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Archives for September 2010

Dudley says BP to pay dividends again soon

Robert Peston | 15:15 UK time, Thursday, 30 September 2010


It's a new safety-first era for BP, under its quietly spoken new American boss, Bob Dudley.

He takes over as chief executive at midnight tonight. And in an exclusive interview with me, he said that controlling risks will henceforth be at the heart of everything BP does.

In fact his very first act, now that he holds the levers of power, is to create a new risk-and-safety division, which will embed safety officers in every nook and cranny of BP's vast global organisation.

BP might become slightly less vast and sprawling on his watch, as it sells off assets to meet the £20bn-odd costs of clearing up after the Deepwater Horizon oil disaster.

But he insisted that he was determined that BP should continue to have a presence in the US, even though its name has been something slightly worse than mud there since the polluting of the Gulf of Mexico.

As for BP's long-suffering shareholders, he had good news for them: he is hopeful that the company will resume dividend payments early in the new year. "I believe we will get there," he said.

Whether BP will be able to afford payments on the scale of the £6.67bn it shelled out in 2009: well, that's less clear.

But given the dependence of most British pension funds on income from what was the UK's biggest dividend payer, it will be huge progress if it pays anything commensurate with its £80bn market value.

Make or break for Ireland finances

Robert Peston | 09:16 UK time, Thursday, 30 September 2010


It is make or break for Ireland's public finances.

Brian Lenihan

The Irish Finance Minister, Brian Lenihan, has announced what he hopes will be a comprehensive and final rescue scheme for Ireland's banks, whose reckless lending has mortgaged the entire Irish economy.

The most reckless of the lenders, Anglo Irish, is to receive a further €6.4bn (£5.5bn) of state aid. An additional €2.7bn (£2.3bn) goes into Irish Nationwide.

And the National Pension Reserve Fund is to inject up to €7.2bn (£6.2bn) into Ireland's second biggest bank, Allied Irish Banks - which will in effect be nationalised, with the state fund likely to hold more than 80% of its shares.

The cost of the rescue to Irish taxpayers, including earlier measures, lifts the deficit in Ireland's pubic finances from a painful 12% of GDP to a staggering 32%.

Anglo Irish on its own is receiving just under €30bn (£25bn) of equity investment from the Irish taxpayer.

For what it's worth, the Irish taxpayer could get up to €2.4bn (£2.1bn) from subordinated debt holders in Anglo: Mr Lenihan has said that since these investors provided capital that was supposed to be at risk, they should shoulder some of the pain. That said, converting their debt into equity will not be a speedy process.

Mr Lenihan has also reaffirmed what he said to me on Friday that he believes it would be lethal for the Irish economy to force losses on any other creditors of Ireland's banks, even if they are sophisticated banks and professional investors who should have known better than to finance Irish banks' lethal lending spree.

If you add together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP.

That would compare with around 6% of GDP in the UK for the equity injected into Royal Bank of Scotland, Lloyds and Northern Rock.

In Ireland, some would also include in the cost of the rescue the further 25% of GDP that is being provided to the banks in form of state-backed bonds, as payment for the toxic loans they've transferred to the banking rescue fund, the National Asset Management Agency.

In other words, more than half of Irish GDP has been devoted to keeping its banks afloat.

That said, NAMA is acquiring these loans at a substantial discount to face value - and NAMA's chairman, Frank Daly, told me that over 10 years he would expect NAMA to make a profit when it finally secures whatever repayments it can from the property developers and speculators who borrowed colossal sums from the likes of Anglo Irish and Allied Irish.

And what a discount! NAMA is paying just 33 cents in the euro to Anglo Irish for the remaining tranche of €19bn (£16bn) in dodgy loans it is taking from the bank. Which implies that the quality of these loans is hideously poor.

The big question for the banks and overseas investors which have lent more than a trillion euros to Ireland's banks, businesses, households and the government is whether the banks' losses will now stabilise.

Mr Lenihan is attempting to reassure them that cataclysm can be avoided by taking further steps in December's budget to cut public spending and thus the deficit. He has reaffirmed his commitment to reduce the deficit to 3% of GDP by 2014.

He feels this is necessary because of the speed with which Ireland's public-sector debt has risen from one of the lowest in the eurozone as a percentage of GDP to 98.6 of GDP (or 70.4% deducting cash and investments). Mr Lenihan says his objective is to stabilise the national debt in relation to GDP by 2012/13.

But some investors will be concerned that with the Irish economy showing a small contraction in the second quarter of the year - following the acutely painful recession of the previous two years when Irish output shrank by around 14% - Ireland is on the brink of a vicious cycle of a public spending squeeze, which undermines economic activity, generates further losses for banks, reduces tax revenues and pushes up the national debt even further.

So it's just as well, perhaps, that the Irish government has already borrowed enough from investors this year to finance itself until the middle of next year.

The finance minister hopes (and probably prays) that by the time the government has to borrow again, early in the new year, the state's creditors will be confident that Ireland banks and the nation's finances are on the mend.

Cause 39 of the banking crisis

Robert Peston | 09:14 UK time, Wednesday, 29 September 2010


Howard Davies, director of the London School of Economics and founding chairman of the Financial Services Authority, has just published a characteristically witty and pellucid analysis of the competing theories for who and what caused the worst global banking crisis since the 1930s, The Financial Crisis - Who is to Blame?.

Howard Davies


He identifies 38 causes, from the efficient market hypothesis and lax regulation through to avarice and traders' testosterone. It's an old-fashioned primer, not a polemic. And - some would say - none the worse for that, given that there are a good few myths still doing the rounds about who or what was at fault.

Why did he write it? Perhaps it was therapy, a need to reassure himself that the debacle wasn't his fault. And he can take comfort that the explosion of banks' balance sheets - the period of the fastest growth of their dangerous lending relative to their capital resources - took place after he had handed back his watchdog's teeth and climbed his ivory tower.

As luck would have it, Tim Bush, a former Hermes fund manager and member of the Accounting Standards Board's Urgent Issues Task Force, would this morning argue that Davies's 38 causes should be 39.

He's tabling a paper for the taskforce to minute, as a prelude to a proposal for reform of the way that British banks account for old-fashioned, plain vanilla loans.

His is not the modish complaint that putting a market price on tradeable loans and investments - the mark-to-market requirement of fair value accounting - meant that banks over-valued their assets in the boom era, and under-valued them in the bust years.

There is a genuine debate to be had about the merits for banks of allocating their capital on the basis of asset prices determined by the irrational herdlike behaviour of investors (including the herdlike behaviour of banks themselves).

But Bush makes a different point. And although he has become something of a one-man, single issue, slightly obsessive campaigner, what he says is certainly worth considering.

In simple terms, what went wrong - Bush says - is that in the UK and Ireland from 2005 onwards banks stopped making any general provisions against the risk that their loans could go bad. In that sense, they stopped the long and tested practice of factoring into the cost of a loan the probability that it might not be repaid.

British and Irish banks stopped making these provisions for possible non-repayment of loans at both the level of published accounts and at the lower level of the operating units.

This was not their choice, Bush says. They were forced to do it by the way that the Accounting Standards Board implemented the international accounting standard IAS 39 as Financial Reporting Standard 26, or FRS 26.

Bush argues that the implementation of FRS26 magically made lending seem less risky and cheaper for British banks - so (guess what?) they did much more of it.

If you look at the terrifying speed at which Northern Rock increased the supply of 100% mortgages, or the extraordinary acceleration of lending to property companies by HBOS, there would seem to be some connection between the worst excesses of the UK's credit bubble and the cessation of any requirement to factor in the probability that some loans would go bad.

And there is a similar correlation between the accounting change and the timing of the explosion in property lending by Anglo Irish Bank and Allied Irish Banks.

That said, it doesn't seem wholly plausible that an accounting change could turn on a credit tap quite so fast - in that an accounting reform surely couldn't have persuaded long-serving bankers to simply forget their years of experience about the riskiness of lending.

On the other hand, it is striking that there was not quite such a lending binge in continental Europe, where the new international accounting standard was not implemented at the level of operating units, where lending decisions are actually made.

Given that the reckless increase in lending by HBOS and Northern Rock generated massive losses for both of them, which ultimately undermined their solvency, you might ask why the Accounting Standards Board thought it a good idea to abolish the requirement to make general provisions against possible non-repayment of loans.

Well, the ASB for some years has strived to reduce the element of subjective judgement in the production of published accounts. The ideal would be that accounts show the world as it is, not the world as managers would like to see it. So it seemed a good idea that banks should only report losses on loans as and when the borrower stops repaying - and not when the bank manager fears that they may stop repaying.

However, it turns out that accounting rules which deny the importance of managers' judgement may have the unfortunate effect of transforming them into credit-spewing automata.

Here's what gets Mr Bush really excited.

He thinks that FRS 26 may actually contravene the requirement of company law that banks operate in a prudent manner consistent with the protection of their depositors and creditors.

Which carries the intriguing and resonant implication that shareholders might be able to claim that they were gulled by FRS26 into believing that Britain's banks were made of bricks when they were in fact made of sand.

Why Ireland can't afford to punish reckless lenders to its banks

Robert Peston | 07:02 UK time, Monday, 27 September 2010


The only time I was taken aback when interviewing the Irish finance minister Brian Lenihan on Friday was when he said - with striking passion - that he did not wish to see losses for international banks and other financial institutions that have lent to Ireland's bloated, ailing banks.

More or less the same point, that Irish banks' wholesale creditors must be protected from the error of their lending ways, was delivered to me with equal vehemence by Peter Sutherland, the grandest of Ireland's globetrotting financial grandees (at various times chairman of BP, chairman of Goldman Sachs International, a European commissioner, director-general of the precursor of the World Trade Organisation, and so on and so on).

We can assume this is the view of the Irish political establishment, since Sutherland is not a supporter of Lenihan's weakening Fianna Fail government.

Which may strike you as a bit odd, given that Ireland's economy has been taken to the brink of bankruptcy, by the reckless lending of its banks to property developers, home builders and house buyers - and that this reckless lending wouldn't have been possible if the banks themselves had not been able to obtain cheap money from overseas banks and institutions.

So there is a strong argument that since Irish taxpayers are incurring huge and rising losses to clear up this mess, the pain should be shared with all the guilty parties, who surely include the sophisticated financial professionals at foreign banks that foolishly provided Irish banks with the means to mortgage an entire economy.

Brian Lenihan


But here's why for Lenihan, Sutherland and Ireland's mainstream political class it is heresy to adopt a policy of caveat emptor (or buyer beware) to the distribution of banking losses: Ireland's dependence on credit from abroad is so great that the economic consequences of that credit being withdrawn would be catastrophic.

Take a look at the latest figures from the central bankers' bank, the Bank for International Settlements, on just the exposure of overseas banks to Ireland (in other words, credit provided by pension funds, hedge funds and wealthy individuals would be on top of this).

Total foreign bank exposure to Ireland's economy is $844bn, or five times the value of Ireland's GDP or economic output. Of that, German and UK banks are Ireland's biggest creditors, with €206bn and €224bn of exposure respectively.

To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn't sound altogether prudent, does it?

As for direct bank-to-bank lending, overseas banks have provided Ireland's banks with €169bn of loans, which is also greater than Irish GDP.

Here's the point: an economy as open and as dependent on foreign finance as Ireland's cannot afford to alienate its creditors. If those overseas lenders asked for their money back now, Ireland's recent fall back into a modest economic contraction could spiral into dark deep prolonged recession or even depression.

There are two big conclusions to be drawn. First Ireland's inability to let market forces take their course will be seen by many as another example of why the banking industry has lost any semblance of right to operate according to normal commercial freedoms.

Second, the Irish economy is hideously and perilously balanced between recovery and Armageddon.

The Irish government has extended till the end of the year its formal guarantees to protect from losses more than €400bn of retail and wholesale loans to Irish banks (banks' subordinated debt is excluded).

But, to state the obvious, those guarantees are only reassuring to creditors if the Irish government is perceived as able to honour its own debts.

The credit-worthiness of the Irish government is largely dependent on two related factors: the delivery of its promise to reduce the public-sector deficit from an unsustainable 14.3% of GDP in 2009 to less than 3% of GDP by the end of 2014; the stabilisation of losses at Irish banks that are being underwritten by the government.

Here's one of many paradoxes about the Irish crisis: the losses at Irish banks are being crystallised by the activities of a fund set up by the Irish government, called the National Asset Management Agency (NAMA), to buy an estimated €80bn of bad loans from the banks.

NAMA tries to buy these loans at the price which captures how much will eventually be repaid by overstretched borrowers. And the average price it paid for the first €27bn of transfers was 47.5 cents per euro of debt.

Which means that the banks on average lost €14.2bn on these transfers to NAMA.

In one way, it looks like good news for the Irish taxpayer that NAMA is purchasing these dodgy loans at the market price.

Except for one thing. The huge losses incurred by the banks on the NAMA transfers deplete banks' capital - which then has to be topped up by (you guessed it) Irish taxpayers and the National Pension Reserve Fund, a state pension fund created for the long term benefit of Irish citizens.

The government has already nationalised the most breathtakingly imprudent lender, Anglo Irish Bank, into which it has injected €23bn. And later this week, Mr Lenihan is expected to announce how much more capital needs to go into Anglo Irish (Mr Lenihan wouldn't disclose the size of the future financial injection, but it'll certainly be a good few billion euros).

There is also a reasonable probability that the state, through the National Pension Reserve Fund, will end up as the majority owner of Allied Irish Banks: AIB is being obliged to raise the ratio of its equity capital to assets to 7%, and may only be able to achieve this if the National Pension Reserve Fund converts all or part of its €3.5bn of preference shares into ordinary shares.

All of which is to say that the banks and the Irish state are more-or-less one and the same thing right now. And the greater are the banks' losses, the greater the strain on taxpayers.

What will determine those losses - in part - is whether house and property prices stabilise after their 40 to 60% falls since the end of 2006. It hasn't happened yet, though the rate at which prices are falling has slowed down.

Of course, the great fear for the Irish government is that its putative virtue in making deep public spending cuts - and Mr Lenihan conceded that there are some big and painful decisions ahead - will further undermine confidence in the value of Irish assets, triggering further losses at banks, and thus eliminating the fiscal benefits of the deficit reduction programme.

Or to put it another way, it will be many months yet before Ireland can be certain it's over the worst.

That's presumably why Mr Lenihan didn't rule out in his interview with me that the Irish government might eventually be obliged to ask for financial support from the European Financial Stability Facility, the special €440bn fund set up by eurozone members to lend to financially challenged eurozone states.

Naturally Mr Lenihan doesn't want the national humiliation for Ireland of being the first eurozone member to tap the special bail-out fund set up after Greece went to the brink of insolvency in the spring.

Nor does he expect it.

But he daren't say no, nay, never - for fear that those all-important overseas creditors lose confidence in the existence of backstop insurance to cover their cripplingly huge claims on the Irish banks and the Irish state.

Triumph of the investment bankers

Robert Peston | 09:23 UK time, Saturday, 25 September 2010


The title of this piece should be called "the triumph of the investment bankers and finance directors".

Because something rather remarkable has happened at the UK's big four listed banks with the appointment of Doug Flint as chairman of HSBC and Stuart Gulliver as chief executive of that huge bank.

It means that - if we exclude from consideration Eric Daniels, who is quitting as chief exec of Lloyds and is yet to be replaced - every single chairman and chief exec at our biggest banks is either an investment banker by training and temperament or a former finance director.

Which tells you something about the culture and ambitions of our banks.

Here's the list.

Royal Bank of Scotland: the chairman is Sir Philip Hampton, a former investment banker (Lazards) and former finance director (lots of places, but notably at Lloyds); chief executive is Stephen Hester (not far off 20 years as an investment banker at CSFB, before stints at Abbey and British Land).

Barclays: the chairman is Marcus Agius (an investment banking lifer, from Lazards); newly appointed chief executive is Bob Diamond (perhaps the quintessential modern investment banker, as de facto creator of Barclays Capital).

Lloyds: the chairman is Win Bischfoff (another investment banking lifer, from Schroders and then Citi).

HSBC: the new chairman will be its long serving finance director, Doug Flint; and the new chief executive will be Stuart Gulliver, feted as having created a highly successful investment banking operation at HSBC.

So what does the takeover of the investment banking and finance cadre mean for these banks and for us?

Well, it shows that the focus of these huge, complicated and sprawling organisations is managing risk.

Which is probably a very good thing, if we remember that rather nasty accident in 2008 - when our banks were run by a miscellany of so-called professional managers and assorted grandees.

But there are other implications, which some will see as not quite so positive.

First, the absence of what you might call a proper retail or commercial banker from these top jobs might lead you to fear that providing the best possible service to customers isn't their metier or top priority.

Second, the ideology and instincts of this new financial ruling class were conditioned by having lived and breathed the recent years of financial globalisation, the erosion of barriers between investment banking and retail banking, massive financial innovation, the pervasive spread of the use of complex derivatives, and the rise of securitisation.

That implies they regard complex global universal banking as the natural order of things - which they may defend against radical change and reform, because it is their world.

On the whole, they take the view that the notion of the banking industry being reconstructed so that it became simpler to understand, more transparent and easier to manage, well they see that as naïve, futile nonsense (they've told me as much).

It also means, if there were any doubt, that the government's new banking commission will probably be fighting the banking industry every inch of the way, in trying to take the risks for taxpayers out of banking.

That said, many would say that our banks are in safer hands - because at least the new bank bosses are equipped to understand and manage the highly complex risks that their banks are running.

The question is whether they're also the appropriate people to take bold action to change the structure of their industry, so that mere mortals might have a better chance of grasping the risks they're running.

As it happens, the City watchdog the Financial Services Authority has encouraged - and indeed mandated - the appointment of these financial specialists to these highly important roles.

And in terms of experience and expertise, the top team running the FSA doesn't look that different fromt the top teams running these banks: the chief executive, Hector Sants, is an investment banking lifer (perhaps best known for his years at DLJ and UBS); Lord Turner was a vice chairman of Merrill Lynch for a few years (although no one would describe Turner as an investment banker).

This is not to imply that Sants and Turner aren't tough on their former investment banking colleagues. They are frequently beastly to them.

It's just that we're all prisoners of our backgrounds. And therefore it must be of some significance that an entire industry, of some importance to the rest of us, is managed and regulated by investment bankers.

Commission tackles too-big-to-fail banks

Robert Peston | 08:00 UK time, Friday, 24 September 2010


The issues paper published today by the banking commission set up by George Osborne includes statistics indicating that the retail banking market in the UK is much less competitive than that of other developed economies.

Some banks

The ICB will look at the "concentration" of banks

Perhaps the most striking figures are that the top six British banks control 88% of all deposits in this country, compared with a 68% market share for Germany's top seven banks, and just 35% for America's top eight.

If the commission were to decide this concentration is unhealthy, it is Lloyds - which provides 30% of all current accounts in the UK - which looks most vulnerable.

The commission also says that it is unacceptable that certain giant banks are perceived to be too big to fail - because (no great shock to readers of this blog) that means individual bankers can take business risks to generate profits and bonuses knowing that, if all goes wrong, the taxpayer will pick up the tab.

But at this stage it is only laying out options about what might be necessary to correct these flaws in the banking system.

These options range from the application of forced radical surgery on banks to the imposition of new legally enforeable prohibitions on what they can do.

Breaking up universal banks to separate retail and investment banking is one option.

Another is to ensure that where a universal bank owns both a retail bank and an investment bank, formal "walls" are erected between the two, preventing any subsidisation of the investment operation by the retail bank, and making it unambiguous that the investment banking arm or subsidiary can go bust without harming the retail bank.

The commission will also look at whether retail banking should be carried out by so-called narrow banks, only permitted to invest customers' deposits in the safest, most liquid assets, such as UK government bonds (the commission doesn't sound breathless with enthusiasm for this option, because of the damage it might do to the credit-creation process).

Also, of course, the commission will look at the range of fashionable proposals (contingent capital, resolution procedures, bail-in provisions) for making sure banks' wholesale creditors are genuinely at risk for the activities of bank executives - and therefore might exercise proper oversight over them or at least charge big banks the proper risk-capturing rate when lending.

To put it another way, it's early days in the life of this commission. And we'll have to wait until it makes preliminary recommendations in March or so before we have a sense of quite how radical it will turn out to be.

In the meantime what is striking is the concern raised by the commission that there may be tension between its twin main aims of promoting financial stability and competition.

In crude terms, bankers who know that profits will fall into their laps, because the competition is so feeble, may take fewer risks than bankers who have to battle for a living.

But that's probably just another reason to make sure that in a competitive market, bankers know that they and their institutions - and not taxpayers - will suffer if they take crazy risks.

The delicious boardroom farce at HSBC

Robert Peston | 22:10 UK time, Thursday, 23 September 2010


The saga of the replacement of Stephen Green as chairman of HSBC is turning into a farce, which is delicious for spectators but humiliating for one of the world's most proper and secretive banks.

I am told by those close to the board that Doug Flint, the current finance director, has been chosen as the new chairman, that Mike Geoghegan, the chief executive, will be quitting, and that he'll be replaced by Stuart Gulliver, the current head of investment banking.

So far, so conventional, you might think.

Well, you'd be wrong.

First of all, it's not at all clear that the Financial Services Authority has given its approval for the changes. In fact, I am informed that the FSA has not yet given permission.

And my guess is that anxious telephone calls are as we speak going into the FSA in the hope that the thumbs up is granted so that HSBC can announce the changes in the morning.

The FSA may concede. But it will hate being rushed into sanctioning a pair of appointments of enormous importance to the stability of the financial system.

Which is not to cast aspersions against Mr Flint or Mr Gulliver. They are both respected bankers.

But there is an argument that promoting an insider like Mr Flint is not the best way to make sure that the executive team is subject to proper challenge and scrutiny.

As it happens, HSBC has a long history of promoting executive insiders to the post of chairman. And the bank has flourished.

However it is at least worthy of debate whether the bank has done well because of its unorthodox boardroom structure or in spite of it.

Certainly a majority of big investors would in general oppose executives being elevated to the position of chairman.

What is also extraordinary is how public - through a series of leaks, to the FT in particular - the battle for the top job has become. At various times, newspapers have reported that the former Goldman Sachs banker, John Thornton, was the front runner, and that Sir Simon Robertson - another Goldman alumnus - was in the frame.

Then there were reports that Mr Geoghegan was threatening to walk in high dudgeon (which HSBC denied).

Oh and Stephen Green's departure wasn't exactly the best kept secret.

None of this probably matters in a fundamental sense.

And it has been profoundly entertaining for those like me who know the shame that must be felt inside HSBC in appearing no more dignified than a football club riven by factional infighting over who should be the next manager.

That said, for all HSBC's success in steering a pretty steady course through the worst banking crisis in 60 years, some would argue that succession planning at such a vast and powerful organisation ought to be a little more orderly.

Royal Mail: A hedge fund that delivers letters

Robert Peston | 15:14 UK time, Thursday, 23 September 2010


Royal Mail is a hedge fund that delivers letters.



Or at least that's what the pension-fund expert John Ralfe argues. He has spotted that Royal Mail's vast pension fund took a massive punt on shares via the derivatives market last year.

The accounts of the Royal Mail Pension Fund show that it had £5.13bn of "economic exposure" to UK and overseas shares via futures contracts as of 31 March this year.

That's up from £2.1bn a year earlier.

Now the pension fund will argue that it has used futures as an efficient way of investing in equities.

And if the equities futures are ignored, the fund has a conservative investment strategy, with 71.5% of assets in bonds or cash.

But the futures bets shouldn't be ignored.

The fund's annual report (as opposed to Royal Mail's) describes this investment in equity futures as a "return-seeking overlay".

And it says that this return-seeking overlay rose from being equivalent to 10.5% of assets to 20.1%.

Some would say that was a big wager on shares. And, of course, it's fabulous that it seems to have paid off.

The return on all the fund's assets (not just derivatives) in 2009-10 was 29%, which more than made up for the previous year's losses and was superior to the performance of many pension funds.

The precise contribution of the futures bets on shares to this return is unclear. But it's reasonable to assume it was positive.

But what if it hadn't paid off?

Here's what will trouble some: there's no mention of the futures investment in Royal Mail's own annual report and accounts.

John Ralfe says that is a worrying omission: the pension fund is a formal liability of Royal Mail, which means that when the fund takes increased risks, so too does Royal Mail.

"These huge off-balance-sheet side-bets should certainly be disclosed in Royal Mail's own accounts," Ralfe asserts.

I understand that Royal Mail's directors were aware of the pension fund's future speculation. And they discussed it with their auditors.

They believe that the potential liability to the group of the derivatives investment going wrong is captured in a general disclaimer in the accounts about uncertainties.

But does the Business Secretary, Vince Cable, know that - in effect - he's the shareholder in a giant hedge fund that happens to be attached to postal service?

Here's the question for him: as Royal Mail prepares for privatisation and for simultaneously putting the bulk of its pension-fund liabilities on to the public sector's balance sheet, should its pension fund be speculating to the tune of £5bn on equity futures?

Why RBS looks set to own Liverpool FC

Robert Peston | 08:43 UK time, Thursday, 23 September 2010


For those interested in owning Liverpool FC, the important calculation is this one: do they want to pay a premium and buy the club and business now, for something between £420m and £600m, or do they want to wait until it is in the hands of its banks, in the hope of securing Liverpool for more-or-less the £280m value of its bank debt (which includes £40m of penalty fees)?



Many would say that harsh commercial logic dictates only one answer.

With the 15 October deadline looming for Royal Bank of Scotland, Liverpool's main creditor, to decide whether to take control of the club, most bidders would surely prefer to wait for the fire sale.

Which is why it looks increasingly likely that Liverpool will - before too long - be the property of Royal Bank of Scotland and the US bank Wachovia (which provided around 25% of the bank debt).

There remain big imponderables, however.

One is whether Royal Bank of Scotland can take control without the business falling into administration - which would lead to a nine-point deduction for Liverpool to its Premier League tally (and, right now, would leave it with an interesting minus four points, which is a bit surreal).

As I understand it, lawyers are beavering away on behalf of RBS to investigate whether the bank can take control while avoiding administration.

Also, for the avoidance of doubt, RBS wants to own Liverpool like Superman craves kryptonite. If, in mid-October, RBS does end up formally in charge, its plan would be pass the club on to a new owner as quickly as humanly possible.

The Kop end of Anfield, circa 1969

The Kop end of Anfield, circa 1969

Finally, here's where those figures of £420m to £600m come from for the price tag if you want to buy Liverpool before the fire sale:
• £600m is what the two US owners Tom Hicks and George Gillett would like for the bank debt and their equity. It would value their equity at more than £300m, providing them with a handsome profit.
• £420m would recoup for Hicks and Gillett the £140m odd they've put into Liverpool's holding company, Kop Holdings, via their Cayman Islands vehicle. It would, in essence, give them their money back without a profit.

There may be some Liverpool supporters who feel it is worth paying Messrs Hicks and Gillett somewhere between £140m and £320m to spare Liverpool FC the humiliation of falling into the clutches of its banks - although the evidence of the fans' blogs and websites appears to be that most supporters would in fact rather stick pins in their eyes before handing a profit to the US duo.

I doubt, however, that any of those supporters have a spare £500m lying about that they don't need right now. Which is why it's a pretty fair bet that RBS will end up owning Liverpool (for a bit).

Cable: 'I love business, really'

Robert Peston | 08:28 UK time, Wednesday, 22 September 2010


Many uber-capitalists would tend to agree with Vince Cable's critique of capitalism - that it tends towards short-termism, that markets often don't work in a fair and efficient way, that vast rewards often accrue to the undeserving.

Vince Cable

But, they would add, history would tend to indicate that capitalism is the least worst system we have for generating wealth.

So what has caused the odd harrumph in British boardrooms, in reaction to the deliberate leaks by Mr Cable of extracts from his speech today to the Liberal Democrat conference, is that Mr Cable is accentuating the negatives about the behaviour of the private sector.

And that's not wholly trivial at a time when we all need the private sector to grow and flourish - if unemployment is to fall and living standards are to rise again - in order to take up the slack in the economy that is being generated by an unprecedented squeeze on public spending.

If the private sector believes the business secretary and government is hostile to its interests, then it'll invest less in the UK - and may even up sticks to those fabled foreign parts where business leaders are deified rather than vilified.

However Mr Cable is a complicated and misunderstood chap, as he implied on the Today programme this morning.

After all, it's him alone at the cabinet table battling on behalf of bigger British companies to allow more immigration into the UK from outside the UK (see my previous post Why businesses want to recruit from overseas).

And no one has shouted louder than he over the past couple of years on behalf of small businesses starved of vital credit by banks.

He has come to tame capitalism, rather than bury it - he might say.

And the truth is that there is nothing desperately novel in that aspiration. Every government since the fall of Margaret Thatcher and Ronald Reagan some two decades ago has - by stealthy increments - tried to make it their business to try and harness capitalism to minimise the bads and maximise the goods that it generates.

The problem is, some would say, that they did this in a piecemeal way that didn't get to the heart of the matter.

So perhaps it is a good thing that the business secretary wants to cast what he calls "a harsh light into the murky world of corporate behaviour."

After all, acknowledged experts - including the governor of the Bank of England and the chairman of the Financial Services Authority, who have hitherto done a good job of hiding any sympathy they might have for the SWP - assert that the banking crisis of 2008 is demonstration that the taming of capitalism has failed in a pretty fundamental way.

Lord Turner, for example, in his annual address to the City of London and in an interview with me yesterday renewed his swipe against his many predecessors at regulatory bodies and central banks who believed that financial markets are self-correcting, and that therefore light-touch regulation is good regulation.

One consequence is that Lord Turner and Mervyn King are both taking it upon themselves to meddle in the affairs of banks before breakfast, lunch and tea, to prevent them ever again holding the entire British economy to ransom.

Also, the recent Deepwater Horizon disaster is widely seen as proof that the boards of huge companies such as BP are not provided with adequate incentives to minimise what have colloquially come to be styled as high impact, low probability events - which is another way of saying that the big rewards go to those business leaders who have Nelsonian vision.

Vince Cable guru on all this seems to be Andy Haldane of the Bank of England - and Mr Haldane's recent monograph on "patience and finance" is the guiding text (see my recent post on this).

Which sets up something of a challenge.

This tendency of markets, especially financial markets, to encourage impatient herdlike behaviour rather than thoughtful, patient investment is not a new malaise: Keynes, for example, is withering about it, in the general theory.

If Vince Cable tries and fails to cure this great Anglo-American disease, he'll be part of a distinguished and long line of well-intentioned, disappointed minsters.

Update 1400: The heat has rather gone out of the pitched battle between Vince Cable as revolutionary vanguard and the boss class.

I think it was when the business secretary attributed to Adam Smith - father of market economics - the notion that "capitalism takes no prisoners and kills competition where it can" that Richard Lambert, director general of the CBI, recognised that Mr Cable was in fact wielding a loaded olive branch rather than a Kalashnikov.

The residual emotion among those killer capitalists is one of mild bemusement. They're not sure what it is Mr Cable will be endeavouring to fix when he shines his "harsh light into the murky world of corporate behaviour" with his promised consultation to be launched in October.

This review will be looking at "the questions of takeovers, executive pay and short termism generally", according to a briefing note from Mr Cable's office.

But this isn't terribly precise. And although Mr Cable has made plain his distaste for Kraft's takeover of Cadbury - which he sees as an example of bad money displacing the good - he presumably wouldn't want to rewrite company law on the basis of a single controversial deal.

It would help, some would say, if Mr Cable would say where he attributes the primary blame for what he perceives to be the failure of markets to allocate resources in a way that maximises employment growth, customer satisfaction and wealth creation for pensioners and other shareholders.

Is it that the management class in big companies doesn't want to listen to the owners, the shareholders?

Is it, as Lord Myners avers, that too many shareholders are unfit owners and lousy stewards of savers' money, who simply refuse to engage with corporate managers.

Or does Vince Cable triangulate and say it's a bit of both?

The fear in much of corporate and financial Britain, which has intensified over the past 24 hours, is that Vince Cable wishes a curse on all their houses.

That's probably wrong. But perhaps it's not ideal for him or for Britain that the private sector appears to be uncertain about "their minister's" basic convictions.

Lord Turner: 'Blame the policymakers more than greedy bankers'

Robert Peston | 21:30 UK time, Tuesday, 21 September 2010


After the impassioned demand by the Deputy Prime Minister, Nick Clegg, for bankers to stop paying what he called sky-high bonuses, the UK's top regulator has said that regulation of City pay is indeed needed to reduce incentives for excessive risk-taking.

Lord Turner

But, in what may be seen as something of a rebuff to Mr Clegg, Lord Turner, the chairman of the Financial Services Authority, added that the UK has to "move beyond the demonisation of overpaid traders".

Lord Turner also told an audience of grandees at the Mansion House that individual greed and error was less of a contributor to the banking crisis of 2008 than a wrong-headed approach to the regulation of banks and the economy.

So he is encouraged by the latest international agreement by central bankers and regulators, the so-called Basel lll agreement, that will force banks to hold more capital as protection against future losses.

However, Lord Turner conceded that if he were designing a relatively safe and stable financial system from scratch, he would force banks to hold yet more capital.

The perfect solution wasn't available, because Lord Turner and his colleagues on the Basel Committee on Banking Supervision were acutely aware that while banks are building up their reserves of capital, they tend to lend less (even if there is no evidence that banks lend less as and when they have accumulated the requested capital).

The Basel Committee had to compromise on a lower target for capital ratios, Turner said, so as not to undermine the global economic recovery.

That said, Lord Turner is determined that the very biggest banks (the notorious "too-big-to-fail" banks) will become much less dependent on the implicit protection of taxpayers, by instituting new legal arrangements that would force the creditors of those giant banks to convert their loans into loss-absorbing equity during a crisis - in a process known as a bail-in (as opposed to a bail-out).

That would add an extra layer of protection before banks came cap in hand to us, the taxpayers.

But such new funding arrangements could be expensive for banks, because their creditors would demand extra interest for the additional risks they would be taking away from taxpayers.

Which raises two questions.

Would these costs be passed to customers, especially to businesses which presumably feel they can ill afford to pay more for credit?

And, if banks were obliged by competition to absorb some of these increased funding costs themselves, would some of the bigger investment banks - those that are more dependent on the de facto subsidy of the taxpayer safety net - become unviable, obsolete, forced to liquidate themselves?

Should bank chairmen kill bonuses?

Robert Peston | 11:16 UK time, Tuesday, 21 September 2010


At what monetary threshold does a bonus become "a ludicrous sky-high" bonus?

Nick Clegg


The banks would quite like to know, because the deputy prime minister this morning told the Today programme that the coalition might well impose an additional punitive tax on them if they remunerate their superstars in that kind of "offensive" (Nick Clegg's words) way.

Well "sky high" - in the matter of pay - is a relative term. For most people, a bonus of £10,000 is a fortune. But we can be pretty sure Nick Clegg is not taking a pop at payments of that magnitude.

What about £100,000? Is that acceptable to him? Probably.

Or £500,000? That may be bordering on the "offensive" to the Lib Dem leader.

And is it £1m or £5m that's definitively intolerable?

This national obsession with bankers' pay - as evidenced by the bonus-bashing at the Lib Dem conference - may be fully justified.

After all, it seems odd and even obscene to many that institutions so recently rescued by taxpayers - and still explicitly or implicitly underwritten by taxpayers - should pay so lavishly.

But this fixation with the heft of the banks' wedge may not be healthy for the banks or for the economy.

Bank bosses have told me they are devoting an inordinate amount of time to thinking about how to pay their people what's necessary to honour their contracts and retain their services, while not paying so much that alienated politicians, media and populace become determined to pull their houses down.

Right now, what laughingly passes for a strategy to deal with this is a hope that the recent worsening in investment banks' performance continues for another couple of months, so that market forces force the banks to pay their people less than last year.

Even if their perverse wish for the froth to be wiped off their revenues is granted, seven-figure comp will still be what Santa brings to thousands of bankers - while hundreds of thousands of non-bankers fear for the security of their jobs.

So bank chairman and chief execs may have no alternative but to revive their collusive habits, and agree some kind of bonus moratorium among themselves.

How likely is it that they can agree a voluntary pay policy among themselves? Well, they made a half-hearted attempt last year and conspicuously failed.

But if they do little to collectively address public concerns about bankers' rewards, they are taking a not-very calculated risk that the furore will blow over.

The last time they took such a risk - namely when they thought the boom times in markets would never finish - it didn't end well.

Update 1210: A voluntary moratorium on bonuses won't happen, a senior banker tells me, because it would be illegal.

Here are his fascinating remarks:

"If a chairman decided to unilaterally disarm (ie slash bonuses) they would commit commercial harm and fail in their duties.

"If the market is producing an outcome that is unacceptable then regulators must regulate. Why has the Government not set up an independent pay commission or better still asked Vickers (the Treasury's bankig commission) to examine this issue alongside everything else?

"There is no realistic industry solution consistent with market rules and the legal responsibilities of directors."

So there you have it. If the government wants the banks to show bonus restraint, it may have to impose a pay policy on them.


What does it mean that the three mega-bankers have quit?

Robert Peston | 16:30 UK time, Monday, 20 September 2010


There was a time, not so very long ago, when it was unclear whether Eric Daniels would have the luxury of being able to determine the moment of his exit from Lloyds.

Eric Daniels


The 2008 takeover of loss-making HBOS cost Lloyds's shareholders so much in the short term - both in respect of a tumbling share price and the arrival of HM Treasury as a 43% (now 41%) shareholder - that it was taken for granted in the City that he would be pushed before he jumped.

But the dogged Mr Daniels refused to be moved. And latterly he has resisted an increase in the state's shareholding while overseeing a return to profit by the enlarged bank.

His reward is that Lloyds's directors have allowed him to tell them - as he did a week ago - that he wants to quit. And today the bank's board accepted his decision to be somewhere else a year from now, by which time he'll have been chief executive for a respectable eight years.

Daniels is the third bank boss this month to stand down: John Varley is quitting as chief executive of Barclays; and Stephen Green is departing as executive chairman of HSBC.

Why has there been this flurry of bankers heading for the door?

Well, it tells you that banks are past the moment of acutest crisis and face a new challenge - which is how to persuade the government and its banking commission (whose detailed work plan is to be published on Friday) that they don't need to be broken up in order to make the banking system safe.

Mr Varley and Mr Daniels are staying on just long enough to make the case to the commission for mega-banks, while Mr Green will be on the ministerial committee that will ultimately decide whether banks should be dismantled, after he joins the government (as trade minister) in a few weeks.

Some would say, however, that the power of these three bankers' arguments in favour of the status quo will be lessened by their refusal to stick around to manage their respective institutions in whatever financial landscape emerges from recession and regulatory review.

Their successors - even Bob Diamond at Barclays - are less associated than them with a particular modus operandi. So arguably their departure makes it easier for ministers, in a psychological sense, to take the cleaver to the vast sprawling businesses which are their legacy.

The passing of Varley, Green and Daniels may well mark the high water mark for the idea that big is best in banking (at least for this cycle).

Is avoiding tax immoral?

Robert Peston | 09:13 UK time, Monday, 20 September 2010


Danny Alexander

For most companies and many wealthy individuals, what Danny Alexander said yesterday about tax avoidance was both shocking and potentially very significant.

It repays reprinting a significant chunk of the Treasury chief secretrary's address to the Liberal Democrats' conference:

"Just as it is right to ensure that every benefit is fully justified, so we must ensure that every tax bill is paid in full. There are some people who believe that not paying their fair share of tax is a lifestyle choice that is socially acceptable. Just like the benefit cheats, they take the resources from those who need them most. Tax avoidance and evasion are unacceptable in the best of times but in today's times it is morally indefensible."

I am sure that many of you would agree with him. But "tax evasion" is illegal whereas "tax avoidance" is not: tax avoidance is the use of lawful devices to reduce taxable income and thus the tax payable to the Exchequer.

Now, there are plenty of individuals who see tax as just another of those irksome costs of doing business, such that they would be certifiable if they didn't do all that's necessary to shrink their tax bills. They would take the view that if they're not breaking the law in reducing the tax they pay on their income, then they're doing nothing wrong.

As it happens, a good number of donors to the Tories - Mr Alexander's partners in the coalition government - have engaged in what they would see as sensible mitigation of tax and what Mr Alexander might well see as hideous avoidance.

So I shall be interested to see the performance of the Tory chancellor, George Osborne, at the Conservative Party conference: will he use the same, tub-thumbing puritanical rhetoric in lambasting those who would rather pay substantial sums to specialist tax advisers, who minimise their tax bills, than hand that extra million or several to the public coffers?

Which shows, of course, that there is a very simple thing that the chancellor and chief secretary could do - at a stroke - to shrink the tax avoidance industry.

They could simply put a ban on giving public-sector work to any auditing, accountancy or consulting firm that has a tax advisory unit. Gosh, that would present the big four accounting firms with an intriguing dilemma.

All that said, quite a few business leaders and entrepreneurs would make a moral case for not paying tax: the less tax they pay, the more they're able to invest in job-creating opportunities in the UK, they would say.

In other words, there is a fine line between taking advantage of tax breaks explicitly created by the government to meet some kind of economic or social purpose and taking cynical steps to deprive the state of its due.

Would Danny Alexander, for example, take the view that most venture capital and private equity firms are behaving in a morally indefensible way, by financing their ventures with so much debt that interest payments wipe out most of their taxable profits and much of their corporation tax liability?

And what about the one man private-equity firm, Sir Philip Green, the owner of Top Shop, BHS and a fair chunk of the rest of the high street.

He would argue that the UK has benefited from the way that he's improved the efficiency of this substantial consumer-facing business - which is presumably why Mr Alexander and the government are using his talents to advise it on how to make the public sector more efficient.

But in 2005 Sir Philip saved himself around £300m in tax on a £1.2bn dividend from his main company, Arcadia - because Arcadia is registered as owned by his wife Tina, who is resident in the tax haven of Monaco.

Also the £1.2bn dividend was financed by increasing the indebtedness of Arcadia, which reduced the taxable profits of Arcadia and therefore the taxes that it pays (although Sir Philip has consistently argued that he chose not to load up Arcadia with as much debt as he might have done, so that he demonstrably pays more corporation tax than private-equity competitors).

None of that is a secret. And none of it is against the law.

But does Mr Alexander think that Sir Philip was engaging in laudable tax planning or showing a repugnant refusal to pay his way in the UK?

Where the line is drawn between acceptable and unacceptable tax behaviour is certainly not easy - but it is a big deal.

If a FTSE 100 company has a tax rate less than the headline rate of 28% is that evidence of an ethical crime against the state?

This would be quite something - in that most businesses, including the UK's largest public companies, believe they are letting down their owners, their shareholders, if they don't use and exploit every legal means to reduce the tax they pay.

In fact the advice to directors of public companies is quite clear: they are failing in their fiduciary duty if they allow their businesses to pay more tax than necessary. Which is why it is such a live issue in many boardrooms whether they should relocate the legal homes of their respective companies to countries where taxes are lower.

Perhaps Mr Alexander would direct his condemnation more against individuals who reduce their tax rate than against businesses. That's certainly the implication of the Treasury's announcement that it will endow Revenue and Customs' enforcement teams with an additional £900m of investment so that it can scrutinise the tax returns of the 150,000-odd individuals liable to the new top 50p rate of tax.

But at the upper end of the wealth and income scale - and Sir Philip Green is one of many cases in point - the distinction between individuals and businesses is a fuzzy one.

What Mr Alexander has done, of course, is to legitimise intensive media scrutiny of the tax practices of all Liberal Democrat and Tory MPs and of donors to their respective parties.

His colleagues in the administration won't thank him if hiring a tax accountant is today seen as embarrassing or shameful as having extra-marital affairs was in John Major's "back to basics" government.

Why banks are riskier than hedge funds

Robert Peston | 08:10 UK time, Saturday, 18 September 2010


For years, most of us took little notice of our banks - except to moan when we felt they charged us too much or when their service was terrible.

But now we know just how important to all our lives they are.

If they lose a ton of money, we've learned that we as taxpayers have to bail them out, with hundreds of billions of pounds of loans and investments.

And when they get into that parlous state and are unable to lend as much as is needed by businesses and households, they cause a deep dark recession, which impoverishes us.

So it really matters that banks are made safer by new global rules - that were announced only last weekend and which go by the eccentric name of Basel lll, after the quaint Swiss city where they've been negotiated in secret meetings by the world's most powerful central bankers and financial regulators.

What's the verdict on Basel lll?

Well regulators - predictably - say that the rules are tougher than they seem.

They insist that banks will have to hold much more capital - or rainy day money - as a protection against investments and loans going bad.

And the increase in the minimum amount of capital that banks have to retain relative to their loans and investments is in practice considerably more than the headline figures imply, regulators say, because there are tougher definitions of the finance that's eligible to be counted as core equity capital.

Also Basel lll instructs banks to recategorise as much more risky certain kinds of assets held by banks' trading arms - which has the effect of forcing banks like Barclays and Royal Bank of Scotland with large financial trading operations to hold disproportionately more capital.

Are regulators right that these rules will make banks more robust, and won't simply allow them to carry on as before, in effect speculating with taxpayers' money?

Well, little noticed financial disclosures earlier this week by the influential US bank, JP Morgan, on the impact of the Basel lll rules implied that it may not be quite as easy for British banks to meet the new capital targets as many believe.

British banks may be forced to limit their dividend payments for longer than thought, to help them build up their reserves, for example.

And, what's more, British regulators have told me that they may impose even higher capital requirements on the biggest banks - those whose failure would undermine the entire economy.

But when bankers say to me - as they do - that the new rules are hard but fair, you can be pretty sure that they do not represent a fundamental challenge to their way of life.

Here's what concerns many critics of our biggest banks.

The new rules still allow our banks to lend and invest far more, relative to their capital, than a typical hedge fund does

That probably shocks you, because you probably think that hedge funds are the most outrageous speculators on the planet. Well you're wrong about that.

Banks borrow far more than hedge funds do to finance their lending and investing. Their leverage, how much they borrow relative to their equity capital, is typically ten or fifteen times the leverage of most hedge funds: the leverage multiple of a typical bank is 30, compared with between zero and eight times leverage for most hedge funds.

In that sense banks take far bigger risks with their investors' money than most hedge funds do.

So how do banks manage to borrow all this money, and relatively cheaply too, if they are taking such colossal risks?

Well as we've all learned to our cost, if a bank blows up, its creditors can be confident that taxpayers will ride to the rescue - which is palpably not the case for a hedge fund.

Which, some would argue, carries two important implications, if banks want to continue to do business as normal, with an implicit guarantee from taxpayers: first, perhaps banks should reduce the amount they pay out in dividends not just for a few years, but forever; and possibly they should stop remunerating themselves like hedge fund managers.

If banks are making money from the implicit taxpayer support, then taxpayers would presumably want that money deployed to build up banks' capital reserves even more, to protect them against the next crisis.

Why businesses want to recruit from overseas

Robert Peston | 08:18 UK time, Friday, 17 September 2010


As luck would have it, I bumped into the boss of one of our largest manufacturing exporters last night, who complained that his ability to expand in the UK was being seriously hampered by the new restrictions on his ability to hire from outside the European Union, that have been imposed by the coalition government.

Vince Cable


And he also queried whether Vince Cable was the ideal choice for business secretary, since he was unpersuaded that Mr Cable would bat aggressively enough on behalf of businesses like his.

Vince Cable would say it's not his job to bat for this or that company in a partisan sense, or for the entire private sector: his role (probably) is to use whatever micro-economic tools he has to promote economic growth and wealth creation.

Even so he's plainly been hearing quite a lot of complaints akin to those made by that industrial grandee, given his statement to today's FT [registration required] that "a lot of damage is being done to British industry " by the immigration cap.

There are two issues here: one is whether a coalition government can hold together when one of the most influential members of the minority partners in the administration is so scathing of a central government policy.

But the other is whether Mr Cable is right, that the reduced limits on the flow of skilled individuals from outside the UK is harming the economy and therefore hurting the majority of us.

For most people, there seems to be a contradiction here. Surely if jobs aren't going to managers, engineers, micro-biologists or bankers from India, the US and Hong Kong, they must be going to Brits - which would surely be a good thing.

And this is presumably what David Cameron and George Osborne believe, or they wouldn't have imposed the cap.

However, my manufacturer says that the pool of highly skilled people just isn't wide enough or deep enough in the UK. And in recent weeks I have heard identical comments from bankers, software designers, drug makers and so on.

So if they want to invest and grow in the UK, they argue that they must have the ability to import the best talent from the rest of the world.

Of course, in theory, if the best talent, at the cheapest price, isn't being bought from India, perhaps we'll grow more of the skills we need here in the UK.

The problem is that the required nurturing of so-called human capital takes years.

And British-based businesses want to expand now.

Here's the serious concern: if there are skill constraints on their ability to grow in the UK, they'll take their investment to other countries where the appropriate skills can be obtained.

That would be a concern at a time when public spending cuts are having a seriously dampening impact on an already weak economy - and when the government is relying on private-sector growth to take up the slack.

So, for example, the Office for Budget Responsibility says that if the economy is to grow next year by 2.3%, just over a third of that growth will have to come from increases in business investment and a little bit more will be dependent on improvements in the balance of trade.

Or to put it another way, if businesses choose instead not to invest, and the UK's exporting capacity doesn't increase, growth of 2.3% would shrink to something derisory.

What many businesses have said to me is that it is all very well for the government to turn to them to re-stimulate the economy, and they would like to rise to the challenge, but restricting their ability to buy from across the world is a binding, painful fetter.

OFT and Competition Commission likely to merge

Robert Peston | 14:43 UK time, Thursday, 16 September 2010


Unless you run a big, takeover-hungry company or you're a competition lawyer, what follows probably may not interest you a great deal, though in theory it's relevant to your future prosperity.

I've discovered that a merger of the Office of Fair Trading and the Competition Commission - the two British regulatory bodies charged with promoting competition and biffing anti-competitive behaviour - is on the cards.

In fact, the merger of the OFT and CC would have been announced by the previous government last autumn. But just as it was about to be unveiled, the then Business Secretary, Lord Mandelson, got cold feet and persuaded the previous chancellor, Alistair Darling, to call the whole thing off.

My understanding is that the coalition government is likely to revive the nuptials of OFT and CC.

And the point of doing so would be to eliminate duplication between the two organisations and streamline the two-stage process of determining the competitive impact of proposed takeovers, or market structures or assorted business practices.

In theory, at a time when all public-sector bodies are under pressure to make substantial savings, crunching together the OFT and CC to make them more efficient would appear to make sense.

However for reasons that are unclear to me, many competition lawyers don't seem to think it's a good idea.

I don't suppose their wariness could be related somehow to the magnitude of the fees they can earn from the current twin-headed hydra of competition assessment, regulation and enforcement.

Ofcom expected to review News Corp's bid for Sky

Robert Peston | 17:22 UK time, Wednesday, 15 September 2010


James Murdoch's hopes of keeping News Corporation's planned takeover of 100% of British Sky Broadcasting away from the scrutiny of the media regulator, Ofcom, look set to be dashed.

James Murdoch


I have learned that the Business Secretary, Vince Cable, is likely to issue what's known as an intervention notice, under the 2002 Enterprise Act, asking Ofcom to advise him whether the takeover would restrict "plurality" or the diversity and number of voices in the media industry - and whether there should therefore be a lengthier and more detailed probe by the Competition Commission.

The decision hasn't yet been formally taken by Mr Cable, because News Corporation hasn't yet made a formal notification of its desire to buy the 61% of BSkyB which it doesn't already control.

But I understand that the business secretary has been advised that the takeover raises concerns about a reduction in the variety and number of media "voices" in the UK, which would justify an Ofcom probe.

The disclosure is likely to infuriate News Corporation and the chief executive of its European and Asian operations, James Murdoch, who expected and hoped that the deal would be assessed only in Brussels by the EU competition regulator and only for its impact on the competitive landscape.

News Corporation has been confident that it could demonstrate that the combination of BSkyB with News Corporations' UK newspapers - the Sun, the Times, the News of the World and the Sunday Times - does not pose a serious threat to competition.

But plurality is a more nebulous and - some would say - more subjective concept than competition. So News Corp will be concerned that a reference to Ofcom and then potentially to the Competition Commission could delay and even stymie the deal.

Ofcom's website says that the public interest test of media mergers involving broadcasters or involving broadcasters and newspaper groups is that there needs to be "a sufficient plurality of persons with control of the media enterprises serving that audience in relation to every different audience in the UK or a particular area/locality of the UK".

It also says that there is a public interest in ensuring the availability "throughout the UK of a wide range of broadcasting which (taken as a whole) is both of high quality and calculated to appeal to a wider variety of tastes and interests".

In June, News Corp told the board of BSkyB that it was prepared to pay 700p a share to take full control of the leading satellite broadcaster, a price that values the whole of BSkyB at £12.2bn. BSkyB's directors said the offer was £1 per share too low, but agreed to resume negotiations after regulatory hurdles have been cleared.

BSkyB is the biggest broadcaster in the UK. Its revenue in the UK was £5.9bn in the 12 months to June, which compares with the BBC's global revenues of £4.8bn.

News Corporation's UK publishing interests, owned and managed through its News International subsidiary, account for well over a third of all national newspaper circulation in the UK.

How will public sector cuts affect cities like Liverpool?

Robert Peston | 10:10 UK time, Wednesday, 15 September 2010


The coalition government hopes and believes that the expansion of the private sector can compensate for the negative effect on economic growth and employment of its public spending cuts. I went to Liverpool to test this view in a city with a relatively small private sector and whose recent prosperity and most job creation has come from increases in public expenditure.

And, with the police warning of an increased risk of social strife in these difficult economic times, I looked back at the Toxteth riots of almost 30 years ago, which followed the painful economic medicine administered by Margaret Thatcher's Conservative government.

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Next: 'Boom years are over for retailers'

Robert Peston | 08:08 UK time, Wednesday, 15 September 2010


Next has today said the boom years for retailers are over for the foreseeable future.

Because of the impact of public spending cuts and a diminution in the amount that consumers are borrowing to finance their lifestyles, the leading fashion retailer says that it expects very little growth in total consumer spending for many years - and "the new normal" will be low growth in underlying sales.

The remarks by Next will be noticed, partly because it is a respected business and partly because Next's chief executive is a Tory peer and close to the prime minister and chancellor.

The company is hopeful that the UK will avoid what it calls a meltdown in consumer spending or a double dip back into recession. But it concedes that public spending cuts will be enough to subdue any potential growth in consumer spending.

So it expects that its own revenue growth will be in the region of 2 to 5% over the long term, a fraction of the kind of increases that Next and other retailers enjoyed in the boom years up to 2007.

Next also warns that a shortage of manufacturing capacity and a rise in the price of cotton will push up the price of its clothes next year between 5 and 8%.

The sober assessment was made in half year results, which showed that Next's profits rose 15% to £213m in the six months to the end of July.

Update 0932: Next's "scenario" for sales growth over the next three to five years is that group revenues will increase at between 2 and 5% per annum.

Those turnover increments do represent a step change, in a downward direction: during the boom consumer spending years of 2002-2007, Next's revenues increased at an annual rate of just under 12%.

A big dip.

But where will Next find any growth in these straitened times? Well Lord Wolfson says most of it will come from "the acquisition of new retail space" and continued progress of Next Directory, the catalogue arm.

Or to put it another way, sales in existing shops are not expected to grow. Its future success depends on it being able to relentlessly take business from weaker competitors.

Even so, Lord Wolfson believes he can still make a healthy return for his shareholders. He believes operating profit can rise by up to 7% a year, through "careful management of costs and continued innovation in our operations".

But here I suppose is the financial proof that the outlook for retailers like Next is fairly grim: Next plans to buy from its shareholders about 4 to 5% of its issued shares every year, because that should deliver a better return for the owners than if the cash was invested in expanding the business.

Update 0944: In case anyone thinks I am losing my marbles, there's no surprise that Next believes consumer spending will be subdued for some time.

The combination of a public spending squeeze and the "deleveraging" of British households - who borrowed more than 170% of their disposable income at the peak and now recognise that there's some virtue in saving rather than spending - has made it obvious for months that the party on the high street is over.

As readers of my blog will know, prospects for consumer-facing businesses changed for the worse in a fundamental way at least as long ago as 2007 - when the credit crunch highlighted how the debts of households had increased to levels that were not sustainable.

If the Bank of England hadn't taken unprecedented steps to force down interest rates, consumer spending would have utterly collapsed, rather than stagnating.

All that said, what is interesting and highly significant is that Next has publicly put a time horizon of at least three to five years for this period of lower retail growth - and is adjusting its business strategy on that basis.

Basel lll: A missed opportunity?

Robert Peston | 09:32 UK time, Tuesday, 14 September 2010


Here are a few more thoughts about Basel lll (sorry).

Bank of international settlements building

The first thing to say is that investors in big banks seem to like the new capital standards: since I disclosed on Thursday morning that the ratio of equity capital (core tier one capital) to assets would be rising from 2% to 7% (including the so-called conservation buffer), shares in the UK's biggest banks have risen between 5% (for Barclays) and 9% (for Royal Bank of Scotland).

Does that mean shareholders believe the new ratios will make the banks less risky investments? Is it a round of applause for the sensible prudence forced on the banks by Jean-Claude Trichet and his elite Basel guard of central bank governors and banking supervisors?

Well, that's unlikely. The investors to whom I've spoken are simply relieved that most big banks already have enough capital to meet the new standard. Which means that few banks will be coming to shareholders for more capital and most won't be constrained in their plans either to restart dividend payments or increase dividends.

Now if you believe that investors suffer from an endemic bullish bias, then you'll be concerned by their cheerfulness. It implies that shareholders in banks are still imprisoned by an ideology that some would say had been shown to be bankrupt by the great crash of 2008, namely that the premier measure of success for a bank is not whether it is rock solid but whether it is growing its balance sheet and dividends.

That is the ideology that still grips most bank executives - partly because it is an ideology that also allows them to extract whopping pay and bonuses. So you may also be concerned that a conspiracy of bankers and investors has gulled the Basel Committee on Banking Supervision into producing a new rulebook for banks' capital, liquidity and risk assessments that represents a futile attempt to strengthen the existing system, rather than engaging in more radical and effective reform.

Is there evidence for this depressing view?

First item in the case against the Basel Committee is all those warnings by banks that if they were forced to boost their capital reserves too much and too fast, that would limit their ability to provide vital credit - which could tip the global economy back into recession and reduce GDP growth forever.

There has been some fight back by regulators: the Basel Committee and the Financial Stability Board published papers over the summer arguing that bankers' fears that higher capital means global impoverishment had been exaggerated.

But it was clear from my conversations with central bankers and regulators that they were chilled to their bones by the idea that they might one day be accused of precipitating a second credit crunch as a result of their sanitizing zeal.

Result? Banks have a lengthy eight years to meet all the new Basel rules.

And the new rules, for most banks, give an official stamp of approval to most banks' current stocks of capital. These have of course been rebuilt and augmented over the past couple of years, in part thanks to the generosity of taxpayers.

But there was a coherent argument that a 7% common equity ratio should be the bare minimum ratio in a recession, and that banks should endeavour to build up their ratios to around 12% when the good economic times return (if they ever return).

To be clear, regulators and central bankers from the US, UK and Switzerland, the financial centres with the deepest knowledge of global investment banks, weren't a million miles from the view that the good-times norm should be circa 12%: as I've pointed out in earlier post, they were pressing for higher capital ratios but couldn't persuade the Germans, French and Japanese.

For what it's worth, the Ango-American-Swiss regulatory troika haven't surrendered completely: they have secured an agreement in principle that big banks whose failure would endanger the health of the financial system should be forced to maintain higher capital ratios than the 7% norm; but the precise increment for the risks that pertain to gigantism haven't yet been specified.

Second item in the case against Basel lll: there'll be no formal constraints on banks' dividend payments or remuneration in the transition period to full implementation of the new rules.

Third item, the new rulebook is - if anything - even more opaque and impenetrable than the Basel ll rulebook. Which means that it will provide endless scope for the brightest banks and bankers to game and arbitrage the system, fomenting new mini and major asset bubbles all over the place.

This opacity also means, of course, that the new rules may turn out to be more constraining on banks' riskier activities - especially their financial trading - than bankers currently appreciate. That's certainly what my regulator chums are endeavouring to persuade me.

We'll see.

Final item: the one new rule that might have acted as a serious permanent dampener on banks' tendency to irrational exuberance, namely a new non-risk-based leverage ratio, is being set at a level that will continue to allow banks to lend mind-boggling and record amounts (by all historical standards) relative to their capital resources.

Banks will be permitted to lend and invest 33.33 (recurring) times their tier one capital, a measure which includes capital with inferior loss-absorbing quality than equity or core tier one. It allows banks to be prone to bankruptcy from a 3% fall in the value of their gross assets - which does not seem altogether prudent.

What's more, the Basel Committee members could not even agree among themselves (largely because of the intransigence of the French) to make this relatively loose constraint obligatory for all banks: it's only an intention to make it such on 1 January 2018, subject to testing its impact in a "parallel run period".

In other words, Basel lll probably won't make the too-big-to-fail bank an extinct dangerous species: the world will still boast a decent (or indecent?) number of banks with balance sheets whose gross size is bigger than the British economy.

Why have we left bank reform to technocrats?

Robert Peston | 09:42 UK time, Monday, 13 September 2010


Credit (please) where it's due: on Thursday, yesterday and today, the BBC has covered the historic agreement on new capital and liquidity rules for banks in the main body of its bulletins.

It's a certainly not the easiest story to explain, but it's hard to think of one of more importance to our future prosperity.

So I regard it as something of an achievement that the BBC has provided its reports outside of the ghetto of specialist financial news. Which is not true of many mainstream news organisations (the FT and Wall Street Journal are of course splashing the story).

I don't suppose most British people, including our lawmakers, would therefore have much of a clue that agreement has been reached on the most important global initiative to learn the lessons of the 2008 banking crisis and correct them.

On the basis of a pact between central bank governors and senior regulators, every important developed and developing country has agreed to enact laws to raise the amount of capital that banks have to hold as protection against future losses to more than treble the current minimum.

If we want to avoid future financial crises that impoverish us all, we've got to pin our hopes on the effectiveness of these new rules - which also cover the amount of cash banks have to hold against the threat of runs, the longevity of their own debts and the risks that banks attach to different kinds of loans (among other things).

And, by the way, whether the rules work or not, they'll have an effect on the price and availability of credit - probably raising the price and shrinking the availability, for the period of implementation (at least) and possibly for longer.

So if you can find me many stories in the past few days or months that matter as much, then I'll acknowledge I'm living on a different planet from you.

For banks, what's been concluded is the equivalent of a climate-change deal: an attempt to reverse potentially lethal global warming in the financial sector.

But do you remember how much coverage there was of the Copenhagen climate change conference, both the hopes attached to it and the massive disappointment when it failed?

What was concluded in negotiations behind closed doors in the Swiss city of Basel last night wasn't much less important to all of us than the Copenhagen debacle. So where's the media circus? Where are the screaming headlines?

Unlike the politicians at Copenhagen, the central bank governors and heads of banking supervision who form the oversight body of the Basel Committee on Banking Supervision - which decides these vital rules for banks - well, they don't exactly court the media.

For television and radio, they are a nightmare, because they rarely give interviews for broadcast. Their press conferences are few and far between. And their press releases are hopeless at translating the arcana of bank regulation into concepts that most can understand.

But, you might say, that should surely double the resolve of the press to hold them to account.

Well, it's not really happened. I've banged on and on and on in posts here about the importance of what was being discussed by the Basel Committee. And many of you have responded with apt and passionate comments.

But you are the exception. There's been little populist debate about how much capital and liquidity banks ought to hold for our own welfare. We've been presented with a fait accompli.

And most would argue that the media hasn't exactly done a brilliant job in shining a light even on that fait accompli.

You might also ask where our MPs have been while unelected central bankers and regulators have trampled on territory that they would surely regard as their own, viz the fundamental laws that affect how British domiciled banks conduct their affairs.

So if you felt there had been something of a democratic failure here, you might have a point.

But I suppose we can always hope that in another 60 years, when a banking crisis next precipitates a great global recession, we'll do a slightly better job as citizens at holding the technocrats to account.

Are new bank capital rules tough enough?

Robert Peston | 20:15 UK time, Sunday, 12 September 2010


The new international standards for how much capital banks need to hold, as a protection against losses, should have an important economic and cultural impact.

Even though banks are being forced to hold marginally less capital than British, US and Swiss regulators regard as ideally desirable, and the transition period for meeting the new rules is a lengthy eight years, there will nonetheless be a significant impact on banks' behaviour.

The amount of common equity (the best capital for absorbing losses) that banks have to hold will rise from 2 per cent of their loans and investments (or their assets weighted according to risk) to 7 per cent.

The 7 per cent includes a 2.5 per cent so-called "conservation buffer", which will be there to protect banks against periods of difficulty or stress.

And if banks' capital ratios fall below 7 per cent, regulators may place restrictions on their ability to pay dividends and bonuses.

That's not the end of the story in respect of new obligations on banks to hold funds in reserve for the proverbial rainy day or twister.

The biggest banks will be forced to hold an as-yet unspecified quantity of additional capital - or debt that automatically converts into capital in a crisis - because of the threat that the failure of a giant bank would pose to the integrity of the entire financial system.

And, what's more, central banks and the new breed of "macro-prudential" regulators will have the power to force banks to increase their core-equity capital ratios by a further 2.5 per cent, if there's evidence that banks in general are lending too much and economies are growing too fast in an unbalanced way.

This "counter-cyclical" buffer is distinct from the conservation buffer of 2.5 per cent. It is supposed to be the new tool that will allow the likes of the Bank of England's soon-to-be-created Financial Policy Committee to prevent property markets, for example, from becoming dangerously overheated (as happened in the US, UK, Spain and Ireland in the years running up to 2007).

A few other points are worth making:

1) The Basel Committee is hopeful that the long phased implementation, to Jan 1 2019, of the new capital requirements will deter banks from cutting back on lending to achieve the new ratios, in a way that could undermine economic recovery (to raise the ratio of capital to loans/investments, banks can either increase their stocks of capital or reduce their stocks of loans/investments).

2) The Basel Committee believes that smaller banks "for the most part" already meet the higher capital standards. It hopes this will reassure small businesses that their access to vital credit won't diminish, since it says that smaller banks are "particularly important for lending to" the small business sector. This is not true in the UK, where small businesses are dependent on big banks for credit.

3) A double whammy for the biggest universal banks - like Barclays, JP Morgan, Deutsche Bank and so on - is that the risk weightings attached to trading assets are massively increasing, which will have the effect of forcing banks which engage in a good deal of trading to raise disproportionately more capital (which could have the effect of shrinking their trading businesses).

4) Even UK and US banks, which have already accumulated a good deal of additional capital (much of it from taxpayers) since the crisis hit in 2008, will be under some pressure over the coming eight years to raise even more capital, because of the way that weightings attached to certain kinds of risky loans and investments are increasing.

5) If there is going to be disappointment with the new rules from banks' sternest critics, it will probably be that a new "leverage" ratio isn't tough enough. That leverage ratio will restrict the overall size of banks' balance sheets, with no weighting of assets for risk, to 30 times tier one capital (a measure that includes capital that is worse at absorbing losses than core equity tier one capital). A leverage ratio of 30 would mean that a bank whose assets fell in value by just a bit over 3 per cent - which is certainly not a once-in-a-millennium kind of event - would be bust.

Will new Basel rules lead to bonus shrinkage?

Robert Peston | 17:50 UK time, Sunday, 12 September 2010


An important milestone has been reached in the reform of the banking system to correct at least some of the palpable flaws that contributed to the worst banking crisis since the 1930s.

Financial regulators and central bankers, the so-called governors' group of the Basel Committee on Banking Supervision, have agreed new global rules for the amount of capital and liquid resources that banks must hold.

A statement should be issued by the Commitee later this evening.

These new rules - which were presented to the governors as a "take-it-or-leave-it" package after negotiations carried out by their officials a few days ago - are intended to protect banks when they make losses and also provide them with insulation against runs.

As I disclosed last week, perhaps the most important and eye-catching change will be an increase in the amount of common equity - known as core Tier One capital - that banks have to hold.

This will rise from 2 per cent of risk-weighted assets (loans and investments) to 7 per cent. And this 7 per cent will include a "buffer" of 2.5 per cent, which can be eaten into in extreme circumstances.

Put simply, the reform ought to mean that banks will have greater ability to absorb losses in future crises without going cap in hand to taxpayers.

But because capital is typically expensive for banks to raise, it may mean that banks progressively increase what they charge for credit and increase the provision of credit at a slower rate.

Central bankers, politicians and borrowers may well point out to banks that an alternative way of financing the cost of servicing increased capital requirements would be to slash the remuneration and bonuses of bankers.

They'll also point out to bankers who may squeal that the new capital rules will be increased in stages from 2013 to 2018, which gives them plenty of time to build up reserves through retaining earnings and selling shares to investors.

That said, it's striking that Deutsche Bank has today announced an anticipatory issue of €9.8bn of new shares - which will both strengthen its balance sheet and help to pay for the 70 per cent of Deutsche Postbank that it doesn't already own.

So in practice, most banks will probably take the view that they will need to get to the 7 per cent core tier one ratio more-or-less immediately, to reassure their creditors and investors.

The timebomb under Royal Mail

Robert Peston | 12:26 UK time, Friday, 10 September 2010


Unsurprisingly, Richard Hooper has renewed his call for the Royal Mail to be privatised - and has therefore underwritten the coalition's plans to do just that.

Post box

It would have been extraordinary if the former deputy chairman of Ofcom had said anything else in his update of the review of the postal services sector, which he originally carried out in 2008.

That's not because privatisation is the right answer. Of course my day job requires me to be utterly agnostic about that.

It's just that the conditions that led him to recommend selling off the Royal Mail have not altered in any fundamental way.

For Hooper, privatisation is the logical answer because the letters market is set to shrink for years to come, which makes it increasingly important that Royal Mail becomes more productive and efficient, which requires investment in new kit and the implementation of new working practices, which requires significant investment, which can't come from a cash-strapped public sector.

Hooper is also a fully paid up adherent of the view that modernisation won't happen on an acceptable timetable while politicians have a licence to meddle in Royal Mail's affairs - which for him is another powerful argument for flogging the business.

There are a few numbers in the report that tell quite a tale of the challenges faced by Royal Mail. And for once, I'm going to ignore the de facto debt burden of an £8bn pension fund deficit, since I've banged on enough about that in earlier posts.

Here's the big trend: the average daily mail bag contained 84m letters, packets and parcels in 2005; this year, the national mailbag was 15% lighter, containing just 71m items every day.

And the cause, as if you online readers didn't know, is that e-mails and texts are replacing letters at a far greater rate than the growth of online shopping is expanding the parcels market.

What's more, as Hooper warns in a resonant phrase, the "digitisable mail sector faces a demographic timebomb" - or to put it another way, our kids can't be bothered to send physical thank-you cards and letters, and never will (and if they end up running big companies, they won't bother with mass or bulk communication at a pedestrian's pace).

There's also, he says, an "environmental time bomb", such that growing numbers of companies are embarrassed by the number of trees they're felling for mass mailshots, and are therefore opting for electronic spam over paper junk (which, some would say, sounds like progress).

So Royal Mail expects that the decline in letter traffic to UK addresses will accelerate, predicting a 20% fall over the next five years.

The implication is that this lossmaking business can only return to profit if it improves productivity. And at a time when the construction of many new school buildings (inter alia) is being cancelled and when much of the public sector faces 40% cuts, if the upfront costs of delivering those efficiency gains are not to come from injections of private-sector capital, where will the money come from?

UPDATE 17:57  John Major, as prime minister, gave up trying to sell Royal Mail in the face of opposition from his own MPs.

The last Labour Government faced intense criticism from its backbenches when it tried to privatise part of Royal Mail - and surrendered when it couldn't find a buyer at the right price.

So will it be third time lucky or a trio of flops, now that the Business Secretary in this coalition government, Vince Cable, wants to offload the whole thing to outside interests and staff.

Opposition in parliament may be slightly less of an obstacle than on previous occasions, partly because post office branches - the part of the business which serves the most overtly social function - will stay in state hands.

And, of course, opposition to privatisation from the CWU trade union will resonate rather less with Lib Dems and Tories than it did with Labour - which has been a major beneficiary of CWU donations.

What about the financial obstacles to privatisation?

Well, it would be impossible to sell unless the taxpayer takes on the £8bn net liability in the pension fund - so taxpayers can certainly brace themselves for that.

But even without the pension burden, Royal Mail faces growing competition in a shrinking market, the regulatory system is widely perceived as hobbling it, the business has a record of losses and its history of industrial relations is lamentable.

This won't be the quickest or easiest of privatisations. 

Regulators agree 7% capital ratio for banks

Robert Peston | 09:02 UK time, Thursday, 9 September 2010


Central bank governors and senior regulators are set to ordain that banks must have a minimum core tier one capital ratio, including a new so-called "buffer" to protect against extreme economic conditions, of 7%, I can reveal.

This is considerably lower than was wanted by the "hawks", the US, UK and Switzerland. They wanted a core tier one capital ratio of 8 to 9% including buffer, which is what British banks currently have to maintain. In fact most British banks currently have a core tier one ratio of around 10%.

But the new 7% minimum has been agreed in the face of stiff resistance from a number of countries, led by Germany, many of whose banks typically have much lower stocks of core capital in the form of equity and retained earnings - and will have great difficulty meeting the new standard.

Basle, Switzerland

This new international minimum was negotiated by regulatory and central banking officials in a meeting of the Basel Committee on Banking Supervision earlier this week. It is expected to be approved by the governors and senior regulators when they meet in Basle on Sunday.

It will then be ratified in a final, supposedly irrevocable way by the heads of the G20 governments, at their summit in November.

The 7% minimum represents a dramatic increase on the current minimum of 2%. That 2% minimum is widely seen as far too low: banks' low levels of capital relative to their assets was a major contributor to the severity of the 2008 banking crisis, as investors lost confidence in their ability to survive losses.

As they approached collapse, the capital ratios of Northern Rock and Royal Bank of Scotland fell to dangerously low levels - which is why Northern Rock was nationalised and RBS was semi-nationalised.

The point of capital is to absorb losses when loans and investments turn bad.

Although this new 7% minimum ratio of core capital (in the form of equity and retained earnings) to assets (loans and investments) as measured on a risk-weighted basis represents a significant increase, some will argue that the ratio is still too low.

One reason for this is that the absolute minimum capital ratio, without buffer, will be around 4%, or double the previous minimum.

Under the new system, if a bank's capital ratio falls below 7% or would fall below 7% when the bank is tested for financial stresses, the bank will be forced by regulators to raise new capital. And if the ratio falls below 4%, the bank will be put into "resolution" - which means that it will be taken over by regulators and wound up.

It means that banks' core capital ratios must always be above 7% in normal economic and financial conditions. But regulators would tolerate those ratios falling below 7% for short periods during economic downturns.

A senior regulator has told me that many of the biggest banks - those "too-big-to-fail" banks whose collapse would cause ruptures to the financial system - will in practice be forced to hold more than the 7% minimum.

"There will be some kind of add-on for systemically important banks," he said. So the likes of Barclays, JP Morgan, Royal Bank of Scotland, UBS and so on will in practice have to maintain core capital ratios greater than 7%.

The major concern of banks about the imposition of the higher capital ratios is that it will constrain their ability to lend in the transition period, as they build up stocks of capital - and that could undermine the global economic recovery.

The point is that there are two ways for banks to raise capital ratios: they can persuade investors to buy new shares; or they can shrink their balance sheets relative to their existing stock of capital by lending and investing less.

Because of the threat to economic growth of rapid implementation of the new capital ratios, the regulators and central bank governors are expected to give banks several years to meet the new standards.

Goldman fined £20m by FSA

Robert Peston | 20:19 UK time, Wednesday, 8 September 2010


I can reveal that Goldman Sachs has been fined around £20m by the Financial Services Authority for failing to tell the City regulator that it was being investigated by the SEC - the US regulator - for alleged fraud over the way it sold a subprime mortgage investment.

Goldman also failed to tell the FSA that Fabrice Tourre, the executive who created the relevant mortgage product, was under investigation: this was relevant because Mr Tourre transferred from the US to London, and therefore had to be authorised by the FSA.

The FSA accused Goldman of failing to have the necessary systems for keeping it informed of investigations by other regulators. Goldman has admitted that it made a mistake.

I understand that Goldman would have been fined more, but received a discount for early settlement.

The FSA announced in April it was investigating Goldman, but never disclosed why it was doing so.

The £20m is one of the heaviest fines ever imposed by the FSA.

In July, Goldman settled the fraud charge with the SEC, agreeing to pay $550m.

The mortgage product at the centre of the storm was a collateralised debt obligation called ABACUS 2007-ACI.

BP stands for Blame Placing

Robert Peston | 13:05 UK time, Wednesday, 8 September 2010


If you eat a dodgy chicken tikka masala bought from one of our best-known supermarket chains, and you feel violently sick afterwards, do you blame the supermarket - or will your ire be directed at the anonymous manufacturer of the product which made the tainted meal?

BP's Deepwater Horizon oil rig

Most of us would, I think, hold the supermarket accountable, if its name was on the packet - although it was another company altogether that had the sloppy hygiene standards which caused the poisoning.

We expect the supermarket to take responsibility for the actions of its contractors and suppliers.

And so it is with BP and its findings released today of what caused the calamitous explosion on the Deepwater Horizon rig, which in turn led to 11 deaths and the worst oil spill in US history.

BP's highly technical report uncovers a whole series of accidents, misjudgements and system failures that contributed to the disaster. And says that no one event can be held as the prime cause.

It also points the finger at two of its contractors in particular: Halliburton, responsible for what BP describes as the inadequate cementing of the well; and Transocean, owner and operator of the Deepwater rig, whose employees are alleged to have made a series of misjudgements in the fateful hours before it all went wrong.

BP also concedes that its own employees made mistakes, particularly when it came to interpreting the results of pressure tests.

But I think it is in BP's recommendations for change that many will see the real story, because there BP makes clear that it needs to exercise far better oversight of those who work for it when trying to extract oil from deepwater fields.

Update 14.38: Pages 185 and 186 of the BP report seem to me to carry serious implications. They are headed "contractor and service provider oversight and assurance" and they are recommendations for how BP can make sure that businesses employed by BP do their job adequately.

Here's a smattering of those proposals:

  • "Conduct an immediate review of the quality of the services provided by all cementing services providers".
  • "Assess and confirm that essential well control and well monitoring practices, such as...shut-in procedures, are clearly defined and rigorously applied on all BP-owned and BP-contracted offshore rigs (consider extending to selected onshore rigs...)"
  • "Require hazard and operability reviews of the surface gas and drilling fluid systems for all BP-owned and BP-contracted drilling rigs."

Now all this does rather imply that BP has been far too trusting of those companies it employs to operate drillings rigs or work on the construction of wells.

So it's all very well for BP to describe - as it does - an extraordinary chain of misjudgements, accidents and kit failure, all of which were unfortunate, but none of which was sufficient in isolation to wreak the havoc we've witnessed for months.

But that's not the same thing as saying "everyone or no one is to blame".

To state the obvious, if BP had exercised sufficient oversight - as the named party on the relevant oil lease - then there is a reasonable chance that not every domino would have toppled in the chain reaction that led to mayhem.

Update 16.07: On the critical issue of the design of the well, a massive gulf has opened between BP and Transocean, which owned and operated the Deepwater rig on behalf of BP.

The outgoing chief executive of BP, Tony Hayward, said:

"Based on the report, it would appear unlikely that the well design contributed to the incident."

BP's shareholders need him to be right: if the well design was seriously flawed, BP would probably be liable for an additional $15bn or so of fines under the US Clean Water Act (because it might be found guilty of gross negligence).

And, of course, in those circumstances, Transocean itself would be perceived to be relatively more culpable, for the alleged shortcomings it showed as the crisis developed.

So contrast Mr Hayward's assessment with this statement by Transocean:

"This is a self-serving report that attempts to conceal the critical factor that set the stage for the Macondo incident: BP's fatally flawed well design. In both its design and construction, BP made a series of cost-saving decisions that increased risk - in some cases, severely."

Which of course implies that BP's owners won't be able to assess the long-term damage to their wealth until a dizzying number of official US investigations and court cases are concluded.

Read the rest of this entry

BP: Braced for humiliation

Robert Peston | 08:12 UK time, Wednesday, 8 September 2010


It's a nerve-wracking countdown for BP this morning, till the publication at 12 noon of the results of its own investigation into the tragic events of 20 April, when the Deepwater Rig exploded, leading to 11 deaths and the worst oil spill in US history.

Deepwater Horizon oil rig

Those close to the investigation tell me that BP will be embarrassed by the report, which runs to 200 pages and is filled with technical detail.

That said, BP is confident that it can prove that its design for the well was not flawed.

Also, as I mentioned on Friday, one important implication is that there are flaws in safety systems prevalent in the oil industry as a whole.

But even if much of what went wrong may be laid at the doors of those BP contracted to work on the well - such as Transocean which owned and operated the rig and Halliburton which cemented the well - BP as their employer is well aware that it cannot shirk responsibility for the disaster, especially if there is even a hint that safety was compromised by BP's attempts to control costs.

Has the casino swallowed Barclays?

Robert Peston | 10:19 UK time, Tuesday, 7 September 2010


I asked a leading member of the government what he thought about Bob Diamond's appointment as chief executive of Barclays.

Bob Diamond

"Bank taken over by casino," he said. Which implies he has the odd reservation about the rise and rise of Mr Diamond.

This is not to suggest that he and his ministerial colleagues are implacably opposed to all bankers.

After all, the government will confirm this afternoon that arguably the UK's most prominent banker, Stephen Green, is joining their ranks as the new trade minister.

But Barclays is the bank that causes most angst to ministers, central bankers and regulators.

In one way, it looks like a great British success story.

Thanks to the well-timed purchase of the US arm of bankrupt Lehman Bros in the autumn of 2008 and years of recruitment and investment, Barclays now owns one of the world's biggest and most successful investment banks in the form of Barclays Capital.

What's more, Barclays weathered 2008's worst financial crisis in living memory far better than RBS and Lloyds: although Barclays needed to raise a colossal amount of new capital to protect itself against losses, it obtained the necessary funds from Middle East sovereign investors rather than British taxpayers.

That said, Barclays benefitted from emergency loans and guarantees provided by the Treasury and the Bank of England.

It was, in that sense, a beneficiary of the government's assessment that Barclays is too big and important to the UK economy to be allowed to fail.

And that, for prominent politicians in all the main parties and the Bank of England, is what matters.

Their view is that Mr Diamond has built the success of Barclays Capital in part on the ability of the investment bank to raise finance at cheaper rates than would be available if creditors didn't believe that Barclays as a whole would always be rescued in a crisis by taxpayers.

So they argue that taxpayers are - in effect- subsidising Barclays Capital's more speculative activities.

And they would say that it is wholly wrong for the state to facilitate what they see as gambling by Barclays Capital.

Even if Barclays Capital has a record of winning far more often than it loses, it sticks in the craw for many that the huge bonuses earned by Mr Diamond and his colleagues are arguably generated to an extent thanks to the state safety net.

Barclays will argue that the importance of the protection provided by taxpayers has been overstated.

Which, in part, is why the Chancellor, George Osborne, has created a high-powered commission, to adjudicate on whether so-called universal banks, which like Barclays combine retail and investment banking, should be broken up.

One uncertainty has been cleared up by the appointment of Mr Diamond, the living, breathing, Chelsea-supporting epitome of the modern investment banker: if there were a scintilla of doubt about how Barclays sees its future, it's clear that (left to its own devices) Barclays would grow and grow as a universal bank, with the bonus-culture of investment banking increasingly dominant.

Were the banking commission to recommend the break up of the bank and were that recommendation to be accepted by the chancellor, then I would expect Mr Diamond to relocate the bank's domicile and head office to New York and the traditional UK retail bank would be demerged in whole or in part.

Barclays preference, I am told, would be to retain majority control of its British high street banking business. But Barclays in the round would in those circumstances be an institution much more focussed on providing services to big companies and Investors rather than millions of individuals.

Oh, and there's another unavoidable implication of Diamond Bob's triumph. A banker who has pocketed £100m from the day job may find it tricky to heed the call from the Mayor of London that bankers should subsist on meagre rations till we're all back in the money.

HSBC's Green becomes trade minister and Diamond to run Barclays

Robert Peston | 00:43 UK time, Tuesday, 7 September 2010


It's all change at the top of the UK's biggest banks.

Stephen Green and Bob Diamond

Stephen Green, chairman of HSBC, is quitting to become trade minister in the coalition government, I have learned.

The announcement of his appointment will be made this afternoon.

And Bob Diamond is replacing John Varley as chief executive of Barclays.

I'll write a longer note in the morning about what it all means.

But it is significant that the individuals perceived to have steered these two giant banks through the worst financial crisis in living memory are moving on.

In the case of Barclays, the appointment of Diamond confirms that the bank sees itself primarily as an international investment bank.

It'll generate speculation that Barclays might voluntarily spin off its historic British retail operation, even if not forced to do so by the government.

And the departure of Green may well prompt even greater talk that if HSBC doesn't like the reforms to be proposed by the government's banking commission, the group's domicile may be moved away from the UK (and, as I said in my note yesterday, bankers tell me that the most likely new home for HSBC would be Australia).

UPDATE 06:30: During the general election campaign, the three main parties were united in their condemnation of the tens of millions of pounds earned by Bob Diamond, who runs Barclays investment bank, Barclays Capital.

So in appointing Mr Diamond (who is thought to be worth around £100m in total) as the new chief executive of Barclays, the bank's board is taking the risk that the bank's relationship with many leading politicians - which hasn't always been close and friendly - could deteriorate.

This matters, at a time when the government has set up a high-powered commission to examine whether big universal banks such as Barclays - which combine an investment bank and a retail bank - should be dismantled.

Barclays has argued that it is a safer and more successful organisation for the way that it combines services to investors, businesses and individuals.

But if commission and government ultimately disagree, the appointment of Mr Diamond will be seen as proof that Barclays is prioritising investment banking, for the future.

Why is Mr Varley going? Well I was told many months ago by a member of Barclays' board that Mr Varley wanted to go before too long, while he was young enough to do other things.

Barclays, in an official sense, denied that Mr Varley had any such plans.

But now that he has decided that enough is enough, the bank's non-executive directors had no real choice other than to appoint Mr Diamond: even Mr Diamond's most jealous rivals would concede that he has done in impressive job in building up Barclays Capital or Barcap; and that it's the growth at Barcap which has turned Barclays into a leading global financial institution.

But this extraordinary expansion of Barcap has also transformed the group's culture. It is now the British bank which pays the biggest bonuses and the most bonuses. Which doesn't endear it to everyone.

UPDATE 07:19: This is what Barclays says about Mr Diamond's new pay arrangements.

"Bob Diamond will continue to work under his existing compensation arrangements for 2010.

"With effect from 1 January 2011, Bob Diamond's compensation arrangements will reflect his new responsibilities. The compensation arrangements have been benchmarked against a peer group of global universal banks, industrial companies and financial services institutions. Bob Diamond's salary will increase to £1,350,000 and his annual incentive award opportunity will be up to 250% of base salary. It is intended to award a long term, performance-based share incentive of 500% of base salary in 2011."

This implies that his annual remuneration could be as much as £11.5m.

At a time when the economy remains weak, this package is likely to spark widespread criticism.

Connaught to go into administration

Robert Peston | 23:27 UK time, Monday, 6 September 2010


Connaught, the property services group that specialises in social housing, is on the brink of going into administration, according to bankers close to the company.

An announcement is expected tomorrow, I have learned.

Connaught, which employs 10,000 people, has £220m of debt, provided by half a dozen banks and a quartet of other creditors.

The lead bank is Royal Bank of Scotland, which recently provided Connaught with a further £15m in an attempt to keep the group going.

Connaught ran into serious difficulties over the past couple of months, after it emerged that a series of contracts would be lossmaking.

The management, under a new chairman, Sir Roy Gardner, the chairmen of Compass, the catering giant, has tried to put together a rescue plan.

However its bank creditors have decided instead to put the business in administration, under UK insolvency procedures.

In spite of the severity of the economic crisis that engulfed the UK in 2008, few listed businesses have collapsed. In that sense, Connaught, a FTSE 250 company which at one stage had a market value of well over £500m, is unusual.

Will patient bankers prevail?

Robert Peston | 08:49 UK time, Monday, 6 September 2010


Andy Haldane of the Bank of England gave a compelling talk last week about the perennial, epic battle between patience and impatience in the psyche of investors, business leaders and the rest - and what that means for how we should regulate or tax markets and companies (you can read the speech here [321KB PDF]).

Banks at Canary Wharf

It included some depressing data on the pernicious triumph of short-termism (or impatience): according to research by the Bank of England, over the long term (in this case, more than 100 years), the investor who buys and sells the market when share prices lose touch with the fundamental value of companies, well he or she loses money; but there are decent profits to be had through momentum investing, or being a sheep, by buying when others buy and selling when others sell, in an unthinking mechanistic way.

Of course, if you buy the market and never sell, then that's probably the best investment strategy. But our nature makes it almost impossible for many of us to sit on our hands forever. Our instinctual preference is to be doing something - especially when we're bombarded with information on the performance of individual investments and specific companies, and also when there's excess liquidity in markets, making it seemingly cheap and easy to buy and sell.

Which is why Haldane concludes that it's quite possible to have too much of a good thing, in the form of information and easy ability to trade. So whether we're managing a portfolio of investments or on the board of a listed company, impatience and irrationality are the victors - as perhaps evinced in the trend over the past century by which dividend payments have become increasingly disconnected from the financial performance of companies.

These days, dividend payments increase, even when profits fall, which is not what happened in the 19th century. The reason? Well it must be that investors are increasingly unable to wait for the jam.

Now if you want to see management impatience at full throttle, perhaps the place to look is at the lobbying by bank executives against the Banking Commission, which has been set up by the government.

The commission - a quintet of bankers, economists and regulators, all of them pretty distinguished and impressively heterogeneous in opinion - has a year to make recommendations on how to improve the stability and security of the banking system, and how to stimulate competition between banks.

But even before the commission has published the scope of its enquiry, bankers - such as Stuart Gulliver of HSBC - have been muttering that they and their institutions may have to relocate elsewhere if the commission comes up with recommendations they don't like (such as that they must formally separate their investment banking operations from retail banking).

This is to assume that Australia (for example) - which, as I understand it, is the most likely destination for HSBC were it to choose to emigrate - would be flattered to become the new home for a bank whose structure would have been ruled by the UK government (in Mr Gulliver's personal nightmare) to be anti-social and too risky.

There is something slightly odd about the idea that banks perceived to be malign for the UK economy would be seen as wholly benign in other territories.

It would be better, surely, for Mr Gulliver and his peers at the other big banks to show a bit of patience (that virtue again), and have a debate with the commission, rather than threatening slightly implausible retribution before the verdict is even a twinkle in the commission's eye.

There has also been another recent manifestation of bankers' impatience: they hoped that the new coalition government would drop the commitment of the previous government to force the publication by banks of statistics showing how many of their respective executives earn between £1m and £2.5m, how many earn between £2.5m and £5m, and how many earn more than that (in bands of £5m).

These pay disclosures - in banks' annual reports next year - were an important recommendation of Sir David Walker's "Review of Corporate Governance in UK Banks". And they are giving the heeby-jeebies to top bankers, because they fear that more than a few of you will be a bit bemused that bankers can pocket such magnificent sums when job insecurity and flat pay is the order of the day elsewhere.

So bankers rather hoped that the chancellor would kill the new disclosure requirements: one of the weekend newspapers even reported that George Osborne was likely to do that.

The Treasury, however, tells me this is not so. Mr Osborne is committed to implementing Sir David Walker's proposals, it says.

Which poses something of a dilemma for bankers.

Either they must demonstrate to the rest of us that paying a few million squids each to their star performers is a sensible long-term way of generating incremental wealth for their institutions and for the economy; or they should concede that these pay deals are another manifestation of animal short-term appetites and irrational impatience, which should (in that case) be reformed and restrained.

How guilty is BP?

Robert Peston | 12:15 UK time, Friday, 3 September 2010


How important will be BP's report into the causes of the Deepwater Horizon oil disaster, which is due to be published in the coming week or so?

Deepwater Horizon oil rig

Well it certainly won't be the last word on the subject: BP faces official investigations and court cases galore on how 11 rig workers lost their lives in April and why so much oil leaked into the Gulf of Mexico.

And some will refuse to believe any analysis by BP, on the basis that it can't help but be tendentious.

But even if you see the report as the case for the defence, it still matters - partly because it is the first detailed evaluation of what went wrong.

And (call me naive) but I don't see how it can be an utter whitewash. It is imperative for BP's owners - its shareholders - to understand the risks their company runs when drilling in deep waters: any attempt to disguise those risks would not be tolerated by them (surely); it would be seen as grotesque negligence on the part of BP's executives.

So I would expect a long, detailed, technical evaluation - which, even if it's not the final word on BP's culpability, will have implications for how oil companies endeavour to extract hydrocarbons from fields deep below the ocean.

In that sense, it should matter to more than just investors in BP. It should influence estimates of how much more tappable oil exists in the world - and what kind of price (direct financial, environmental) will have to be paid to tap it.

The investigation for BP was carried out by Mark Bly, BP's Group Vice President for Safety and Operations, and a team of more than 70 engineers, technical specialists and business people, some from outside the company.

For what it's worth, he has assured colleagues that he has felt no pressure from senior BP executives to cover anything up or deliver a particular verdict. And he feels he has had the resources to do the job (or so I'm told).

That said, he hasn't had all the relevant data he requested from the important contractors, viz Transocean, which owned and operated the Deepwater rig on behalf of BP, and Halliburton, which cemented the well. So he has been forced to make some assumptions in reaching his conclusions.

What has he found?

Well we know he has not concluded that BP produced a shoddy design for the well or forced its contractors to cut corners in a significant way.

How so?

Well BP's chairman, Carl-Henric Svanberg, said in July - when BP was announcing its second quarter results - that he was confident BP won't be found guilty of gross negligence.

Now it's impossible to know whether he'll be proved right as and when BP's culpability under the Clean Water Act is finally determined. But he couldn't possibly have made the claim if his own colleague, Mark Bly, had uncovered proof of grotesque dereliction of duty.

That said, any report which doesn't raise questions about safety practices would not be believable.

So as the named party on the relevant oil lease - for Mississippi Canyon Block 252 - BP (which owns 65% of property) will be embarrassed (at the very least) by its own investigation.

Even if there turned out to be important errors by employees of Transocean as operator of the platform, that would not absolve BP of blame: regulators and BP's owners (and presumably the rest of us) would expect BP to assess, monitor and correct the quality of its contractors' performance.

In a perverse way, the best that BP can hope for is that Bly has found systemic safety failures. Because it is unlikely those systemic problems would apply only to BP's management of this one new well.

If questions are raised about the quality of safety kit, or the robustness of procedures for monitoring performance or about the skills of employees, these would probably be questions for the oil industry in general when drilling in deeper water, not just for BP.

One lesson from the debacle is that the catastrophic potential of drilling in deep water is (arguably) only marginally less than what can happen when a plane falls out of the sky or a nuclear power plant goes badly wrong.

Are the safety practices in oil on a par with standard practice in nuclear generation or the airline industry? I would be very surprised if that reassuring conclusion will be drawn from Mr Bly's report.

A valueless banking boom?

Robert Peston | 10:16 UK time, Wednesday, 1 September 2010


So how big has been the recent boom in some parts of the banking industry?

Big enough, according to new figures released this morning by the Bank for International Settlements (the central bankers' central bank, as if you didn't know) and the Bank England.

Man stands in front of an electronic boardAccording to the results of their latest triennial survey, global foreign exchange turnover rose 20% to $4trn per day on average (yes, that's each single day) in April 2010 compared with April 2007.

Or to put it another way, a sum equivalent to the entire output of the global economy is traded around once a fortnight on currency markets.

What's more, London's portion of this business has increased even faster, by 25%, so UK based banks' share of forex business is a market-leading 37%.

So no evidence as yet that the reality and threat of horrid new bank taxes and heinous regulation has seriously damaged UK based banks.

As for over-the-counter interest rate derivatives (transactions that are largely bets on the direction of interest rates), these rose 24% globally to $2.1 trn.

And Britain's share of these trades was a striking 46%, up from 44% in 2007.

I presume that warms your patriotic cockles.

What is there to say about an industry that deals in numbers that boggle the typical human brain?

Well, the first thing to point out is that a tiny fraction of this business is carried out on behalf of "non-financial" businesses - or what some would describe as "real" companies (you know the sort of thing I mean - businesses that make cars, or create music, or sell advertising, rather than trading in dematerialised, electronic money on a screen).

These non-financial companies were responsible for just 13% of forex transactions, their lowest proportion for 12 years.

By contrast, "other" financial institutions - such as hedge funds, insurers, mutual funds and so on - contributed a record 48% of the business.

And there's a similar story on the origination of these massive flows of money in the OTC interest rate derivative business.

What does that mean?

Well some would view these statistics as evidence that the banking industry has become more than slightly detached from the "real" economy, that many of its activities are either pure speculation, or attempts to hedge speculation, or attempts to hedge the hedges.

Also, it would be pretty difficult to argue that the net effect of all this financial business has been to reduce the volatility of markets, or to improve the stability of the global economy, or to increase the growth rate of the global economy.

Many might well dispute that the great banking meltdown of 2008 happened because of this explosive growth in financial trading - but the trading certainly didn't prevent the crash.

And there is a massive disconnect between a global economy that has less than doubled in size over 12 years and - on the other hand - OTC derivative transactions that have increased eight fold while foreign exchange transactions have almost trebled in value.

What's more, as I've pointed out before, the global economy was growing quite as fast in the 1960s when much of this financial business barely existed.

So those who can't see the point of all these financial trades may (ahem) have a point - unless, that is, you believe the enrichment of financial traders and hedge fund managers is a social good in itself.

Which is why, some would say, it's slightly odd that when no less an authority than the chairman of the Financial Services Authority, Lord Turner, questions the social utility of much activity in financial markets, and also suggests that it might be no bad thing to levy a tiny Tobin tax on all this frenetic trading in electrons, well it's curious that the chancellor of the exchequer (who could use a bob or two) doesn't lick his chops and demand a bit of that.

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