Wednesday, 30 January 2008
THE ICEBERG OF INFINITY
What does this image represent to you?
- Could it be the hidden sub-prime losses of the major banks of the world?
- Or perhaps the off-balance sheet funding of the UK Government (soon to be boosted by Northern Rock bonds)
- Or the deeper story behind Jerome Kerviel's unfolding saga in France?
It could of course be any of these things; what it is to me is pure switch off boredom. Increasingly this image is used by all management consultants to present some idea, where there is a hidden aspect to a problem. I have seen it used in the last few weeks alone in at least 10 different presentations on utterly different topics by separate organisations.
Hence to me it means boredom, the same old ruse used by people to try to elicit interest. Images like this get used all the time, but this one has got to me. Soon no doubt it will be used in the newspapers too as it filters down into the print media.
So, what does it mean to you and have you any other examples of similar images done to death in the corporate world?
Tuesday, 29 January 2008
So we have had a good few weeks of resignations and clinging on and it seems appropriate to note the etiquette and mores of today's world when it comes to hanging on to one's highly paid job.
First up, Peter Hain, who finally succumbed after realising the plod were coming to feel his collar, his boss seemed to weak to act. Next up on the list is the Harriet Harman, keen to keep her status and showing no sign of remorse - up until she is proven guilty of something.
Then we get to some corporate players - The Northern Rock board, Adam Applegarth amongst them who clung on for a good few months; in sharp contrast the the immediate reactions of the directors of M&B today.
At Societe Generale, apart from the devious Mr Kerviel, there seems to be a strong culture of hanging in through the tough times, with remarkably little activity despite the huge losses and obvious failures of senior management.
Then finally we reach Mr Conway, today having the whip withdrawn by David Cameron. No fear of him resigning despite clearly lining the pockets of his family with public funds.
The Patterns are hard to discern. Certainly the politico's come out poorly, as at least some businessmen behave honourably whereas it seems modern politicians do not; going only when pushed or pulled by the rozza's.
Having said that, businessmen in really indefensible positions like Applegarth seem to make the most of the hay whilst possible, being kicked out screaming at the end.
Perhaps the moral is those with a clean conscience resign in the knowledge that it will not be accepted or they will be forgiven and in a new job soon. Those caught at the till keep going until the PAYE is forcibly removed. Maybe this can be our guide to understanding where the guilty party resides in future incidents...
More meaty news for risk management fans as Mitchells & Butlers take a £ 274m hit to close out their ‘inflation-hedge’ derivatives position – a 30-year RPI swap with a 3.1775% strike. As the FT says,
“M&B hung on to the hedges in the belief that the disruption would prove temporary and that a less ambitious deal could be pushed through”
Huh. Their MTM valuation on the swaps had fallen steadily, from £ 60m out-of-the-money in July when everything started to go wrong for them, through £ 140m by September, (though who calls an RPI forward curve right now is an interesting question), to the fateful £ 274m at the end.
In M&B’s favour, they’ve been unusually up-front about this throughout the piece: I could name several plc’s who have sat silently on far greater MTM losses in the (vain) hope they would go away.
On the less creditable side: whoever conned them into entering the hedge before the intended property deal was done ? Big financings tend to swap out simultaneously: admittedly more often in interest-rates and not the more obscure RPI ‘market’. And why didn’t they cut their losses as soon as the deal fell through ? They have a ‘no speculation’ policy on derivatives, as a humble pub-chain should. Carrying these monster-swaps against a putative ‘this year, next year, sometime never’ deal can only be described as spec.
(Also, given that they entered the swap in July - see their 2007 Report - how come it was immediately £ 60m out of the money ?? A bit fishy, that.)
In their formal risk reporting, their number one worry is the threat posed by supermarkets selling booze at discounted prices. Fair enough: they’re a pub chain ! This is an excellent illustration of the oldest risk management principle of them all: if you don’t understand it, don’t do it.
Meanwhile, I have some time on a plane coming up, and I may try a little back-calculation on that RPI valuation …
Monday, 28 January 2008
And there’s plenty to explain because the public-domain story just doesn’t wash. Robert Peston has had an honourable crack at it, correctly lighting upon the odd claim that Jerome ‘arbitrageur’ Kerviel avoided detection of his vast naked position by entering fictitious ‘special hedging’ deals which involved no margin calls. Peston’s inference is that this “doesn’t sound like a very liquid hedge … we are now at the nub of what worries me – that SocGen was allowing its traders far too much exposure to liquidity risk”.
But that’s a second-order point. (BTW, the liquidity in the underlying certainly held up: SocGen claim to have liquidated in next to no time - in a bear market !) Surely the bigger point is that the fictitious trades must have been burning up a humungous line of credit to the providers of the ‘special hedge’ – and this in the middle of a credit crunch ! And this went unnoticed too ? By a bank ?
We remain, Sir, yours utterly unconvinced …
Update (CU): Not normally my forte to just spin rumours, but the temptation is too high given ND's story above According to the MSN the whole story is elaborate fraud by Jerome Kerviel to which the Bank is an innocent victim. The story on the street is that there were quite a few executives who knew of the exposure by the end of December - at which point his positions were 1.6 billion euros in the black.It was only the huge market falls in January that changed the attitude towards him, with reports being created and him effectively being dobbed in. At this point he had moved to a 1 billion euro loss. When Risk Management became involved they ordered all the positions to be unwound in a crashing market which led to a 5 billion euro loss overall. Ouch.Many heads are to role and it is interesting to note the resignations before the inquest - often a giveaway of those who know they will get caught and choose an 'honourable' route. Just like the executive in the Kent superbug story of late last year.
Sunday, 27 January 2008
Here are the best business stories as found, just a few this week:
FSA on alert - late as ever, the FSA looks to close a loophole after the horse has bolted.
Hedge fund losses - 10 funds in trouble, after bad bets on the volatile markets. Time for crocodile tears?
Kerviel denouement - One of the better articles on the farce at Soc Gen this week.
Metals prices soar - Prediction of $1000 gold getting ever closer...
Beer sale - Finally S&N agrees to a take-over, what a great price secured in this market.
20,000 city jobs to go - But will they all be in fixed income?
Xstrata to go - For $50 billion, who said buying at the top of the market was bad plan.
Back when I am back online...
Friday, 25 January 2008
Ok, this week's poll results were as follows:
Friday 18th Jan
Before the end of January
Before the end of February
Virgin take-over spectacular!
Now we all know the Government changed the rules of the game so that although the debt is to be nationalised, it won't be paid for by the private sector.
This means that the final answer is the winner, well done everyone (it was my vote too!)
Now onto the next question - who will Brown choose out of Virgin Money and Olivant?
The whole brand regeneration story would suggest Virgin which has the advantage of being a real business too, albeit a little subscale.
Olivant has some heavyweight management; but is financial re-engineering the answer to Northern Wreck's issues? I personally think not and that Private Equity would have a hard time, except if it is just a scam to rob the government for a few years.
So my bet is with Virgin Money to come out on top by the end of February.
A lot of mandarins at the Bank of England must be sighing that they have had a close escape from having to manage in the with the real world..
Thursday, 24 January 2008
Wednesday, 23 January 2008
So Bush and the Fed have fired the starting-pistol, the phoney war is over, and the 2008 financial crisis has officially kicked off.
And with immaculate timing, Presidente Barroso announces the EU’s masterplan to reduce carbon emissions, at a cost he estimates at € 3 per citizen per week, or 0.5% of GDP. Or perhaps more … “some commission officials acknowledge the bill might be double that”
If this sounds a bit like the way the Olympics is costed, that’s because it is, and capitalists@work confidently predicts the bill would be way, way higher if the EU’s energy targets were to be met. Although space doesn’t permit detailed analysis here, it should be understood just how extraordinarily difficult it would be to meet those targets: we are talking full-scale rebuilding (and/or closure) of vast swathes of industrial and energy infrastructure. The nearest recent analogy would be the Deutsche Einheit (reunification) which cost
Taking the lower end of that range, and pro-rating for population, that leads one to estimate Barroso’s environmental bill at €12 per citizen per week, or 2% of GDP, with plenty of scope on the upside - at a time when GDP growth is in full retreat, a credit crunch is in full swing, and economic pessimism is mounting. Which is why we couched the above in the conditional: the bill would be way, way higher, if ...
But when push comes to shove – and the shoving has just started in earnest – we strongly suspect environmental concerns are trumped by economic worries. Presidente, you are just too late.
Tuesday, 22 January 2008
The markets have spoken and Northern Rock is on the up. All is well as Gordon denies he has been doing deals with Branson whilst ego-tripping around the world.
Today though I present the links to the key European laws on state aid which may come into play. no doubt Goldman Sachs has had its legal team pouring over this and they have come to the conclusion that the Government is on safe ground.
One of the downsides to expensive lawyers is that they often tell you what you want to hear and there are always two sides to every case.
My view is that the Government could well face an investigation under the terms of article 81/1 2.2.2. The Commission could argue that the bonds issued give the company an extra benefit in the market and have prevented administration. Any views from lawyers reading this?
Somehow I don't think the formidable Neelie Kroes is going to make life easy for Badger and Gordon.
Now they just have to get the bonds away in this market....
Monday, 21 January 2008
At the start of what promises to be an interesting week on the Northern Crock front, here's a little reminder of how it all kicks off, from the Money section in this weekend's Grauniad: a lengthy article extolling the virtues of high loan-to-value mortgages.
Oh yes, you can still get 125% mortgages, it seems, and the Grauniad is there to help you, because as they say in the intro, it's not much fun having to find a deposit, is it? In an 815-word puff-piece, there is just this tiny caveat - and from an interviewee, not the writer of the article:
It is questionable whether now is the right time to take out a high-LTV mortgage because house prices are falling in some areas
Yes indeedy - but back to business ! "Guardian Money has been looking at the best mortgage deals still available for those looking to borrow 100%".
And good luck to all who sail in her.
going down ... and in light of the above, are we surprised ?
Sunday, 20 January 2008
So may interesting themes this week that the normal 10 link approach is just not going to do it justice.
Reflecting on this, the modern globalised world, with billions more people than just a generation ago, really is more complex and inter-related than ever before. As such, seemingly unrelated and distant events now play on each other and produce strange and unpredictable events. Perhaps this is the real rise of the growth in hedge funds and other such vehicles, gambling on what has become an economic model too complex to understand or predict accurately.
Anyway, the start today has, as usual to be Northern Rock. Yet more twists and turns this week as the Government shows its desperation to get Branson to bail them out. I have severe doubts this is legal and will look up the euro law later this week and do a post. The Government is also looking at its tripartite system, now focusing on the FSA, no doubt some sacrificial victims will be found here rather than in Downing Street.
As if that is not bad enough, then our Great Leader has plenty more bad news in the press. The government finances are in a mess, the currency problem may cloud the way forward to solving the coming recession. Despite this there are pleas to not cut spending and make the situation worse.
So in the real world, other than a massacre on the markets this week, what other news is there? Well commercial property business is in such dire straights that market participants are trying to peddle back away from the cliff edge; And on the UK High Street it was the worst Christmas for 13 years. The stock markets reputation is also in trouble. Northern Wreck has of course helped this no end!
The UK of course is not alone, here are two good stories about problems in Japan and the next disasters to hit Wall Street - more junk bonds...
With all this macroeconomic activity, the pound falling and psychology affecting the market, our companies are well primed for foreign take-over. So what do you know, a long list this week, from Rio Tinto, to BMI and Biffa.
Friday, 18 January 2008
managerial people like to meet on Monday, because it's Monday. You'll get used to it. You'd better, because this kind account for
83% of all meetings (based on a study in which I wrote down numbers until one of them looked about right). This type of meeting operates the way "Show and Tell" does in nursery school, with everyone getting to say something, the difference being that in nursery school, the kids actually have something to say.
When it's your turn, you should say that you're still working on whatever it is you're supposed to be working on. This may seem pretty dumb, since obviously you'd be working on whatever you're supposed to be working on, and even if you weren't, you'd claim you were, but that's the traditional thing for everyone to say. It would be a lot faster if the person running the meeting would just say, "Everyone who is still working on what he or she is supposed to be working on, raise your hand." You'd be out of there in five minutes, even allowing for jokes. But this is not how we do it in America. My guess is, it's how they do it in Japan.
Meetings where there is some alleged purpose. These are trickier, because what you do depends on what the purpose is.
Sometimes the purpose is harmless, like someone wants to show slides of pie charts and give everyone a big, fat report. All you have to do in this kind of meeting is sit there and have elaborate fantasies,
then take the report back to your office and throw it away, unless, of course, you're a vice president, in which case you write the name of a subordinate in the upper right hand corner, followed be a
question mark, like this: "Norm?"
Then you send it to Norm and forget all about it (although it will plague Norm for the rest of his career).
But sometimes you go to meetings where the purpose is to get your "input" on something. This is very serious because what it means is, they want to make sure that in case whatever it is turns out to be stupid or fatal, you'll get some of the blame, so you have to escape from the meeting before they get around to asking you
anything. One way is to set fire to your tie.
Another is to have an accomplice interrupt the meeting and announce that you have a phone call from someone very important, such as the president of the company or the Pope. It should be one or the other. It would a sound fishy if the accomplice said, "You have a call from the president of the company, or the Pope."
You should know how to take notes at a meeting. Use a yellow legal pad. At the top, write the date and underline it twice.
Thursday, 17 January 2008
The UK banks have finally begun defending a case against the OFT re their allegedly unfair business charges.
I am personally quite keen that they win. Effectively what the banks do is rip off people who are stupid. Going overdrawn without a limit - stupid. Writing a cheque that you know will bounce - stupid.
Of course, at times I have done both the above and it is a annoying when they get you; but by doing this we have free banking and lower charges for those customers who can manage their finances. Do we really think that if they lose the bank's shareholders will just accept lower profits in future, of course not.
A prime example of idiocy in in the link, scroll down and see the comment by Luke. The chap could see his problem but clearly could not be bothered to fix it, so he calls them bloodsuckers.
Having lived abroad, it would be a shame to see the end of free current account banking in the UK, it is a great model overall for the financially prudent.
Wednesday, 16 January 2008
Now, Magner's cider, thanks to some slick ad work and a nice summer a couple of years ago, cleaned up on the under-age drink market (who else drinks cider, really?). Displacing Strongbow et al from our pubs.
However, the worm has turned and the company is now in serious trouble, with perhaps its future in doubt. None of this really bothers me that much.
What has always got to me though is the advertising. Going on about the traditions of Irish cider making. What traditional Irish cider making, there is not any. Cider is an English drink from the West Country and the South.
So methinks that the world has come to its senses and decided the Magner's was not the magnificence it proclaimed.
Tuesday, 15 January 2008
UK full recession
Alistair Darling resigns
Spain exits Euro area
China stock bubble bursts
Not much surprise that we think there will be a full recession, very hard to see now how it can be avoided, but with corporate activity holding up we may just scrape by with 0% growth.
I have a nasty feeling that 3 out of the 4 come true. My vote was for Spain to exit the euro area, you read it here first. Wait to you see their sub-prime write down's on Spanish banks, whom the government bet the house on in tax and investment terms....
Crisis, what Crisis?
So just in a single day we have 4 separate yet inter-linked and worrying stories:
1. Citigroup announces the huge £10 billion loss, together with a fall in revenue of $14 billion, the largest bank in the world is officially in deep trouble and will be reliant on sovereign funds to climb out of its mess.
2. The markets, seeing this as a tip, drop again, with the FTSE hovering at about 6,000, 10% down on 3 months ago.
3. The pound falls further against the euro on expectation of further interest rate cuts, although a weak currency is good for exporters, it is very inflationary.
4. The Northern Rock saga continues, a new poll is up to accompany this.
Yikes, what will tomorrow bring?!
Monday, 14 January 2008
Hands’ traditional MO is to buy unfashionable companies with reliable cash-flows (pub chains, cinemas, rental properties etc) and securitise the hell out of them. How does EMI fit that pattern ? Is it the vanity purchase of a very wealthy man; or a new business model - or does he see the same underlying business dynamics to be exploited one more time ?
I’d guess the latter: he is probably looking to extend the concept of securitising royalty streams, as pioneered by David Bowie. Accordingly, part of Hands’ due diligence was an attempt to assess what teenagers are willing to pay for downloads. Can there really be any stability in that ?
‘Trooble at mill’ from Mr Williams et al is perhaps something he has catered for in his planning, with his talk of 'incentivising' EMI acts (profit-sharing, I imagine, not percent of the gross). Likewise, with the vast increase in the number of bands spawned from the YouTube generation, perhaps he is anticipating a wholesale commoditisation of pop music, and consequent reduction in artist-power. But I also reckon he is expecting to run an efficient business with slender and predictable margins: he refers to his Odeon cinema chain as being in the popcorn business, not the movie business.
Good luck, matey: the pop industry may be fuelled on alcohol (and other substances) but music doesn’t flow quite as smoothly as beer.
Sunday, 13 January 2008
The pic next to this is taken from here, an US stagflation watch site.
Here are my 10 most interesting links:
Energy rip-off - The Times leads with allegations of price fixing in the UK energy market. Very convenient for the government...
Retail figures for Boots - Mixed cheer from the retail sector post Christmas.
Northern Rock management - Treasury has team lined up for inevitable nationalisation.
Lost Rock - Even the Guardian concede the Government will have to step in to clear up its own mess.
A Tribute to Sir John Harvey-Jones
Stagflation speculation - more of this to come this year, even if what we experience will only be mild compared to the 1970's. Get ready for comparisons aplenty with 1990 bust Japan too.
Threats to UK employment - A good piece in the Telegraph, maybe help is at hand from the falling pound.
Music Industry still a-changing - EMI to cut jobs, the fundamental Business model issues still unresolved.
Nuclear button pressed - The Observer writes a puff piece for NuLab - worth a read for the insight to lame government thinking.
Credit Crunch - Still the fire is lit as Citi seeks even more money for a bail out from Saudi sources.
Saturday, 12 January 2008
Interestingly my anecdotal evidence suggests there is plenty of work going on in The City and things are picking up as the year goes on; perhaps this could be a sign that the slow down will be mild after all?
Have a nice weekend everyone.
Thursday, 10 January 2008
Alistair Darling has today admitted that it may not be possible to put together a private deal to sort out the Northern Rock mess.
Goldman's who are advising the government have also announced an idea to try and sell the Wreck debt as bonds (junk bonds anyone?).
This is surely nearly the end game. It is highly unlikely that the EU would allow the bonds to be issued as they would be government guaranteed which means illegal state aid.
What this activity does show is that Goldman's perhaps know more than they are letting on about the prospects of the RBS and Citigroup lending to one of Virgin Money or Olivant.
The taxpayers are going to be in the hole for a long time...
Here is the Graph below for the last month, not looking so good is it. I am struggling to predict which sectors will do well this year, maybe tobacco and oil?
Wednesday, 9 January 2008
Now it is not often that Iain Dale beats us to a profound statement about the economy and interest rates...but he did this week.
Iain asked the question of what is the real interest rate. This is indeed a hoary old topic, old enough to have been my first decent post on this blog.
The fact is that the Labour government had to change the old RPIX rate to the Euro standard CPI rate as ordered by our European masters. This has helped us in early years of the naughties to be able to lower interest rates and stave off a real dot-com bust. However this fuelled an asset bubble, experienced by most people in the form of housing and a huge increase in mortgage debt. It has also allowed banks to release lots of money into the economic system in a bid to maintain or grow their returns in a low interest environment.
These chickens are coming home to roost in 2008 and the Government may well be make matters worse by persisting in a flawed inflation measure.
When the Bank of England meets tomorrow it will see a set of figures suggesting we have a low interest rate and decreasing economic activity. Just as Alistair Darling effectively asked for in his press conference on Monday, the MPC committee will likely vote to cut rates.
This will be a personal relief, given my indebted mortgage status and its help to drive the gold price higher for my investments....or will it?
Food prices according to the ONS are 10% up on a year ago, Npower, provider of leccy and gas to chez Slicker, have just put up prices 27%. Hmmm...seems like quite high inflation to me...almost as if corporates feel they have strong pricing power. Now to keep a lid on this the idea is generally that a government reduces the flow of money to try and encourage saving over spending, which in turn forces retailers to lower prices to drive sales (as is happening on the high street, but not elsewhere in the economy). Yes there are other drivers and reasons, but I don't want to bore forever here...
We are caught in a vicious trap of rising prices in many areas which will drive inflation - out current CPI measure discounts big chunks of this and relies on a near random and politically influenced basket of goods, not really very clever stuff in 2007 in a world of super computers on people's desktops. The ONS has admitted its data could be better last year. But headline inflation is low and Brown and Badger are hardly going to advocate a change to make it reflect its true rate!
So the Bank of England may well vote for a cut in rates which may or may not be a good idea; the issue I have is that it is working on a false mandate from Government, which belies the idea that it is independent at all.
Tuesday, 8 January 2008
Also poll result from last year voted the August credit crunch the biggest shock of the year, followed by the Northern Rock collapse. I was a little surprised the order was not reversed but not too much.
Anyway, according to the media the crunch is over. Let's see how long it takes forLIBOR rates to creep up again as the fear comes back to the banks. I see Citigroup is strongly rumoured to have a another huge write-down in the pipeline.
Finally, there is a new poll, what do you think will be the biggest event in business and economic terms this..just a bit of fun!
Monday, 7 January 2008
The Drew has had some exposure to government departments over the years and could also tell some horror stories. (High on the list from personal experience - no names, Minister - would be the development from scratch of a rather basic database, when superior generic products were available from PCWorld for £ 200.)
Fact is, I’ve seen the private sector being royally ripped-off too, primarily by so-called System Integrators (again, no names). Another quick story from personal experience: a blue-chip energy company spending around £ 6 million on a trading system that did no more than could easily be achieved using – coughs - MS Access ®: and the bulk of the dosh went to the SI, not the software
vendor (*gnashes teeth*, I was once a software vendor …)
So – is government uniquely bad at IT, or are their cock-ups just more high-profile ? There are many less prominent but equally vivid red faces in large organizations everywhere.
Sunday, 6 January 2008
The new year sees the return of the business round-up this week. Last year was a very significant year in terms of business and economics; this year will be even more so.
Before you get to the click-fest below, let me know if there are any changes or additions you would like to see to this format....more international news? more focus on specific areas? etc..
Here are the 10 stories to get us started, many will be with us for a few weeks to come:
Housing crash threatens Rock sale - The fall in house prices is giving the jitters tot he banks who are proposing to lend to the potential Northern Rock saviours. Alternatives to state ownership are now nearly all gone..
Goldman to the rescue of the Rock - However, perhaps the above can be trumped by a new financing initiative from Goldman Sachs. We will know the answer before long.
Cohen rounds on AIM - Veteran investor sides with the yanks and asks some difficult questions of the LSE's AIM market. Hard to answer these, especially as the overall shares on this market go south. This year could be a tough one for AIM investors.
M&S leads the denouement - Retailers to continue the 'bad' news (bad for them, good for those managing personal debts in a more sensible way) from the last quarter.
Bank urged to cut rates - The Bank of England is under great pressure to cut rates again. Few chances now to avoid stagflation.
Comment of the week - Liam Halligan in the Telegraph on the meddling of politicians.
Nuclear power funding - This will be a story for the next 20 years. The sums involved and the risks are astronomical.
Gold heading to new highs - Volatility drives up the price even further. Gold is doing even better than Google!
Challenges for TV in 2008 - Good summary of some of the regulatory and economic changes coming to the media in 2008.
Guardian share tips - just for a laugh...
Friday, 4 January 2008
Thursday, 3 January 2008
Last month, having shafted the Nation (and shorted the Pound), Gordon Brown made a feeble attempt to draw a line under the EU Constitution, stating:
We expect no change in the foreseeable future so that the union will be able to fully concentrate on other challenges ahead.
Meanwhile, the Ukrainian Ambassador has written to the Grauniad in pained terms, concerning an 'atlas of carbon hot-spots' he found in its pages:
… I tried to find my country on your graphic ... After some effort I finally found
No prizes for guessing what His Excellency wants for Christmas. Don’t worry pal, no-one listens to Brown: and if
PS, as regards your own little 'hot spot', you’ll love Sarkozy’s idea for a new EU nuclear policy
Wednesday, 2 January 2008
In his predictions of just yesterday, Mr Drew of this house predicted gold would hit over $1000 an ounce.
I scoffed at this suggestion in my cereal this morning, as much as I am a gold bug, it seems outlandish to think that the market will get so jittery and the dollar fall so much as to make this a plausible scenario.
Then gold shoots up today to $851, just $150 shy of Drew's prediction and it is only Jan 2!
Time to stock up in bits and bobs from Hatton Gardens per chance?