Vericool Finance

A New Financial Blueprint

The gumshoes at the US securities and Exchange Commission are none too impressed by Allen Stanford’s knighthood.  They have accused the flamboyant Texan billionaire and cricket impresario of perpetrating a fraud of shocking magnitude.

But even if the title, bestowed by Antigua and Barbuda, is pukka, it may be the only thing about Stanford that is.  He is alleged to have run the Stanford international bank like a piratical Caribbean enterprise, gulling some 30,000 investors out of an estimated $9bn.  If the accusations stand up, it will be a severe blow to a fund management industry still reeling from Madoff.

The affair is also a kick in the balls for English cricket.  The England Cricket Board, which immediately severed relations with Stanford, insists it ran exhaustive checks on the tycoon before he lured the England cricket team into a circus of Twenty20 pyjama cricket with his own team, the Stanford Superstars.  Stanford was rebuked for the tacky quality of his competition, which offered $20m purse to the winning team, and for the inappropriate attention he paid to the cricketers’ wives and girlfriends.

But ultimately the ECB was swayed by his promise to counter India’s growing dominance of the commercial game.  Still, alarm bells should have rung from the moment that Stanford – a man with self-confessed loathing of Test cricket – touched down at Lord’s in a gold plated helicopter,.  Rumours of money-laundering had long been rife and it was clear to any sane observer that this was a tawdry business.  This affair has brought out the worst in English cricket and the men who run it. They have got exactly what they deserved.

The same cannot be said of the residents of Antigua, where Stanford has established himself, in colonial style, as the biggest private employer and business force.  His personal fortune dwarfs Antigua’s $1bn GDP and, if he goes down, the island’s economy could sink, too.

Yet Sanford’s other investors are not entirely blameless.  In the usual triumph of greed over fear, they missed a parade of red flags:  notably the promise that a unique investment strategy would consistently deliver double-digit returns from ostensibly low-risk investments.  The SEC, which was alerted by a whistle-blower, is yet to track down 90% of the portfolio, which it claims resides in a “black box” shielded from independent oversight.

It will have to do better than that.  The watchdog must now act urgently to address investor panic about how many more multi-billion dollar frauds have yet to be unmasked.

Geithner’s Lousy Start

One thing that Hank Paulson learnt during his troubled tenure as US Treasury Secretary is that if you say you’re going to launch a bazooka, you’d better darn well do it.

Barely a fortnight into his new job, Paulson’s successor, Timothy Geithner, is in danger of repeating his mistakes. After months of ad hoc rescue plans, the markets hoped the new administration would deliver on its promise of a coherent, detailed plan to mend the financial system. What they got instead was strong on rhetoric, but offered little more than a bare-bone outline -and Wall Street threw its toys out of the pram.

The S&;P 500 fell 5% in the worst sell-off since President Barack Obama assumed office. Shares in Citigroup and Bank of America were hammered 15% and 19% respectively.

The chief problem with the $2trn bailout was that it fell between all the stools. It was neither well funded enough to recapitalise troubled banks, nor detailed enough to assure investors that the governmnet can solve the toxic asset problem - and there was a crucial lack of information about how each of these initiatives would work.

The reaction to the plan was a severe setback to the newly minted Treasury Secretary, who’d been hoping to gain some gravitas after a lengthy battle with Congress over his personal tax affairs, but there’s a good deal more at stake than Geithner’s reputation.

On some estimates, more than 1,000 US banks could fail over the next three to five years unless a credible plan emerges. Maybe the critics’ reaction to the plan was over-harsh. Who knows? This plan - once properly fleshed out - may end up working, but it would be unwise to count on it.

The lesson of all previous banking crises is that the problem isn’t properly lanced until the system is fully cleansed and suspect assets fully removed. Ideallogically, Americans are vehemently opposed to nationalism, even more than Britons. But when there is so much money already being used to prop up the banking system, what’s the difference?

Geithner now says he’s consulting to fill in the missing gaps. If that’s the case, why were we led to believe that a completed plan would be delivered this week?

The markets would forgive a delay caused by the desire to get the details right, but they don’t like being misled. Raising hopes and under-delivery may be standard procedure in the political sphere but it doesn’t fly in finance.

This was a catastrophic failure of expectation management that bodes ill for the new administration.

Knives Out In Davos

The chief complaint about Davos this year was that there weren’t enough bankers to bash. “I’d like to congratulate Stephen Green,” said Tony Blair at one session, gesticulating towards the HSBC chairman. “We must congratulate him for being one of the few bankers willing to come out in daylight hours.”

Nonsense, if it was bankers you were after, Davos had them in spades. Over there, that grumpy looking chap, that’s Gordon Brown. He’s got three - or is it four? - big british banks. And that’s Angela Merkel. She’s got a couple, and that man over there from the US - he’s got stakes in loads of them…

If the humour was dark, so, too was the mood. The hope was that politicians and business leaders would come together at the World Economic Forum to forge a common approach to shaping the post-crisis world. The reality came closer to common abuse. The Russians attacked the Americans, Turkey had a bust-up with Israel, the globalisers took on the protectionists, casual dressers sneered at the tie-wearers, and everyone had a go at the bankers.

What else could you expect? The annual event has long been the epicentre of globaloney, and now that these self-styled global governors are faced with a major crisis, most of it their own making, they are clueless. The best they could offer were vague calls for “better” regulation, “improved” institutions and “more pulling together”.

The overall effect was of a crash inquiry into an airline that intends to keep flying. There was no serious intention to rebuild in a different way. Davos Man was subdued, but still partying.

The knives are out, but if you don’t like what you’ve seen from Davos Man, wait till you see Nationalist Man get to work. We certainly got a glimpse of him. In the absence of any strong delegation from the US, this year’s cast list was dominated by a mix of journalists, academics and authoritarian leaders. As Russia’s Prime Minister Vladimir Putin remarked: “This is Davos under the Russian flag.”

Neither he, nor the Chinese premier, Wen Jibao, could resist having a pop at an unnamed country’s inappropriate macroeconomic policies. And the Chinese delegation was visibly displeased and alarmed by the suggestion of Timothy Geithner, President Obama’s newly confirmed Treasury Secretary, that China has been manipulating its currency.

For all the drama on display elsewhere in Davos, the tensions between the Chinese and Americans look to be by far the most significant in the long term.

Is Globalisation A Busted Flush?

Global leaders are caught in a dilemma: they face growing pressure at home to safeguard jobs and businesses, yet they know full well that if national considerations become paramount, our future is indeed bleak. It was the retreat into protectionism that blighted the 1930s, helping to create a worldwide slump and triggering political instability that led ultimately to WWII.

Who should we follow - Gordon Brown or Sir Alan Sugar. The PM says he’s “fighting hard” to halt a return to beggar-thy-neighbour trade policies and stresses the grave dangers of financial isolationism. But protectionist forces are already rampant. Spain’s industry minister has called on his compatriots “to shop Spanish”. In the US, pressure mounts for Buy America clauses in stimulus packages. And here, Sir Alan is telly Daily Mirror readers to “stuff the EU for a while until it suits us”.

But there’s every reason to be wary of such campaigns (which, when applied aggressively, are illegal anyway). Above all, they’re counter-productive.

We should avoid inflaming nationalistic counter-blasts from trading partners, particularly since, thanks to sterling’s weakness, British goods ought soon to be among the cheapest on international shelves. Buy British by all means, but beware the backlash.

There’s no reason why we should shun the grass-roots approach entirely. Britain’s localities need the power to drive their own regeneration.

The best means of achieving this might be a complete rethink on the role and use of the Post Office. The PO is a trusted brand, with a big but steadily declining branch network. Yet it is a massively under-used banking asset. Rather than privatising it, and further running down the network, why not turn each branch into a local finance hub, which would act as a vehicle for local investment and savings, and stimulate local economies?

Royal Mail has a £7bn pension deficit, but the PO is free of toxic debt. If the Government can underwrite hundreds of billions for the private banks, it can surely refinance £7bn for a public one.

We need a new parallel banking system. The Post Office is the obvious platform on which one could be built.

Are Britain’s Banks Bankrupt?

The financial markets were meant to view the UK’s second giant bank bailout as a path towards the resumption of normal lending. What we saw instead was open speculation on the chances of further nationalisation – and not just of the Royal Bank of Scotland.

During the turmoil, Lloyds HBOS lost 54% of its value in two days; and the markets were having none of Barclays protestations about how well it is doing either. The overwhelming impression is left that the banks still haven’t come clean about the risk on their books. And while that remains the case, private-sector investors will continue to pass on offers to pump in more capital.

The Government’s ambition of limiting the state’s involvement is well intentioned: the further we go in, the harder it will be to get out. But it should recognise which way the breezes are blowing.

A bad bank approach would have been a more direct and transparent method of quantifying and cleaning the smelliest items from the banks’ balance sheets. But maybe the Government was worried about seeing another multi-billion pound figure in the headlines.

The insurance policy is a politically palatable compromise, but until the details are clear it’s impossible to tell how adequate the package will be. That’s far from ideal : as every parent knows, “wait and see” is the least effective way of keeping impatient children quiet. Indeed, if Lloyds and Barclays are going to stand any chance of putting a floor under their shares, they must bring forward the announcement of their audited results.

Confidence is deteriorating fast and the Government’s scolding attitude isn’t helping. If Gordon Brown thinks nationalisation is the right solution, he should get on with it. But if he wants a commercially driven banking sector, he must start acting like he means it. You cannot hope to rebuild confidence in the banking system by constantly punishing its shareholders. No wonder investors are deserting the sector en masse. Ministers are doing their level best to make it worthless.

There are three main reasons why the Government might yet take control of the banks: to halt a bank run; to respond to the need for further capital injections; or to gain full control of bank lending to prevent the economy from falling into an abyss. As things stand, all three look inlikely. The market is pricing in survival probabilities of only 10%-20% fro RBS, and 25%-40% for Lloyds and Barclays, according to Bernstein Research.

A lot depends on the length of the recession and the generosity of the loss-guarantee scheme, but there’s still a chance of a rosier outcome.

Loans For Businesses

At last, the Governments is showing some urgency in deciding how to unblock bank lending to businesses. The £20bn loan scheme unveiled by Business Secretary Lord Mandelson is unlikely to do all that the Government claims for it - and the Tories may be right that their own plan for a £50bn loan scheme is a bigger and better-value version of what ministers intend.

But with a third of all small businesses reported to be struggling to get credit, the situation is urgent. A jump-start is needed and a modest start now is better than a grand plan that takes even longer to launch.

Under the terms of the plan - aimed at businesses turning over less than £500m - the Government will pledge £10bn of taxpayers’ money to underwrite loans. The money will attract a further £10bn of lending from banks, who will share the risk 50:50 with the Government. Since the banks will decide who qualifies for the loans, ministers will not find themselves in the tricky position of having to pick winners.

The scheme is a useful contribution but it won’t fix the problem. The £20bn is small beer in the context of the vast quantities of credit that have been removed from the economy as a whole, and ministers have no control over whether banks simultaneously cut their lending to households or big businesses.

This scheme will certainly release capital, but some of it may just be sat on. If the Government wants the banks to lend more, it will have to do more.

Some observers, including the Lib Dem Treasury Spokesman Vince Cable, prefer the stick: the Government should simply demand more lending from the banks in which it holds a majority stake. But that is to assume a degree of health that may be lacking.

Indeed, there appears to be a deep concern among the financial authorities that the banking sector is heading towards a fresh crisis and that a big policy response is needed. US Fed chief Ben Bernanke hinted as much in his speech at the London School of Economics.

The most radical suggestion being considered is the establishment of a bad bank that would buy up the nastiest and most illiquid assets and cleanse the banks’ balance sheets. It would be controversial and difficult to hammer out, but, short of full-scale nationalisation, it is the best shot we have of ensuring that Britain’s banks emerge from this crisis and start lending again.

The World In Economic Peril

The year 2009 can be paired with 1931 as the second year after the start of a big recession, but the question facing the world now is whether we can avoid a repeat of the vicious spiral of depression that took root then and find an alternative way forward.

Some lessons appear to have been assimilated: notably that in a depression, too much and too early is safer than too little and too late. The Americans plan a $700bn fiscal stimulus, the Chinese are spending $584bn to shore up their economy, and policy-makers worldwide are at least paying lip service to the dangers of protectionism.

Yet no one should underestimate the extent of the threat. A year ago, we were looking at a US downswing, an occasional bank failure and rapidly increasing oil prices. Our economic worries now are much more deep-rooted.

Weakness can be seen everywhere - from China to Chile, from Switzerland to South Korea. It looks as if global output will shrink this year - an extraordinary development in the modern era.

This global downswing is partly trade-related: the manufacturing nations of the East have been hit hard by plummeting demand in the West. But it is mostly being driven by the spreading tentacles of the credit crunch.

Many emerging economies were dependent of inflows of loans from the Western banking system. Those flows are now drying up, as indeed are the emerging markets’ economic prospects. What happens in China may well determine the world’s prospects.

By Western standards, growth - projected to fall to 7.2% this year - is still licking along, but with factories closing and unemployment rising, there are signs of social unrest.

The big fear is that the Chinese government will choose to prop up its exporters by allowing the yuan to depreciate, thus bolstering its already huge surplus and aggravating existing imbalances with heavily indebted countries such as the US - with dire consequences for the world economy.

The danger is extreme. In Barack Obama, the US has a new president with vast political capital, but it is not strong enough to rescue the world economy on its own. It needs helpers, particularly in the surplus countries. If China pursues the depreciation route, the outcome could be a devastating round of beggar-my-neighbour devaluations plus protectionism, as was seem in the 1930s.

The world has changed and so must global policy - and quickly. Welcome to 2009, a year in which the fate of the world economy will be determined, maybe for generations.

Sterling In Crisis

Trust the Germans to set the cat among the pigeons. The last time a senior German official publicly criticised Britain’s economic policy, in 1992, the spat eventually sent the pound crashing out of the European exchange rate mechanism.

This recent attack by German finance minister Peer Steinbrück’s remarks about Gordon Brown’s conversion to “crass Keynesianism” threatened to send it through the floor.

The outburst was a gift for headline writers: “Don’t mention the economy,” sniggered the Daily Mail. But is was also seized upon by the Tories as further weight for their argument that Brown’s decision to borrow heavily, in an attempt to prevent recession from turning into a slump, is a potentially ruinous gamble.

The markets have given their verdict on the Government’s recklessness with a vote of no confidence in our currency. It was a pivotal psychological moment when sterling’s value fell to near-parity with the euro.

Investors, bluntly, are fleeing the prospect of a bankruptcy scenario. The Government is expected to borrow at least £70bn this year to add to the £640bn it already owes. Throw in the hundreds of billions it has made available to banks, and suddenly the prospect of a £1trn national debt does not seem so distant.

Sterling devaluations are a touchy issue for Labour: they crippled every government from Ramsey MacDonald to Jim Callaghan. But the pound had to fall: it was over-inflated for years by speculative cash. This devaluation could prove as good for Britain’s economy as our ejection from the ERM in 1992.

There’s not much sign of an upside yet. The much-vaunted benefit to exporters hasn’t materialised, and the weak pound is damaging both our national self-esteem and our buying power overseas. But that doesn’t mean that Steinbrück is right to dismiss Brown’s stimulus policy as crass.

Ultimately this debate boils down to who is right: the mega stimulators – Gordon Brown and Barack Obama – or the steady-as-she-goes brigade. History may offer the best guide. What did the Weimar equivalent of Peer Steinbrück do? He stuck to sound money and fiscal rectitude – with eventually fire consequences. FDR, by contrast, opened the spigots.

As the world faces another terrifying nosedive, history supports the theory of economic intervention.

The Carphone Share Scandal

The new topsy-turvy world of finance has turned the business world upside down – and the old established rules no longer apply. No one, perhaps, feels the truth of this more keenly than David Ross, the boy-wonder entrepreneur who, in partnership with Charles Dunstone, built Carphone Warehouse into the biggest mobile phone operation in Europe.

Two years ago, “Rossy” seemed to have it all. His near 20% stake in Carphone, combined with an extensive commercial property portfolio, had seen his wealth soar to some £900m. With several chairmanships under his belt, Ross was much in demand: the Tories even considered him for their London mayoral candidate. He was a businessman of his time. His fall may be equally apt.

The credit crunch has hit Ross hard: his shares in Carphone have fallen 75% since their peak last year and the value of his Kandahar Real Estate portfolio has plummeted. But the revelation that shocked the market was that Ross, recently hired by Boris Johnson to inject financial discipline into the 2012 London Olympics committee, had been secretly using shares – in Carphone Warehouse, National Express, Big Yellow and Cosalt – to guarantee personal loans shoring up his property empire.

Pending an investigation by the FSA, he has resigned all his posts and now faces public ruin.

Ross’s actions were not illegal so much as very stupid. He has been a director of public companies long enough to know the stock-market rules. If you have pledged your shares as collateral in a loan, you have to declare the fact.

Ross insists he won’t default on the £100m he reportedly owes JPMorgan, but if the bank insists on calling in its collateral, his partner, Dunstone, is in a fix.

As a 22% shareholder himself, Dunstone cannot buy out Ross’s 19.4% stake unless he makes a full takeover bid, according to City rules. No wonder Dunstone is desperate to find a third-party buyer.

There are good reasons for these disclosure rules, which were established during the recession of the early 1990s when several high-profile entrepreneurs – including Asil Nadir of Polly Peck fame – pledged shares as collateral against personal loans. When Nadir defaulted and the shares were called in, the share price bombed.

These are anxious times for all involved, and a private tragedy for Ross. But the mixing of private and public company interests invariably ends disastrously. Ross is just the latest to find out the hard way.

The Fall Of Woolworths

No we know things are serious. Forget Lehman Brothers, Woolies has bitten the dust. Most people saw it coming: Woolworths has been struggling for years – decades in fact. It finally hit a brick wall, in what should have been one of the busiest weeks of the year, when suppliers abruptly refused to deliver stock even as creditors demanded immediate payment.

Even so, many Britons will mourn its passing. Woolies has been operating in Britain ever since 1909 when the US nickel and dime king, Frank Winfield Woolworth, spotted an opportunity to introduce a budget store. Its vinyl singles and pick’n'mix counter are the stuff of everyone’s fond childhood memory. Sadly, however, nostalgia does not fill the tills.

Woolies isn’t dead yet. The administrators, Deloitte, claim there has been interest from ten serious buyers – including Theo Paphitis, the high street turnaround expert of Dragon’s Den fame. Moreover, parts of the business, including its distribution arm, EUK, and a joint venture with the BBC are still going strong. Even so, it will take a miracle to resurrect a store group deserted by even its core sink-estate customers, and the matter of some £385m in debt cannot be dismissed lightly either.

The writing was on the wall for Woolies in 2001 when the group was de-merged from its Kingfisher parent by Geoff Mulcahy, who flogged off its freeholds and saddled it with ruinously expensive long-term leases.

This collapse was as much about financial fads as retail fads. It’s a prime example of what happens when shopkeepers start viewing financial engineering as the best means of maximising returns. And that bodes ominously for the many other retailers enmeshed in an equally terrible tangle of lending. Corporate undertakers say they are already swamped: it will be a good deal worse after Christmas.

But the demise of Woolworths isn’t a tragedy – unless you work there. On the contrary, the essence of retailing, and of brands, is chop and change. One of the reasons for boom and bust, however distressing, is the need for a simple cull. Unless the merchants of plastic tat feel pain, there is never a spur to go one better with something fresh and innovative.

The decline and fall of Woolworths, then, is a cause for modest celebration – as well as gloom.