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Archives for August 2008

BAA break-up

Robert Peston | 04:00 UK time, Saturday, 16 August 2008


The charge sheet against BAA is a long one.

Heathrow Terminal 5Passengers moan about overcrowding and delays in its terminals.

Airlines complain that the charges levied by the owner of the UK's largest airports are excessive.

For the Competition Commission part of the solution would be for there to be proper competition between airports.

Which is why next week the competiton watchdog will recommend that BAA's near-monopoly of airports in the South East and in lowland Scotland should be smashed.

BAA would keep Heathrow but probably be forced to sell either or both of London's Gatwick and Stansted airports and also Edinburgh or Glasgow airport.

Sir Nigel Rudd, BAA's chairman, discloses in an interview with me (to be broadcast on BBC News tonight as part of my Leading Questions series of interviews with business leaders) that he fully expects such a recommendation from the Commission.

And he says that dismantling BAA in this way would not be a financial disaster for its owners, led by Ferrovial of Spain.

The owners have already had what he describes as "huge expressions of interest" from potential buyers of Gatwick and Stansted, he says.

And he insists that the painful recession afflicting airlines right now hasn't depressed in a serious way what Ferrovial and its partners would receive from a sale.

But just because the Heathrow proprietors could cope with the disposal of these airports would not make their disposal a good thing: Rudd believes that breaking up Heathrow would be pointless.


Because airlines are still queuing around the block to obtain slots at Heathrow, he says.

And he's doubtful that even the very best management and marketing in the world would ever turn Gatwick or Stansted into serious competition for the UK's great transport hub.

That however is an unprovable proposition: Heathrow has never faced a serious commercial challenge to its extraordinary market position, though it's probably about to do so.

Many will dismiss Rudd argument as what a monopolist would say.

As for the future of Heathrow itself, Sir Nigel Rudd is hopeful that by 2020 it will have the third runway it so badly wants.

This lifelong Tory is disappointed that David Cameron has expressed strong reservations about the necessity of a new runway. But Sir Nigel is confident that once elected to office, Mr Cameron would suddenly see the desirability of expanding Heathrow.

As for the suggestion by London's Mayor Boris Johnson that Heathrow could be relocated to a less residential area in the Thames Estuary, Rudd says that's simply not feasible.

BA's American dream

Robert Peston | 18:38 UK time, Tuesday, 12 August 2008


Such is the history of bad blood between Virgin Atlantic and British Airways that this time Sir Richard Branson has launched a passionate attack on a transatlantic deal being negotiated by BA even before that deal has been formally announced.

Sir Richard BransonIt won't be too long before BA announces the details of a proposed co-operation agreement with American Airlines. BA and AA on Monday approached the US Department of Justice for what's known as anti-trust immunity.

If granted, BA and AA would be able to share revenues, collaborate on prices, co-ordinate schedules and merge as much of their operations as is permissible without infringing the prohibition on overseas ownership of US airlines.

Details of what may be seen as a virtual merger will be announced this week, possibly tomorrow. But such is Branson's certainty that it will be a headache for Virgin Atlantic, that the Virgin founder has already written to the two presidential candidates, Obama and McCain, warning them that such a deal would be bad for consumers.

He believes it would give BA and AA an unfair advantage over the likes of Virgin Atlantic. And that ultimately it would lead to higher prices.

In the past, the Department of Transport has appeared to agree with him. When in 2001 BA and AA sought permission for extensive collaboration, the DoT insisted they give up 16 daily round-trip flights from Heathrow, which was more than they could stomach - so they withdrew their application.

Since then, the EU and the US authorities have agreed Open Skies, which goes some way to increasing competition on routes between Europe and the USA. Stage One came into effect in March and allows any US or EU carrier to fly from anywhere in the EU to anywhere in the US. And it broke the stranglehold on Heathrow-US flights of BA, Virgin, AA and United.

This year, Air France, Continental, Delta, US Airways and NorthWest have started up new flights to the US from London Heathrow. So BA's argument is that Open Skies has made the competitive landscape more competitive.

And, it adds, some of its biggest competitors - including Air France and Lufthansa - already have anti-trust immunity on their respective co-operation agreements with US airlines (the SkyTeam and Star global alliances).

Also relevant for BA is that trading conditions for airlines are currently worse than it can ever remember. The cost of fuel has been going through the roof just as its customers have suffered an acute squeeze on their disposable income. So BA feels an acute need to improve its efficiency, which the partnership with AA should deliver.

More or less the same logic explains why Sir Richard Branson is determined to characterise the planned deal as an anti-consumer scandal. At a time when so many airlines are in a parlous state, he argues that it would be appalling to reinforce the strength of the two mighty beasts, AA and BA.

And he believes that, as yet, Open Skies has delivered precious little meaningful competition to BA and AA out of Heathrow. Certainly the bare stats, which show that 60% of passengers going between the UK and the US fly with BA or AA, suggest that these two remain the powerful forces in transatlantic travel by a wide margin.

For Branson, BA's recently announced agreement to merge in a more formal sense with Iberia of Spain is more evidence of BA's determination to crunch the competition through its sheer size and weight.

All that said, it's quite difficult to see Branson and Virgin Atlantic as pathetic victims. What BA has initiated (again) is a bare knuckle fight against its longstanding nemesis. And since the contest will all be about lobbying and persuading regulators, the form guide would suggest that BA should not bank on securing permission for its American adventure.

May be as bad as early 90s

Robert Peston | 00:00 UK time, Saturday, 9 August 2008


The City watchdog, the Financial Services Authority, has told the UK's banks to make sure they are strong enough to withstand serious losses on mortgages and other lending for the next two or three years.

In an exclusive interview with me, the FSA's chief executive, Hector Sants, was asked whether the difficulties for banks could be as bad as they were in the early 1990's and whether losses on lending would continue to be a problem for up to three years.

Mr Sants replied that he would expect banks "to plan on that type of assumption". The recession and property market downturn of the early 1990s saw British banks suffer debilitating losses over an extended period.

He said "you'd expect a regulator to be naturally more pessimistic possibly than the market place as a whole".

He added that he expressed his opinions "fairly forcibly" to banks that they needed to raise capital, so that they could be confident of weathering the economic downturn.

Royal Bank of Scotland, Barclays and HBOS have between them raised £20bn of new equity capital. It's understood that the FSA had to exert a fair amount of pressure - to be "directive" in Mr Sants' words - before the banks agreed to raise as much.

Figures disclosed by banks in their results and in aggregate by the Council of Mortgage Lenders show that growing numbers of mortgage borrowers are having difficulties keeping up the payments. There has also been a sharp rise in repossessions.

However not all banks have started to incur significantly increased losses on their UK loans. The recent falls in their profits - and the £691m loss suffered by Royal Bank of Scotland - stemmed mainly from their investments linked to the dire US subprime lending market.

There has been a sharp rise in charges for losses on mortgages reported by HBOS, Northern Rock and Bradford & Bingley. But Royal Bank of Scotland actually reported a fall in losses on personal loans and mortgages made to British customers.

Most analysts expect losses on mortgages to rise for most banks over the coming months.

In relation to the causes of the credit crunch, Mr Sants disclosed that the FSA is unhappy at the way banks rewarded their star bankers during the boom years.

He says that there was an incentive on these bankers to take excessive risks with their firms' capital. That foolish risk taking has come home to roost in the form of massive losses on investments linked to US subprime lending.

Mr Sants said that the FSA would find a way to penalise any banks which continue to incentivise staff to take dangerous risks. He said there would be "consequences" for banks that pay employees too much for doing imprudent deals.

The full interview will be broadcast tonight on the News Channel series, Leading Questions.

RBS takes silver medal

Robert Peston | 08:06 UK time, Friday, 8 August 2008


It was only a year ago that Royal Bank of Scotland was the proudest, most confident bank in the UK.

RBS branchThe owner of NatWest had just pulled off the biggest banking deal in Europe, the takeover of ABN of the Netherlands, in partnership with a couple of other banks.

Now, on the anniversary of the onset of the credit crunch, it has suffered the indignity of the second worst loss ever in British banking history - a pre-tax loss of £691m.

Only Lloyds has recorded a bigger loss, of £715m, back in 1989, when it was forced to write off colossal bad loans to Latin America (although till I told Royal Bank this morning about the Lloyds debacle, it thought it had taken the British gold medal for worst ever loss).

Royal Bank's undoing has been that it piled into all those toxic securities linked to the dire US subprime housing market - and that it increased its exposure to the poison through the ABN takeover.

Its so-called credit market write-downs were a staggering £5.9bn - an almost incomprehensibly big figure.

What is particularly galling for the bank is that the rest of its business isn't doing too badly.

Its US operations have been hurt by a widespread banking downturn over there - with profits down a painful 42% - but in the UK it seems to be performing better than many of its peers.

Royal Bank's charge for the impairment of British personal loans and mortgages has fallen. However this may be the last time there's a fall in that charge, if the UK economy continues on its current decelerating path.

In fact if you want to see why the economy is slowing down, you only have to look at Royal Bank's consolidated balance sheet, which shows that in just the last six months it has shrunk the amount that it lends to customers and other banks while massively increasing its holdings of risk-free liquid assets (Treasury bills, and cash deposited at central banks, inter alia).

Like most banks, Royal Bank is deleveraging, or lending less than it was, in the spirit of these more risk-averse times. That's what its shareholders would want, though there's a serious price for most of us in the form of slower economic growth.

Also good for shareholders is that Royal Bank's profit margins on lending are improving a bit, which reflects the massive reduction in lending capacity in many banking markets. Or to put it another way, most of us are paying more for whatever finance we can raise from our cash-strapped banks.

And after its eyewateringly large £12bn rights issue, its balance sheet is in much better shape - though it still needs to sell a few more assets in order to lift its capital-to-assets ratio up to best-in-class levels.

In fact the scale of Royal Bank's humiliation is that it had to be shouted at (metaphorically) by the Financial Services Authority before agreeing to issue all those new shares to compensate for the subprime losses and prepare for the chill economic climate we're all experiencing.

Sir Fred GoodwinIts chief executive, Sir Fred Goodwin, tries to put a brave face on the humiliation. He says of the subprime and credit-market calamity: "It has been a chastening experience and reporting a pre-tax loss of £691m is something I and my colleagues regret very much."

He says that he and his team are "acutely aware that we drew heavily on our shareholders for financial support and we recognise that we must now deliver a level of performance that meets their expectation for the company and restores value to our shares."

That's as close as you'll ever hear to a chief executive saying that he's living on borrowed time. He is under unambiguous instruction from the bank's owners and its non-executives to fix the business and pronto, or he'll be out the door quicker than it takes to say "ABN was the wrong deal, at the wrong price, at the wrong time".

Stamp phobia

Robert Peston | 12:20 UK time, Thursday, 7 August 2008


I was supposed to be interviewing the chancellor this morning about the lessons of the credit crunch.

Alistair DarlingIt was something I'd arranged with the Treasury over the past fortnight, to mark the anniversary of when it became much harder for our banks to raise money and a serious downturn in our economy began.

I was an hour from asking Alistair Darling my first question when I received a call from the Treasury. An official enquired whether I would be asking the chancellor about his plans for stamp duty, following all those reports that he is planning a temporary suspension of that tax on house purchases.

Stamp duty would never have been the heart of the interview. But I could not ignore it.

The precipitous fall in house prices we are seeing is part of the fall-out from the crunch. So Mr Darling's plans for possible changes to an important tax on housing transactions are material to any general discussion of the causes, consequences and future shape of the economic mess we're in.

It would have been weird to ask nothing about stamp. And what I particularly wanted to know is what the chancellor would say to potential house purchasers who may be holding off doing deals in the hope that stamp will be waived in the autumn.

House pricesThat is a relevant question because we were contacted by estate agents yesterday claiming that the uncertainty over what will happen to stamp duty is further reducing activity in the already flat housing market, to the extent that they are quite concerned.

Long story short, I could not tell the Treasury that I wouldn't ask about stamp.

And the Treasury then cancelled the interview.

Which didn't surprise me or make me feel particularly grumpy. It would have been absurd for me to skirt around stamp, but the chancellor feels the resonant subject isn't quite within the spirit of the interview he agreed.

However the much more important point is that the chancellor feels he can say nothing about stamp, that to utter a world right now would be to pour petrol on a raging fire.

If he were to imply that there is not going to be a cut or suspension, and then there was a change, well he would be toast.

And he couldn't announce the details of any stamp plans he may have, because the Treasury doesn't know what's affordable so many weeks before the Pre-Budget Report - and, anyway, it would be wholly inappropriate to announce a tax change so potentially important during the summer recess.

So Alistair Darling has chosen to keep schtoom. But that too has a cost.

The prevailing view since his Today interview of earlier this week is that he is going to make a stamp change. And that may well be encouraging those thinking of buying a property to delay, thus sending the housing market from torpor to coma.

Barclays: credit and credibility

Robert Peston | 08:29 UK time, Thursday, 7 August 2008


Over most of my 25-year stretch in journalism, Barclays has been the bank that swaggered and then stumbled.

Barclays logoWhich is why so many observers of the banking scene have been assuming that, at some point during the current downturn in the banking cycle, Barclays would come up smelling of something profoundly unpleasant.

But so far it has performed significantly better than many of its peers. And although its chief executive, John Varley, says he's "acutely" disappointed with a 33% fall to £2.75bn in pre-tax profits for the six months to 30 June, I visualise him saying that with just a hint of a snigger - because the decline at Barclays is far less than at most of its British competitors.

Barclays has done particularly well, given that so much of its growth over the past few years has come from an investment bank, Barcap, that positioned itself as the bank that liked to provide leverage.

So more-or-less every analyst on the planet expected Barcap to be the pre-eminent credit-crunch victim. But, to date, Barcap has not suffered credit losses anywhere near as big as Merrill, or UBS, or even our own Royal Bank of Scotland (there'll be more to say on the RBS mess tomorrow), and it remains profitable to the tune of £524m (down almost 70%).

How has Barcap avoided the silly risks that others wallowed in? It's difficult to be sure, since on paper Barcap is stuffed to the gills with CDOs, and monoline exposure and leveraged loans. But its apparently sitting on the less toxic stuff. And if it were to survive this ghastly phase of the banking cycle without suffering significantly increased losses, well it would have earned some respect.

Which is not to say it's avoided all pain. Barclays' losses from what we now appear to be calling credit market dislocation (but which most of us would call "making foolish bets") were £2bn, give or take a few million, and were split roughly evenly between the first and second quarters of the year.

More-or-less all its other businesses - from Barclaycard, to retail banking in the UK and around the world, to commercial banking, to wealth management, fund management and custody - are doing okay.

And there are three very striking features of these figures:

1) impairment charges, ignoring the credit-markets ghastliness, are up only a bit - and charges against loan losses in UK retail banking are only very slightly higher (which will make HBOS feel queasy);
2) it's been ruthless in cutting costs, to prepare itself for leaner times;
3) and it has captured a staggering 26% of the new mortgage lending market, up from just 6%.

That last statistic tells you quite how hobbled are most of the other British banks. Barclays is capturing huge share of a rapidly shrinking market because it has the wherewithal and confidence to play.

And lest you think it is taking foolish risks with house prices falling, the average value of these new mortgages is 51% of the value of the respective properties - so it'll make good money on all scenarios for our economy other than Armageddon.

The crumbling ITV pillar

Robert Peston | 08:08 UK time, Wednesday, 6 August 2008


The most important announcement by ITV today is that it has halved its interim dividend to 0.675p. The painful cut is the ITV board shouting that life is tough and expected to become tougher.

Michael GradeBut what was perhaps more shocking - but only because of its symbolism - was to hear Michael Grade, ITV's chairman, talking this morning on Today with complete equanimity about the possibility of losing its special position as a licensed broadcaster.

The costs of living up to its obligations as the leading licensed commercial broadcaster were too financially onerous, he said, such that ITV wouldn't suffer too much if it became just another digital channel, providing less of the public-service broadcasting that once gave so much of its original definition.

He may be stating the obvious - but it was strangely upsetting to hear.

In urging Ofcom to lessen the regulatory burden, Michael Grade is no longer playing it in a nuanced way: "What is at stake is ITV's position as one of the three pillars of UK broadcasting, alongside the BBC and BSkyB", he says.

Multi-channel competition against ITV has been a nightmare for this founder of commercial broadcasting for years. What makes this nightmare almost unbearable is the economic slowdown we're all experiencing - manifest in ITV's expectation that its net TV advertising revenue will be 20% lower in September.

Michael Grade, ITV's chairman, is being realistic about the challenges. So a target to grow revenues from the sale of its programmes and content around the world has been cut by 20%, and it is now hoping to increase online revenues to £150m by 2012, two years later than planned.

All that said, the figures for the first half of the year don't look too bad in the circumstances. Group revenue is flat at just over £1bn. Pre tax profits - excluding an enormous impairment charge - were down 28% to £91m.

And Grade rightly takes pride that ITV's viewing share is up 2.5% and net advertising revenue for all its channels increased a smidgeon (though the revenue of ITV 1 fell 5.1%).

As for that impairment charge of £1.6bn, that's simply the unavoidable recognition that the businesses brought together to create ITV in 2000 and 2004 are worth a great deal less now than they were.

So cost-cutting has become the order of the day: there's a new goal of saving a further £35m a year by 2010. And the future for this totemic business looks uncertain - not least because one of these days BSkyB will probably be forced to sell a stake of more than 10% in a broadcaster that's in danger of being categorised as the media soap opera's battered victim.

Treasury injects £3bn into Rock

Robert Peston | 07:31 UK time, Tuesday, 5 August 2008


The government is to inject up to £3bn of new equity capital into Northern Rock.

Northern RockOr to put it another way, the nationalised bank is having a mega rights issue that taps its one shareholder.

The way to see it is as a tweaking by the government of its promise that all those taxpayer loans would be repaid.

It's now saying, in essence, that the final £3bn - plus £400m of preference shares that will also be converted into ordinary capital - will only be repaid if the bank is eventually sold and denationalised at a profit.

And it's anyone's guess, in the current ghastly climate for banks,.whether that will happen.

If Vince Cable, the LibDem Treasury spokesman, doesn't make hay out of this, he's asleep.

The reasons the Rock needs the capital are straightforward.

Its ratio of capital to assets - which was about 5% on the Tier One measure - is well below the industry average.

Most British banks - following their substantial capital-raising exercises - have Tier One ratios between 8 and 12%.

And the City watchdog, the Financial Services Authority, is insisting that Northern Rock be managed on exactly the same basis as other banks. So it too has to raise capital.

That said, £3bn looks massively over the top. On some measures, it looks about double what would need.

But the Treasury is probably being prudent in allocating as much as £3bn, for a couple of reasons.

1) Unlike other banks, Northern Rock has just one shot to recapitalise itself, because any such injection needs state-aid approval by the European Commission, which is typically granted only once.

2) It still has much reorganisation to carry out and - with prospects for the mortgage market looking pretty grim - it's probably as well to secure a bit more capital than it needs immediately.

In that context, it is relevant that the Rock made a loss of £585.4m in the six months to June 30 - and that arrears over three months on residential mortgages at the end of June were more than double as a proportion of loans what they were at December 31.

It's true that this arrears performance is still a tiny bit better than the industry average, but the trend is horribly in the wrong direction - and there are signs of particular strain for homeowners who took out the Rock's notorious Together loans, where the value of the combined mortgage and personal loans are significantly more than the value of the relevant secured properties.

Here's the most politically charged statistic: repossessed homes at the Rock have risen from 2,215 to 3,710 in the six months, or almost 70%.

The government has been urging banks not to repossess the properties of struggling borrowers, if they can possibly avoid doing so. The question therefore is whether the bank it owns, Northern Rock, has been sensitive enough to the problems of hard-pressed families.

The Rock's new capital will come from ceasing for a period the repayment of the giant taxpayer loan made to the Rock. What'll happen is that around £3bn of that will be converted into equity.

So what does it all mean?

Well the £3bn will probably - under our weird public accounting rules - be another £3bn added to the national debt, which the Treasury needs like a hole in the head.

And it will doubtless be seen by the government's critics as £3bn of taxpayers' cash very much at risk of loss.

Whether it is eventually lost, depends on two related factors.

First is when and whether the decline in the housing market is arrested and when prospects for the repayment of mortgages improve.

Second is when and whether investors become bullish about the prospects for banks again. If the government tried to sell the Rock into the private sector right now, the loss would be colossal.


I have been nudged into reconsidering my remarks that the conversion of £3bn of our loan into equity represents a political opportunity for the ubiquitous and often insightful Vince Cable. He, famously, was a longstanding proponent of nationalising the Rock, so if the capital injection is a sign of the nationalisation going a bit pear-shaped, then he can't really put the boot in.

It's more of a political opportunity for the Tories, since they consistently opposed state ownership for the Rock. Although they are a bit hamstrung in the impact they can make, since the shadow chancellor, George Osborne, is on his hols.

In fact the Tories might well ask whether it's appropriate that such a significant policy shift - which puts taxpayers right at the back of the creditors' queue for £3.4bn (the converted loan plus the pref that's being exchanged for ordinary shares) - should have been announced while the Commons is not sitting.

Rock's £500m loss

Robert Peston | 21:00 UK time, Monday, 4 August 2008


I have learned that Northern Rock will tomorrow morning announce a substantial loss of around £500m before tax - or a £200m loss on a so-called underlying basis, stripping out one-off charges - as it presents its first trading results as a nationalised bank.

However it will also disclose that it is paying back the huge loan it received from the Bank of England, which is guaranteed by taxpayers, faster than it had expected to do.

The Rock's slump into bigger-than-expected losses has three main causes.

There will be one-off charges associated with reorganising and shrinking the business, including the cost of 1300 redundancies which were announced last week.

Also it has changed its approach to accounting, which has had the effect of increasing reported losses.

But most attention will be on the charges it takes to cover losses it expects to suffer on mortgages made to financially stretched homeowners who are having difficulty keeping up the payments.

These loan impairment charges have risen sharply - just as those of HBOS, Alliance & Leicester and Bradford & Bingley have all done.

Mortgages provided by the Rock where the borrower is three months or more behind with payments rose dramatically in the first four months of the year, by two thirds as a percentage of all its mortgages.

The Rock is expected to say tomorrow that the loss is towards the worse end of what it expected when it created its business plan in the spring but is consistent with that business plan.

But even if trading conditions became much worse, there would be nothing for the Rock's savers to worry about because the bank is state-owned and therefore cannot collapse.

The better news for taxpayers is that the Rock is making faster-than-expected progress in paying back the £26.9bn it owed to the Bank of England at the end of last year.

The reason for the early repayment is that it has been applying pressure to borrowers to pay off their mortgages or take their business to other banks.

HSBC: Half right

Robert Peston | 10:31 UK time, Monday, 4 August 2008


HSBC this morning announced pre-tax profits for the first half of the year that will turn out to be more than the sum of the profits (and losses) of every other major British bank.

So it's worth taking notice of remarks made by the boss of this uber-bank.

Stephen Green, HSBC's chairman said:

Stephen Green"It is clear that growth models in our industry based on high and increasing leverage will no longer be sustainable. It is also clear that complexity in financial services and the recent consequences of failed risk management needs to be addressed.

"Along with its supervisors, our industry - including lenders, underwriters and investors - needs to reflect on the lessons for risk management, capital adequacy and funding.

"Ultimately, the real economy will recover from this crisis, though it may get worse before it gets better. Financial markets will not, and should not, return to the status quo ante".

For those of you not completely fluent in bankese, I'll translate. Green said that most banks over many years lent far too much to borrowers with scant chance of repaying. And they did so in such a complicated way that they couldn't understand the risks they were running.

Both of these bad habits have to be dropped for good, he added.

Oh, and as we approach the anniversary of when most of us date the onset of the credit crunch, he implied that the world's great banks are in large measure responsible for the mess we're in - and that the mess may well get worse before it gets better.

Green will be viewed by some of his banking peers as veering dangerously close to being a smug b. But HSBC has probably earned the right to lecture, because it still has buckets of capital (its important tier 1 capital ratio is a healthy 8.8%) and unlike so many of its competitors it hasn't needed to impoverish its shareholders by demanding they stump up more cash.

Which is not to say that HSBC's record is unblemished. Its first half results, released this morning, show that its pre-tax profits fell by 28% or almost $4bn to $10.2bn.

But $10.2bn of profit, or more than £5bn, will turn out to be more than combined earnings in the comparable period of Royal Bank of Scotland (which is expected to make a loss by analysts), Barclays, HBOS, Lloyds TSB and Alliance & Leicester.

Some of HSBC's success is an accident of its birth: it's massively strong in the still-buoyant economies of China, Hong Kong, Asia and the Far East. But some is also due to its long and strong tradition of penny-pinching prudence and caution - old-fashioned banking virtues neglected by so many of our financial institutions.

But HSBC is a human institution, it makes mistakes. These are manifest in a 58% rise to $10bn in loan impairment charges and in a $2.9bn loss generated by its US operations.

HSBC's error in the last banking cycle was - true to its soul - of an old-fashioned sort: it paid too much for a business that turned out to be something of a dog.

In 2002, it forked out almost £9bn for Household International, a US subprime lender which even then was described as "troubled". At the time, the FT reported analysts as saying that "Household needed to sell because its funding costs were being driven up by worries among investors about its accounting methods and business practices".

So there may have been a touch of hubris in HSBC believing that it could fix a model already identified as a touch rickety.

However HSBC's then chairman, Sir John Bond - who is now chairman of Vodafone - justified the deal by saying: "If you look at the low inflation, low cost environment, consumer finance is one area you would want to be in."

He couldn't have been more wrong. Household gave HSBC direct exposure to the collapse of the bottom end of the US housing market, and has delivered loss after loss to the group.

Which is why any applause for Green's lecture on the evils of modern banking practices should perhaps be three and a half fingers and not the full hand.

Pru and Invesco go nuclear

Robert Peston | 08:39 UK time, Friday, 1 August 2008


Depending on your view of the intrinsic value of British Energy, Invesco and the Pru are either heroes or villains.

Power stationAround 10pm last night British Energy's board decided it could not agree to a takeover by EDF, having been told that afternoon that these two big investment institutions, which together control 22% of the nuclear generator, were not prepared to accept EDF's revised takeover offer of 765p a share, which valued the company at more than £12bn.

At 11pm, British Energy delivered the news to the French energy colossus. Its reaction was probably a bit more colourful than a mere "zut!" - since detailed preparations had been made for triumphant declarations that were supposed to be made today.

But who delivered the painful message to Gordon Brown, at his Suffolk retreat? It would have been a plucky individual, since the prime minister has staked his reputation on a strategy for meeting the UK's future energy needs with a massive nuclear investment programme - and the EDF takeover of British Energy was supposed to deliver the bulk of this investment.

And in a way, this would have been a bit of family business, since the prime minister's brother, Andrew, runs EDF's press relations in the UK.

So what went wrong?

Well, Invesco and the Pru expect oil and gas prices to remain high for years to come - and on that basis they believe British Energy's shares are worth much more than what was on the table.

That's why a deal that was supposed to be announced on both sides of the Channel first thing this morning - and would have been hailed in a government press release as helping to deliver the UK's vital future energy requirements - imploded.

Bridging the gap between these two British Energy shareholders and EDF will not be easy, because the French power giant had been reluctant to push up its bid from the £7 it put on the table a few months ago.

There may be some scope to tweak the so-called "contingent value rights" being offered to BE's shareholders as an alternative to pure cash. These rights would have given shareholders who opted for them a share in the nuclear generators' future success: incremental payouts would have been paid to shareholders in the years ahead if British Energy's output and if the power price were above certain specified levels during the coming decade.

So maybe a more generous forumula for delivering such future payments may still tempt Invesco and the Pru to say yes. But executives and members of the government close to the deal are pretty pessimistic that the takeover can be rescued.

I have to say it's a bit odd that British Energy's advisers, Rothschild and JP Morgan Cazenove, weren't able to warn the company's board a bit earlier that the prospects weren't great for securing the agreement of these big investors.

Apparently the reason why investors' attitude was tricky to gauge was because of the difficulty in putting a monetary value on the contingent value rights.

Among those feeling bruised today is the business department, BERR, which controls just over 35% of BE.

BERR - which has responsibility for energy policy - was planning to hail the deal as facilitating plans to fill the gap between our energy needs and generating capacity that will yawn open in the coming decade.

That said, the takeover also brought problems, in that ministers were nervous about being seen to be giving a quasi-monopoly over the UK's energy security to a gigantic power business, EDF, controlled by the French government.

But what mattered more to the government is that the deal offered a route-map to a UK in which the lights would be kept on.

What will probably have to happen now is that agreements to build new plant will have to be negotiated on a site by site basis by British Energy - and by the Nuclear Decommissioning Authority, which controls older nuclear stock that also offers the potential for the building of modern generating capacity.

In fact BERR had been planning this morning to announce how the Nuclear Decommissioning Authority's property could be used to promote competition to an EDF-controlled British Energy: John Hutton, the secretary of state of business, would have hailed the likelihood of the likes of RWE of Germany building new nuclear plant. But an announcement about the future of the Nuclear Decommisioning Authority has been postponed too.

Arguably all of this mess could have been avoided if BERR last year hadn't sold part of its BE stake. Under pressure from the Treasury, it disposed of 450m BE shares to raise £2.34bn - a third less than the shares are worth today.

If BERR had kept that holding, it would still have majority control of BE, rather than just 35.2%, and neither Invesco or the Pru could have determined BE's future.

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