For an entertaining read it’s hard to beat the Davis Review for the Financial Conduct Authority. Its exposure of shocking incompetence and amateur public relations, wrapped in the sort of pompous prose that only an experienced lawyer can pull off successfully, turn it into a classic.

Simon Davis investigates the events at the end of March when a story in the Daily Telegraph caused panic in the market for life assurance shares. It indicated that the FCA was going to attack “exit fees”, the charges that life offices impose on policyholders who have the temerity to try and move their money to escape rotten value policies.

The report tells, in gripping detail, how the FCA’s attempts to manipulate the press coverage of its document on fair treatment of customers backfired spectacularly. Contrary to the leak to the Telegraph, the FCA is proposing only to look into exit fees to see if there’s a problem.

Well, they know the answer now. The slump in share prices gave the game away. Milking old policies, while penalising attempts to escape, is hugely profitable. Shares in the specialists at Phoenix and Friends Life plunged by a fifth.

The FCA’s final report is due next year, giving the life offices time to explain how these 30m old policies are so terribly expensive to service, and that they must make their money somewhere. Should the bonusless Martin Wheatley, the FCA’s chief executive, survive that long, he might explain that that’s just tough, and demand that exit fees be scrapped.

Meanwhile, at £17,000 a page, the 226-page report is cracking value – not least for Mr Davis.

PPP is the new PPI

And the prize for 2014’s cheekiest takeover bid goes to… John Laing Infrastructure Fund. Actually, it was more of a “Take it off yer ‘ands guv” offer. After five profit warnings and a slumping share price, Balfour Beatty looked a soft enough touch to accept £1bn for its portfolio of roads, schools and hospitals.

The offer, more than JLIF’s market capitalisation, is at a recent valuation, but Balfour’s jury-rigged board swiftly rejected it,  highlighting just how valuable these public private partnership portfolios really are. The price at which PPP hospitals and schools change hands is seldom exposed to the public gaze, since they tend to be shuffled between private equity groups, but some of the financing is so expensive that it threatens to bankrupt the users.

In October, Balfour sold its half interest in a Yorkshire hospital for £61.5m, a gain of £42.2m and a 28 per cent premium to the recent book value. Meanwhile, the hospital’s trust has had to fire employees and cut salaries to balance its books. The last government’s dash for PPP financing promises to do to the taxpayer what PPI did for the banks.

The Balfour board is promising to publish the latest value of the portfolio next month, in a move likely to expose the true cost still more starkly. Not such a cheeky offer from JLIF, then.


Is POG a dog?

Fancy a few shares in Petropavlovsk? Don’t worry if you can’t pronounce it, nobody else can either, so it’s universally known as POG, its stock market moniker. There will be plenty of shares to go round, not far short of four billion including conversions, assuming this week’s rescue goes according to plan. The veteran chairman, Peter Hambro, promised to honour shareholders’ pre-emption rights, and by a prodigious feat of financial engineering, he’s done so.

The existing shares are almost worthless, but each carries the right to buy 15 new ones at 5p apiece. He’s not only taking up his, but with his CEO is personally underwriting $30m of the $235m issue, part of the cash needed to pay off an ill-judged convertible issue due in February.

POG shares were once £12.50, a price, it’s safe to say, they’ll never see again.Today’s cum-rights price is 9.5p, ex-rights under 6p. But in the wastes of Siberia there’s a gold mine that is forecast to produce 700,000 ounces at $900 each (worth $1230 today), which is why Mr Hambro is so keen to save the company. That, and the family pride of a City banking dynasty, of course.

This is my FT column from last Saturday (with apologies for late publication. On Monday my iPad said it had been published. It lied.)

It’s jolly competitive in consumer telecoms. You’ve seen the ads. Free broadband! Well, free apart from the £16.99 a month line rental. Oh, and it’s only free for six months, and it doesn’t include those old-fashioned phone calls. After 18 months, you’ll be paying £34.50. Add on the VAT, and it’s almost £500 a year, even if BT doesn’t raise its charges.

Still, never mind, you’ll be getting free football. Put another way, you’ll be pushing even more money into the pockets of the well-rewarded stars of the premier league, as BT scraps with Sky for the broadcast rights. Our obsession with the beautiful game is the chosen battleground for the anticipated convergence of fixed line, mobile, internet and tv, and it’s driving the telecoms analysts into a frenzy of speculation perming any two from BT, Sky, Vodafone, EE and O2. It’s propelled the whole sector onto giddy ratings, despite dismal growth prospects.

It seems that every mobile company wants to get into fixed, while BT is convinced that it must get back into mobile. The trend towards offering both is much further advanced in some of the operators’ continental European markets. However, it’s far from clear that the putative mega-deals would benefit anyone other than the usual suspects in the investment banks.

Not so long ago, the clearing banks decided that current account holders would buy anything, from household and holiday cover to policy protection insurance. Cross-selling simply made the customers cross, while the bills for mis-selling PPI are still coming in.

It may be fanciful to imagine the telecom companies being punished for mis-selling. However Ofcom, the industry regulator, is already looking at the giddy price British viewers pay for football, and the complexity of teaser deals has served to disguise just how expensive our internet hobby really is.

Should the orgy of mergers in anticipation of fourplay actually happen, the providers might be forced into clear, honest pricing. Alternatively, as Nomura put it: “Consolidated markets should drive more disciplined pricing for the medium term.” In other words, we might be forced to pay up and accept “free” wall-to-wall footy whether we like it or not.

No more war

When there was no longer a place for the price of War Loan in the new look FT, it was the beginning of the end. Now George Osborne has decided to redeem the irredeemable, and pay it back at par, or £100. War loan was never quite irredeemable, merely marked “1952 or after” when the coupon was effectively cut from 5 per cent to 3 1/2 per cent in 1932.

When issued in 1917, it prompted one Labour politician to remark that “no foreign conqueror could have devised a more complete robbery and enslavement of the British nation.” The lenders (or their descendants) who are finally to get their money back might disagree. £100 then had the purchasing power of  £4,280 today, or if you prefer, the real value of £100 has dwindled to £2.34.

That the state can save money redeeming an undated stock with a 3 1/2 per cent coupon shows how times have changed. Mr Osborne claimed the credit for today’s ultra-low gilt yields, but everyone else has them too. Spain’s bond yields.for example, are even lower.

The bond vigilantes at M&G muse whether this is telling us something more than expectations for inflation. They find a strong, long-term correlation between bond yields and (nominal) GDP growth, and conclude that it’s the poor outlook for growth that has pushed the yields down so far.

Well, maybe. In 1976 war loan fell to the point where the yield mirrored the price. At £18.70 the yield was 18.7 per cent, as inflation destroyed fixed interest bonds. That rang the bell for the bottom of the market. Perhaps George’s gesture has rung it for the top.

Crude love

Deflation is bad for you, ergo cheaper oil is bad for the EU. “It is scarcely possible to exaggerate how crude and wrong-headed this line of argument is” says the normally restrained Stephen Lewis of ADM. He points out that the drop to $70 saves the eurozone $145bn a year, or 0.9 per cent of GDP, even before the knock-on effects. As he (nearly) says: enjoy it.

This is my FT column from Saturday

There’s nothing quite like the prospect of “efficiency gains” to persuade shareholders that an ambitious takeover is worth doing. And there’s no sector where they have been so hard to realise as the ever-opaque life assurance business.

So here we go again, with Aviva’s plan to absorb Friends Life, aka Resolution II, with the prospect of at least £100m of savings from merging the businesses. Aviva is the product of too many rounds of mergers to count, and given the long-term nature of the industry, still has the ghosts of Commercial Union, General Accident and Norwich Union rattling around its City HQ. Now it proposes to add Axa UK, BUPA Life and Friends Provident to what Eamonn Flanagan at Shore Capital calls the alphabet soup of Aviva companies.

To say the move surprised the City hardly covers it. Mark Wilson, the tough-minded Kiwi who succeeded the hapless Andrew Moss, has spent two years rebuilding trust and the share price, to the point where it’s more than half the price it was a decade ago (and more than twice its nadir).  The company is still a trifle stretched for cash, one thing that Friends is generating, which is why Mr Flanagan describes the £5.3bn deal as a disguised rights issue.

Mr Wilson has not yet used the dread word “transformational” to describe what he’s doing, but to counter the rights issue jibe, he has to focus attention on those savings – while not emphasising the associated job losses. It’s a tough call. After all these years, Aviva’s back office is still a long way from being a model of efficiency and customer care.

When he quit as CEO of AIA in Hong Kong, Mr Wilson described that company as “90 years of spaghetti“, which should ring a bell with Aviva policyholders. He had opposed the Prudential’s failed $35bn bid (for a company that subsequently floated and is now worth $82bn) so if anyone can make Friends with those efficiency savings, he can.

Long ago David Prosser, then CEO of Legal & General, made it a rule not to buy another life office, and the shareholders prospered. We’ll see whether Mr Wilson can prove him wrong.

Off track, on market

Last year Warren Buffett suggested to his fans that they put their money into Vanguard’s index tracker funds. In the following 10 months, $164bn followed his advice.

The logic is simple: no nasty shocks from individual stocks, and no greedy fund manager skimming fees while quietly sticking close to his index benchmark. This activity has become less comfortable in the UK since the Retail Distribution Review forced disclosure of the cost of advice, concentrating investors’ minds no end. Some have concluded they are better off making their own mistakes instead of paying someone else to do so.

Others have gone tracking. The trend is less extreme than in the US, but it’s growing fast. The six managers controlling the biggest funds identified by the FT this week included Eleanor de Freitas, who runs Blackrock’s UK Equity tracker. Her stocks pick themselves, so she’s hardly managing in the usual sense of the word.

There are far too many pooled funds in London. Many are run for the convenience of the manager, and deserve to disappear. Yet the bigger the portion of the market controlled by trackers, the more opportunity for active investors. The indices will always contain some businesses driven to improbable valuations by market fashion (remember Baltimore Technologies?) and the more extreme the fashion, the more the trackers have to buy. Beating the index by avoiding the duds is just as good for performance as picking the winners.

Another shocker

Sir Terry Leahy is shocked at the way Tesco has lost sight of its customers. It’s true that fewer of them can be seen in the stores,  three years after he stepped down. It’s shocking that Tesco struggled on in America before 2011, shocking that his strategy of cornering the market in planning permissions for big sheds has produced white elephants, shocking that Tesco’s return on capital in the Leahy years fell even while declared earnings were rising. We’re all shocked.

This is my FT column from Saturday

The only way to have a quick war is to lose it. In the boardrooms of the world’s top trio of iron ore miners, the directors have decided that they are not going to lose. Rio Tinto has announced another mine in Western Australia. Not to be outdone, BHP updated its plans to expand, to get its cost of production below that of Rio.

Meanwhile in Brazil, Vale is exploiting its weak currency and ramping up output. This mining machismo makes for a truly horrible outlook. Goldman Sachs estimates that 165m tonnes more ore will be mined next year than the market needs.

The price has already slumped to $72 a tonne, a five-year low, and since commodities swing violently around equilibrium, it won’t stop there. Citicorp’s forecast of $65 next year looks optimistic. The big boys’ plan is to force the smaller miners out of business, and since most of them are already losing money, they won’t last long.

Or will they? The biggest consumer of iron ore is China, and it’s the high-cost local miners which are supposed to close. If the price falls far enough for long enough, they will, but not before the Chinese authorities finally give up hope of an upturn.

To be fair to the big three, they have the prisoner’s dilemma. If one scrapped its expansion plans, its own cost per tonne would not fall, while the higher price would allow the other two to clean up. You can see why clever Ivan Glasenberg wanted to put us Rio shareholders out of this misery by taking the company over and stopping the producers “killing the supercycle”.

Instead, the west’s miners will hand their efficiency gains to Chinese consumers. Perhaps the maxim in those boardrooms should be: If you’re in a hole, stop digging.

Budget leak

A page from an early draft of the Autumn Statement has fallen into my hands

Mr Speaker, I come now to the nation’s finances.

My Treasury colleague, the chief secretary, has remarked on our deficit reduction plans for after we win the next election. He said they were “simply not credible”. This does him no credit as a member of the government.

However, today I can announce a single measure to transform the public finances.

The Bank of England’s programme of Quantitative Easing has required it to purchase £375 bn of government securities. This has enabled Britain to mitigate the effect of the recession that has so damaged our trading partners in Europe.

It is an experiment that is widely held to have worked. Today I can go further.

One result of QE is that 28 per cent of the National Debt is now owned by the Bank. The Bank itself is owned by the taxpayer. Accordingly, I have instructed it to destroy its entire stock of government securities. This will require some technical adjustments to the Bank’s balance sheet.

The move may be seen as controversial. So was that of QE itself when we embarked on it. But of course there is no question of the Bank being unable to meet its obligations as they fall due. It can print its own currency, unlike our less fortunate European neighbours.

When our economy recovers to the point where inflation is a danger, new Treasury stock can be created and sold as necessary.

As it always has been in the past.

As a result of this action, Britain’s National Debt will fall from 80 per cent of our gross national product to under 60 per cent. A lower figure than almost all our international competitors.

I turn now to our scope for tax cuts…

Who’d have thought it?

You can’t beat social science for increasing the sum of human understanding, and here are two fine examples. Bankers, according to some researchers at the University of Zurich, lie for financial gain.

Meanwhile, their colleagues across the border at the Universite de Bretagne-Sud have been amusing themselves observing the impact of women wearing high heels on the male psyche. They’ve found that we pay more attention. Coming next: research on defecating bears in woods.

This is my updated FT column from Saturday


Long ago, the redevelopment of Canary Wharf was conceived as a sort of back office centre, one step up from warehouses. Then the Reichmann brothers stepped in, and while their business failed, the Canary flew.

Last week its quoted parent, Songbird Estates, did too. A  295p-a-share “indicative offer” from its biggest shareholders was quickly rejected, and the price has soared to 342p, as the market spotted what the Qatar Investment Authority and its partner Brookfield of Canada already knew.

Canary Wharf is about to take flight again, with rents rising and the seemingly-endless Crossrail project becoming reality. Its station, 330 metres long under four decks of retail space, topped with a mini version of Cornwall’s Eden Project, is nearing completion. From 2018, trains from Canary Wharf will reach Bond Street in 13 minutes and Heathrow in 39.

The Wharf’s long-serving boss, George Iacobescu, can scarcely contain his excitement. He has seen his project rise into the sky, and now plans a proper city centre where people will want to live. He may even succeed.

The QIA owns 29 per cent of Songbird while Brookfield has 22 per cent of Canary Wharf. The next three biggest holders could deliver control of the £2.5bn market cap company, but the likes of Standard Life, with 3.5 per cent, will be watching carefully to see the rules are followed.

Despite the elevated share price, there seems little downside. Brokers Oriel see 14 per cent compound annual growth even before the trains arrive, and a take-out value nearer 400p for “arguably the best large-scale developer in London.” A catfight over the Canary surely looms.

Mr Nobody is to blame

Did you see all those forex traders being marched off to clink this week for crimes against customers and shareholders? Did you note the names in the Financial Conduct Authority’s report into market rigging? No, you didn’t miss them. There was no “perp walk” parading the suspects in handcuffs past the cameras, and no names in the shocking findings from the FCA.

This omission, like the findings themselves, follows a pattern that has become wearily familiar. Those at the top express shock and sadness that their employees could behave as such self-interested brutes. The brutes have all been “let go”,  and in future there will be better behaviour, tighter controls, care for customers, etc etc…

Too often the new employees are just other banks’ brutes, and the fact that the forex fix took place after so many other scandals had been exposed betrays what the senior bankers really think about reform. Why should they care, when it takes only a few years to make enough in bonuses to be set up for life?

There’s a danger, too, that the regulators and their governments start to view the continuing fines as nice little earners at the expense of the banks’ shareholders. Until the bigger holders among them insist on reform rather than wilful ignorance of how the money is earned, this cycle will continue.

A golden opportunity

Only in Switzerland. In a fortnight’s time, the populace is invited to force their central bank to hold at least a fifth of its assets in gold. A yes vote would signal the turn in the market as surely as Gordon Brown did when he dumped 400 tonnes of Britain’s gold reserves 15 years ago.

The price then was at a 20-year low, and it subsequently multiplied seven-fold. It’s since come back to a mere four times Gordon’s sale price, but a yes vote would oblige the Swiss National Bank to put a rocket under it.

Last year, calculates Grant’s Interest Rate Observer, the world’s central banks bought a net 368 tonnes. For the SNB to hit a 20 per cent target, it would have to buy 2,500 tonnes. No point in paying with all those billions of euros in the bank, either, since that would only drive up the price of the Swissie still further.

The SNB already owns 1,040 tonnes, and the referendum also demands repatriation. Since much of the world’s gold is tied up as collateral (some pledged many times over) few counterparties have deliverable bullion on this scale. “Yes” would mean a very nasty bear squeeze.

This is my FT column from Saturday

Last week’s announcement from HSBC covered 32 pages – positively skinny when set against August’s half time report. That ran to 293 pages, but then the latest one was merely an interim management statement, a snapshot of trading in the arid wastes between actual trading statements.

So how’s it going for Britain’s biggest bank? Not that well, judged by the headline pre-tax profit of $4.6bn, which was an eighth below outside estimates. Rather swimmingly, judging by adjusted pre-tax profit of $6.6bn, which was roughly the same distance ahead.

Which is the “underlying” profit figure, and which merely lying? Who knows? Disclosure on this scale, even the 32-page mini, effectively robs the numbers of their meaning. More compensation here, a new threat of fines there, a writeback of some provisions, and the numbers can be tortured to confess to almost anything.

The professionals struggle to see what’s really going on, while the rest of us have no hope. We were grateful for Terry Smith’s simplified Lloyds Banking balance sheet in the FT last Saturday, just three lines to demonstrate how high-risk these businesses really are. Thirty years ago as a bank analyst, he could deconstruct their balance sheets with confidence, something he says is not possible today.

The top executives pretend they understand, but they don’t. These institutions are simply too big and complex for the human brain to grasp, as CEO Stuart Gulliver effectively admitted as he abandoned his cost efficiency target. At HSBC’s British rival, Standard Chartered, Peter Sands has found that even after seven years as CEO, he couldn’t see what was coming in the eighth.

The regulators are doing their best, with the ECB’s stress tests and the Bank of England’s leverage ratio designed to force better behaviour than in the past. Alas, it’s like training tigers to be vegetarian. Whatever the CEO tells them, bankers will find ways to game the system at the expense of customers and shareholders, and complexity is their camouflage stripes.

The solution is the same as it’s been since the start of the crisis: break the banks into businesses simple enough for managements to understand, and small enough to fail without bringing the house down. Until then, expect many more 293-page statements, and no three-line balance sheets.

Clip that hedge

Why do airlines hedge their fuel costs? Almost all of them do it, and last week Ryanair, the smartest of the lot, announced that it had bought 90 per cent of its expected needs until 2016 at an equivalent $93 a barrel.

This may look quite clever if the crude price dances away next year, but so far it’s merely locked in a 10 per cent loss on the cost of the company’s most important raw material. The pat answer is that hedging reduces uncertainty, allowing better forecasting, although Ryanair issued its third  reverse profit warning of 2014 after the business had a better summer than it had expected.

Hedging costs money, since there’s never a perfect match between forward contracts and actual fuel use, and those poor market traders have to make a living. It’s hard to disagree with the conclusion of a study eight years ago by Peter Morrell at Cranfield University: “Hedging may be a zero-cost signal to investors that management is technically alert. Perhaps this is the most compelling argument for airline hedging. However, it lies more in the realm of the psychology of markets than the mathematics.”

If it costs nothing…

There’s no such thing as free banking, and no such thing as a free email account, but if you’re not paying, it feels that way. Provide you keep your current account in credit, there is little incentive to switch.

This hidden subsidy has driven sneaky behaviour by the banks, but the idea that without it they will behave better is as laughful as the Competition and Markets Authority forcing consumers to pay for something which currently costs nothing.

Without such a diktat, the first bank to scrap free-in-credit current accounts would see a stampede for the exit by their core customers. Alex Chisholm, the CMA’s boss, grumbles that too few people change their bank account, but recent changes make that pretty simple. He should be careful what he wishes for.


This is my FT column from Saturday

Share buybacks, that process of paying some shareholders to go away at the expense of those who remain, is getting a bad name. It’s deserved. Buybacks’ principal effect is to pretty up the earnings per share, a key measure for executive bonuses. They also help disguise the dilution caused by employee share awards, while producing a nice little earner for the company’s brokers.

The general rule is to announce the sum to be spent, and to keep buying almost regardless of the price, until it’s all gone. At the height of the last crisis, some boards took fright and suspended their programmes, only to resume at dearer prices when the market recovered.

Returning excess capital to shareholders makes obvious sense. It allows the owners to squander their money rather than have the directors do it for them. Mechanisms to do this, through special dividends or capital distributions, are uncontroversial, but the buyback fails to treat all shareholders alike.

As so often, Simon Wolfson at Next is showing how to do it. Last year the management’s projections indicated that the shares were too expensive to justify using the company’s money to buy them, so shareholders got a special dividend instead. As markets plunged last week, the price has come back into range, and Next spent £32m on its own shares.

This increases Lord Wolfson’s grip on the business, since he doesn’t sell shares in what he sees as his family company. However, as the perspicacious Nick Bubb points out in his Daily Retailer blog, the buying also indicates that Next is avoiding the weather woes of others in the high street and that the management views today’s price as fair value.What’s not to like?

Jam tomorrow

“Let’s put the cars of tomorrow on the roads of today” gushes the headline of Shell’s latest ad campaign, boasting with unfortunate timing about how far a single litre of fuel could take you.

Unfortunately, the roads of today have quite enough cars on them already, with congestion in London costing £5.3bn last year. According to Inrix, a “traffic information provider,” each car-commuter in the capital wasted £2,700-worth of time in jams, a sort of rough equality of misery with train-commuters. Across the country, the estimated figure is £13bn, and rising fast.

Still, next month the much-trumpeted investment in transport infrastructure is due to start. So, new roads, big improvements or new river crossings, then? Sadly not. Contracts worth £10bn are to be let for HS2, even though the gargantuan enabling Bill is not even law yet.

It’s hard to disagree with Edmund King (of the road) at the AA , that this new train set will make a minimal impact on the capital’s congestion. Unfortunately, new roads are even less popular than new railways, and those who are directly affected by the building works can cause serious damage at the ballot box. With politicians completely focused on next May, it seems Shell is right after all. However fuel-efficient, the cars of tomorrow will be stuck on the roads of today.

 Better to tax the dead

It’s often said that inheritance tax is only paid by those who trust their relatives less than they trust the taxman. To which could be added: it’s only paid by the middling-rich slice of the population. The poor escape, and the seriously-rich buy expensive and ingenious schemes to avoid it.

Paying tax when dead certainly sounds better than paying it while still alive, and if we want a meritocratic society, the logic is unassailable. There’s even less logic in allowing those swept up the property wave into taxable territory to pass the family home on to their undeserving offspring.

The prime minister says he wants to raise the current threshold. This is a handy benefit for elderly voters (the Office for Budget Responsibility expects 200,000 of them to die in the four years after the election) but a rational policy would cut the rate to 10 per cent and make everyone pay it on death, without exception. It would no longer be worth while for the rich to avoid it, and might even yield more than the £3.4bn, or a half of one per cent of all taxes, that IHT raised last year.

This is my FT column from Saturday






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