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Archives for May 2011

Peston Picks is moving

Robert Peston | 12:20 UK time, Thursday, 12 May 2011

Cardboard Boxes on a trolley

My blog is dead. Long live the new blog. Or to put it another way, my page - and those of other BBC bloggers - is having a makeover. So if you don't want to read on, and you simply want to read my latest post, click here.

The reason for the change is to bring together more of my output in one place. So on the new page, you'll find many of my TV and radio pieces, and (soon) my tweets.

If I go mad and decide to do other social media, that'll be there too.

Fingers crossed that you like what you see. I can't hope that all of you will love all the changes. And in particular, I am sure some of you will be frustrated that (for cost reasons) there is now a 400 character limit on the comments you can leave.

Please don't let that put you off expressing yourselves. I can't tell you how much I value your opinions and the debate we have.

As for the posts I've written since Picks was launched in January 2007, the best place to find them is here. For future posts, the best URL for me is still

HSBC banks on UK

Robert Peston | 09:43 UK time, Wednesday, 11 May 2011

For all HSBC's mutterings that it's fed up with having the UK as its home base - because of the incremental tax it pays here and what it perceives as an anti-bank climate - there is no evidence from today's strategy review that it is growing any cooler on having a big presence in the UK.

A branch of HSBC bank near Westminster Abbey and the Houses of Parliament

In fact, if anything, the opposite is implied by its assessment of where best to allocate its capital and expertise over the coming decade. The UK is categorised by HSBC as a "strategic market", which is HSBC's highest accolade, partly because it has a massive presence in retail banking here and partly because it wants to be "the UK's leading bank for international businesses".

Interestingly, and in spite of the superior growth rates of emerging economies, HSBC expects the UK to still be the sixth largest economy in the world in 2050, only a fraction smaller than Germany, but bigger than Brazil, Mexico and France.

The British economy is expected by HSBC to grow faster than the US, Japan, and France over the coming 40 years - and a bit slower than Germany (but, of course, massively slower than China, India, Brazil, Mexico and Turkey). Some of that British momentum, compared to the eurozone and Japan for example, is presumably due to an expected faster rate of population growth in the UK - which is not universally popular.

But even so, income per capita in the UK in 2050 is predicted to be $49,000, 6.5% below German income per head and almost 20% greater than French per capita income.

For HSBC, the important trends are expected annual growth of world trade of 8.9% in the coming 10 years and the persistence of huge financial imbalances between the saving and exporting nations (China, India, Germany, and so on) and the consuming and borrowing nations (the US and much of Europe).

Interestingly, HSBC expects the UK to be a rare example of a country moving from deficit into surplus, by 2020 (or rather it buys into the analysis of the consultants McKinsey and the World Economic Forum to that effect - although there is a bit of a mystery here, because HSBC attributes the forecast to McKinsey, but it's not in the relevant McKinsey document).

The point, for HSBC, of analysing the world in these terms is that it wants to be the leader in financing those swelling trade flows between emerging economies and developed ones, and also in the related businesses of shipping China's and India's and Taiwan's surplus capital to the US and Europe.

Which means that what it calls Global Banking and Markets (and others call investment banking) together with its Commercial Banking arm will be the focus of future expansion.

That looks rational for one of the world's genuinely global banks. But it is slightly disturbing for the rest of us, perhaps, because the bank is assuming that the leaders of the G20 most powerful economies will fail in their avowed aim of stabilising the global economy by reducing China's funding surplus and America's funding deficit, the imbalances that were a fundamental cause of the great crash of 2007-8.

HSBC's success in that sense seems in part to be predicated on the idea that the global financial economy won't become a much safer place.

Like all sensible businesses, HSBC say it will reallocate capital to where it sees superior growth or where it has substantial market shares. So it will only stay in retail banking in places, like the UK for example, where it is big enough to be a price leader, rather than a follower.

The new chief executive, Stuart Gulliver, recognises that current returns are too low, partly because the bank's running costs are too high. So it plans to reduce annual costs by between $2.5bn and $3.5bn over the next three years - though it hasn't said how.

There is one cost that particularly rankles with HSBC - the special banking levy imposed by the British government. What it finds particularly galling, I am told, is that it pays the levy on uninsured deposits outside the UK, which most would see as a stable form of funding that contributes to the perception of HSBC as being a relatively safe bank.

Given that Treasury said the levy was designed in part to encourage banks to finance themselves in a more prudent way, it is a bit odd that the levy is costing HSBC around £370m this year, almost exactly the same as Royal Bank of Scotland and Barclays, and £110m more than Lloyds, in spite of HSBC's funding arrangements being widely seen to be much more prudent and stable than those of the other UK banks.

It is perhaps understandable therefore that HSBC hopes the Treasury will look again at the structure of the levy. Although - as I've said and elucidated before - HSBC's not-very-veiled threat to leave the UK if the levy isn't reformed doesn't look credible.

What price a Greek haircut?

Robert Peston | 09:41 UK time, Tuesday, 10 May 2011

One of Europe's most influential bankers said to me the other day that he thought it would be a disaster if any of the eurozone's debt-stretched nations imposed a reduction in the value of their respective sovereign borrowings, or - to use the jargon - took a haircut on their debts.

Greek parliament building

For him, the eurozone approach of muddling through - providing IMF and eurozone loans to those countries that cannot borrow on markets - is the right approach, even if it hasn't actually solved anything for the eurozone in a permanent sense.

It is curious he should take that view, given that the rescues of Greece and Ireland that took place last year are already having to be renegotiated. And the bailout of those countries didn't stop the rot: Portugal is well into the process of obtaining emergency finance from eurozone and IMF.

Wouldn't it be better to cut what Greece - or Portugal or Ireland - owes down to a manageable size, in tandem with the imposed shrinkage of its public sector, to put its public finances back on a basis that is sustainable for the long term?

The markets are saying that's the only way forward. Over the course of a year, the market price of Greek government debt has fallen by more than half, for example. The yield on 10-year Greek government bonds is well over 15%. Which is an unambiguous statement from investors that there is not the faintest chance that they will lend to Greece again, unless and until its debt burden is reduced to a manageable size.

Or to put it another way, markets are presenting a simple choice to eurozone government heads and the IMF: they can continue to lend to Greece for an indefinite period, in the hope that Greece's economic growth will eventually pick up and generate incremental tax revenues, which would allow the Greek government to perhaps start paying down its debts; or they can bite the bullet and put Greece into the equivalent of what the Americans call Chapter 11 bankruptcy protection, to restructure and reduce what Greece owes so that it is consistent with the market price of all that debt.

Now as of this instant, option one looks a bit naive, in that what's happened subsequent to the first bailout of Greece a year ago is that its ratio of debt to GDP has been growing in leaps and bounds to more than 150% of GDP (and for more on the heroic challenges faced by Greece, see reports in the next day or two from Stephanie Flanders, who is in Athens).

So you would have expected my influential banker - who knows a thing or two about the markets - to be in favour of what the markets are saying is inevitable. Surely he should be calling for that most humiliating event for any creditor, a formal admission by Greece that it can't pay what it owes, which goes by the moniker of a haircut, or restructuring, or default?

But Mr Big Banker doesn't think that's the right way forward. His reasoning is that he fears a debt restructuring would weaken many of Europe's banks, such that they would be forced to raise new capital - perhaps from their respective governments. And, for reasons that slightly elude me, he sees that as a worse outcome than leaving Greece trapped in an unbreakably vicious cycle of economic decline.

The odd thing, however, is that the official statistics really don't seem to indicate that a haircut on Greek debt would be Armageddon for Europe's banks.

It would be a disaster for Greece's banks, that's certainly true, given that (according to Bank of England figures) a 50% writedown of Greek sovereign debt would wipe out more than 70% of their equity capital. Or to put it another way, they would be bust and would have to be recapitalised.

But, sooner or later, Greece's banks are going to need strengthening in any case. Fixing Greece's public finances won't fix Greece unless its banks are mended too. So any estimate of the costs of rehabilitating that country will include the price of providing new capital to the banks.

The more relevant question, perhaps, is what a Greek haircut would mean for banks outside Greece.

The latest figures from the Bank for International Settlements, published a few days ago, show that at the end of last year banks outside Greece had lent $146bn to Greek banks, companies and the public sector - down from $171bn three months earlier. And, of this, loans to the public sector (largely holdings of Greek government bonds) were $54bn.

To be clear, this doesn't take account of exposure through derivatives, credit commitments or guarantees. So the world's banks probably have a further $100bn exposure to Greece.

The sums at risk therefore look serious though not - on their own - potentially disastrous for the health of the financial system.

Now as luck would have it, the banks most at risk happen to be those of the eurozone's two largest and strongest economies, Germany and France. The exposure of German banks to Greece is $34bn, including perhaps $20bn of loans to the Greek government, while the exposure of French banks is $57bn, of which again around $20bn is probably sovereign lending

Now because of what some would say is the madness of how the global Basel rules - that measure the strength of banks - are applied, there would be a double whammy for eurozone banks if there were a write-off of Greek sovereign debt.

The banks with Greek sovereign exposure would have to reduce their respective stocks of capital by the amount of the loan loss. And they would have to inflate the size of their balance sheets, because the residual exposure to the Greek government would lose its official (and some would say insane) zero risk weighting. So the fall in the capital ratios of banks with exposure to Greece would be magnified in a painful way.

Of the larger listed banks, only one, the Franco-Belgian group Dexia, looks as though it would be seriously hurt by a Greek debt writedown. According to Morgan Stanley, Dexia has 4.9bn euros of exposure to Greek sovereign debt, equivalent to more than half the value of its equity capital. Dexia would be significantly weakened by a 50% Greek haircut.

Next at risk, according to Morgan Stanley, would be Commerzbank of Germany, with €3bn of Greek sovereign debt, equivalent to 15% of its capital. Meanwhile BNP Paribas and Credit Agricole of France, Erste of Austria, KBC of Belgium and Deutsche Bank of Germany all have meaningful though not devastating exposures.

Less visible is the Greek exposure of Germany's state backed landesbanks - which regulators tell me is considerable. But if they were to incur large losses on it, Germany could afford to recapitalise them.

So what is going on? Why are eurozone governments so wary of a restructuring or haircut of Greek sovereign debt, given that banks in the round won't be killed by the consequential hit?

There seem to be three reasons.

First, in Germany, it is apparently politically more acceptable to provide rescue finance to Greece directly than to rescue German banks that foolishly and greedily bought Greek debt for its relatively high yield.

Second, a Greek debt restructuring would be a severe blow to eurozone pride in the strength of the currency union.

Third, a Greek haircut might be the thin end of a large wedge. If it created a precedent for haircuts in Portugal and Ireland, the losses for the eurozone's banks would begin to look serious. But again, if there were just a trio of national debt haircuts, if the rot were to stop with Ireland and Portugal, eurozone governments could afford to shore up and recapitalise their banks.

That said, what the eurozone could not afford - or so regulators fear - would be haircut contagion to the likes of Spain and Italy.

But Spain and Italy are looking in better shape. Spain, for example, is taking steps to strengthen its second tier banks and its banks in general have become less dependent on funding from the European central bank (which is a proxy for their perceived weakness).

So here, I think, will be what will determine whether Greece gets its haircut in the next two or three months: if eurozone governments come to believe that Spain is well past the moment of maximum risk of financial crisis, there will be a bold restructuring of Greek debt.

But, to use that awful footballing expression, if they do go for a Greek debt haircut or writedown, it will be squeaky bum time in government buildings all over Europe.

The big PPI lesson for banks

Robert Peston | 10:02 UK time, Monday, 9 May 2011

The big lesson for the banks from today's decision by the British Bankers Association not to appeal against the high court ruling on Payment Protection Insurance is - funnily enough - very similar to the big lesson from the Great Crash of 2007-8.

Barclays Bank sign

Which is that if a bank runs its business on the basis of what the regulators' detailed rules allow - rather than on the basis of what is commercially sustainable and sensible - public humiliation and enormous losses are likely to be the bitter harvest.

In the case of PPI, much of what the banks have now acknowledged to be mis-selling seemed consistent with rules laid down by the regulator, the Financial Services Authority, in its handbook and its source book on the selling of insurance.

But the FSA argued that following the letter of these rules was a necessary but not sufficient guarantee that the banks were behaving property. The FSA argued that the big banks should have been more mindful of its over-arching principles, notably the imperative of paying due regard to the interests of customers and treating them fairly.

The banks appear to have been so seduced by the apparently huge profits available from insuring personal loans, mortgages and credit card debt that they pushed the insurance to all manner of unsuitable customers (the self-employed who could never make a claim for being made redundant, or those with pre-existing health conditions, that would invalidate claims, to name just two common examples).

"It is very difficult to justify how we behaved" said one senior banker. "You can't imagine supermarkets treating their customers in the way we treated ours. I know my colleagues think that so long as we followed what was in the FSA's handbook, we shouldn't be blamed. But my view is that we forgot the cardinal rule, which is that we're there to serve customers, not to shove something down their throats which they don't need".

This departure from the very basics of retailing is costing the banks very dearly indeed. Last week Lloyds - the market leader in PPI and the first of the big banks to say it would provide comprehensive restitution - said that the settlement would lead to a £3.2bn expense.

Today, Barclays has quantified the compensation and related costs at £1bn. There will be a similar charge for Royal Bank of Scotland. And HSBC has just said it is setting aside £274m to meet these costs.

In total for all the big banks, the costs are heading towards £6bn or so - and that's to ignore the compensation bill for hundreds of smaller firms which joined in the PPI mis-selling frenzy.

Now what's striking is that the PPI debacle shares strong cultural characteristics with the behaviour that took many of the world's banks to the brink of bankruptcy less than three years ago. During the boom years before the crisis of 2007-8, you won't need telling that banks lent and invested recklessly - to subprime borrowers, to commercial property, to each other, through off-balance sheet vehicles, in the form of "structured" products which delivered the illusion of quality (inter alia).

And much of this reckless lending and investing took advantage of the global Basel rules that give the official regulators' view of how much risk the banks were taking - and, as we now know, were catastrophically wrong.

But - many bankers belatedly concede - banks should have known better than to make their judgments on how to lend on the basis of the regulators' rules. They should have done what other commercial businesses do, which was to lend and invest on the basis of what would be sustainable and prudent for the long term.

Gaming or playing the Basel rules, and forgetting commercial common sense, led to disaster. It meant that Royal Bank of Scotland, in the autumn of 2008, looked like a sound bank as measured by the Basel rules, when to all intents and purposes it was bust.

Of course it is reasonable to blame the regulators for framing the rules badly. But many would say that the banks were more at fault for mindlessly running their businesses on the basis of what the rules allowed.

So what's the big lesson of both PPI and the 2007-8 crash? Well, it is probably that banks need to base everything they do on what is good for customers, shareholders and creditors in a fundamental sense - and not on what the rules allow them to do.

PS Apart from the banks, another group of firms - the claims management firms - look set to be burned by the banks' decision to chuck in the towel and pay compensation to 2.75m or so individuals who were mis-sold PPI insurance.

The banks will now set up operations to speedily process claims for compensation. So they would argue that there is no point in their customers using the services of claims management firms, because in doing so those customers would not gain any additional compensation but would have to pay commission to the claims handler.

RBS opposes internal firewalls

Robert Peston | 10:05 UK time, Friday, 6 May 2011

Although Royal Bank of Scotland is back in loss on a so-called statutory basis, having made the tiniest of profits in the final three months of last year, that doesn't really tell the story of what has been going on at this semi-nationalised bank.

Lady walks past RBS sign

For the record, the statutory attributable loss was £528m in the three months to March 31, compared with a profit of £12m in the last quarter of 2010 and a £248m loss in the first quarter of 2010.

But, as is par for the course with big, complex universal banks, these numbers do almost as much to obscure as to enlighten.

They are, for example, heavily influenced by changes in the valuation of debt sold by Royal Bank of Scotland to investors and of credit insurance bought from taxpayers in the form of the Asset Protection Scheme.

There was a loss of not far off £1bn on these items. Now it's moot whether it really enhances our understanding of Royal Bank of Scotland's performance that the value of these contracts - which can't be broken at a moment's notice - have moved against RBS.

More important, I think, is that operating profits of RBS's retail and commercial operations are almost a fifth better than a year ago at £1.9bn, though a little bit lower than in the fourth quarter of 2010.

The trend at RBS's global banking and markets business - what most would call its investment banking arm - was more volatile. Operating profits were £1.1bn in the latest period, double what was generated in the final quarter of 2010, but a third less than the bumper first three months of last year.

For the bank as a whole, the charge for debts going bad seems to be on an unambiguously declining trend, from £2.7bn in the first quarter of 2010, to £2.1bn in the final quarter of last year, and just under £2bn in the latest quarterly figures.

As for other important measures, RBS is succeeding in widening the gap between what it charges for credit and what it has to pay to borrow (good for shareholders, not always welcomed by customers) - and overheads appear to be under control.

So there is progress towards re-establishing RBS as thriving, growing business, which could prosper without the benefit of exceptional support from taxpayers - although that progress goes by fits and starts rather than in one giant leap (witness, as with Lloyds, a big increase in losses on lending to the troubled Irish economy).

What will perhaps spark some controversy is that the provision of credit to small businesses fell 7%. And, once again, RBS puts this down to a weakness of demand rather than a lack of any determination on its part to supply - but that doesn't enlighten on whether it's the unattractive borrowing terms on offer that puts off some potential business borrowers.

Also RBS has gone on the record for the first time with its opposition to the proposal from the Independent Banking Commission that internal firewalls should be erected inside giant banks such as RBS.

RBS says that the Independent Banking Commission's recommendation that universal banks like it should erect internal firewalls, or should put their retail and investment banking operations into separate insulated subsidiaries, are "likely to add to bank costs - impacting both customers and shareholders -without the safety gains that the broader Basel process is delivering" (the Basel process is the global negotiations on strengthening banks).

It is also striking that RBS signals that it isn't overjoyed at the unilateral decision made yesterday by Lloyds to chuck in the towel in the banks' legal battle against the regulators' judgement that they should make comprehensive restitution to those mis-sold PPI loan insurance. The banks says: "a decision on appeal of the court case...has not yet been made as it relates to important other issues of retrospective regulation".

As I've mentioned before, if RBS follows Lloyds's lead and offers a comprehensive PPI settlement, that would probably cost the bank a bit more than £1bn, about a third of the cost to Lloyds.

And if we're in the business of comparing the two partly nationalised mega banks, Lloyds and RBS, both still look some way from being in a fit state to see taxpayers' huge stakes privatised at a profit to all of us.

However if Lloyds entered the reporting season looking as though it was nearer to privatisation than RBS, their respective latest results probably show RBS inching forward a bit in that journey and Lloyds perhaps retreating slightly.

Lloyds to settle PPI claims

Robert Peston | 07:57 UK time, Thursday, 5 May 2011

Lloyds has decided not to use the courts any further to contest the decision of the regulator, the Financial Service Authority, that it should pay restitution to customers who were mis-sold PPI loan insurance.

Lloyds logo

This will be welcomed by thousands of Lloyds customers, although it will be very expensive for Lloyds - which is making a provision of £3.2bn to cover the likely costs.

That £3.2bn charge means Lloyds is back in loss, to the tune of £3.5bn on a statutory or official basis.

My post from last night explains much of the background to this.

Ignoring one-offs, on what Lloyds calls a combined business basis, Lloyds remained in profit, to the tune of £284m, for the first three months of the year - although this was well down on the £1.1bn made in the equivalent period of last year.

There was also a charge of £1.1bn to cover the expected cost of Irish loans going bad. This was £500m more than expected.

The reason for the higher than anticipated Irish lending loss is that the new chief executive Antonio Horsa-Orsorio decided to factor in a further possible fall of 10% in Irish commercial property prices.

Other striking characteristics of these figures for the first quarter of the year is that net lending to small businesses rose, bucking the national trend, and overall income was down from £6bn to £5.2bn.

What stands out however is Lloyds' decision to settle with PPI claimants.

It was a unilateral decision, but will put pressure on the other banks to do the same.

The size of Lloyds charge implies that the big British banks will in total take a £9bn hit to settle PPI claims, with Royal Bank of Scotland, the second most exposed, perhaps taking a £2bn hit.

Update 09:21: For taxpayers, it is good news that Lloyds has been weaning itself off loans and loan guarantees provided by us.

So in the first three months of the year, there was a further reduction of £26bn of funding for Lloyds in effect provided by the state.

Which means that Lloyds' residual dependence on de facto loans from us is £70bn - with £26bn of this still owed to the Bank of England's Special Liquidity Scheme and £44bn of debt guaranteed by the Treasury (under the Credit Guarantee Scheme) still needing to be repaid.

Barring a meltdown in wholesale markets, Lloyds should be free of exceptional taxpayer funding support by the target of 2012.

By contrast, the timetable for privatising taxpayers' 41% stake in Lloyds is yet to be decided - although today's decision by the new chief executive to face up to the mistakes of the past (the PPI and Irish losses) should make privatisation easier.

The next milestone for Lloyds on the road away from state ownership and influence will be the announcement in June of Mr Horta-Orsorio's new strategy for the group.

Update 09:54: Royal Bank of Scotland will not make a decision till next week on whether to join Lloyds in agreeing to settle PPI cases.

It had the second biggest share of the PPI market, with around 20%, compared with 35% for Lloyds.

My banking sources are surprised by the magnitude of the PPI charge taken by Lloyds. It was significantly bigger than they had expected.

They would expect RBS to eventually take a PPI hit of around £1bn (as I mentioned in a post last month) rather than the £2bn implied by Lloyds' PPI provision.

That said, it is highly unlikely that RBS will quantify the potential PPI damage when it announces its first quarter results tomorrow.

On RBS's imminent results, I would expect it still to be in the red at the statutory level, including - for example - a debit from a market valuation of credit insurance provided to RBS by taxpayers under the Asset Protection Scheme.

But at the operating level it will be in profit. And RBS's general insurance operations should be back in the black (some would say 'at last') - which matters, because RBS is committed to dispose of these well-known insurance activities, probably by floating them on the stock market.

Lloyds: Back in the red?

Robert Peston | 19:04 UK time, Wednesday, 4 May 2011

It's the first results tomorrow for Lloyds new chief executive, Antonio Horta-Orsorio - and I wouldn't be at all surprised if, in the time-honoured fashion of new brooms, he announces substantial losses on ventures that had already gone a bit wrong for his predecessors.

In particular, I would expect him to announce further significant writedowns on £20bn odd of outstanding loans to the troubled Irish economy - after last year's impairment charge of £4.3bn on Irish lending.

Also, he may well make a provision of well over £1bn to cover potential payouts to thousands of purchasers of PPI loan insurance.

This would follow last month's comprehensive defeat in the courts of Britain's leading banks, which had challenged the decision of the regulator, the Financial Services Authority, that they should pay compensation for mis-selling of the credit insurance.

If Lloyds were to incur such a big loss on its past sales of PPI policies, that of course would be seen as a very good thing by those who believe that Lloyds mis-sold to them - because it would imply that Lloyds would be ceasing its legal battle (with the other banks) to avoid making comprehensive restitution.

Anyway, the Irish and PPI debits together could well run to many billions of pounds - which would be enough to put Lloyds into losses overall for the first three months of the year, and possibly for the first six months too.

That would be embarrassing for Lloyds, though not for Mr Horta-Orsorio, who can't be held responsible for decisions made before his time.

Remember that Lloyds made a big thing last year of being back in the black, following its humungous losses in 2008 and 2009 of £6.7bn and £6.3bn respectively.

Anyway, if I'm right, and if Lloyds takes a chunky hit from Ireland and PPI, it would represent a setback to the recovery of a bank 41% owned by taxpayers - but it wouldn't impair the health of the bank in a fundamental way.

That said, it would pose a very particular question for the non-executives of Lloyds - which is why they chose to award a £1.45m bonus to the bank's retiring chief executive, Eric Daniels, earlier this year.

Four billionaires at Glencore

Robert Peston | 09:04 UK time, Wednesday, 4 May 2011

I can't recall a flotation like it, in terms of the sheer number of executives emerging as wealthy beyond most people's wildest dreams or expectations - not even the conversion of Goldman Sachs into a public company or the listing of Google.

Glencore logo

When Glencore publishes its full flotation prospectus later this morning, it will show that there are four billionaires working for the world's leading commodities, minerals and energy trader.

These are led by the chief executive Ivan Glasenberg, who will be shown to be worth around $10bn.

But it is the quartet of billionaires, plus many others worth more than $100m each, and hundreds who are millionaires, that makes Glencore quite extraordinary.

Now all the top executives are saying they won't sell any of their shares for five years at least - that they won't use the flotation to cash in. As for Glasenberg, he's pledging not to sell even a single share till he steps down as chief executive.

Even so, the stock market listing converts their stakes into currency. These are not paupers.

Is there a price for them of this remarkable valuation of their respective Glencore holdings?

Well their company is already receiving vastly more public scrutiny - for it's environmental record and tax practices, for example - than it did as a pretty secretive private company over the last 20 years or so.

It won't like all this attention - such as claims in this morning's Daily Mail of how Glencore's copper mining operations in Zambia are doing too little for that country.

And it certainly didn't enjoy the furore sparked by remarks of the new chairman, Simon Murray, about how women's desire to have babies prevents them rising to then top in business.

But some of you might feel that whatever embarrassment is caused to Glencore's bosses will be softened by all that personal wealth.

Update 16:44: Oh dear. There’s another billionaire at Glencore I somehow missed.

The prospectus – which is longer than Proust, and racier than Proust in parts – shows that the chief executive, Ivan Glasenberg is worth just under $10bn.

Also, two of his lieutenants are each worth around $3.7bn, one other has a $3.2bn holding and the fifth in this billionaire quintet has a $2.8bn stake.

The poor finance director, Steven Kalmin, is worth a mere $610m.

As the FT points out, each one of these has a holding worth more than what the famous (some would use a less flattering epithet) founder of Glencore, Marc Rich, pocketed when he sold the business to management less than 20 years ago.

Is the Treasury understating pension liabilities?

Robert Peston | 17:18 UK time, Tuesday, 3 May 2011

Belatedly, I've got round to looking at the Treasury's recent decision to change how it calculates the necessary contributions that have to be made to cover the future costs of unfunded public service pensions.

HM Treasury

My interest was sparked by a letter sent to the chancellor by 23 pension experts, organised by the consultant John Ralfe. They argue that the Treasury has made a mistake in its choice of a new so-called discount rate.

If you think this is tedious abstruse stuff that has no relevance to you, think again. The aggregate public-sector net liability for pensions is so huge - perhaps £1 trillion - that it matters to all of us as taxpayers, especially those likely to be paying tax in 10 and 20 years time, that the government has a reliable and accurate valuation of pension promises.

Pensions represent, to coin the phrase, a massive off-balance-sheet debt. And as we've all learned to our cost from the financial crisis of 2007-8, it is a bad idea to carry on blithely pretending off-balance-sheet liabilities don't exist.

So what is this blessed discount rate? Well in the private sector it can be seen as the number used to translate into today's money a commitment to pay £650 a week pension (for example) for 30 years or so to a retired employee (till he or she dies), so that we can see whether there's enough money in the pension fund to pay that employee (and all the other employees) during his or her long retirement.

The point of the discount rate is to assess whether there's enough money in the pension fund - or whether it needs to be topped up.

Which is all very well, except that for most of the public sector, there are no funds or pots of money to pay for future pensions. Most of the pension promises are unfunded, payable out of employees' current contributions and out of general taxation.

That said, since public sector workers are increasingly expected to make a contribution to the costs of their own pensions, it would presumably be sensible for that contribution to be set at a level that is rationally related to the value of promised pensions.

So what is the best way of measuring the cost today of new pension promises?

Well the government has decided to "discount" those promises by the rate at which the economy is expected to grow.

Now there is some logic to that: the growth rate of the economy should determine the growth rate of tax revenues; and the growth rate of tax revenues will have a direct bearing on whether future pension promises will bankrupt us all or not.

But here's the thing. Any private sector chief executive might well be sent to prison if he or she decided to use the equivalent discount rate for a company, which would be the expected growth rate of that company's revenues or profits.

The reason is that although it might be possible to remove subjectivity (or in a worst case, manipulation) from any long-term forecast of the growth of GDP or of a company's turnover, it is not possible to remove considerable uncertainty.

To illustrate, the Treasury has chosen a GDP growth rate of 3% per annum as the discount rate for public sector pensions, which is considerably above the rate at which the UK economy has grown for years or indeed may grow for many years.

If we were growing at 3%, we would in practice be less worried about the off-balance-sheet liabilities of public-sector pensions, because the on-balance-sheet debt of the government would not be growing at an unsustainably fast rate.

To put it another way, in choosing its view of the long term growth rate of GDP as the discount rate, the Treasury is arguably understating the burden of future pensions to a considerable extent.

So what discount rate do companies use?

Well they are obliged to discount the liabilities at the yield or interest rate on AA rated corporate bonds.

Which may not be ideal, but has some advantages: there is a market price for AA corporate bonds, so the yield or discount rate is difficult to manipulate by unscrupulous employers; and it tells the company how much money would need to be in the pension pot, on the basis that all the money were invested in relatively safe investments (AA corporate bonds).

Now Ralfe and his chums believe that the discount rate for public sector promises should be the yield on long-term index linked gilts (gilts are bonds or debts of the British government) - partly because this too has a difficult-to-manipulate market price and because an index-linked government bond is a very similar liability to a public sector pension promise (both are protected against inflation, both are in effect debts of the government).

They point out that gilt interest and principal payments are paid out of future tax revenues, just as future pensions are. So if the value today of future pensions should be discounted at the GDP rate, that's how index linked gilts should be value on the government's balance sheet - which would be bonkers.

Anyway, if you've read this far (and many congratulations to you if you have), you may take the view that it would not be rational to impose a tougher discount rate on the government than on private-sector companies - which is what Ralfe et al seem to want, in that the yield on index linked gilts will always be lower than the yield on AA corporate bonds (because HMG, even with all its debts, is deemed to be more creditworthy than any British business).

But for a government and for a chancellor who have made it a badge of honour to bring transparency and prudence to public-sector finances, prospective GDP growth does look a slightly rum discount rate for valuing those enormous pension liabilities.

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