - to cap the reputational and financial damage from the phone-hacking debacle.

Executives at News are engaged - they tell me - in finding out everything they can about who was hacked by the News of the World, News International's Sunday tabloid, and who at News International knew about the hacking.

Once they have the details, they will offer settlements to those celebs, politicians and others whose privacy may have been invaded - to cut out the requirement for huge lawyers' fees.

Any culpable News International executives will be sacked.

They tell me all of this could happen in a matter of weeks.

And, not too subtly, the message will be sent out that if News International's Augean Stables have been cleaned, what about the stench from other media groups? Because, as I've mentioned before on this blog, there was a period at the start of this century when questionable techniques to obtain stories were employed by a number of newspapers.

In this context, it matters that Mark Lewis - the solicitor who obtained a whopping settlement from the News of the World over the hacking of the phone of Gordon Taylor, the chief executive of the Professional Footballers' Association - is preparing cases for clients alleging unlawful breach of privacy against media groups other than News International.

I spoke to Lewis yesterday, and the allegations of his clients are pretty hair-raising. Which implies that those other media groups (and they know who they are) should probably be conducting thorough internal reviews, to ascertain just how liable they may turn out to be.

Not to over-dramatise, this has all the potential for the newspaper industry to turn into its version of the MPs' expenses scandal.

But back to News International. What are the implications for that vast media business?

Now there are two separate questions of culpability here.

First there is the basic question of who knew about the hacking and who authorised it.

That's primarily what its own internal investigation, which began with the suspension of Ian Edmondson, head of news at the News of the World since 2005, is aimed at discovering.

Now without pre-judging the outcome, when Mr Edmondson was suspended a few weeks ago, News International executives told me that they expected Andy Coulson to resign as the prime minister's communications director - which he duly did on Friday.

Their prediction that he would go wasn't because they had found e-mails or evidence that he was directly implicated in the hacking - or, at least, so they said. It will take some time for them to conclude their trawl through Mr Edmondson's e-mails and computer files.

But they didn't see how Mr Coulson - as the News of the World's editor at the relevant time - could stay on in government, once News International had made its very public demonstration (through the suspension of Mr Edmondson) that it was re-examining its earlier statements that it had already found out everything that needed to be found out and had taken all the necessary corrective action.

For what it's worth, colleagues of Rupert Murdoch tell me he knew nothing about the hacking. He's in London this week and - say executives - is hopping mad about the whole thing. He is so angry, he may even cancel News Corporation's annual jaunt to the World Economic Forum in Davos.

His son, James - who runs all of News Corp's European and Asian operations - is also in the clear, because he was chief executive of British Sky Broadcasting when the hacking was taking place.

But there is a separate question that shareholders in News Corporation will want James Murdoch to answer - which is why he didn't order this comprehensive internal review much earlier.

In particular, what's hanging over James Murdoch is the statement made to MPs in July 2009 by two News International executives - Tom Crone, its head of legal, and Colin Myler, then editor of the News of the World - that James Murdoch authorised payments to Gordon Taylor of several hundred thousand pounds to settle a case of invasion of privacy.

Rather than paying Mr Taylor to keep his mouth shut about the whole affair (the settlement included a confidentiality clause), some would argue that James Murdoch would have done better to find out quite how systemic hacking had become in his organisation, and taken whatever remedial action was necessary.

Update 15:34: I am told by a News International insider that investigators are processing “tens of thousands” of e-mails sent and received by Ian Edmondson – which is why the probe is taking a while.

But News International hopes to have completed its evaluation of what happened and who (if anyone) was to blame within days – though probably not this week.

If the investigators do find further evidence relating to unlawful invasion of individuals’ privacy, News International says it will pass such material to the police.

Banking Commission: Basel not enough to make banks safe

Robert Peston | 14:30 UK time, Saturday, 22 January 2011


I took seven things away from the speech today by John Vickers, the chairman of the Independent Banking Commission that has been asked by the chancellor to advise him on how to make the banking system safer and how to improve competition between banks.

First, the commission has already concluded that the new international rules known as Basel lll to force banks to hold more capital and liquid resources, and lengthen the maturity of their debt, do not go far enough.

He has signalled that the commission does not believe that for what are known as systemically important banks - huge banks such as Barclays, HSBC and Royal Bank of Scotland - the new 7% Basel minimum ratio of equity capital to assets (loans and investments) would adequately reduce the risk of taxpayers again bailing out big banks in future crises.

This will trouble the likes of Barclays and RBS, because almost anything that the Commission does ultimately recommend to make them safer would reduce their profitability (at least in the short term).

Second, the commission - like the Bank of England - is persuaded that it is profoundly unhealthy that the biggest banks, especially those engaged in retail banking, are able to raise money more cheaply because of creditors' perception that the state will always rescue them as and when they run into difficulties.

This is how Vickers puts it:

"Systemically important institutions now have an implicit guarantee for risk taking activities, particularly those related to and/or inseparable from retail banking. The distortion, which is also a distortion to competition with other institutions, should be neutralised or contained."

Third, the central task for the Commission is to propose reforms that would heap all the costs of a banking failure on to creditors and investors, while avoiding any serious disruption in the transmission of money, savers' access to deposits and the provision of credit to households and small businesses.

Fourth, the more extreme versions of so-called narrow banking, in which banks that look after our deposits would be banned from lending our cash to businesses or individuals, would impose excessive costs on the economy.

This will disappoint the campaigners for more radical banking reform, who are convinced that the current basic structure of banking - called fractional reserve banking, in which short term deposits are 'transformed' into long-term loans - is flawed.

Fifth, the tax system, which makes it cheaper for all companies to fund themselves with debt rather than loss-absorbing equity - because of the deductibility of interest - is at the heart of the problem, because it provides a powerful incentive to banks to minimize their holdings of equity.

Sixth, the Commission is highly sceptical of the arguments of universal banks - those like RBS, Barclays and HSBC which combine retail banking and investment banking - that they are intrinsically safer than banks that are more specialized.

Seventh, the proposed solution to all of this looks as though it will involve significantly higher capital requirements for systemically important banks (which might well include a huge retail bank such as Lloyds), so that they are better able to absorb losses.

And although it is fairly clear that the Commission would quite like to see some kind of separation of retail banking and investment banking (not necessarily full and formal bifurcation or demerger, but perhaps putting the distinct activities into separate subsidiaries that would have their own capital and would be capable of being physically carved out in a crisis), what is less obvious is whether it wants such separation to be effected by legislative fiat or encouraged through capital surcharges on those banks which choose to remain huge and universal.

Finally some of you may think none of this is sufficiently bold. But the big banks will view it, rightly, as a threat to the ability of their investment banking arms to generate huge profits. And they will fight hard to prevent the ideas of Vickers and co becoming - for them - a painful, bonus-squeezing reality.

UPDATE 17:47

And another thing. It is proving immensely difficult for the Treasury to reach agreement with the UK's four biggest banks on new commitments to lend to small business, support a new so-called Big Society Bank and declare that they have moderated their bonus payments (a bit).

As a result there won't be an announcement on all this deal - which goes by the moniker of Project Merlin - early next week, which is what was expected.

Sources tell me that there is "still a way to go, on lending in particular". So talks will continue over the coming weeks.

Apparently the snafu is to do with "company governance", whatever that means. But bankers seem to think a deal is more likely than not, in the end.

All a bit odd, since you'd think RBS, Barclays, HSBC and Lloyds would all be desperate to show that they're doing their bit to support small businesses and economic recovery - and take some of the sting out of the widespread criticism of the substantial bonuses they are set to pay.

UPDATE 18:11

Also one banker told me that George Osborne apparently does not want his first punch up with the new shadow Chancellor, Ed Balls, to be over why there is no promise to reduce bonuses to any substantial extent.

"HMG does not want to give Balls a platform against Osborne next week", the banker said.

Which means that the Treasury isn't particularly upset - or so I am told - that it is taking a bit longer than expected for the banks to ensure that the deal isn't in breach of their responsibilities to shareholders.

UPDATE 00:20

A source close to the Chancellor says that the banker I quoted above got it wrong on George Osborne's supposed lack of desire to have a scrap with Ed Balls on the banks.

The source said: "This would be a great issue on which to take Balls on, especially as he was City minister at the height of the boom...The reason for delay is that we're not satisfied we have a good enough deal. You'd expect us to drive a hard bargain for taxpayers.

"This would be a good opportunity to remind Balls that he designed the tripartite (regulatory) system that failed so badly and ended up with us owning these banks."

I have to say, direct hostilities between Osborne and Balls - as and when they start for real - should be quite a spectator sport.

Can Hunt do a deal with Murdoch to meet Ofcom's concerns?

Robert Peston | 14:28 UK time, Thursday, 20 January 2011


Thinking is frequently a bad idea.

Jeremy Hunt

Last week I thought it was unlikely (though not impossible) that the culture secretary, Jeremy Hunt, would be negotiating with James Murdoch of News Corporation to remedy the harm to media plurality or choice that Ofcom has concluded would be the consequence of News Corp's £7.5bn plan to buy all of British Sky Broadcasting.

Today I think Mr Hunt is doing just that - or at least over the past few days a number of informed sources have told me that is what Mr Hunt is doing.

And there is quite a lot of sizzling detail about all this in today's FT.

As I revealed in a post earlier this month, Ofcom has made a clear recommendation to Mr Hunt that the proposed takeover should be referred to the Competition Commission for further scrutiny, because of the potential damage to plurality or media choice for citizens, especially in the provision of news.

However when I said that I thought it was unlikely that Mr Hunt would endeavour to negotiate a way around this impasse, my reasoning was that I thought Mr Hunt would wish to avoid the perception that he is bending over backwards to help News Corp - particularly in the wake of what happened to Vince Cable, the business secretary, when he was seen to be prejudiced in the other direction (that perceived bias earned Mr Cable a rebuke from the prime minister, who transferred responsibilities for media policy and regulation from the Business Department to Mr Hunt's department).

Now sources close to Mr Hunt deny he is doing any favours for News Corp or for James Murdoch, who runs all of News Corp's European and Asian operations.

They insist there is nothing strange in Mr Hunt's failure yet to publish Ofcom's report - which he received on the last day of 2010 - or to say how he will respond to its recommendation.

Everything he is doing, his colleagues say, is guided by the culture department's lawyers. And his aim is to minimise the prospect of a legal appeal against whatever he ultimately decides is the right way of responding to Ofcom's judgement.

Which is a bit puzzling because sources close to News Corp tell me that they don't regard a reference to the Competition Commission as such a dreadful outcome - which rather implies New Corp isn't poised to resort to the courts at this stage.

A legal challenge would in fact be much more likely from other media groups if Mr Hunt were seen to be wilfully ignoring Ofcom's recommendation by not ordering an investigation by the Competition Commission.

Anyway it's not proving quick or easy for Mr Hunt to make up his mind. Officials tell me that we're unlikely to hear Mr Hunt's verdict till the end of the month - and perhaps not till early February.

All that said, the notion that Mr Hunt might not follow Ofcom's advice makes sense of one thing that has been puzzling me.

Given that the Ofcom's recommendation is of relevance to an assessment of the value of BSkyB's shares, I've been slightly surprised that the culture department hasn't been forced by the Financial Services Authority to put out some kind of statement to the Stock Exchange, following the leak to me of Ofcom's verdict.

Of course, such a statement would not have been necessary from Mr Hunt if there were a reasonable chance that he won't be following Ofcom's advice.

Goldman: Pay and bonuses of £269,000 per head

Robert Peston | 14:22 UK time, Wednesday, 19 January 2011


The story at Goldman Sachs is that net earnings have fallen by a considerable amount, 38%, to $8.4bn (£5.3bn), and net revenues have dropped by 13% to $39.2bn (24.5bn)

Goldman Sachs booth, New York Stock Exchange

But "compensation and benefits" (largely pay and bonuses for staff) has been reduced just 5% to $15.4bn. The ratio of compensation to revenues has risen from 36% to 39%.

Which some will see as the bankers doing considerably better out of the firm than the owners.

That said, 39% of revenue is still lower than Goldman has often allocated to pay and bonuses in the past (which is what I'm sure they'll say when they ring me about this post - so perhaps I am saving Goldman the cost of a phone call).

Average pay per head (which includes bonuses) for Goldman 35,700 employees was $431,000 (£269,000) for 2010. So less than last year's $495,000 but - most would say - not too shoddy.

And remember that this figure for average pay should not be seen as saying anything terribly informative about typical pay at the firm, because variations in rewards are so pronounced. At the top, there are 475 partners who take home millions of dollars each year.

Also, in addition to the remuneration disclosed today, Goldman's executives have shared a $3.5bn windfall from stock options granted to staff at the end of the 2008, according to an analysis published in today's New York Times.

What does it all mean?

First, the substantial rewards for Goldman's people will reinforce the case of the boards of Barclays and Royal Bank of Scotland that they too must pay big bonuses - or risk seeing their better people defect.

Second, it is pretty clear that Goldman has come through a turbulent year in good shape (including ending 2010 with a ratio of equity capital of 13.3% under the old rules - which makes its balance sheet reasonably robust, though not an absolutely unbreakable fortress, to use the cliche).

Note that this is the year when Goldman paid $550m to the US regulator, the Securities and Exchange Commission, to settle a case of alleged fraud in the sale of an issue of collateralised debt obligations - and when it was pilloried by many senior members of Congress for perceived shortcomings in the way it conducts business.

It was the year when Goldman paid $465m in a one-off bonus tax to the UK exchequer.

And 2010 was the year in which it had to start reconstructing its business in a fundamental way, to eliminate some of the conflicts of interest perceived by its critics and to get out of proprietary trading (which has historically been very important to Goldman, but which has been banned for banks by a US reform known as the Volcker rule).

So many would say that the rise in Goldman's share price over the past year, and its continued claim to be the global leader in investment banking (albeit facing stiffer competition from the likes of JP Morgan, Morgan Stanley and Barclays Capital) is no mean achievement.

That said a few of you would probably argue that the Goldman hegemony is great for Goldman partners, though not necessarily for the world.

Update 1620: I thought you might find these two responses to my post diverting.

The first is from Goldman Sachs:

"You might note that comp and benefits per employee (at £269,000) fell 14% year on year, in line with the decline in revenue. The reason total comp wasn't down in line with this is that we increased headcount by 10% over the past year, or an increase of 3,200 people, mainly in Growth Markets, Investment Management and Technology."

The second is from a City chum:

"The top 20% in an investment bank scoop 80% of the pot, so the more interesting number is £1.3m per head for the bankers (as opposed to the doormen, security guards, receptionists, waiters, cooks, electricians, personal assistants, IT staff, accountants and researchers etc etc). And on the basis of an 80/20 split of that pool, there was £5m plus for the 220-odd senior folk in London."

HMV: It gets worse

Robert Peston | 16:59 UK time, Tuesday, 18 January 2011


I have been told by two music and entertainment companies that they can no longer get credit insurance for additional sales to HMV.

HMV shop

Here is an extract from an e-mail sent by the "head of credit and collections" at the UK arm of a major UK manufacturer and distributor of CDs and DVDs:

"I need to advise you that our credit insurers have significantly reduced our insured credit limit on all HMV entities. Based on the current HMV balances, the limit is not sufficient to support any sales on an insured basis moving forward.
"I have this morning met with the Chief Executive and Risk Director at the insurance company to understand the reasons for such a quick and drastic reduction. Due to HMV's listing on the stock exchange, they are unable to divulge the reasons for their decision. They met with Simon Fox last week and whilst they have said that HMV has provided everything asked for, they are clearly worried following the public announcement that bank covenants may not be met. A further review will take place in 4 weeks time."

I have put this to Simon Fox, the chief executive of HMV, which issued a profit warning on 5 January after lousy trading in the run-up to Christmas.

He said he was unaware that credit insurance had been so drastically scaled back - but he said he wouldn't necessarily know, because credit insurers deal with suppliers, not with HMV itself.

When companies can't obtain insurance for their sales, they trade at their own risk.

The entertainment companies I contacted said that for the time being they were likely to trade with HMV on this basis, because HMV is so vital to their ability to sell CDs and DVDs in the UK.

Mr Fox said that HMV had not yet experienced any difficulty in obtaining stock - though that did not surprise him, because this is a time of year when typically it tries to reduce its stocks.

The entertainment and music companies I spoke to were horrified by the idea that HMV might go out of business, because they do not want to become dependent on sales over the internet or through supermarkets.

The broken heart of capitalism

Robert Peston | 09:25 UK time, Tuesday, 18 January 2011


Has the banking system been fixed, been made safe, following the 2008 financial crisis, the worst since the 1930s?

Canary Wharf

Not yet, according to the regulators, central bankers, politicians and bankers I interviewed for a documentary that airs tonight at 2100GMT on BBC Two (Britain's Banks: Too big to save).

The cast includes the chairman of Royal Bank of Scotland, Sir Philip Hampton (and see his striking analysis of how bankers are paid too much in last night's post), two members of the Banking Commission set up by the chancellor (Martin Wolf and Martin Taylor), the chairman of the Financial Services Authority, Lord Turner, the Business Secretary, Vince Cable, and the deputy governor of the Bank of England, Paul Tucker (among others).

What I hope emerges from the film is the gravity of the structural flaws in the banking industry that caused the 2008 crash, which in turn led to the worst recession we've suffered in several generations.

And, which is perhaps more disturbing, few of the participants felt that the system had yet been mended.

Here is Martin Wolf, the FT commentator and member of the Banking Commission, responding to a question on whether Basel lll the new international agreement on how much capital banks have to hold - as protection against losses - goes far enough:

"I think it is plausible if you think of the risks in the system and your ability to manage crisis, ah, we need more capital than the Basel lll agreement concluded. It is clearly a compromise of course. It is an international compromise...But I think it's at least in the right direction and it sort of sets a, how can you put it, a less unreasonable minimum, that's true.
"And then of course I hope that countries will look at the particular risks they run or they can sustain. It is clearly possible - as the Swiss have shown (who have imposed capital requirements well above the new Basel minimum on big banks) - to go beyond it."

So how much more capital do banks need? Wolf:

"If you wanted banks that were pretty safe we would be probably talking about leverage of certainly in the the neighbourhood of not more than five to one".

Depending on how you define capital, that would mean safe banks should hold at least double the capital currently stipulated by the new Basel rules.

Is Martin Wolf a loan wolf on the Banking Commission? Apparently not. Here is Martin Taylor:

"I'm not suggesting to you that we should rely on Basel III to solve all our financial stability problems...I think that we shouldn't make Basel carry too much weight."

Or to put in another way, and as I mentioned just before Christmas, any bank chief executive who thinks the Banking Commission is going to suggest only modest reforms to the banking system probably doesn't get out enough.

In particular it looks as though as a minimum the Commission will recommend a substantial capital surcharge should be imposed on our biggest banks, Royal Bank of Scotland, Barclays and HSBC - which they won't like, because capital is expensive and their profitability would be reduced.

It might marginally reassure the banks that Paul Tucker, the deputy governor of the Bank of England, wants at least part of this surcharge for the biggest banks to be imposed globally - and he is negotiating for this on the Financial Stability Board, which is the senior global regulatory body.

I asked Tucker how much extra capital he felt the big banks need to hold:

"I'm not gonna give you a number because it's tremendously important that we're in step with our international colleagues. But this isn't going to be a percentage point or two, it has to be meaningful for it to make a difference.
"What we're talking about is two things. First of all these giant banks can absorb more losses. And secondly if that isn't enough and it won't always be enough - at some point in the next 100 years there will be a real threat again and [we must make sure] that our successors will have tools where they can, as the expression goes, resolve these banks in an orderly way without taxpayer money".

And here, for Tucker, is the heart of the problem. He made two particularly compelling statements:

"If we have a system where banks take the upside but the taxpayer takes the downside something has gone wrong with capitalism, with the very heart of capitalism, and we need to repair this".


"Capitalism can't work unless these financial firms at the centre of the heart of capitalism can be subject to orderly failure. The rules of capitalism need to apply to them just as they do to non-financial companies."

To put it another way, what's required are reforms so that next time a big bank gets into trouble, all the pain and cost is heaped on the bank's creditors, investors and managers - with none falling on taxpayers.

How close are we to having achieved those fundamental changes, which would be necessary - according to Tucker (and he is not alone) - to fix capitalism?

Not very close, is the answer.

It is not just about the amount of capital and liquid resources that banks are forced to hold, or the maturity of their debt (what we might call the Basel stuff).

It is also about the walls they may be forced to erect between their various financial activities. It is about bankruptcy procedures that apply uniformly in all the very many countries where global banks operate. It is about identifying which bits of banks are so vital to the functioning of the economy that they must always be removed from a troubled bank before they are seriously damaged. And it is about the sheer size and complexity of big banks.

There is, as yet, no international consensus on any of this, let alone a national consensus.

As I hope tonight's film makes clear, we are still living in a world and in a United Kingdom where a big bank that runs into difficulties would still be able to hold taxpayers and our economy to ransom.

Big banks remain too important to be allowed to fail. And it may be worse than that, as the troubles of the eurozone - and the Irish in particular - show.

Given that the balance sheets of many western governments (including the UK's) have become seriously financially stretched, some banks may have outgrown the capacity of their home states to rescue them: banks may have become too big to save.

RBS's Hampton: 'Journeymen' bankers are paid too much

Robert Peston | 21:50 UK time, Monday, 17 January 2011


Large numbers of bankers are paid more than they're worth, the chairman of Royal Bank of Scotland has conceded, because of what he calls a "gangmaster" culture in investment banking.

Philip Hampton


Sir Philip Hampton, interviewed by me for a documentary to be broadcast on BBC2 at 2100GMT on Tuesday (Britain's Banks: too big to save), says:

"The star quality, as it were, seems to filter down to people who don't seem so star quality. There is, if I can use the expression, a sort of gangmaster cultural phenomenon in this, that you recruit top people who really do make a difference, who really do move markets and get business and are really high achievers.
"But they do tend to associate themselves with people who aren't such stars, but they want them around and they trust them, sometimes they move with them and there is a team associated with it. And the disparities between the top stars in the team and some of the journeymen players, if you like, is probably not as marked as it should be."

Inevitably some will see similarities with Premier League football teams, in which even quite mediocre players earn tens of thousands of pounds per week, because that's the going rate for the Premier League.

Hampton says that when the real stars leave, "they take their clients and their business with them, and we see this routinely". That's why RBS feels obliged to pay huge bonuses to these top performers. But it is "one of the major challenges" to reduce the pay of the more average bankers in the teams assembled by these stars.

Hampton also implies that investors have been irrational in allowing banks to pay huge bonuses. He says:

"This explosive growth in financial services meant that thousands of people, arguably tens of thousands of people, are extraordinarily highly paid. The most peculiar thing about it all, actually, if you look at the last ten years of massive increases in pay is that the performance for shareholders has been pretty disastrous really across most banks. Some of them have gone out of business altogether and most banks have had a relatively poor performance for shareholders".

Hampton's frank analysis of the flaws in the way bankers are paid comes as the boards of big banks decide how much to pay out in bonuses for performance in 2010. RBS is expected to award just under £1bn of bonuses in aggregate, down from around £1.3bn last year.

His remarks may exacerbate tensions in the coalition. As I disclosed in early January, the prime minister and chancellor have reluctantly come to the conclusion that they cannot prevent big British banks - even RBS, which is 83% owned by taxpayers - paying very substantial bonuses, lest these businesses are seriously damaged by paying less than the international going rate.

By contrast Liberal Democrat ministers - notably Vince Cable and Nick Clegg - remain determined to crack down on big bonuses.

In an interview on the Today programme this morning, David Cameron said:

"In a matter of weeks... you will be able to see both what is going to happen at, effectively, state-owned banks, where I absolutely believe they should not be the front-markers on bonus payments, they will be the backmarkers."

To put it another way, Mr Cameron expects Lloyds and Royal Bank of Scotland to be less generous than other banks in their bonus payments, but accepts they will have to hand out what most will see as very substantial awards.

In the shadow of the volcano

Robert Peston | 08:53 UK time, Monday, 17 January 2011


Last week I gave a presentation to my BBC colleagues on the business, financial and economic outlook for 2011. You can see it, by clicking here.

The central theme was that we shouldn't be gulled by the clear evidence of recovery into thinking it's business as normal again.

There are signs of new bubbles being pumped up - in China, for example. Perhaps more importantly, the structural flaws to the global financial system (banks that are under-capitalised and remain too big to fail, the excessive indebtedness of the West, and so on) have not yet been fixed.

World leaders are trying to move from treating the symptoms of the financial and economic disease to effecting a fundamental cure - but this very process carries dangers for the health of the patient, as we have seen in the form of recent turmoil in the eurozone (where any ministerial talk of transferring the burden of state or bank failure from taxpayers to commercial creditors prompts a flight of capital away from banks or states - such as Ireland or Portugal - perceived to be weak).

Similarly, a premature return to normal monetary conditions and normal rates of interest in the UK could wreak havoc on the finances of British households still struggling to manage record levels of personal indebtedness (a point also stressed in related presentations by Stephanie Flanders and Simon Gompertz).

There are reasons to hope that we will avoid a double dip back into recession. That said, the weight of debt bearing down on our economy raises the prospect that growth will be relatively anaemic for years, that a return to the 3% per annum enjoyed in the UK during the golden years of 1992 to 2008 may prove elusive.

The big point however is that the imbalances which built up in the financial system and global economy over the 15 years or so till 2007 were so huge (bank lending, for example, that grew out of all proportion to the fundamental needs of the economy) that the process of correction will take years. And in those coming years of returning the financial system to some kind of stable equilibrium, we'll be living in the shadow of a live volcano.

Why did Putin choose BP?

Robert Peston | 10:41 UK time, Sunday, 16 January 2011


It is striking, to put it mildly, that - of all the companies in the world that prime minister Putin of Russia could have chosen as a partner on the exploration of an enormous area of the shallow Arctic seas - Mr Putin chose the one associated with the most disastrous offshore oil spill of modern times.

Vladimir Putin


Why would he pick BP as his ally in a venture seen both by hydrocarbon fans and environmental campaigners alike as of huge significance?

Given the horrified reaction of Greenpeace and of a couple of US congressmen to the deal - who allege that America's national security may in some sense be threatened by the linked transaction of BP engaging in a share swap with the semi-nationalised Russian oil giant, Rosneft - perhaps it's a manifestation of Mr Putin's mischievous sense of humour.

That however seems unlikely.

For Bob Dudley, the chief executive of BP - whom I interviewed shortly before midnight on Friday soon after the deal with Rosneft had been signed - it shows that his company has learned the important lessons of the debacle in the Gulf of Mexico (you can hear a good chunk of the interview by clicking here.

BP has set up a new safety division, to make sure that safety is a priority in all its operations. And - perhaps more importantly - it has ceased to delegate to contractors any autonomy over decisions which would have a serious impact on BP's reputation or its finances.

Although the argument may well rage in the courts for years about the balance of blame and financial liability to be distributed between BP and its contractors on the Macondo well in the Gulf of Mexico - notably Transocean and Halliburton - the big lesson for BP was that it was too trusting of Transocean and Halliburton to get it right.

Or to put it another way, Dudley argues that BP has learned the systemic lessons of the Gulf spill.

Here's the interesting thing. Let's say that the US presidential commission into the Macondo accident is correct that the accident highlights systemic risks and possible management weaknesses not only for BP and its contractors and partners, but for all the offshore oil explorers and exploiters.

This, of course, is a conclusion that BP's competitors have denied. They would reject the implication that the Macondo horror could have happened to any one of them.

However prime minister Putin would apparently beg to differ. He seems to believe that a once-bitten BP is now a highly reliable offshore explorer - and has backed that judgement with a contract of huge important to his country's ecology, finances and energy reserves.

All of which may imply that BP has - paradoxically - won some kind of competitive advantage in having been forced so publicly to show that it understands what went wrong in the Gulf and that it is a changed company.

So what should that suggest to the non-executives of Shell, Exxon and the rest? Do their companies need to demonstrate to the wider world why they're to be trusted when finding and extracting oil in challenging environments?

Government's plan B for strikes

Robert Peston | 08:59 UK time, Friday, 14 January 2011


This is what Simon Wolfson, the chief executive of Next, wrote in the Times last April:

"We need change in the culture of the public sector. We need a culture that will play to the strength of its many capable managers rather than compensate for the weaknesses of the few poor ones.
"The first step is to recognise that good management starts with good people; all the 'processes' in the world will not make up for weak individuals. Public sector managers must have the same freedom to rapidly advance talent and correct poor performance that their counterparts in the private sector enjoy.
"Yet public sector working practices are geared up to limit initiative and freedom of action. Managers' hands are tied at every turn. The essential activities of recruitment, promotion, reward, disciplinary and dismissal are so hidebound by restrictive practices that good managers find it hard to promote good people and nigh on impossible to remove underperformers."

What I hadn't realised, till I had a conversation with a senior cabinet minister earlier this week, was the extent to which this analysis by Wolfson (who became a Tory peer in July) underpins the government's programme to shrink and reform the public sector.

In particular, this minister told me that when it comes to cutting significant numbers of public sector employees during the coming year, the cabinet is clear that it will take whatever action is needed to retain more able officials and sack what Wolfson calls "weak individuals".

In practice this means that if better staff apply for redundancy, their requests will be turned down, said the minister. "If it means we have to have substantial numbers of compulsory redundancies, that's what we'll do", he said.

This will be a shock to a public sector in which redundancy programmes have been rare in recent years - and compulsory redundancies have been seen as to be avoided, if at all possible.

That's why the government is only hopeful that the shrinkage of the public sector won't lead to widespread industrial action. In practice, ministers are realistic that the threat - and reality - of strikes is highly likely.

So ministers and officials are beavering away working on contingency plans, to maintain security in prisons, keep our borders manned, and prevent the collapse of the tax and welfare systems, for example, in the event that there is serious industrial action.

The point, according to the minister, is that it is impossible for the government to negotiate credibly with unions on public sector changes and cost-cutting, if the unions are confident that strike action would lead to chaos.

But it is by no means easy. The minister wouldn't tell me what he was doing to make sure that prisoners are kept where they should be, if prison staff walk out. All he would say is that it is a priority - albeit a very challenging one - to find a solution.

Of course the programme of revolution in the public sector isn't just about cuts. It is about imbuing a culture of responsibility, of sharing best practice across services, and of improving data collection and analysis (so that public servants actually know what goods and services cost).

Little of this requires legislation. Mostly it is about importing the methods and mindset of the private sector.

To an extent, quite a large one, it will be about transferring a growing number of public-sector operations directly into the private sector - although the big players in this area (the Sercos and Capitas for example) should not under-estimate the government's determination to stimulate much greater competition for contracts to manage all kinds of government services, by making it much easier for smaller younger companies to make credible bids.

That said, a big new wave of outsourcing or other forms of de facto privatisation probably won't happen till after the summer, because a precondition is that the government has to decide how to limit the costs for private-sector companies of taking on the pension rights of officials who are transferred out of the public sector.

What I am less clear about is whether the government's big idea, mutualisation of public services, will become a serious practical reality.

There is no doubt of ministerial enthusiasm for mutualisation, for the sense of personal responsibility and common purpose that shared employee ownership of a public service may deliver.

But whether the formidable practical obstacles can be overcome? Work in progress.

Ofcom says NewsCorp's Sky bid should go to Competition Commission

Robert Peston | 11:15 UK time, Thursday, 13 January 2011


I am as sure as I can be that Ofcom has made an unambiguous recommendation that NewsCorp's plan to acquire all of British Sky Broadcasting should be referred to the Competition Commission for further investigation.

Sky headquarters

I have come to this view having had a number of conversations with sources close to the media regulator, to News Corporation and to the Department of Culture Media and Sport, which received Ofcom's report on the proposed £7.5bn deal on the last day of 2010.

What I don't understand is why Jeremy Hunt, the Culture Secretary, has not simply published the report and announced that there will be a further Competition Commission enquiry into whether the takeover restricts plurality in the media (or choice for viewers and readers).

Instead, he is having talks with BSkyB and with News Corporation (which already owns 39% of Sky and various British newspapers, including the Sun and Times), as the Guardian disclosed a few days ago.

What is there for Mr Hunt to talk to NewsCorp and Sky about, if - as I say - Ofcom's advice is clear and unambiguous?

Although under the law, Mr Hunt has discretion whether or not to make the reference to the Competition Commission, his colleagues told me some time ago that he would not exercise this discretion, if the advice from Ofcom was categoric - which it is.

So some might say that it is a bit odd that he is talking to Sky and News.

Is Mr Hunt doing so to ward off any possible legal challenge from NewsCorp to a decision to order a further enquiry?

That's possible, though it is difficult to see how there could be such an appeal from NewsCorp, if Ofcom has done its job properly.

Is Mr Hunt seeing whether some kind of deal can be cut that would meet Ofcom's concerns and allow the takeover to go through without the need for a reference to Competition Commission?

If that were the case, Mr Hunt would lay himself open to the charge of being too kind to NewsCorp - which presumably he would not wish to do.

After all, Vince Cable was stripped of his responsibility to adjudicate on the takeover by the prime minister after I disclosed that he had told undercover reporters on the Telegraph that he had gone to war against NewsCorp.

Or to put it another way, the perception of bias either for or against NewsCorp taints the judicial impartiality that the relevant secretary of state is supposed to show.

Which is why I presume that Mr Hunt will ultimately do what Ofcom recommends and will refer the proposed takeover to the Competition Commission.

Update 12:59: I slightly regret the way I wrote this post, because some of you seem to think this is speculation.

It isn’t speculation.

What I am saying is very simple: Ofcom has recommended that there should be a full Competition Commission enquiry into News Corporation’s plan to buy all of British Sky Broadcasting.

That is a fact.

Lloyds' Daniels to receive £2m bonus

Robert Peston | 11:42 UK time, Wednesday, 12 January 2011


Eric Daniels, the outgoing chief executive of Lloyds Banking Group, is set to receive a bonus of around £2m.

Eric Daniels


According to those close to the bank, it is inconceivable he will turn the bonus down, as he did last year and the year before.

"Why on earth should he?" said a banker. "He has returned Lloyds to profit. And also, he is leaving Lloyds in March, so why should Eric care if the bonus makes him unpopular?".

That said, the payment will be controversial, for two reasons. First, Lloyds is 41% owned by taxpayers - and the government has said it does not wish to see what it calls "unacceptable" bonuses, especially in banks where the state has a stake.

Second, Mr Daniels was chief executive when Lloyds agreed to buy HBOS in the autumn of 2008 - which is a deal that has generated spectacular losses for Lloyds and also meant that Lloyds was forced to receive a far bigger injection of funds from taxpayers than would otherwise have been the case.

That said, Mr Daniels has in the past year returned Lloyds to profit faster than some thought likely. Also he avoided the bank becoming majority controlled by the government by persuading commercial investors to buy £13.5bn of shares in a jumbo rights issue.

Daniels is leaving Lloyds in March, to be replaced at the helm by Antonio Horta-Osario, who recently quit as boss of Santander's substantial UK operations.

The maximum bonus entitlement for Mr Daniels is 225% of his salary of £1.035m.

Those close to Lloyds say that the board is likely to award him around £2m. The announcement will be made in February.

On top of the bonus, Mr Daniels is also expected to receive shares worth more than £2m from a so-called long-term incentive plan.

The disclosure that Mr Daniels will receive a substantial bonus will cause something of a headache for the Treasury and for Royal Bank of Scotland.

Ministers, especially the Lib Dem Business Secretary, Vince Cable, are keen that the chief executive of Royal Bank of Scotland - which is more than 80% owned by taxpayers - should not take the £2.5m bonus to which he may be entitled.

Mr Hester may not wish to be the only prominent banker making a financial sacrifice to alleviate tensions in the coalition government over the remuneration of bankers.

Update 12:14: If you need evidence of the toxicity of bonuses for the coalition, a government source has rushed to tell me that the precise magnitude of Mr Daniel's bonus has not been agreed.

But then I never said it had been. What I said is that Lloyds' board is convinced he has earned his bonus and that it will be of the order of £2m.

Will the government try to block the bonus? My government source is refusing to say that.

Diamond: 'I am compelled to pay big bonuses'

Robert Peston | 15:05 UK time, Tuesday, 11 January 2011


First of all, an apology to those who follow me on Twitter: I had a bad case of Twittarrhoea while I watched the theatre of Treasury Select Committee versus Bob Diamond this morning.

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My enthusiasm did not stem from any huge news divulged by Diamond - but it was gripping theatre.

Probably for most of the audience the best moment was when - on the second time of asking by the Labour MP John Mann - the UK's best-paid top banker said he was still stuck on why it was harder for a camel to pass through the eye of a needle than for a rich banker to enter the Kingdom of Heaven.

Which didn't reveal anything, other than the breadth of the gulf between those who run our biggest banks and legislators.

What should have perhaps disturbed Mr Diamond - who performed with good humour and some aplomb - is that not a single MP on a committee with a Tory majority chose to defend Barclays or give the benefit of the doubt to bonus-paying banks.

They listened when Mr Diamond explained why Barclays is - in his view - compelled to pay billions of pounds in bonuses. But none hinted any kind of approval.

Mr Diamond's case is pretty simple: he wants us all to take great pride that a British bank, Barclays, has created a world-class investment bank, Barclays Capital; and the price of that success is that Barclays has to pay billions of pounds in bonuses to retain and recruit talent for Barclays Capital.

We might not like it. He might not like it. But - and he said this several times - he cannot pay significantly less to his investment bankers and sustain the success of the bank.

For what it's worth, no MP endorsed this view, but nor did they seriously challenge it.

Perhaps the most telling exchanges were on the issue of bonus disclosure.

Mr Diamond said that Barclays did not wish to unilaterally disclose more detail about how much it pays individuals than its competitors.

Had Barclays bigger shareholders requested such information, so that they can form a judgement on whether Barclays is deploying their resources as efficiently as possible?

Mr Diamond said they had not.

Which meant, according to Andrew Tyrie, the Tory chairman of the committee, that shareholders are "half asleep".

If shareholders have been nodding off, perhaps they will have been roused from slumber by something Mr Diamond omitted to say.

He conceded, as he must, that Barclays was forced to eliminate and slash the dividends it pays to the owners following the 2008 crash.

Was there an apology from Mr Diamond for the diet of gruel foisted on investors, while Barclays investment bankers continue to pocket billions in bonuses? There was not.

And, perhaps more strikingly, Mr Diamond also rejected what the Basel Committee and Bank of England would argue, namely that the bank has some discretion in deciding how much to reward staff and how much to remunerate the shareholders.

The trade off between bonuses and dividends is illusory, according to Mr Diamond. The implication is that without big bonuses, there would be no dividends.

But here's the thing. Even with big bonuses, the return on equity likely to be earned by big banks such as Barclays over the coming few years will be stuck at between 4 and 6%, Mr Diamond said, compared with a long run average or around 12% - which will make it extremely hard for Barclays to cover its cost of capital.

In fact the return will be lower still if the Financial Services Authority has its way and forces Globally Significant Financial Institutions - such as Barclays - to raise substantially more equity relative to their loans and investments than the new Basel minimum (which is why Mr Diamond is desperately keen for the FSA to be defeated on this).

Which poses something of a problem for investors and - by extension - for big banks like Barclays.

If investors come to believe that the only reason for supplying that capital is to enable Mr Diamond's investment bankers to generate huge bonuses for themselves - with little left over for dividends - the rational thing for investors to do is to ask for their money back.

Although Mr Diamond may say that slashing bonuses would harm the bank and its owners, he has some work to do to prove that paying those bonuses benefits anyone much but the recipients.

PS I'm not sure Mr Diamond did himself any favours in refusing an invitation from the Tory MP David Ruffley to say he is grateful to British taxpayers for a subsidy which the Bank of England estimates at £100bn for all our big banks in 2009 (see my post How to curb bonuses).

Diamond Bob's bonus protected by Chinese boom

Robert Peston | 09:46 UK time, Tuesday, 11 January 2011


In the UK, one significant economic concern is that banks aren't lending enough to reinforce economic recovery - which is why, as I pointed out last Thursday, the government is negotiating with our biggest banks to persuade them to make new promises to increase lending to small businesses.

Shanhai's financial centre

In China, they have the opposite problem. Bank lending increased an unsustainable 19.9% in December, according to figures released overnight.

That caps a year in which lending by Chinese banks rose by around a fifth, fuelling inflation in property and in retail prices.

In China the authorities are trying to increase the price of credit and reduce its supply - though not with any great determination as yet.

Those who believe a dangerous bubble is being pumped up there won't be reassured.

Which is why, as the FT points out this morning, it matters that the latest version of the Basel lll agreement on reinforcing the financial strength of banks allows for co-ordinated international action to increase capital ratios of domestic and international banks operating in bubble economies.

In theory, this would stem the supply of credit when overheating is perceived to be a problem. But, as is the way of these things, don't expect to see the new cross-border approach become a reality for many years.

Now the Chinese boom even has an impact on the price of bankers in the UK - in that one reason why Standard Chartered, HSBC and Barclays won't cut what they pay their top people and investment bankers to any significant extent is that they are having to pay more and more to hire and retain in Asia and China.

The only British bank subject to any material interference from the Treasury in respect of the bonuses it is set to pay is Royal Bank of Scotland.

As we speak, the holder of the government's stakes in the banks, UKFI, is negotiating with RBS to make sure that the ratio of what RBS pays its investment bankers to the income of the investment bank is at the bottom end of the ratio for its rivals (though not at the very bottom).

And the government is trying to influence the pay threshold at RBS at which bankers will receive all their bonus in shares or subordinated debt, as opposed to cash.

That said, as I mentioned last week, RBS is still on course to pay not far off £1bn in bonuses for its performance in 2010 - which will stir up controversy, when it happens, because bonuses paid in shares and subordinated debt will still be lovely jubbly for the recipients.

Interestingly, what the Treasury cannot directly determine is the bonus to be received by Stephen Hester, RBS's chief executive - because to do so would be micro-managing to the extent of making RBS's board redundant (and in those circumstances, the chairman and non-executives might well have to quit).

Instead ministers are looking to Mr Hester and RBS's non-execs to show what they would see as common sense, and defer any very substantial rewards for Mr Hester for a year or two - till it becomes clearer whether he has engineered a recovery at the battered bank that would benefit taxpayers as majority owner of RBS.

No such constraints for Mr Hester's most direct rival, Bob Diamond, who has just taken over as chief executive at Barclays - and whose pay package for 2011 is worth up to £11.5m.

As readers of this blog will know, the government has concluded that there is nothing much they can do to influence bonus payments at banks where taxpayers don't have a significant stake - other than appeal to the good offices of the likes of Mr Diamond.

In a minute or two Mr Diamond will be grilled on all this by MPs on the Treasury Select Committee. It's his first public outing as chief executive - and will be the first opportunity for Barclays owners to assess whether he's worth the money.

I will keep you updated.

Is there something British about banker bashing?

Robert Peston | 15:12 UK time, Monday, 10 January 2011


Bank bosses complain that British politicians, media and people are more conspicuously upset by the whopping bonuses paid by banks than the citizens of any other country (except, possibly, the Irish, who may have just cause, in that their economy was arguably made insolvent in a technical sense by bankers' excesses).

If the British are more stressed by what bankers pocket, why should that be?

After all, the reckless lending and investing of banks in the US, Switzerland, the Netherlands and Germany - inter alia - wreaked a fair amount of havoc in those countries (and around the globe).

So why would we Brits be more determined to bash or tax a banker in reaction to his or her bulging bonus than the Americans, for example?

Is it something to do with cultural disagreements over what's fair?

After all, the banking industries of both the US and the UK have been rescued by taxpayers, are still being propped up by taxpayers and are being subsidised by taxpayers (subsidised in the UK to the tune of £100bn in 2009 according to the Bank of England, and refinanced by British taxpayers - with loans, guarantees and investments - to the extent of £1.2 trillion just under two years ago, and about half that now).

Many in the UK take the view that banks should not be paying enormous bonuses unless and until all state support and subsidy is removed (a view apparently shared by the Deputy Prime Minister, Nick Clegg, based on his Today interview - though we'll see whether his view has teeth).

As the UK's banks still have £200bn of support from the Credit Guarantee Scheme and Special Liquidity Scheme to repay, and since RBS is still benefiting from loss insurance underwritten by taxpayers, and since Lloyds and RBS are still semi-nationalised, and since all the big banks are trading with the benefit of an implicit promise from the state that they won't be allowed to fail, well some would say the payment of billions of pounds in bonuses at this juncture looks a bit odd.

Here's the thing. Similar views are prevalent in the US. But they are not dominating the political agenda, as they do here.

Why should that be so? Arguably recession-induced unemployment and homelessness are bigger problems in the US than in the UK. So if you are minded to blame bankers for that recession, you ought to be angrier about the plight of the US than that of the UK.

So is it that Brits are genetically and culturally pre-disposed to be more cynical than Americans about anyone - not just bankers - making a colossal sum of money in business?

That is what many bankers believe. But something else may be relevant.

It is striking that the big bonus-paying banks in the UK are also the big high street banks, namely Royal Bank of Scotland, Barclays and HSBC.

They are banks with which more-or-less everyone in the country has some kind of relationship.

Since that relationship isn't always one that occasions joy on the part of the customer - when the overdraft charge kicks in, or the loan request is declined, or the phone is answered by a call centre operative thousands of miles away - it is probably not surprising that big rewards for banks' employees can grate, in economic good times and bad times.

By contrast, the big bonus-payers in the US are not institutions which count the vast majority of Americans as their customers.

Thus Goldman Sachs and Morgan Stanley, the leading US investment banks, do not have vast networks of ATMs, they do not provide home-loans, they do not offer current accounts to the mass market.

And those conglomerate or universal banks in the US that combine retail banking and investment banking - Bank of America, Citigroup and JP Morgan - may look huge in absolute terms, but they are relatively small within the fragmented US banking market: they don't dominate retail banking in America, in the way that RBS, Barclays and HSBC do in the UK.

To put it another way, when a British person becomes angry at Royal Bank of Scotland, it's like being angry with an errant family member; when an American becomes angry with Goldman Sachs, it is probably the equivalent of being furious with an irksome stranger.

In the UK, it is very difficult to escape from RBS, Barclays and HSBC. They are everywhere, constant reminders of the bonuses they pay that are viewed by many as unwarranted and egregious.

Also, there is a general view that these banks are deploying our precious deposits to gamble, to generate their bonuses - and that our savings are being put at risk so that bankers can live in mansions.

The bankers would say that's hysterical rubbish. The governor of the Bank of England would say there is something to the popular concern.

Here's the punch line.

Those who run RBS, Barclays and HSBC argue it would be a bad idea to break up their banks, to hive off their bonus-paying investment banking arms into independent organisations.

They disagree that the economy and our savings would be safer if retail banks could no longer be attached to investment banks.

But maybe, if their investment banks severed all connection with those high-street branches, they'd be able to regain their cherished freedom to pay and be paid what they like when they like.

Why government can't stop big bonus payments

Robert Peston | 09:56 UK time, Friday, 7 January 2011


The third commitment in the coalition's programme for government is to

"bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk".

Has that happened since the general election in May?

Well as a result of new European Union rules and earlier action by the UK's Financial Services Authority, the way that bonuses will be paid has been significantly reformed.

At least half has to be paid in shares and between 40% and 60% can't be cashed in for years.

Also, it is highly likely that for the top earners at the UK's leading banks, more-or-less 100% of payments will be made in shares or in subordinated debt (IOUs from the banks that can incur losses if the bank gets into difficulty).

Which should remove two elements of risk from the bonus payments, namely that they would deplete banks' precious capital and liquid resources, and that they would encourage bankers to take crazy short term risks.

If bankers are forced to hold shares and subordinated debt in their banks for years, then they should have less of an incentive to make dangerous bets to maximise short term profits - in that they would suffer if the bets go wrong.

That's the theory - though it didn't work at Lehman Bros, where employee share ownership was higher than it will ever be at Royal Bank of Scotland or Barclays.

But many, especially Lib Dem supporters, will be infuriated by the huge absolute size of bonus payment - millions of pounds for some individuals. Whether they are paid in shares or cash, these bonuses are immensely valuable.

And even if the bonuses or variable payments fall a bit, there have been increases in fixed salaries of between 20% and 40% for many investment bankers over the past few months.

So at a time when the incomes of most British people are being squeezed by low nominal pay rises and inflation, some will doubtless argue that bankers' bonuses remain "unacceptable" (to quote the coalition agreement) - especially when all big banks benefit from a guarantee provided by taxpayers that they won't be allowed to fail.

Even the Bank of England takes the view that big bonuses are inappropriate at institutions in effect subsidised by the state (to the tune of £100bn or so in 2009, according to Bank of England calculations).

As a consequence, the thrust of government policy - via international negotiations on reforming the banking system and the work of the government's own Banking Commission - will be to remove that implicit subsidy and support provided by taxpayers.

As readers of this blog will know, that means allowing banks to fail, or putting in place arrangements such that when banks get into difficulties, huge losses fall on investors and institutional creditors, while depositors cash and the bits of banks vital to the economy are protected.

Easier said than done. It is by no means certain the implicit support of taxpayers can be completely removed.

Royal Bank of Scotland


Which begs the question why ministers haven't simply ordered banks to slash bonuses, especially at the largely nationalised Royal Bank of Scotland.

Well, it is because slashing bonuses in that way would be tantamount (the banks warn) to closing down the investment banking operations of Barclays, and RBS and HSBC - in that their internationally mobile banking superstars would simply move to overseas competitors.

That is not a risk the chancellor wishes to take, because investment banking (whether you like it or not) has over the years generated significant revenues for the Exchequer and creates a good deal of employment in the UK (even if some would also argue that the proliferation of highly paid bankers in London distorts the economy and housing market of the capital).

To state the obvious, the payment of billions of pounds in bonuses will cause something a headache for the Liberal Democrat Business Secretary Vince Cable and the Lib Dem Deputy Prime Minister Nick Clegg - both of whom put the banks on warning before Christmas that the payment of massive bonuses would be wrong, especially if the banks were perceived to be doing too little to support the UK's economic recovery.

That's why ministers are now pinning all their hopes on the second strand of negotiations with bank chief executives, which are aimed at persuading banks to provide more and cheaper credit to small businesses.

To be clear, even reaching agreement on business lending isn't easy. For example, shareholders in HSBC might well query why on earth that bank should allocate precious capital to what they would see as relatively risky and low-return lending to small British companies, when there are arguably far better opportunities for a bank with global reach in India, or China or the Middle East.

All that said, I would be staggered if the banks don't come up with promises of new finance for smaller businesses, perhaps as soon as the end of next week. Because if they failed to do so, the political pressure on ministers to punish them - perhaps through the implementation of a new tax - might become impossible to resist, even for the chancellor (who doesn't want a new bonus tax).

Banks to pay out billions in bonuses

Robert Peston | 21:45 UK time, Thursday, 6 January 2011


The government has become reconciled to British-based banks paying out bonuses running to many billions of pounds in the forthcoming bonus round.

After weeks of talks between ministers and senior bankers, the best that ministers are hoping for from the banks is a statement from them - possibly at the end of next week - that they will pay out less than they would otherwise have done.

"They are looking for some words from us that prove that the negotiations have achieved something," said a senior banker. "I fear however that there may be more spin than substance to what we say."

A member of the government said: "We have never said that we want to see the end of big bonuses because we know that is not deliverable."

Investment banking has been a less profitable business for many banks in 2010 than it was in 2009. So bonuses were expected to decline in any case.

Royal Bank of Scotland may pay nearer £1bn in bonuses than last year's £1.3bn.

Barclays may award less than the £5bn to £6bn in salaries and bonuses that its results for the first nine months of 2010 indicate it would pay out to the 25,000 employees of its investment bank, Barclays Capital.

In the case of Barclays Capital, many of its employees are based outside of the UK: it has a huge base in New York, having bought the rump of Lehman in 2008.

Even if bonuses are cut, investment bankers won't necessarily be worse off, because many of them have enjoyed rises in fixed salaries of between 20% and 40%.

"It's well known that the pay of investment bankers has been reweighted towards salaries and away from bonuses," said the senior banker. "So even if bonuses are cut, the total pay of many bankers won't fall."

Another banker said: "the total amount we pay out in bonuses will look huge to most people. Even if we pay out less than the £7bn or so it was estimated we paid in 2009, we are still likely to face criticism".

The Chancellor, George Osborne, recognises that Royal Bank of Scotland, Barclays and HSBC - which are the main payers of bonuses among British banks - operate in a global market, and cannot afford to pay significantly less than their overseas competitors.

The banks argue that they would lose staff essential to their profitable operations if they fail to pay more-or-less the going rate.

To take the sting out of criticism of the substantial rewards for bankers who are widely blamed for the recent savage recession - and whose organisations are only afloat because they have been rescued by loans and investment from taxpayers - the government is looking for the banks to make new commitments to provide additional credit to small businesses.

The hope of Mr Osborne and of the Business Secretary Vince Cable is that the banks will make binding promises to increase lending to smaller businesses and charge those businesses less for credit.

"The Governor of the Bank of England and the Chancellor are concerned that banks' understandable and sensible desire to shrink their balance sheets is depriving credit-worthy businesses of essential finance," said a government source. "It's really important that the banks are seen to be making a contribution to the recovery of the UK economy."

Ministers are hopeful that the banks will sign up to a meaningful lending pact, but it is by no means certain. "The deal is certainly not done and it may never be done," said a member of the government.

One problem is deciding how much each individual bank must commit to lend.

"The banks in general understand that they must be seen to be lending enough," said a banker. "But when capital is in short supply, it is quite difficult for a global bank like Barclays or HSBC to choose to devote a substantial amount of resource to the relatively risky and low margin business of lending to smaller UK businesses, when there are more attractive opportunities elsewhere in the world."

As and when the banks issue their statement on lending and bonuses, they are also likely to say that they support David Cameron's plan to create a so-called Big Society bank using the proceeds from customers' dormant accounts (or funds left untouched by depositors for so long that they are unlikely ever to be claimed).

"The only problem we have with the Big Society bank is that we are not completely sure what it is going to do, though the idea of using the funds for community projects seems a good one as a general idea" said a banker.

The negotiations with ministers on a bonus and lending pact were started by John Varley, who has recently stood down as chief executive of Barclays. I disclosed the existence of these talks back in November.

Osborne lectures EU on banks

Robert Peston | 10:22 UK time, Thursday, 6 January 2011


The European emperor had no clothes, is broadly the gist of George Osborne's article in today's FT  about the eurozone's financial strains.

George Osborne

What he has to say about the weakness of Europe's banks, and the apparent fatuousness of last year's much heralded "stress tests" to assess the robustness of EU banks, is worth quoting:

"It is revealing that the tests conducted last July identified a capital shortfall of just €3.5bn. Yet less than six months later, Irish banks required 10 times that amount. That is why the UK has already gone further with tougher stress tests that mean our banks are well capitalised."

This does of course raise a question for Mr Osborne and the Financial Services Authority. Readers of this blog will be well aware of the widespread concerns last spring that the stress tests weren't tough enough, that they exaggerated the strength of Europe's banks.

Yet the UK joined in the chorus of European countries claiming that the stress tests proved that the health of European banks was tickety boo - only for it to become conspicuous within weeks that many of them had and have less capital relative to their loans and investments than their US and UK counterparts, that their liquid resources are inadequate and they remain too dependent on unreliable wholesale funding.

Some would say it might have been helpful if Mr Osborne, or the chairman of the FSA or the governor of the Bank of England had raised these concerns a few months ago.

Since Mr Osborne's criticism of the stress testing process is bound to infuriate his fellow European ministers, it might have been better to annoy them early.

Mr Osborne hopes that new stress tests, which European governments have agreed to conduct, will be more credible. And he raises the possibility of semi-nationalisation of some continental banks.

He makes two other striking points. First he sets himself up as roadblock to German hopes of restricting the short-selling of European government bonds, or the selling bonds that the investor does not already own.

Mr Osborne says there is no evidence that short-selling has in itself made it more difficult for European governments to borrow, which is presumably the point that matters. He argues that current plans to limit such speculation would actually force interest rates higher, which would be the opposite of what EU members would wish to achieve.

Second, he is plainly worried that European governments are trying to water down the new global Basel rules on the amount of capital and liquid resources that banks must hold. This is what he says:

"It is vital that we insist on its implementation in the US and elsewhere, and that we do not weaken the measures as they are translated into European law. And we should do the same with the agreed G20 principles on bankers' pay. Any talk of 'European specificities' in Basel III that are not already accounted for, and any delay to the agreed timetable, will simply reaffirm markets' suspicion that we are failing to address the difficult issues."

Why does this matter? Well there are many who believe that the new Basel standards for capital, liquidity and funding maturity don't go nearly far enough to make the banking system less prone to the kind of meltdown we saw in 2008 - and so any dilution of those standards might not be a wholly good or reassuring thing.

Big winners and losers from cold snap

Robert Peston | 16:20 UK time, Wednesday, 5 January 2011


It's fairly clear that the important Christmas trading period has created something of a hierarchy of retailers.

At the top (no surprise here) are the giant supermarket groups.

People clearing street outside shops


Some may have been net beneficiaries of the appalling cold snap.

How so?

Well, we all have to eat; and if we went out to shop at all through the deep and treacherous snow of December, we probably went to Tesco, or Sainsbury, Asda or Morrisson. And when we were in the supermarket, we may well have spent more than usual on clothes, DVDs, CDs, electrical items and the baubles that go into Santa's sack, to save ourselves a horridly frozen trip to the high street.

Which means that the supermarkets may, in the round, have taken more money than normal.

And it explains in part why the performance of HMV has been so lousy and why Next says that it lost £25m of sales to the elements.

Against that backdrop, Marks & Spencer is also likely to have suffered.

The apparent anomaly is John Lewis, whose remarkable sales growth seems impervious to any kind of climate.

One question, for when the dust has settled (and the snow has stopped settling), is which retailers are experiencing serious difficulties unrelated to poor weather.

HMV is plainly facing a structural challenge: competition from the supermarkets, online retailers and digital downloads is intensifying, though that threat was camouflaged to an extent till recently by the windfall HMV received from the collapse of Zavvi and Woolworths (and the demise of Woolworths was a double boon for HMV, because it disrupted wholesale distribution to supermarkets).

With the rise in VAT dampening consumer spending, and households' fear of interest rate rises a potential second dampener, 2011 is likely to be one of those Darwinian years, which sees the extinction of retailers genetically incapable of surviving a long economic winter.

Is the recovery too tilted towards big business?

Robert Peston | 09:34 UK time, Wednesday, 5 January 2011


Cautious optimism about the coming year looks like something of a trend.

A survey of Ipsos Mori published this morning shows that leaders of FTSE 350 companies are a bit more upbeat about their prospects than they were a year ago, which is similar to what finance directors of bigger companies have said to Deloitte in that firm's quarterly poll of their views.

These assessments are consistent with what business leaders say to me in informal conversations, with manufacturers in particular more cheerful than I have known them in years.

That said, there remains a sensible reluctance to count chickens. Which is hardly surprising, in that a year ago business leaders were allowing themselves to make similar positive noises - before the collapse of Greece and Ireland hit them in the face like a large wet fish.

Sale sign


And there are exceptions to the general mood that things are getting a bit better, especially in the retailing sector, where there is an expectation that households' record indebtedness will continue to dampen their enthusiasm to spend.

Then there are those businesses that cannot escape who and what they are - witness the hideous drop in sales disclosed today by HMV, a victim of the big freeze and technological change.

I should introduce a number of obvious caveats here. First is that Ipsos Mori obtained answers from "just" 102 "captains of industry" - a decent number, but plainly not the whole field.

Second, they are weighted towards the middle and bottom of the FTSE 350 rather than the biggest multinational companies.

Even so, the views of these second-rank executives are arguably a bit more representative of what's actually going on in the British economy, in that the fortunes of the biggest FTSE 100 companies - the oil and commodities giants for example - are far more dependent on conditions in the rest of the world rather than on this smallish island.

Finally, there is something of a contradiction between what they say about the economy in general and what they say about the prospects for their own companies.

So, for example, 32% of them expect the economic condition of the country will improve over the coming 12 months, whereas 29% expect it to deteriorate - which is almost identical to what they thought a year ago.

But a much more decisive 60% of them expect that business for their own companies will get better in 2011 - which does represent a bit of tick up from the beginning of 2010.

Even so, and this looks like another contradiction, a significant 75% of them say they have or are likely to postpone investment because of the economic uncertainty - with hiring new staff the main casualty. Which rather implies that even if the recovery gains momentum, unemployment may fall relatively slowly.

There are some other interesting nuances. The vast majority of them support the thrust of the government's general economic policy and believe that the public sector deficit needs to be cut rapidly.

But around half fear that restrictions on immigration will harm the UK's economic performance. Also they overwhelmingly believe that regulatory burdens on their businesses are rising and will harm the British economy.

Now it's in this general area, of managing the burden on productive industry, that there is an important challenge for the coalition.

Big businesses don't like regulation or additional taxes - such as the VAT increase - but they typically have the resources to deal with it. So, for example, to limit the impact of the VAT rise, they can (and do) squeeze their smaller suppliers to obtain supplies at keener prices.

However for smaller businesses, these new burdens can be the difference between life and death. And that's especially true at a time when they continue to find it difficult and expensive to obtain finance (which is absolutely not the case for the bigger companies, which are able to borrow as much as they like on the keenest possible terms).

As it happens smaller businesses also seem to be somewhat more upbeat than they were. That's the thrust of my completely unscientific Twitter trawl of the past 48 hours (to which you can contribute by tweeting with a mention of @peston).

More comprehensive attempts to gauge the mood of companies with turnover less than £100m also indicate a rise confidence.

That said, proper entrepreneurs are genetically programmed to look on the bright side, even when they acknowledge that times remain tough.

And what they want and need to know is whether the government will match its consistent rhetoric about the importance of smaller businesses with practical help in the short term.

Arguably the immediate consequence of the thrust of government economic, tax and regulatory policies is to increase the relative strength of big companies in the British economy - simply because bigger companies have the infrastructure and cash flows to cope.

Which may not be a complete disaster in the round, if the management consultancy firm McKinsey is correct that it is bigger companies that drive innovation and productivity improvements (see McKinsey's recent report, From Austerity to Prosperity).

But an absolute decline in the numbers and health of smaller businesses would not only be a personal tragedy for thousands of entrepreneurs. It would sap the ability of the British private sector to re-make itself - which would be pretty awful for all of us.

Update 12:30: Ipsos Mori has been in touch to say it made a mistake in the data it sent to me.

In fact, 25% of the business leaders said they were postponing investment, not 75%.

That still represents a significant reduction in investment plans, but not nearly as significant as Mori initially stated.

Will FSA take action against HBOS?

Robert Peston | 14:31 UK time, Tuesday, 4 January 2011


There were two huge British banking casualties of the great crash of 2008: Royal Bank of Scotland, rescued by taxpayers, and HBOS, rescued by Lloyds' shareholders and taxpayers.

The destruction of wealth - that of investors, including more-or-less anyone saving for a pension - has been savage, running to tens of billions of pounds in each case.

But for RBS, the Financial Services Authority as watchdog has already ruled - just before Christmas - that there was no wrongdoing.

The calamitous takeover of the rump of ABN in 2007, which did for RBS, was the consequence of misjudgements by the banks' directors that were appalling but within the rules. Or at least that is what the FSA has concluded.

And the FSA concedes that its own regulatory oversight of the risks being run by RBS was woeful.

We should learn more about all of this in the spring, when the FSA is to publish (after politicians and press screamed for a document) a bowdlerised account of its investigations into whether RBS and its directors deserved to be punished.

I should point out that one of the gaps in this report will be the absence of testimony from directors of Barclays.

This is not a trivial obstacle to understanding why RBS's directors drove their bank towards the edge of the cliff - in that some would argue that Barclays' board was doing something similar in 2007.

You'll recall that Barclays was bidding in a competition with the consortium led by RBS to buy ABN. To the great good fortune of Barclays and its owners, Barclays lost the bidding war.

But it would certainly be instructive to have a sense of why Barclays' directors were - like RBS's - apparently so desperate to overpay for a bank, ABN, that turned out to be something more poisonous than the curate's egg.

If banks are to avoid this kind of takeover debacle in future, insights from the boardrooms of both RBS and Barclays would be helpful.

However the FSA has neither the time nor the powers to extract the relevant testimony from Barclays. So we won't get it.

What of HBOS? What will we learn about how and why it made such mind-bogglingly poor loans to businesses, especially to property companies?

Here's the measure of the disaster at HBOS. Between the beginning of 2008 and the end of 2009, the losses on loans made by Lloyds and HBOS combined were £39bn - of which the vast bulk was contributed by HBOS (which became a part of Lloyds two years ago).

Now, much of what went wrong at HBOS was old-fashioned lethal exuberance about lending to property developers. It's not dissimilar to the madness that infected and harmed all of Ireland's major banks.

There have been a couple of decent official reports into the Irish banking meltdown. Something similar for HBOS - given that taxpayers have lent and invested over £100bn in keeping its new owner, Lloyds, afloat - would be seen by many as wholly appropriate.

But what detail the FSA can disclose about HBOS's near demise will depend on whether it finds strong evidence that HBOS and its directors broke the rules - and whether, to use the jargon, the FSA decides to take enforcement action against HBOS.

The former directors of HBOS will be concerned that - unlike what has happened at RBS - they haven't yet been given a clean bill of health by the FSA.

They will also be aware that what went wrong at HBOS was qualitatively different from what went wrong at RBS.

At RBS, its doom was sealed by the reckless decision of its directors to carry out a takeover (of the rump of ABN) that shrunk its stocks of loss-absorbing capital and liquid resources to the regulatory minima, and also made the huge bank far too dependent on unreliable short-term wholesale funding.

RBS went down (or rather it would have collapsed had it not been for taxpayers' financial support) because it made a strategic misjudgement at the highest level of the organisation that there would not be a serious economic downturn and that other banks and financial institutions would not stop lending to it.

So, for example, it allowed its equity capital to shrink to one fiftieth of its loans and investments - which may well have been crazily dangerous, but was consistent with the global Basel rules on capital adequacy.

Which is why the FSA would say the imperative has been to reform and mend the Basel rules, but that there is no basis for prosecuting RBS's directors.

At HBOS, something different happened. It lent tens of billions of pounds to companies - especially those with property interests - which have proved unable to keep up the payments and honour their debts.

The big question prompted by the sheer scale of the losses disclosed by Lloyds (as HBOS's new owner) from the beginning of 2009 onwards is whether HBOS could and should have revealed more and at an earlier stage about the problems being experience by those to whom it had lent.

Apart from anything else, the UK commercial property market was already in a dire state many months before Lloyds agreed to buy HBOS in the autumn of 2008.

For the avoidance of doubt, it is too early to say whether the FSA will find that HBOS breached important rules on the disclosure to investors of material financial information.

But the conspicuous fact that the FSA has not yet given HBOS a clean bill of health is not trivial.

Update 16.30: Here is the crux of what the FSA is looking at.

In the accounting period from the beginning of July 2008 to the end of June 2009, impairment losses for HBOS (losses on loans it had made) were around £21bn.

So that's £21bn of loan losses in a single year, of which the vast bulk came from poor quality loans to property-related businesses.

How credible is it that £21bn of losses can crystallise as fast as that?

Does that show failure of the accounting rules - which is what Tim Bush, the former Hermes fund manager, argues.

Or should HBOS have told its shareholders before the end of 2008 that a good portion of its corporate loans were looking a bit sick.

This is what Lloyds said about £7bn of loan impairments that Lloyds disclosed in a trading update on February 13 2009:

"The impairments are, principally as a result of applying a more conservative provisioning methodology consistent with that used by Lloyds TSB, and reflecting the acceleration in the deterioration in the economy, some £1.6bn higher than our expectations when we issued our shareholder circular at the beginning of November last year."

Does that reference to a "more conservative provisioning methodology" imply that HBOS should have disclosed at least some of the loan losses rather earlier than it in fact did?

The FSA will adjudicate on all this.

PS. Barclays (no surprise here) is keen for me to point out that the value of its offer for ABN was significantly lower than that made by the RBS consortium. And Barclays was mainly offering shares, rather than precious cash. So its board behaved less recklessly than RBS's.

But Barclays does not dispute that it should probably say a little prayer of thanks more-or-less every waking minute that it did not end up as the owner of ABN.

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