Capitalist Bees @ Work

These fine creatures are Leaf-Cutter bees, hard at work in the Drew garden this weekend.





They are clearly Capitalists:

- industrious
- vital for the natural economy
- keen on private property
- each has its own home, but gets on fine with the neighbours (see photo)
- co-exist happily with other capitalists, viz the Drew family, and the Mason bees (the ones whose front doors are grey paste rather than leaves)
- will sting, but only when severely provoked

At present they take a dim view of home ownership, echoing Alice Cook's opinion, and accordingly prefer to rent from me. They are excellent tenants.

ND


photo (c) NickDrew 2009

Gordon's Strategy Captured: "Extend & Pretend"

Americans are so good at coining really excellent phrases and here’s a cracker, perfectly capturing Brown’s strategy for dealing with the financial crisis ...

Extend and Pretend

... meaning, to push a problem out into the future, close your eyes to the inevitable, and kid yourself everything will be all right.

This being a financial blog, and writing as an old deal-structurer, there’s extra resonance to this: one of the most venerable tools of the trade is known as Blend & Extend. This is where the client has a short-term problem with a deal. As a short-term fix, you sell them a swap or something that extends further forward in time than the original deal, and which is in-the-money in the near term (enabling them to ‘blend’, or dilute their immediate difficulties) but at the cost of being out-of-the-money in a later period. Difference being, that with proper mark-to-market accounting there’s not much chance of pretence about what’s going on.

Hat-tip for this to Bryan Marsal of the restructuring firm Alvarez & Marsal, currently unwinding Lehman’s (good luck mate!). He was being interviewed on CNBC here – why don’t we have TV like that, BTW ? The neologism arises in the context of bankers doing short-termist stuff like Gordon: and of course mark-to-market accounting has conveniently been suspended just now … so pretend away gentlemen !

For a government with an AAA rating, almost any problem can be postponed. But, like Nixon's deal for quitting IndoChina leaving South Vietnam apparently intact, Brown's QE is merely delaying the day of reckoning.

Extend and Pretend. Love it.

ND

How well do you score on the new UK citizenship test.

PATENTLY has put up a link to the Official practice citizenship test

C@W have another one

Your citizenship test starts now

A} Who holds the record for the most appearances in Eastenders

1. Ian Beale
2. Pat Butcher
3. Lofty
4. Mark Fowler

B} Which tube line is generally regarded as the worst

1. District
2. Bakerloo
3. Northern
4. Central

C} Where does the English Assembly meet

1. York
2. Leeds
3. Swindon
4. Nowhere

D} If you need to report a crime what should you do

1. Dial 999
2. Dial 0847 number for out of hours police service
3. Write to your MP
4. Visit the appropriate police post on the days when it is open

E} If you believe you have swine Flu you should

1. Call NHS direct
2. Stay at home and do nothing
3. Phone the newspapers
4. Visit doctor to obtain Tamiflu

F} To get your child into one of the best schools you should

1. Live within the catchment area, have siblings at the school already, have special needs.
2. Pretend to live in the catchment area
3. Child has an excellent record of academic and social achievement
4. Study hard, take out a loan, get a PhD, work long hours in the city, marry similar,take out giant mortgage, put children into private education.

G} Who won Britain’s got talent in 2009

1. Paul Potts
2. Susan Boyle
3. Diversity
4. Gordon Brown
   

H} Britain went to war with Iraq in 2003 for which of the following reasons

1. To prevent Al Qaeda operating there
2. To topple an evil dictator
3. To prevent weapons of mass destruction being used against the UK
4. No real reason

I} A British train is considered LATE if it is delayed in excess of

1. 2 minutes
2. 15 minutes
3. 10 minutes
4. 25 minutes

J} The ruling party {Labour} controls how many of the 34 county councils in England

1. 0
2. 26
3. 7
4. 33

K} The Prime Minister of the United Kingdom needs to be elected by the people.

1. True
2. False

L} A bank holiday in the UK is usually spent

1. In traffic
2. At the sea side
3. At a DIY store
4. In traffic on the way to a DIY store by the seaside

M} The average wait in an A+E hospital before seeing anyone

1. 5 minutes
2. 15 minutes
3. 4 hours
4. 24 hours

N} Tax Payers in the North East have seen their council tax bills__ since 1997

1. Double
2. Triple
3. Quadruple
4. Half

O} The Public Spending revue is held

1. Every year
2. Every other year
3. Every three years
4. No longer held
   

P} The main religion of the UK is

1. Shopping
2. Sex
3. Christianity
4. Football

Q} In England it is traditional to drink

1. Vodka and Red Bull
2. Bacardi Breezer
3. J2O and Southern Comfort
4. To Excess

R} In England the unemployed are also called

1. Chavs
2. Property developers
3. Bankers
4. Estate Agents
   

S} In the UK lunch is taken

1. Between 1pm -2pm
2. Between 2pm- 2.05pm
3. At the desk
4. Lunch is for wimps

T} In the UK people are encouraged to eat five portions a day. What does this mean?

1. No one really knows
2. Mars bar, cheese stick, crisps, Coke, Big Mac
3. Five unspecified amounts of fruit and veg
4. Five portions of chips

EACH CORRECT ANSWER SCORES 5 PTS. YOU MUST SCORE 70 TO PASS THE CITIZENSHIP TEST

IF YOU FAIL, NOT MUCH WILL HAPPEN.

Answers A.1- B.3 C.4 D.4 E.2 F.4 G.3 H.4 I.3 J.1 K.2 L.1,2,3OR4. M.2{for an assessment} N.1 O.4 P.1 Q.4 R.{any} S.3 T.1 or 3.

"Reforming the Markets": Still Craven After All These Years

Yesterday the Government’s “Reforming Financial Markets” dropped on the virtual mat, and what a waste of electrons it is: let us hope they don’t physically print too many copies. The introductory parts are so blinkered, complacent and self-serving that we must assume Brown wrote them himself. It’s all there, complete with typos and grammatical errors, so clearly the Civil Service wasn’t invited, even at the proof-reading stage.

All the heavy lifting on the main issues has already been done by Turner and the FSA back in March: Turner’s review was very much more open, honest, philosophical and academically sound; I feel almost guilty at having criticized it at the time. The Government can do little more than (a) agree with everything he said, but (b) run away from macro-prudential measures (we’ll just get M-P ‘analysis’ instead).

In other highlights, we learn that:

- no part of the crisis was the Government’s fault;
- yup, the blame rests with failure to recognize risk on the part of “market participants …regulators, central banks and many other authorities and commentators” (I always knew it was Peston’s fault);
- “investors … frequently failed to carry out sufficient due diligence” (yes, and Lloyds-TSB comes immediately to mind, eh Victor ? eh, Gordon ?)
- action taken in respect of … wait for it … the Dunfermline Building Society (!) shows how clever Gordon has been;
- “no model of regulation has been successful in fully insulating a country from the current crisis”

So the fact that his crap tri-partite system didn’t work, doesn’t matter. Actually, of course, ‘fully insulating’ is not the test: ‘insulating better’ is the appropriate measure, by which standard there are several more successful systems around the globe.

Conversely, Brown is still fixated with not getting out of step with other regulatory systems: at every turn we find the refrain: “measures can only be effective if implemented on an international basis”.

In short, he is as paranoid about being "outside the mainstream" as ever – which pathetic reason is exactly why the UK is languishing today: the victims of his blind and cowardly rush to the bottom. He seems to like it there.

ND

Bank of England can't see beyond more Quantitative Easing

Yes, that is what the Bank of England is likely to say today: print more money, the Government spending is the only thing keeping the economy alive.

This is an horrendous trap, see FT here, we have fallen into, now that the UK is existing on printed money for its government financing, it will be difficult to see how this can be stopped. The Bank of England may need to keep extending the 'window' and I have no idea where that will lead, but Zimbabwe is the worst option and Japan, with 20 years of sclerotic economic activity, is the other.

Many economists are now openly saying more stimulus is needed, what they are not saying is that the markets are seriously considering another September to November event like last year; that is the fear. Not so much a double dip a as tombstoning.

However, why are no alternatives being put forward by the Opposition? The need for stimulus is quite clear, even to me. Allowing the economy to collapse to make Austrian Economists and goldbugs happy is not the answer.

However, the stimulus could be provided by tax cuts and holidays; OK, VAT did not really work as it was too small and mixed with Christmaes in any event, but there are options on income, property and business taxes.

The net affect in the short term will be to increase public debt as with QE, the difference is the sector being stimulated is the private sector, not the non-producing (in a fiscal sense) public sector.

This is what the Tories should be recommending, they need to look into their own ideology to see solutions and not be blinded by the socialists decrying only the State can save us. The state is bankrupting our futures at a record rate; time to stop it.

Quiz of the day: 2010 oil price

One year ago today the oil price was $147 per barrel. Oh, what a different world it was then pre-Lehman bankruptcy and the meltdown of September to October.

Today the price of oil hovers around $62, a huge discount to last year, but nonetheless 100% up since the lows earlier in the year of $31 dollars.

These are indeed the ups and downs of the Assyrian Empire.

So in an extra special competition I want you to guess predict the price of Oil a year from today.

Anyone who gets it right (rounded down to the nearest whole dollar) wins that amount of Money from me this time next year.

So what do you think, deflation, hyperinflation or more of the same?
(Answers in the comments, competition entry closes midnight 8/7/09)

That’s Why I Hate (Most of) the French

This is Robert Louis-Dreyfus, of the famous French merchant family. He died on Saturday. Yes, he did indeed sometimes look a bit like Jeremy Clarkson.

As well as being a rogue, and prominent in business (CEO of Saatchi, Adidas, owner of Marseille soccer club), in the family tradition he was a great believer in open markets, and was active in efforts to kick-start competition in the French electricity and gas sectors. This is a noble calling, as the majority of the French (along with the even more strategically situated Germans) are doing their level best to prevent competition from taking hold. To the detriment of all of us.

You sometimes encounter other highly competent French businessmen who’ve seen the light. If they and M. Louis-Dreyfus can see the merits of competition, why can’t the rest of the froggies ?

ND

Michael & Willie in clown competition; BA-Ryanair

I will give Ryanair some credit, they believe that they have the market cornered on being cheap. This latest stunt is just incredibly funny; the idea that there can be a ledge to sit on in a plane and no seat.

I cannot for the life of me believe the CAA would ever regulate such a thing on an aeroplane.

No doubt Mr O'Leary knows this too, but he can't help himself in promoting Ryanair as the cheapest of cheap brands.

Good luck to him, I vowed never to fly with them long ago after a truly miserable experience (which did not even involve being able to get on a plane).

Next up though, British Airways look set for another summer of strikes. Willie Walsh, a decent man with a near impossible job, has decided to play hard-ball with the staff. The trouble is they are highly unionised at BA and it seems they think he is lying when he says BA might go under. Well, maybe the staff will get to find out soon enough.

Which of these jovial Irishmen would you rather work for Willie or Michael?

Coffee Republic heads for administration

Coffee Republic has put one of its subsidiaries 'GoodBean' into administration and shares in Coffee Republic were suspended at the request of the business today, pending “clarification of the company's financial position”.

Quite a surprise as Coffee Republic as the company had announced in December that it was free of bank borrowings and expected to become earnings positive by the end of the financial year for the first time in the company's history.They have some 220 outlets.

Coffee Companies were one of the major reasons for spiraling rents on the highstreets in the 1990's. A Coffee chain works on a huge profit/low overhead cost basis. Coffee bars work on location, location, location. The chains reasoned that any rent was worth paying to secure the volume of customers necessary, in the location deemed most desirable to take a slice of the sandwich market.
They bid high and in a short time significantly pushed up the rents on the prime sites, causing increases all the way down the marketplace for everyone. So its a little ironic that..

The company Chief executive Steve Bartlett said that the PLC remained viable but that the board had begun a restructuring programme in order to shed onerous leases for a number of its UK outlets that it was no longer able to support.

Legal week don't fancy their chances much.
Bristol corporate partner Paul Cooper and head of restructuring and insolvency Nigel Boobier, have been brought in to advise the company in relation to its potential collapse.

Its still tough all round. Our old favourite JJB has been forced to confirm that it is looking to raise at least £50 million in capital to fund its turnaround plan; and to add further questions to an already troubled company chairman Sir David Jones borrowed £1.5 million from the billionaire Mike Ashley.

Economic Generals focus on the last war

There is much discussion, see here for example, of whether the FSA or Bank of England get to oversee future financial regulation. Personally, I am getting a bit tired of it all as it is a really typical Government-style piece of bureaucratic infighting.
Worse, it is clouding over the real policy failures that have been made these last few months and also ignoring the real crisis we are seeing now in the Country.

Who cares about a macro-prudential economic panel that may or may not help to avoid another bubble in 50 years time. No sane bank or borrower is going to repeat the mistakes of the past few years having learned their lessons in such a costly manner so recently. Not that we do not need new rules, but the market has enforced them much faster than any regulation can be imposed.


So this hypothetical discussion is of little interest. It also is hiding the true debate which is what on earth we can do to both try and stop doing more quantitative easing whilst not letting the economy completely die? This may be happening in any event, in which case all the bureaucratic political warfare is real deck-chairs-on-the-Titanic-stuff: As with Generals down the ages the orders and weapons put in place for a new army are those needed to fight the last war, not the next one. The next economic period is about the controlling the collapse of the fiat money system as was and the huge inflationary pressures of a 6 billion person, resource-constrained world.

The Bank of England has run out of bullets, the FSA is concerned with minutiae and the Government is busy fighting over its future in opposition. This is not the leadership we would ideally like to see us through the crisis, it is a terrible failure of the UK political system as a whole.

So, will it be doubel -dip or not?

The Independent on Sunday is one of the better Sunday Newspaper business pages these days; shame about the rest of the paper.

It's prospects are not too good either, with Tony O'Reilly caught in the Irish maelstrom.

However, this article judges the time we live in quite well. There is no doubt that we are on an economic knife edge. A fall from here will be very painful, perhaps even worst that the year we have just suffered. But a if somehow we muddle through, then it will be a great result.

At the moment, my heart is with the latter, my head with the former.

The Buck Stops ..?

Dinner last night with a Distinguished Person, until recently a non-exec of a la-arge British bank.

ND: Remarkable how everyone seems to get swept along in the enthusiasm when things are booming, with little regard for due diligence or even common sense ...

DP: Well, everyone's under considerable pressure to say 'yes', everyone's got an interest in approving things.

ND: Isn't this where, err *delicately* the non-execs come in ?

DP: No, it can only be the Chairman, everyone else has a vested interest.

* * * * *
Aah. I see.

ND

Weekend Word Games

Your best efforts for the following.
Best definition will be mentioned in dispatches.

Government Wipe Paper

'De Tracto'

Poorfolio

Flockbrocker

Exchange Rape

Tesco begged to shaft taxpayers by Brown

I know this story, Tesco to buy Northern Rock, has been floating about for a few days, but I had not had enough time to get round to addressing it.

Effectively, the Government wants to sell a bank in order to prove that it can actually sell all the other banks it has bought on our behalf.

Only, it can't sell Northern Wreck, because it is still losing money hand over fist. Another £500 million this year. On top of the £3 billion taxpayers have already contributed.

Oh, and Tesco only want the deposits and the performing loans. And the offer is £1 billion.

So let's do some very back of envelope maths (this is the type most used in the treasury according to my sources):

Taxpayers - £3 billion in, plus holding £60 billion of loans sat with a 5% default rate. So add another £3 billion to that. Plus the extra £500 million loss this year. Plus £8.75 billion loan still outstanding, but expected to be paid back, without interest.

Total: £6.5 billion expected loss, on current liabilities of circa £70 billion.

Sale price to Tesco to cover losses: £1 billion.

Brilliant, ain't it?

The Great Game, 2009-Style

Europe needs gas, of which there is no shortage. Although LNG brings welcome diversity, pipeline gas costs less, and Russia has the biggest reserves of the lot. But Russia is a bit strapped right now, as CU pointed out on Monday.

Ordinarily there would be a number of sensible ways around this dilemma: but Russia likes to play silly buggers, they feel it’s worked well for them over the years.

Current attention is on a new supply route for EU countries in the south and east, who need increasing amounts of gas as they decommission really old coal and nuclear power plants. For diversification, the EC’s favoured project is the ‘Nabucco’ pipeline, a rather complex scheme which would bring gas from a catchment area of non-Russian states through to Austria and Italy.

Russia’s game is as follows. They’ve invented ‘South Stream’, a rival project, or more accurately a paper concept, which would fulfil the same purpose but with gas from Russia – and a lot less multi-national complexity. As usual, they spend no money on it, but they’ve leaned on the Italians – always suckers for a ‘special relationship’ with Gazprom - to give this less-than-tangible scheme some cred. It's unlikely both schemes could proceed.

Every time Nabucco takes another step forward, Gazprom announces some new degree of 'commitment' (short of actual cash, you understand) to South Stream, causing potential customers for gas from either system – from any system, really – to feel a bit cautious about committing concretely to purchasing Nabucco gas.

Paralysis is the result. Gazprom believes – with some justification – that this plays straight into their hands, pushing up the eventual price of gas. Hint to Russia: when (many years hence) you have succeeded with the gas price, you’ll find that LNG import terminals cost a lot less, and are built a lot quicker, than pipelines …

ND

You haven't got mail

Lord Mandelson has finally faced up to the inevitable and withdrawn the part privatisation of Royal Mail from the parliamentary agenda. He made various bogus and a few truthful claims in his statement. There are no suitable bidders. Market conditions are unfavourable and there just isn't the parliamentary time to get the bill through.

Well, there is plenty of time for the bill to pass. The most parliamentary time there has ever been. Lord M rushed it through the Lords himself in anticipation of an early reading. What there isn't is the backbench will. And they are right. The decision to privatise a nationalised {sort of} industry would cripple the activists trying to get out the core Labour vote next summer.
MP's know its death and they have said so since the idea was mooted last November in the wake of the wide ranging but narrow focus Hooper report. The public are not convinced either.
Claiming there were no suitable bidders reveals that the government price for RM was too high.
{see CU's previous post for lessons learned.}

The Business secretary says that that the partial sell-off would not happen until "later" when market conditions have improved. TNT and Deutchepost pulled out leaving the private equity firms who want to pay little, turn around quick and cash in. That won't help RM.

So if there is to be no part privatisation what is there to be?
Well, nothing. Nothing at all.

Some pretty wild statements were made by the government claiming that Royal Mail could collapse within weeks. Royal Mail "was in danger of running out of money". Dire warnings of the "severe" impact on pensions. That unless urgent investment was received and new management and technology introduced the company would be unable to continue. The universal service must soon end and a foreign company must be bought in.
Now it seems, none of those things are even remotely urgent. Politically Lord Mandelson should have left the whole thing well alone in the first place. From a business perspective there are plenty of issues that he should be tackling outside of privatisation. Everyone from unions to the private mail firms wants changes to the current crippling regulations.

That nothing will be done at all will leave Royal Mail weaker, less profitable, more in debt and less able to deal with the challenges in the future.

National Express Disaster

The too-clever-by-half CEO is gone and now the very existence of National Express is in doubt. Lord Adonis has said this morning that the East Coast mainline franchise is to be nationalised and NE's other franchises are in jeopardy due to contract terms.

A fine mess, here comes the Government to clear up a poor private sector bid. The Government will say they have done nothing wrong; are they right?

I don't think so, by setting up auctions that allow prices to be bid up to high they set themselves up for a fall. Down the line companies won't be able to make the payments so they will fail and the contracts will be handed back.

Think of it like a bank offering you too much on a mortgage, when you fall into negative equity it is the Bank that loses more than yourself. The Government are too obsessed by getting the money in. Not enough due diligence was done on the winning bid, end of story.

We have seen this many times before with the Government, perhaps the 3G mobile auctions being the best example. The UK went from having some huge international dominant operators in O2, Orange and Vodafone to having the first two swallowed up by weak competition as they struggled with the debts they had saddled themselves.

Of course, the companies make the bids and so should be held to account, this is not all the fault of Government. But in desperation for money, both private and public sector are wasting it on a colossal scale instead. More thought by Government could stop this, as could more thought by the private sector.