Once upon a time, the London Stock Exchange bosses had an urge to merge. More accurately, there has seldom been a moment when the LSE was not either trying to merge or fighting off unwanted advances from other exchanges. Ah, but this time it’s different. The tie-up with Deutsche Borse is that pantomime horse, a “merger of equals”.

As if to make the point, the LSE’s CEO Xavier Rolet is off, perhaps with a view to saving France’s political system, to let his oppo run the show, but from London, not Frankfurt. Merger of equals, see? That was in March. The Brexit referendum would make no difference and when the people failed to do as they were told, both sides signed a cheerful business-as-usual statement on May 24.

It is now obvious that business is anything but usual, after “the single most important decision the UK has taken in more than 40 years”. Seen from Brussels, the prospect of the vast markets in bond derivatives, as well as the currency, being run from outside the European Union is horrible to contemplate. So it’s fortunate that Margrethe Vestager, the scourge of big business, is on the case. Fresh from thumping Li Ka Shing and Apple’s Tim Cook, the competition commissioner must approve the merger for it to go ahead.

The exchanges have already offered to jettison some euro bits and pieces, but France’s finance minister is nervous for his country’s stock exchange. Apparently Holland, Belgium and Portugal still have them too. All face oblivion should the merger proceed.

The prize for LSE/Deutsche is the elimination of the need to post collateral twice for trades which involve both bourses. Since those two pools total E150bn, the claim of £450m a year in savings is plausible, although monopoly power may prevent much of that reaching the customers.

M. Rolet reckons the deal is still on track but Mrs Vestager is famously impervious to lobbying. Yet this is as much a political as a competition issue. As the deadline for Britain to trigger Article 50 draws closer, the thought of all the EU’s major financial markets being run by Perfidious Albion may be too much to bear. She is supposed to rule by February 13, but the odds on her sending a Valentine card to the big bourses are lengthening by the day.

No more gimmicks, please

Two more of George Osborne’s crowd-pleasing stunts bit the dust last eek. The retail offer of the rest of the state’s shares in Lloyds Banking was scrapped, as the price sagged under the weight of the Bank of England’s financial repression. Bank shares in today’s climate are gambles rather than investments, so it’s probably as well for the former chancellor that the offer never got further than his headline, since he would have been blamed for the punters’ losses.

Financial repression, in the shape of near-zero interest rates, also helped sink his idea of allowing pensioners to cash in their existing annuities. The earlier change, scrapping the requirement to buy an annuity from pension contributions, remains, and bringing in existing pensioners was somehow seen as “fair.”

Mr Osborne would rather we did not view these liberalisation moves as a way of raising revenue now at the expense of future taxpayers. However, cashing in annuities means jam today and no bread tomorrow, forcing the state to step in when the money’s all gone.

The underlying problem is that annuities simply don’t work at these silly interest rates, which imply that a pound in a decade hence is worth almost as much as a pound today. The resultant rates mean that even a decent capital sum produces a trivial income, reinforcing the suspicion that the insurance companies are stealing from their customers, as usual.

Mr Osborne’s strategic error was to set 55 as the minimum age for capital withdrawal. This is less than two-thirds through the adult life of those born after 1961. Few employees outside the public sector can hope to have accumulated enough of a pension by 55 to last them until death, so they might as well take the money as soon as they can. Next month we shall see whether his successor has learned from Mr Osborne’s blunders. A gimmick-free Autumn Statement would be a good start.

This is my FT column from Saturday (with apologies for late publication. Scafell Pike got in the way).


You ticked the box to confirm that you read the terms and conditions. You lied. Nobody has the time or energy to read the fine print of the contract for car insurance or your Apple phone. Last week a pair of economists won the Nobel prize for designing such contracts. Well thanks, Bengt Holmstrom and Oliver Hart.

Unkind souls might suggest that this award shows how hard it is to find worthy winners of the economics prize nowadays unlike, say, for literature. It is tempting  to ask what economics has done for us, since its most valuable use in the popular imagination is for forecasting, at which it is impressively poor. Some economists have better records than others, for long enough to suggest that it is more than just luck, but by and large, economic forecasting is little better than a random walk. The recent record of both the treasury on the consequences of Brexit and the Bank of England on interest rates suggest that forecasting is just guesswork with added gobbledegook.

Still, the Nobel pair have done a fine service to chief executives everywhere. Their argument is that the optimal contract should link payments to outcomes that reveal the performance of the parties. This sensible principle has spawned the fabulous complexity of the bonus calculation in the CEO’s contract. Spread over a dozen pages of the annual report, it invites the reader into a jungle of targets, strategic objectives, short and long term incentives, performance shares and pension accruals.

Obfuscation in plain sight allows the board to conclude that the CEO has done jolly well in the circumstances, so that he should get the money. At BP, for example, remcom chairman Anne Dowling was so pleased with the contract that rewarded CEO Bob Dudley with $20m despite another grim year that she had to promise shareholders to review it.

The scandal at the Royal Bank of Scotland unearthed by BuzzFeed demonstrates that the baleful influence of contracts with bonuses extends far beyond the boardroom. It seems that many viable businesses were ruined by employees of the bank, whose bonuses depended on debt recovery. Perhaps some economist might win a prize for demonstrating that bonuses benefit only those who get them. But perhaps we knew that already.

Next best thing for a buyback

In his excellent Daily Retailer, Nick Bubb has been teasing Simon Wolfson, the brains behind the extraordinary success of Next, calling him “Mr Buyback Man” for the company’s carefully calibrated share purchase programme. Recently the Next share price has wilted as analysts, like those from brokers Numis last week, fret that web-based newcomers are stealing their clothes and that Next is too dependent on customers taking its expensive extended credit.

Having stopped the programme in July, swamped by post-Brexit selling, Next was back in the market, following the traditionally gloomy commentary from Lord Wolfson. Mr Bubb rather mischievously suggests that the purchase follows improving sales with worsening weather, but with the shares at £46, little more than half their peak, they are now well within Next’s formula for deployment of excess cash. Most companies’ buyback programmes are essentially “keep buying but stop if the share price falls” Not for the first time, Lord Wolfson is showing them how to do it.

A tweet for help

In the dot.com boom, it sometimes seemed that the more money your company lost, the better you were doing. Seventeen years on, here is Twitter, losing more than half a billion dollars a year thanks to burgeoning expenses and despite trebling sales to $2.2bn from 2012 to 2015. As a sharp analysis from Bronte Capital points out, the money spent has barely improved user experience, and the product is essentially unchanged.

When Facebook’s sales were about where Twitter’s are now, it was making half a billion dollars, and the business was innovating while throwing off cash. Twitter is not innovating and is eating money. However, there is plenty that some ruthless Wall Street raider could do on both fronts. The Bronte remedy starts with firing the founder, Jack Dorsey, and concludes: “Carl Icahn – Twitter needs you.”

This is my FT column from Saturday

The Nissan car plant in Sunderland employs 7,000 people and churns out more cars than the whole of the Italian motor industry. It is a jewel in Britain’s post-industrial crown, which perhaps explains why its chief executive felt confident enough to threaten the British government.

Without “commitments for compensation” should tariff barriers to mainland Europe spring up, Carlos Ghosn warned that future investment in the plant was at risk. Until he knows the outcome of the Brexit negotiations, he said, everything will be placed on hold, explaining that “important investment decisions will not be made in the dark.”

Mr Ghosn is one of the world’s finest auto executives, and under him Renault-Nissan has undergone a remarkable revival, but this comment is as short-sighted as it is foolish. Important investment decisions are always being made in the dark. By the time the answer is obvious, say that Europe’s motorists fancy buying little SUVs, it’s too late. The Qashqai was there at the right time to catch the trend.

While his disappointment at the Brexit vote – including from many of the 50,000 with jobs that depend on the Sunderland plant – is understandable, he might consider what has happened since. The outcome has produced a massive boost to Nissan’s profits. On June 22, each euro earned by a Qashqai was worth 77p. Today, each euro earned is worth around 88p, as sterling has slumped following the vote.

Even allowing for a significant increase in imported component costs, that is a dramatic competitive gain which no realistic outcome of the tariff negotiations with the European Union would come close to eliminating. Currencies fluctuate all the time, and if the markets start to see the advantages of our release from Brussels’ hegemony, sterling could climb. Who knows? Like Mr Ghosn, we are all making important decisions in the dark, but while the financial sun shines, he might refrain from trying to blackmail the British government.

Quite beyond our Ken

As an indication that there’s no economic tonic like an unwanted devaluation, Britain’s forced exit from the Exchange Rate Mechanism is a model. Serialising his memoir in The Times, Ken Clarke tells the story of Wednesday September 16, 1992. In the shambles of early evening on Black Wednesday, with interest rates jacked up to 15 per cent, he relates how Douglas Hurd, then Foreign Secretary, insisted that we could not leave the ERM without permission from the European Union’s monetary committee. The treaty rules demanded that it would have to be obtained by sending a treasury official to Brussels to ask for it. Even at the time, this was self-evidently absurd.

Writing in the same slightly jocular way that he speaks, Clarke concludes: “We were now a government with its economic middle stump flying through the air.” This has turned out to be a particularly poor analogy. Not only was he not out, since he went on to become a rather successful Chancellor after the holder on that day was fired, but the devaluation triggered 15 years of economic growth and gathering prosperity. The inflation that so many had warned would follow a plunge in the pound never arrived.

The puzzle, in the light of Mr Clarke’s comments, is why he remains a passionate europhile. Britain’s fall from the ERM allowed us to learn before it was too late that linking the currencies of disparate economies is a recipe for misery and strife. Our unfortunate neighbours are still finding out.

You’re just another cost

Fund management is a rum old business. Apparently, having a mere $127bn to run with is “sub-scale”, so Henderson is taking over an American outfit called Janus, with a mere $195bn on its books. This will eventually produce $110m of economies of scale, mostly from combining funds and firing the managers, to help this transatlantic pantomime horse cut costs to compete with tracker funds. It is unlikely that much of the cutting will impact Janus’s Bill Gross, whose pay is not disclosed, but who was paid hundreds of millions of dollars in his last job. By comparison, the £6.5m headline pay of Andrew Formica, Henderson’s CEO, looks almost parsimonious. Clearly no scope for cost-cutting there, then.

This is my FT column from Saturday

Does your company make a “material contribution to economic activity in the UK”? If it does, and has issued some bonds, then the Bank of England has £10bn to spend buying them. This latest extension of Quantitative Easing, which got under way last week, promises to be as entertaining as it is futile, as the BoE sinks ever further into the monetary mire.

For a start, corporate bonds are comparatively rare beasts. A buyer of £10bn-worth, even spread  over 18 months, would have to bid fairly briskly to get the stock, and the holders will see him coming. At the same time, £10bn is little more than a rounding error in the great QE game, which has seen the BoE buy in a third of Britain’s national debt.

Then there is the question of which corporate bonds to buy. Only investment-grade paper makes the list, including from such obvious material contributors as United Utilities and Rolls-Royce, but also Apple, the famous tax-avoiding behemoth and McDonalds, whose biggest material contribution has been to the nation’s waistline.

Not on the list are the likes of Enquest, whose efforts to squeeze the remaining oil from the North Sea surely make it a material contributor. Unfortunately, it is financially challenged, and its retail bonds have been a sore disappointment to us holders. They are currently half price, yielding over 10 per cent and promising to double our money in six years. Since it is only Enquest’s promise, the market reckons it’s a good deal less reliable than the BoE’s promise on those new plastic fivers.

The serious point here is that giving the material contributors the opportunity to borrow more at a fraction of a percent less than before will make no difference to their plans. Rather, the malign impact on their pension fund deficits from still lower yields will raise the stress on their balance sheets and make them less inclined to invest. Thus does this adventure into corporate bonds expose the absurd lengths to which the proponents of QE are now driven.

The devil of a bid to unravel

A publicly quoted private equity group sounds like an oxymoron, which is why there are so few of them. Should Harbourvest succeed in buying SVG Capital, there will be one less, but it is a strange affair. Last month the $42bn US group bid 650p a share, just shy of the last published 666p net asset value, followed by an old-fashioned dawn raid. Sufficient other big SVG holders indicted acceptance to take the total in favour past 50 per cent.

Ah, not so fast, said SVG. Our assets are not worth 666p but 735p, and you’re not our only suitor. Then Schroders, the second-largest shareholder, rejected the bid. Even if Harbourvest now wants to pay up, the Takeover Panel rules prohibit it without SVG’s agreement, because it called its first bid final.

Contested bids for investment companies are rare, because the target can threaten a nuclear option of liquidating the assets and paying net asset value to its shareholders. However, valuing unquoted shares is an inexact science. When those assets are themselves holdings in other vehicles, there’s another layer of guesswork.

SVG shares fell off a cliff in 2008, and despite a strong recovery, at 666p they are still cheaper than a decade ago. The company’s current financial commitments effectively rule out liquidation, and the share price will always lag the NAV. An agreed takeout at the number of the beast would be a happy ending, of sorts.

Mine’s a monopoly, thanks

The creation of the world’s largest maker of alcoholic fizzy drinks moved a stage closer last week, as SABMiller shareholders voted to be taken over by the even bigger Anheuser-Busch InBev. The precise overlap of the share registers (and that of Molson Coors, buyer of some chunky bits which must be sold) is hard to gauge, but is likely to be significant given the presence of monster funds like Blackrock and State Street. Since the deal self-evidently reduces competition, it is easy to see why the big shareholders were so keen. Do not expect any economies of scale to find themselves into your glass, though.

This is my FT column from Saturday

A good rule for the cautious investor is never buy a share until the company has been publicly listed for at least a year – doubly so for businesses being sold by private equity. These holders are natural sellers and their skills include prettying up companies first. They have no long-term interest in the prospects for the business, and they know much more about those prospects than you do.

Rising share prices have presented the opportunity to the owners of Misys, Biffa and Hollywood Bowl among others. It may be that Misys is so transformed that a financial software business bought for £1.2bn in 2012 is worth £5.5bn today, or that this time, waste disposal really will prove that where there’s muck there’s money, or that we are going back to the future with sweaty shoes and ten-pin bowling.

However, there is an exception to test every rule, and this year’s monster flotation, O2, may be it. We have the inestimable Margrethe Vestager, the European Union competition commissioner who vetoed the purchase of O2 by 3 to thank for the opportunity. This ‘orrible merger would have cut the number of significant players in UK mobile telecoms from four to three, something that is self-evidently anti-competitive.

O2’s owner, Telefonica of Spain, is essentially a forced seller, struggling under a E53bn debt mountain. It has yet to commit formally to a public offering, but is widely expected to float the business this autumn. The price agreed with 3 was £10.25bn, which provides a good idea of the float price. Telefonica has said it plans to keep a majority holding,  another powerful incentive to see share trading off to a good start, since it would make the rest easier to sell in the future.

The offer also presents a fine chance to win some customer loyalty in an industry which generally treats users with indifference bordering on contempt. Unfortunately a retail offer, let alone one targeted at O2’s 25m customers, is unlikely because the bankers see it as too much like hard work. Still, a big company priced to go is a rarity. Pay attention.

How to get Grayling off the hook

Whisper it, but the government may actually decide where to build London’s next runway. There is something of a high-stakes poker game going on at Heathrow, between the official proposal (a third runway) and the unofficial “Heathrow Hub” which extends one, and potentially both, runways westward. The Hub is much cheaper, would cut the early morning aircraft noise over west London, and redeem the (previous) PM’s promise of “no third runway.”

Heathrow’s owners have cold-shouldered the hub. Ferrovial of Spain overpaid for BAA, the airport’s owner, in 2006, and today’s shareholders also include China Investment Corporation, Qatar Holding and the Singapore government.  A go-ahead for the third runway would dramatically raise the airport’s Regulated Asset Base, boosting what is a large long-term, low-risk investment.

However, Gatwick is winning the PR battle, and the danger for Heathrow’s shareholders is that the best may be the enemy of the good. Were they to formally embrace the hub as an acceptable second-best expansion, they might yet allow transport minister Chris Grayling to announce an elegant solution to this interminable problem.

Mine’s a gamble, not an investment

Now that shares in the big mining companies have soared from their January lows, the analysts are saying investors should buy them. There is something about this industry which wrong-foots experts and executives alike, as illustrated by the boom-bust-recovery at Glencore.

Floated in 2011 at the peak of the commodity boom, the shares dribbled down from 550p to a little more than £3 in 2014. Claiming they were cheap, the company then spent the next year and $1bn buying its own shares. They were nothing of the kind, and six months later Glencore was forced into an emergency equity issue to raise more than twice as much at less than half the price.

Soc Gen had decided Glencore shares were cheap at 180p and last week Liberum agreed that they are now too expensive to sell (sic) at today’s 210p. Goodness, dividend payments might even resume next year. Plenty of scope for trading, then, but please don’t call it investment.

This is my FT column from Saturday

Last Thursday was Pension Awareness Day, perhaps to make up for the other 364 days of the year when we are blissfully unaware. Still, it’s over now, so we can continue to pretend that saving pennies from our wages will somehow transmute into world cruises when we retire.

Auto-enrolment, the mechanism for collecting the pennies, has now extended its baleful shadow over even the smallest, most transient businesses. At first, sacrificing 1 per cent of your gross salary is merely an irritant, but by 2018 it will be 4 per cent, a nasty kick in the take-home pay when wages are rising at half that rate.

The employer must contribute at least as much, turning the whole exercise into a new payroll tax at 8 per cent, on top of income tax and National Insurance. Worse still, this sacrifice will not fend off poverty in old age. The Bank of England rather let the moggie from the box this week. Its pension scheme is in surplus, unlike a rapidly-rising number of corporate schemes, but to achieve this, it paid in 54.6 per cent of the salary bill last year.

Fortunately for the BoE employees, they contribute nothing directly from their own pay, or they could scarcely afford to get to work. The scheme is particularly helpful to the top executives. For example Andy Haldane, its chief economist, will retire on an inflation-proofed £84,000 a year, enough for plenty of cruises, if not quite his own yacht.

Despite this, Mr Haldane does not think much of conventional pensions as the best way to save, telling The Sunday Times that he prefers property, while appearing to have only the vaguest idea of the true value of his promise to pay from the BoE. Now Mr Haldane is supposed to be one of the bright sparks of Threadneedle Street. Featured in Time magazine’s Top 100 most influential in 2014, he was expected to bring new ideas to bank regulation.

If he had any, he has run out of them now. His admission that he plumps for property is hardly an endorsement of government policy, while his justification of the last rate cut as “jobs before savers” is  laughable. It merely gives another twist to the house price spiral, puts bank margins under more pressure, and undermines the solvency of pension funds.

The Monetary Policy Committee demonstrated again this week that it really has no more idea of what to do than the rest of us, reduced to hinting at another futile cut in Bank Rate before Christmas. Like his colleagues, Mr Haldane is insulated from the consequences of his actions, but he at least should see what is happening away from government-backed pension promises, among those who cannot take advantage of the ballooning asset prices the BoE’s policies have spawned.

It would be a comfort to the rest of us if the B0E’s chief economist had enough confidence in these policies to put his savings to productive use. Adam Smith, and many others since, pointed out that property by itself does not generate wealth. Such an old-fashioned view, yes?

Bandits at 10 O’clock high

Should John Devaney, the chairman of Cobham, find the air refuelling group at the wrong end of an incoming fighter, as was suggested last week,  he can always turn to Bank of America Merrill Lynch to repel boarders.

The bankers have faithfully supported Cobham through its troubles. They advised on the transformational $1.5bn purchase of Aeroflex in 2014, which brought, ahem, grave financial and operational issues which somehow escaped the due diligence. In addition, the bankers’ financing was not as clever as it might have been.

Still, when it all went terribly wrong, there was BofA on hand to organise a £500m rescue rights issue. The bankers helped underwrite the offer, and helped themselves to £20m for taking the risk that the price would plunge by 45 per cent in a fortnight, to 89p, and nobody would want the shares. They never got below 135p. Even following a new profit warning last month, the shares are 169p.

After such disasters, it is hardly surprising that both CEO and finance director have had to eject, and the talk is, inevitably, of an offensive from another defence company. Still, never mind. Mr Devaney can always rely on his friends at BofA for their valuable advice.

This is my FT column from Saturday

Such a comfort to know that the governor of the Bank of England is “absolutely serene”. If banking is all about confidence, then central banking is about national confidence, and Mark Carney, apparently, believes he has it. Please do not label the halving of Bank Rate, the expansion of quantitative easing and the buying of big company debt as a panic reaction to the people voting the wrong way.

It was, Mr Carney told parliament last week, a measured response and, golly gee, look how successful it has been in combatting the terrors of Brexit. See, houses are still being sold, people are still shopping, company buyers are still buying. It’s all thanks to the BoE’s prompt action. Even the pound has perked up.

If Mr Carney really believes that a trivial cut in Bank Rate, the farcical shenanigans in the gilts market and the offer to buy a few investment-grade private sector bonds have prevented the meltdown his former boss predicted, then he is not so much serene as delusional.

Shaving a quarter-point off the official cost of money makes no practical difference to borrowers.  Pushing gilt yields into negative territory merely compounds the already dire problems facing pension funds, while intensifying the margin squeeze on the banks. The suggestion that another cut in Bank Rate may follow shows how little our monetary masters have learned.

With interest rates at this level, monetary policy is powerless to influence the behaviour of companies and individuals, whatever Mr Carney may think. The power is firmly back in the hands of the treasury, and if the new chancellor knows what to do, he might tell us on November 23. It may not suit Mr Carney to admit as much, but rather than pretend that he is really making a difference to people’s lives, he might remember the words of Leslie O’Brien, one of his predecessors: “The role of the Governor is to exude confidence without actually lying.”


More breakages for Hammond to fix

The art of taxation is extracting the maximum amount of feather with the minimum amount of clucking. In his attempts to squeeze more revenue from stamp duty on housing, George Osborne seems to have got this the wrong way round. The chickens are clucking like mad, yet the harvest of feathers is shrinking.

We may not feel too sad about Berkeley Group suspending work on a £20m development in Barnes (supposedly to allow to allow buyers to customise their apartments and not because they have the post-Brexit blues) or the fact that unaffordable properties in London are becoming marginally less unaffordable.

Out in the world away from London, the contradictions of the government policies are stark. Barratt Homes, Britain’s largest housebuilder, reported that 30 per cent of its sales were to those using the subsidised Help to Buy scheme, where buyers need find only 5 per cent of the price. The demand thus created allowed Barratt to raise its prices by twice that amount.

The combination of steep charges to purchasers of expensive homes and penalties for buyers of second homes are not making existing houses any cheaper either. The costs are merely gumming up the market,with fewer houses on agents’ books. Lower volume means less tax paid. The old system was silly, with its step changes of rates of duty, but Mr Osborne has demonstrated once again that there is no situation so bad that government interference cannot make it worse.

He hadn’t got a clue

When Gordon Brown took bank supervision away from the Bank of England and sent it to the Financial Services Authority, it looked at the time more like punishment than policy. So it proved. Stanislas Yassukovich, a giant in the eurobond market which had laid the foundation for London’s financial supremacy, relates in his memoir Two Lives how he was interviewed by a pimply youth from the FSA. Did he understand what his dealers were doing? As a tease, Stanni replied: “Actually, I find the cricket scores easier to understand.” The youth merely ticked the box and moved on to the next question. No wonder the FSA went sleepwalking into the banking crisis.