Robert Shiller on tour

I made it along to a Work Foundation seminar this week where Robert Shiller was the guest speaker. I think some of the stuff he has written is really interesting. Irrational Exuberance is an excellent takedown of the efficient markets hypothesis and famously came out at the very peak of the dotcom bubble. But I actually think that The new Financial Order is the most interesting thing he has written as it attempts to put forward some ideas about how to mitigate risk.

At the the seminar his presentation combined both areas of his work. First he had a look at speculative bubbles and the subsequent collapses (1929, 1987 and the 1990s in the stockmarket, and the recent housing bubble) and he made the point very clearly that the current situation can only really be compared in scale to 1929. Shiller's view of bubbles is very definitely that they exist (as I've said before this is disputed by some) and that they are driven by psychological factors. In Irrational Exuberance he says bubbles are naturally occuring Ponzi schems which is a nice way of looking at it. His argument that psychology is key is in contrast to the view that bubbles may arise because of specific policy decisions made by key officials (ie central bank rates). Personally I find his view the most believable interpretation of bubbles, but we can argue about that another day.

In the second bit of the presentation he touched on a few ideas for financial reform, which in essence are really about designing financial services that are a better fit with people's lives. One suggestion he looked at was continuous workout mortgages that allow you to pay less if you run into financial difficulties. He also briefly mentioned his ideas about macro markets.

My general impression was that people were in tune with his critique of speculative bubbles, but less onboard with his ideas for new financial products. And I suppose in a way the section half didn't necessarily flow from the first. That said, it sounds like Shiller is doing the rounds in the policy world and has put his ideas in at a high level. Personally I think there's a lot of good ideas in what Shiller says, though I recognise other TU people aren't quite so impressed (Colin!). One question/point made by one of the policy people there was whether, if the market for the types of products Shiller advocates don't naturally arise, the Government could mandate some of them. I reckon that is a line of thought worth exploring.

J K Galbraith on post-bubble reflection

A snippet from A Short History of Financial Euphoria:

"There will... be scrutiny of the previously much-praised financial instruments and practices - paper money; implausible securities issues; insider trading; market rigging; more recently, program and indez trading - that have facilitated and financed the speculation. There will be talk of regulation and reform. What will not be discussed is the speculation itself or the aberrant optimism that lay behind it. Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.

There are two reasons for this. In the first place, many people and institutions have been involved, and whereas it is acceptable to attribute error, gullibility, and excess to a single individual or even to a particular corporation, it is not deemed fitting to attribute them to a whole community, and certainly not to the whole financial community. Wisespread naivete, even stupidity, is manifest; mention of this, however, runs drastically counter to the... presumption that intelligence is intimately associated with money. The financial community must be assumed to be intellecually above such extravagance of error.

The second reason that the speculative mood and mania are exempted from blame is theologiocal. In accepted free-enterprise attitudes and doctrine, the market is a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error. This is the classical faith, So there os a need to find some cause for the crash, however far-fetched, that is externaal to the market itself. Or some abuse of the market that has inhibited its normal performance."

Measured, reasonable comment from a City boy

From the Beeb's City Diaries section, here's 'Stephen' on the PBR:

During the chancellor's pre-Budget report and the opposition's response, there were alternate gasps of disbelief and jeers of contempt across our trading floor. It's utterly bewildering how our political system has managed to put such innumerates, however well-meaning, in charge of our economy.

I, like many of my City brethren, am a politician's nightmare. I'm a free-thinking, floating voter so I won't cast one party in good light and another in bad. They all have their failings, although the real issue is bigger than any one party. Nothing that was said will really make any difference, because the underlying problems remain and this is why so many City folk view politicians as an amusing but mostly irrelevant side-show. Some colleagues were pounding their desks in despair.

Looking into Libor

A quick plug for a really interesting post on the TUC blog Touchstone, which looks at how Libor gets set. As Adam suggests, most people probably assume that Libor - the rate at which banks lend to each other - is some free-floating measure over which no-one has any control. Not so. This is an area that definitely deserves a bit more scrutiny, so go and have a read.

Heffer's Law holds

From today's Telegraph:

So it should be clear what the Tories have to promise to do should they win the next election... They especially have to promise to scrap the spiteful and iniquitous 45 per cent tax band for those earning more than £150,000 a year, and which will raise a derisorily small amount of revenue.

And from todays YouGov poll commissioned by the... err... Telegraph:

The poll found that 60% of the public supported Chancellor Alistair Darling's announcement of a temporary cut in VAT and 72% welcomed his new higher-rate tax band for the wealthy.

Squeaky bum time

Tory lead cut in post-PBR poll
6 hours ago

Labour has narrowed the Conservative lead to just four points in the first opinion poll taken since Monday's Pre-Budget Report.

The YouGov survey for the Daily Telegraph puts the Tories on 40% (down two points on a similar poll last month), Labour on 36% (up three) and Liberal Democrats on 14% (down one).

Because of Labour's inbuilt electoral advantage, the findings could deliver Gordon Brown victory in a hung Parliament if repeated in a General Election.

The poll found that 60% of the public supported Chancellor Alistair Darling's announcement of a temporary cut in VAT and 72% welcomed his new higher-rate tax band for the wealthy.

But just 28% thought the PBR decisions would benefit them personally and only 27% said that they would lessen the impact of the economic crisis.

The poll - conducted following the PBR on Monday evening and Tuesday - is the latest in a string of surveys to show Labour catching up on the Tories after a summer which saw Mr Brown's party trailing by more than 20 points.

YouGov questioned 1,556 adults across Britain online on November 24 and 25.

Keynes quote of the day

"Of all the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of the investment institutions to concentrate their resources upon the holding of "liquid" securities."

Capital market dysfunction

Just a quick plug. There's another bit from a recent weekend FT worth a look here. It includes a look at some of the critiques of efficient markets, including that of Paul Woolley:

Paul Woolley, a former academic, policymaker, International Monetary Fund economist and asset manager, argues that efficient market theory falls down because of the "asymmetric information" problem. This, simply put, is the difference in the quality of information enjoyed by agents - the banks, fund managers, brokers and so forth - and the principals, or end investors. The agents know more than the principals and exploit this to maximise their own wealth. While this worry isn't new, critics have in the past focused on banking and corporate finance and on abuses such as insider trading. Woolley, however, applies it to investment management, arguing that asymmetric information, especially in this area, has far graver consequences for the functioning of finance.

This "agency" problem leads to two bleak conclusions. First, that capital markets do not necessarily price assets efficiently and capital can be misallocated. When the misallocation grows big enough, as it has now, it can lead to substantial macro-economic dislocation. Second, it allows banks and financial intermediaries to capture too big a share of the economic gains from capital investment, and thus from growth itself. And this share - the "croupier's take" in the celebrated phrase of Warren Buffett's partner, Charlie Munger - has been going up as financiers have become ever more cunning. Woolley argues that big and unstable capital markets make it likely that we will suffer more and potentially bigger upsets in future.

Woolley's analysis differs from that of Soros or the behaviouralists in that it does not require one to depart from mainstream economics. In his vision, the participants in financial markets are all acting optimally and rationally in their own self-interest, while generating outcomes that are less than optimal in terms of growth and welfare. Modern financial markets thus tend, Woolley believes, towards dysfunction. This flies in the face of the inherited wisdom that has prevailed since Adam Smith, and his belief in the power of the "invisible hand".

Behavioural bonuses

Today via someone else (sorry I don't remember who) I came across a recent piece by behavioural economist Dan Ariely in the New York Times on whether bonuses work or not. Now this is based on some experiments, rather than real-life examples, but worth a look:

[U]ndergraduate students were offered the chance to earn a high bonus ($600) or a lower one ($60) by performing one task that called for some cognitive skill (adding numbers) and another one that required only a mechanical skill (tapping a key as fast as possible). We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance.

Funnily enough I seem to remember something similar in Tim Harford's most recent book - incentive pay only really works very effectively when there is a relatively straightfoward and standardised task and where performance in the task can be accurately measured. So that rules out a lot of activity where people earn really big bonuses.

But arguably the more interesting bit in the Dan Ariely article is the effect of public scrutiny:

We asked 39 participants to solve anagram puzzles, sometimes privately in a cubicle and sometimes in front of the others. We reasoned that their motivation to do well would be higher in public, and we wanted to see if this would affect their performance. But we found that while the subjects wanted to perform better when they worked in front of others, in fact they did worse.
So it turns out that social pressure has the same effect that money has. It motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.

So two factors that might ordinarily be assumed to encourage better performance may actually have the opposite impact. This seems to be something worth exploring, to put it mildly.

The 45% rate TaxPayers Alliance

No surprise to see the Right TaxPayers Alliance (as opposed to the far more sensible Other TaxPayers Alliance) straight into bat on behalf of those earning £150K or more. I've just seen some TPA dude argue on More 4 News that a 45% top rate will send a dangerous smell overseas or something. It's not surprising that the Right TPA take this line, as many of their business supporters will be caught by it. There's got to be payback for those donations you know!

Another bank needs public money

Citibank this time. As Pesto says:

This proudest of US banks has been humbled: the rescue is about as close to nationalisation as it's possible to get without the state taking 100% ownership.

Taxing the rich...

I've just about picked my jaw up off the floor after watching the news. The Beeb's Nick Robinson has revealed that the Government is suggesting a new top rate of tax of 45% on incomes over £150,000, to kick in after the next election. Just when you thought the news had started getting back to normal too. A few initial thoughts...

1. It surely won't raise that much money. There just aren't that many people earning £150k and up. As such it will run the risk of coming across as a bit of a populist stunt.

2. It's probably going to be portrayed as the death of New Labour and/or the revival of Old Labour.

3. Precisely because it's on such high incomes it's going to be hard to paint it as a tax on aspiration, as the Tories would no doubt like to. Not great for them to say that they will reverse it if they get in either.

4. It's going to hit many of the people that the punters blame for the financial crisis.

5. It's going to hugely popular on the Left, and amongst disenchanted ex-Labour voters. It's difficult to argue that there's no difference between the parties now.

6. I can't believe Brown would allow this if he didn't expect something similar to happen in other countries.

7. It still might not make any difference to our polling. Just being realistic, like.

WOW!

The difficulty in taking away the punch bowl when the party starts getting interesting

Googling around I stumbled across this piece by Robert Shiller in the New York Times recently. It's really about the problem of group-think in organisations like the Fed, but I was struck by the comments he makes about his own desire not to be seen as too much of a nutter when speaking out about the bubbles in first the stockmarket, and later the housing market.

"From my own experience on expert panels, I know firsthand the pressures that people — might I say mavericks? — may feel when questioning the group consensus."

"I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 2004, when the New York bank’s new president, Timothy F. Geithner, arrived. That panel advises the president of the New York bank, who, in turn, is vice chairman of the Federal Open Market Committee, which sets interest rates. In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated."

As I've said quite a few times before, I like the fact that Shiller pays a lot of attention to the psychological factors associated with markets. By that I don't just mean the psychology behind market transactions, but also (as above) the psychology of financial policy, and the psychological effects of economic events. His stuff is well worth reading.

DB stifles PE

This piece in the FT is quite interesting (you need to scroll down a bit for it). The re-emergence of pension scheme deficits is likely to further increase their role as poison pills.

Pension liabilities are large hurdle

More than four out of five private equity groups view the need to reach agreement with the trustees of a pension fund as a significant hurdle to acquiring a company with a defined benefit pension scheme, according to research.

With the government preparing to beef up the powers of the Pensions Regulator and many pension funds facing growing deficits, several private equity groups view pension liabilities as one of the biggest hurdles to completing deals next year.

The biggest worry for more than half the 16 private equity groups that responded to the survey by Punter Southall, the pensions adviser, was the risk that new life-expectancy predictions may inflate the pension-fund liabilities at companies they own.

Richard Jones, principal at Punter Southall, said: "If there is a pension scheme in a company then it is the first thing that private equity [firms] seek external advice on.

"Several clients we used to work with now say they will not touch another company with a defined benefit pension scheme," he added.

The survey found that most private equity groups were sanguine about the regulator's powers. Most found it less worrisome than the potential actions of trustees after an acquisition is completed, or the risk of future legislative burdens.

The Origin of Financial Crises

Just a bit of recommended 'crisis' reading. This is one of the better things I have read about the financial crisis. It's a nicely-written and clearly argued case against the efficient markets hypothesis (EMH) and the argument that left to their own financial markets will tend towards equilibrium. In fact a large part of the author's motivation for writing the book seems to be to drive a stake through the heart of the efficient markets hypothesis, which he sees as fundamentally wrong (no argument here!).

As such the book is broadly pro-Keynes, and very pro-Minsky. It takes as a given Minsky's view that markets are inherently unstable and will inevitably swing between ..er.. boom and bust, and that the busts can be very bad indeed if no action is taken. The suggestion is that Minksy's financial instability hypothesis should replace the EMH has our bedrock understanding of how financial markets work.

Notably this leads him query what central banks are trying to do. He is particularly scathing of Fed, which he suggests tries to combine a belief in the EMH with intervention, when logically they should preclude each other. He argues central banks should refocus their attention on credit expansion and asset price bubbles, rather than consumer price inflation. Notably he therefore believes that bubbles both exist (this might seem obvious, but it's actually an important point) and that central banks can do something about them, though in practice it's credit creation that he thinks should be monitored.

That's the headline argument, but there are lots of nicely structured points building up to it along the way. There's a great section on why even 'fundamental' company analysis on its own can fail to spot the distorting effects of bubbles.

Anyway, definely worth a read, and given that it's both very clearly-written and one of these double-spaced books you can get through it in no time.

The Real Taxpayers' Alliance

Hehe, this is good.

Via Adam.

The human cost of the credit crunch

The Beeb website has some interesting personal stories on it from the frontline of the credit. Daniel (not his real name) who works for an investment bank explains just how painful it is out there –

“As I approached my desk I did not even say the usual "Good Morning" or "How was your weekend?"… People are buying lunch for £5 in the cafeteria rather then spending £20 on some Sushi or Dim Sum outside. People now have breakfast at home or even bring a packed lunch. The days of the one hour lunch are well and truly over.”

Packed lunches instead of sushi? And they say people had it hard in the 1930s.

Bank stuff

There's a stack of stuff to look at today. First up, Unite has put out some stats put together by LRD on remuneration at the banks -

Unite has a detailed dossier exposing the pay of senior executives in the financial services taken from annual reports, between 2003 and 2007. The dossier shows that the basic pay and cash bonuses (excluding share based payments) of just 5 CEOs at HBOS, Lloyds TSB, RBS, Barclays and HSBC totalled over £52 million.

A few executive directors (named in the annual reports) of RBS, LTSB and HBOS, 3 banks which the government will take a £37bn stake in, have earned a combined £122 million in pay and bonuses including over £64 million in cash bonuses alone.

Excluding share based payments, between 2003 and 2007, CEOs Fred Godwin (RBS) made £15.5 million, Andy Hornby made £6.9 million and Eric Daniels made £10,2 million.

The total remuneration (excluding share based payments) for a handful of executives included in the annual reports of the major British finance companies and the majority of UK subsidiaries of overseas parents totals an astonishing £729.3 million.

Unite members are also protesting outside the Lloyds TSB EGM which seeks approval for both the HBOS takeover and the HMT capital injection.

Secondly, the TUC is one of a number of organisations giving evidence today to the Treasury select committee on remuneration at the banks, so it might be worth keeping an eye on that one.

Robert Peston has another punchy piece on his blog about the Barclays deal, this time looking at the large fees being paid to Barclays Middle Eastern investors (over 4% of the total value of the deal). As he says the fees look even more ridiculous in light of the fact that existing investors have snapped up their slice of the RCIs (the bond-like debt bit of the deal)immediately.

Arguably... Barclays has needlessly given away £300m. And don't think this is about losses suffered by funny, remote people in the City with no connection to you. It represents an erosion of wealth for millions of us saving for a pension, since most of our pension funds and life companies have an interest in Barclays. You should be concerned.

Finally Jeff Randall gives the Barclays deal the thumbs up. For him it is clearly an ideological position -

If Varley could rewind the video, he would not start from here. That said, I applaud his determination to steer clear of Government intervention. At 12pc, the Treasury's money would ostensibly be less expensive than cash from desert kingdoms, but it would come with the burden of political strings, the real price of which is always far greater than what's written in the contract.

Notably he makes the point earlier in the piece that small HBOS shareholders are kicking off about the Lloyds TSB merger (which, as the Govt supports it and will have a stake, he doesn't like). True, but I bet you they aren't kicking off half as much as small Barclays shareholders are, judging from my experience this week.

Pluggity plug plug

For Charlie's blog, Excuse Me Whilst I Step Outside, which you can find here.

Game on

I've been so caught up in work stuff I completely failed to spot today's Ipsos Mori poll - Tories on 40%, Labour on 37%. Wonder if Dave knows what he's doing with today's decision to put a bit of clear blue water between the parties? A bit of renewed Tory infighting seems likely given the dramatic fall in the poll lead.

ABI tightens the screw

Wow, I'm a bit surprised by this (from Citywire):

Changes to Barclays' cash raising plans win few supporters

By Deborah Hyde | 14:30:21 | 18 November 2008

Institutional investors have expressed ‘grave concerns’ about Barclays’ capital raising measures, with the new measures taken by the bank appearing to have done little to appease those who oppose the deal.

Despite the bank’s decision to allow institutions to participate in some of its capital raising measures and for its directors to forgo their bonuses, both analysts and shareholders remain unconvinced of the merit of the deal, with one analyst describing Barclays’ latest measures as a ‘small olive branch’.

The ABI, which represents leading opponents Legal & General and Aviva as well as other insurance groups, has slapped a ‘red top’ on the bank.

The group said that the red top, a designation which the organisation rarely dishes out, does not constitute advice to vote against the proposals, but highlights the presence of an issue of grave concern.

It said it had made the decision because the changes announced today did not address all of its concerns.

'These changes cannot offset the concern of shareholders at the serious breach of the pre-emption principle, especially on an issue with a large discount,' said Peter Montagnon, the ABI’s director of investment affairs

The ABI met with Barclay’s management last week to discuss their opposition to the plans to raise £7 billion fin the Middle East.

Barclays folds... a bit

So, Barclays and its Middle Eastern investors have agreed to grant a couple of concessions to investors, one quite valuable, the other pretty meaningless. The former is this bit -

Barclays has also held discussions in recent days with Qatar Holding LLC and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan (“the Investors”) who agreed on 31st October 2008 to invest substantial funds into Barclays. The Investors wish institutional investors to be able to participate further in the capital raising. The Board of Barclays today announces that the Investors have each offered to make available up to £250m of Reserve Capital Instruments for clawback by existing Barclays institutional investors at par. By consequence £500m of Reserve Capital Instruments (excluding Warrants) will today be made available to Barclays institutional investors by way of a bookbuild placing.

The RCIs are one of the tasty bits of the deal, as they pay out a generous coupon. Originally existing investors weren't being offered any of this, now they are going to get access to about a sixth of the total. It's a significant move in favour of institutional investors, though small shareholders won't get a look in (though this might not be practical/possible anyway). But there's no movement on the warrants- effectively an option to by Barclays shares in future.

Part 2 of the concessions are as follows -

In recognition of the extraordinary circumstances of the Capital Raising, the Board of Barclays also announces that:

*all members of the Board will exceptionally offer themselves for re-election at the Barclays Annual General Meeting to be held in April 2009; and
*no annual bonuses will be paid to executive directors of Barclays PLC for 2008, following the offer by the executive directors to waive any annual bonus for 2008.

This doesn't add up to much and surely ought to be standard operating procedure for the banks now. On the bonuses Barclays is simply following the now well-established trend that acknowledges that in the current crisis giving your top team rewards for good performance might look a bit wrong, though presumably it will be a bit painful for Bob Diamond.

And does putting all directors up for election at the AGM (and this isn't - yet - even a commitment to annual re-election) really mean much? Perhaps we really are in a new world where institutional investors will pull the trigger if they think directors aren't up to the job. Judged on previous evidence I think we ought to be a bit sceptical. How many directors actually get voted off boards? (admittedly some get knifed before it gets anywhere near a vote). If shareholder don't use the vote effectively, what sort of concession is it?

Unfortunately this kind of 'back me or sack me' initiative plays out in the corporate world rather differently to the political world. Business journalism plays a part here since it tends to play up the idea of superhero chief execs. Business leaders can garner the kind of fawning coverage politicians can only dream of if the organisation which they lead does well, and this attitude seems to seep into many people's views of companies. Therefore when execs pull the equivalent of a John Major resignation it is perhaps not surprising that many investors blink first. If we are ever to get to a position where shareholders really do act like owners this is exactly the sort of issue over which investors ought to call the company's bluff. Here's hoping...

Interesting snippets

On Capital Matters there are a few details about some individual votes that took place during the election that affect investment of assets.

There's another left-leaning website about the current crisis here.

Snowflake has a look at Osborne's comments on Sterling here.

AVPS recasts Charlie Brooker's zombie series Dead Set as the class struggle. (I must put up a zombie post of my own soon).

And Prem Sikka on the Barclays deal.

Barclays again

A bit more news from The Grauniad:

Pressure is mounting on John Varley, Barclays chief executive, and his boardroom colleagues amid growing shareholder opposition to the bank's £7bn fundraising plan.

Pirc, the body that advises pension funds and other major investors, is today urging shareholders to oppose the controversial capital raising at next week's extraordinary shareholder meeting. It wants shareholders to send directors a "clear unequivocal message" that the new investors from the Middle East are not a good solution to the need to raise funds.

The deal is already facing criticism from RREV, which also advises pension funds, and corporate governance advisory group RiskMetrics Group. The Barclays chairman, Marcus Agius, tried to convince major City investors of the merits of the fundraising at a meeting at the Association of British Insurers, which also has concerns about the fundraising, last week.

I still think they will get through the vote ok though.

Bits & bobs

Simon Caulkin has another interesting-ish bit The Observer today about self-interest. He argues that building economic models and rewards in organisatons on the assumption of rational self-interest is both flawed and counter-productive:

"Self-interest contains within it the seeds of its own destruction. It drives for reward, but once rewards reach a certain size it can no longer function as a discipline. When rewards were less high, self-interest was tempered by the need to nurture the reputation a career depended on. With salaries at current stratospheric levels, however, self-interest provides no such restraint, since careers are redundant."

"Anyone who has done one big deal - or worked in the City for more than a few years - never need work again. Far from being a restraining influence, in these circumstances self-interest promotes a short-term focus on transactions that in turn amplifies its second baleful impact: increasing distrust. As anyone not blinded by fundamentalist zeal must see, the obverse of the coin of self-interest is lack of trust - and both are self-reinforcing. The swelling of self-interest is in direct proportion to the draining away of trust, the cumulative results of which are now visible all around us."

Sort of. I think the idea of rational self-interest is certainly flawed, in part because a lot of evidence shows we aren't very rational, and in part because, as I argued t'other day, I think acting in you 'self-interest' covers much more ground than just money or other material rewards. He's got a point about the career-defining deal I'm sure, which does raise the old questions about the structure of remuneration. This sort of stuff does suggest that if we want to really focus on getting the most out of the people in charge of large organisations then we ought to be looking to psychology as much as economics. But I can't see much sign of any desire to do so amongst investors. If the current situation does prove to be a bit of turning point (and I still think it will be) the this ought to be fertile territory to advance some new ideas.

Elsewhere it's interesting to see Osborne continuing to take flak from both us and his own side. His comments on Sterling don't see particularly earth-shattering to me, but at the moment it doesn't really matter. He is clearly seen as wobbling and various parties are more than willing to give him a push. At present it looks like he will survive but, as argued previously, that isn't a bad thing either as I reckon he's already got himself a negative image in the average punter's imagination. Not too much of a stretch to imagine an election poster of him in either Bullingdon Club gear or plus-fours and shotgun ensemble next to some unhelpful factoid or other.

Barclays is my other hobby horse at the moment. A quick read through the headlines today suggests that they aren't out of the woods yet by any means, as some of their large shareholders aren't taking the patently worse deal lying down. The problem is that if Barcalys pulls out they still have to pay £300m in fees to the Middle Eastern investors they have struck the deal with. Given that the deal itself is worth abut £7bn that's quite a high fee too. I still think it will go through, but more fireworks this week no doubt, and more damage to the board's reputation.

Finally, I'm nearly finished The (Mis)Behaviour of Markets by Benoit Mandelbrot (yes, he of the Mandelbrot Set) during which my interest level has reflected market moves - trending upwards for a bit before reversing. But there's some great stuff at the end where he has a pop at the idea of trying to estimate 'real' value in financial markets. I'll post up a chunk shortly.

Bank vs State

There's all kinds of spin and counter-spin going on out there about the nature of the Government's involvement in the banks in which it is taking a stake. In today's FT, Sir Philip Hampton and John Kingman play down the idea that HMT will be a back seat driver. Rather, in their comment piece, they pitch their role as comparable to an institutional investor:

First, we will operate like any other active, engaged shareholder to maximise the sustainable value of the taxpayer’s investment in the banks, taking account of risk...

Like any other large institutional holder we will engage robustly with banks’ boards and management, holding both strategy and financial performance to account. We will also need to understand the views of and, where appropriate, consult with other investors – again, as any engaged investor would...

Finally, like any engaged investor, we will take a close interest in board remuneration structures. We want our investee companies to pay fairly, but not beyond fairly, for the world-class talent they need...

Excuse me for stifling a chuckle, but who are these 'engaged investor' types that UKFI (the govt's investment vehicle) is going to act like? I would argue that they barely exist in the UK market. As I've argued previously, if you take a look at the actual voting of asset managers - on, say, bank remuneration - you won't harbour any illusions about them being very engaged. (A more prickly person than I might make a particular point about the asset management arm of a bank in which HMT might have something of an interest.)

If the Government IS going to act like a genuinely engaged shareholder, all power to them, but it's a slightly different offer to seats on the board, which Darling was suggesting not long ago. In fact the Government is bending over backwards to at least give the impression that it won't meddle. All of which does rather kick away the central argument in Barclays' decision to go for Middle East funding. In contrast to HMT, Barclays is telling shareholders that having state investment would mean interference and conflict with its global strategy. That won't happen, you understand, with two large investors holding a third of its shares.

Today the Barclays team meet with the insurers, whose trade body has amber-topped their report on the bank. Taken together with the abstention recommendation from RREV that's already a real vote of no confidence, as these are not radical organisations. Perhaps some of the large institutions would have preferred HMT to have a chunk of Barclays (especially if that was the only alternative to this deal). I still think Barclays will easily make it through the vote, simply because most asset managers rarely oppose management, but they have done some serious damage to their reputation.

RREV abstains on Barclays deal

According to Reuters:

LONDON (Reuters) - Barclays (BARC.L: Quote, Profile, Research) investors should abstain from a vote on the bank's plan to raise 7 billion pounds from the Middle East due to the high cost and dilutive nature of the plan, according to a report by a shareholder advisory service.

A report by investor advisers RREV seen by Reuters said Barclays investors should abstain from the vote on November 24 mainly due to a large discount that shares are being offered at, the high cost and dilutive nature of the capital raising, and the negative market reaction since it was announced.

But it said "it would not be in shareholders' best interest to reject this proposal outright."

RREV, part of U.S. company RiskMetrics Group, could not be immediately reached for comment.

Looking a bit wobbly now...

ICGN statement

The International Corporate Governance Network has put out this statement, which is fairly sensible but the language leaves me a bit uneasy. Have a look at this -

Some commentators have criticised shareholders for failing to hold boards to account. It is true that shareholders sometimes encouraged companies, including investment banks, to ramp up short-term returns through leverage. They were not always as close as they could have been to companies they owned.

Yet, a larger problem has been failure of regulators. They did not respond decisively when they realised that markets were mispricing risk. They allowed banks to operate with too little capital, with excessive leverage and too little attention to liquidity risk. They failed to pick up on poor risk management by boards and on poor lending practices in the mortgage market.

Personally I agree that both 'owners' and regulators have not done a great job, but look at all the criticisms the ICGN makes of regulators - these could apply to shareholders too, surely? And since shareholders are supposed to be driven by self-interest to monitor companies, I don't think we can really say the bigger problem is regulatory oversight. In addition the ICGN goes on to say that shareholders need greater rights. Again I'm basically on the same page, but it won't make any difference if shareholders don't use them.

By way of example, being a geek about voting, I've been looking through the voting records of some of the big asset managers to see what they were up to at the banks in recent years. Very few had any governance problems. I have found one asset manager that voted for every single resolution at all the banks' AGMs for the past 6 years. A lack of rights isn't the issue.

To be fair the ICGN does go on to address this point, saying that shareholders do need to use their rights, and to devote proper resource to governance issues. But the tilt against regulators really bothers me. We have witnessed a failure of ownership. We need to face up to this and try and put it right, trying to pass the blame onto regulators and a lack of rights doesn't seem to be a positive way of starting this process.

PS. Peter Montagnon of the ABI had a sensible bit in the FT yesterday on exec pay that's worth a read.

Barclays investors are kicking off

See here. This should become a reputational issue for fund managers - trustees should find out what their managers are planning to do.

Barclays - ownership is on the line

This is a bit of a rant, but the more I look at the proposed deal whereby the investors from Qatar and Abu Dhabi get to snap up a big chunk of Barclays, the less I find anything to like about it. It is a waaaay worse deal than that available from HMT in terms of the capital injection, plus the investors get warrants (effectively the right to buy more shares at a given price in the future), but existing shareholders don't get a slice of the warrants. For existing shareholders - and that means by extension all of us with pensions and investments that have shares in Barclays - this will be a significant dilution, plus we don't get access to any of the good stuff.

You can, and Barclays does, make the argument that having HMT as a shareholder would restrict their freedom to operate. But a) it looks like under this deal an even larger chunk of Barclays will be held by a small group of investors - how do we know they won't seek to influence the Barclays board? - and b) all the signs are that Government won't (for good or ill) be trying to be a back seat driver to the banks in which it has taken a stake. Barclays also makes an attempt to argue that having HMT as a shareholder might affect the share price but a) the opposite may actually be true, lets's wait and see and b) maybe the presence of these other controlling shareholders could also affect the price. Why not?

I really don't see why existing investors should put up with this, not least because there is quite a bit of space between the deal being proposed and taking the taxpayers' shilling. Even if the City really does want to avoid part-nationalisation of Barclays, could they not push for something better than this?

I'm starting to think that this could be an important event in terms of policy on the nature of company ownership. If shareholders - which primarily means fund managers - simply swallow this deal because management says they should, it really does punch a hole in the 'shareholders are owners' argument. If the 'owners' of a major UK-listed company can't even oppose an obviously bad deal (in the sense that a better one for them is available), in a situation where the bank needs a serious funding injection whatever remember, how can we take seriously the idea that this works effectively as an ownership model?

And remember it's your money in there. These investors are supposed to be acting in your best interests. Do you think simply meekly accepting the dilution and devaluation of the rights that they have as a result of investing your capital is doing a good enough job? I don't.

Who does the finance sector blame?

Just a quick plug for the survey of finance people done by the Network for Sustainable Financial Markets, a... errr... network of progressive types working in the finance sector. Here's what Responsible Investors has to say about it:

The global response to the credit crisis has actively encouraged moral hazard – the belief that financial services companies will take more risk if they think that governments will step in and bail them out – according to 64% of respondents from the institutional investment industry to a survey by the Network for Sustainable Financial Markets (NSFM). As a result, just 7% of the investment specialists who answered the open survey during October said they believed the response to the crisis should come from government. Half said they thought the financial industry should sort out its own house, while the remaining respondents suggest that other stakeholders such as consumers and international agencies such as the World Bank should push the markets to change. Significantly, in apportioning blame for the credit crisis, the largest number of investment professionals (21%) said they criticised financial industry insiders such as bank leaders, who many said didn’t understand their risk positions and were incentivised to bet big. Just under a fifth (19%) blamed shareholders and/or fund managers who failed to exercise proper governance on companies or understand the risks in their investments.

Politicians and regulators came lower in the blame stakes with 14% pointing the finger their way. Few respondents believe that the crisis will be stemmed by ‘reactive’ government intervention. Instead, half of those answering thought the best response to the crisis would be a 1-2 year global consultation, with the remainder suggesting a medium-term considered view from politicians and regulators.

Trade union statement to the “G20 crisis summit”

Exec summary below, full statement here (PDF).

Hat-tip: Pierre

G20 leaders are meeting as the global economy is teetering on the edge of a precipice. The spectacular worsening of the financial crisis in September and October 2008 is now having a dramatic impact on the real economy. GDP is forecast to fall and unemployment surge in the major industrialised countries. The crisis is spreading to emerging and developing economies.
Already, several governments have had to request emergency loans from the International Monetary Fund (IMF) as their financial sectors become paralysed, capital flows out of the country, currencies collapse and economic growth comes to a standstill. The global economy is facing a very serious recession. How protracted and deep this proves to be depends on how timely and well-focused government action is. This systemic crisis comes on top of the unprecedented rise in food and commodity prices earlier in the year and the resulting food crisis in developing countries. It also occurs against the background of accelerating climate change which, without rapid action, will affect the poorest across the globe most severely, and especially vulnerable groups including women.

History has shown that crises on this scale lead to social and political instability with unpredictable and often tragic results. Working families have an enormous stake in the response to this crisis. Already, for more than two decades social cohesion has been under stress as a result of growing inequality in most countries. Today, those who are losing homes, jobs and pensions as a result of the financial crisis, for which they bear no responsibility, as taxpayers are being called on to bail-out those who are responsible. The G20 governments must acknowledge the urgent need to begin work on a more inclusive, just and democratic system for the governance of global markets. Trade unions must have a seat at the table and be part of the crucial negotiations that will be held in the different institutions, during the months ahead.

The current economic crisis began in the US as a conjunction of a housing crisis, a credit market crisis and, increasingly, an employment crisis. Each of these crises is serious enough in itself, but their interaction makes for a particularly complex and dangerous dynamic in the real economy. Housing prices have collapsed, foreclosures have surged and trillions of dollars have been drained from household net worth.

Consumers are pulling back sharply as their wealth declines, slowing the economy and forcing employers to shed jobs and cut wages and benefits.

The continuing decline of housing prices also aggravates the credit crisis as the value of mortgage-backed assets continues to undermine the balance sheets of under-capitalized financial institutions. Unless the decline in asset prices and employment is halted, the banking system will continue to haemorrhage. This vicious circle is now repeating itself in other industrialised countries and in emerging economies originally thought to be immune.

The entry of governments into the financial markets to nationalise banks, guarantee deposits, buy up bad debts and recapitalise the banking systems across the US and Europe, is necessary. However it is unacceptable that governments nationalise the losses of financial capital and let financial institutions privatise the profits. This most serious economic crisis since the Great Depression of the 1930s must mark an end to an ideology of unfettered financial markets, where self-regulation has been exposed as a fraud and greed has overridden rational judgement to the detriment of the real economy. A national and global regulatory architecture needs to be built
so that financial markets return to their primary function: to ensure stable and cost-effective financing of productive investment in the real economy.

Beyond this governments and international institutions must establish a new economic order that is economically efficient and socially just – a task as ambitious as that confronted by the meeting in Bretton Woods in 1944.

The leaders of the major nations meeting in Washington must set in train a process to work with countries beyond the G20, in order to:

* Initiate a major recovery plan to stabilise global capital markets, move economies rapidly out of recession, stave off the risks of a global depression and get back on the track of creating decent work. There should be further coordinated interest rate cuts as necessary. Governments should bring forward infrastructure investment programmes that can stimulate demand growth in the short term and raise productivity growth in the medium term. Now is the time to move forward with a “Green New Deal” to create jobs through alternative energy development and energy saving and conservation. Tax and expenditure measures should be introduced to support the purchasing power of middle and low income earners. Development assistance budgets need to be maintained to the Least Developed Countries (LDCs) to help meet the Millennium Development Goals (MDGs) with the adoption of binding commitments and a timetable to meet the UN target of 0.7 % of GDP.


* Ensure that a financial crisis on such a scale never happens again. For two decades most governments, together with the International Financial Institutions (IFIs), have promoted the lightly regulated ‘new financial architecture’ that has characterised the global financial markets responsible for this crisis. Governments have now been forced to intervene to save the banking system; the quid pro quo must be properly regulated financial institutions. The agenda must cover: the public accountability of central banks; counter-cyclical asset requirements and public supervision for banks; the regulation of hedge funds and private equity; the reform and control of executive compensation and corporate profit distributions; the reform of the credit rating industry; the ending of offshore tax havens; the taxation of international financial transactions; proper consumer protection against predatory lending and aggressive banking sales policy; and active housing and community-based financial service public policies.

The new system needs to reflect the requirements of all regulators; bank regulators, tax and competition authorities, and governance and consumer bodies in each country. There must be no more piecemeal approaches to reform.

* Establish a new structure of economic governance for the global economy. This must go beyond financial markets or currency systems to tackle all the imbalances of growth and capital flows that contributed to the crisis. Just as the post-World War II economic settlements included the strengthening of the International Labour Organisation (ILO), in parallel with the creation of the United Nations, the new postcrisis settlement must address international economic governance.

Governments must start work on the necessary structures. But this debate should not be held between bankers and finance ministry officials, behind closed doors. Trade unions must have a seat at the table.

* Combat the explosion of inequality in income distribution that lies behind this crisis. The new system of economic governance must tackle the crisis of distributive justice that has blighted the global economy. It must ensure more balanced growth in the global economy between regions, as well as within countries, between capital and labour, between high and low income earners, between rich and poor, and between men and women.

The G20 meeting should mark the beginning of a process. The agenda for change must be progressed at other meetings in the months ahead; notably at the Follow-up International Conference on Financing for Development, to be held in Doha at the end of the month. At the subsequent Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC), being held in Poznan in December, there must be pledges of immediate assistance from industrialised countries to enable
more technology transfer and climate change adaptation in developing countries. This would further contribute to establishing the trust that is required to successfully conclude the current climate change negotiations by the end of 2009. The G8 meetings in Italy, as well as the meetings of the IFIs and the Organisation for Economic Cooperation and Development (OECD) in 2009, must all be used to maximum effect – there can be no return to ‘business as usual’.

Matthew Taylor UKSIF annual lecture

This (PDF) is well worth a read. I missed the actual lecture, but the text is available online now. It's always interesting to read a view on markets, investors etc from someone thoughtful who doesn't work in the sector (and as such is willing to pull in insights from elsewhere). Quite a few references to behavioural economics in there, and even a mention of S&M's Chris Dillow (and I have to say I think I'm closer to his views of the public company model - I don't think it's bust, but it doesn't work how some suggest it could/should). Deffo worth 5 mins of your time!

Hat-tip: Adam

Fair Pensions analyses asset managers

This (PDF) is worth a read. It has a serious stab at analysing how fund managers address evironmental, social and governance (ESG issues. No surprises here for me:

Our findings suggest that asset managers’ focus on ESG more often than not is limited to governance issues such as board structure and remuneration. Of the 22 asset managers that disclosed a policy on ESG issues 19 covered only corporate governance issues, while only F&C, Insight and Standard Life could explain their policy on environmental and social factors in any detail. Similarly, on corporate engagement, although the overall score for the 30 asset managers on ESG engagement was 53%, this fell to a mere 25% when environmental and social issues were considered separately from governance. It appears as though investment analysis of environmental and social risks/opportunities is confined to a small niche in the industry. This is a significant cause for concern as the risks associated with environmental and social mismanagement by companies can be as damaging to value as governance issues both in the short and the long run.

Here is the TUC reaction. As they say, there's not much evidence of the S in ESG.

Economics n stuff

It's a wacky world today. Gordo is clearly laying the ground for tax cuts, which may (I doubt it, but there's speculation) end up being opposed by the Tories. If Gordo does follow this path then the mixture of policies being implemented - public spending, plus tax cuts, plus rate cuts - does seem to push all the Keynesian buttons for avoiding a slump doesn't it? It suggests a couple of obvious things - active economic policy is back, and the Government thinks we're in quite a big hole. PS - here's the TUC take on this stuff.

Meanwhile in the US of States, the inevitable reaction to the bank bailouts is occuring in the car industry. If you can do it for them, why can't you do it for us? The Democrats are likely to respond to this special pleading too I reckon. And if it's good enough for US manufacturing why, folks will ask, can't we have it here? It's going to be a difficult argument for the Government (and the Tories) to handle.

Also in the States, there's speculation over who could be the new chair of the SEC. Obviously there is a lot of kite-flying going on, but it's interesting to note that Damon Silvers of the AFL-CIO has cropped up in a couple of reports. It would be a great appointment from the unions's point of view obviously - here's hoping.

Finally, via Nick this interview with Gillian Tett is well worth a read. I'm pulling out a different quote to him though. The following makes a lot of sense to me:

"I happen to think anthropology is a brilliant background for looking at finance," she reasons. "Firstly, you're trained to look at how societies or cultures operate holistically, so you look at how all the bits move together. And most people in the City don't do that. They are so specialised, so busy, that they just look at their own little silos. And one of the reasons we got into the mess we are in is because they were all so busy looking at their own little bit that they totally failed to understand how it interacted with the rest of society.

"But the other thing is, if you come from an anthropology background, you also try and put finance in a cultural context. Bankers like to imagine that money and the profit motive is as universal as gravity. They think it's basically a given and they think it's completely apersonal. And it's not. What they do in finance is all about culture and interaction."

I think this is bang on, and it fits in with some of the Habermas stuff I've been reading lately. Something for another day though.

bubblewrapped

Just a quick plug for this here website which looks great, and links to me, so is therefore ace.

Glenrothes is Labour's Ohio!

Or something. And just think, if this result was repeated across the country there wouldn't be any Tory MPs left.

Pay & motivation

I had a quick look at Performance And Reward today, and was reminded of this piece in the FT a few weeks back. The writer is author of a book about clear thinking, so he’s fair game surely? The piece is about bank pay, and what to do with it, and this is the section that troubles me.

“Employees act in their own interests. That should be the starting assumption of anyone designing an incentive scheme. The task for employers is not to weed out greedy employees. It is to create incentives that make employees' interests the same as their employers', so that when they do what is best for themselves they also do what is best for their employers.”

Even if we accept that ‘Employees act in their own interests’, which is a big assumption in itself, I think he’s missed out a vitally important bit of info here. What are ‘their own interests’? I think it isn’t as simple as material/financial self-interest as seems to be taken as a given here. If it were then the idea that we need to pay people who are amongst the richest in world even more to keep doing their job would be laughable. These people clearly do not need (in a financial sense) the extra bucks. Something else is going on.

I think that when you are talking about people at the top, variable pay is not an incentive, it’s a symbol. For some this is vanity - how much does the company love me? For many (most?) it’s probably about recognition of their talent and relative position - how much more do they think I am worth than my equivalent at another company? But if that is the case then aligning shareholder and manager interests should really focus on how to address these psychological factors, rather than just chucking money at the problem.

Funnily enough I was at an event this week where a remuneration consultant said that, in her experience, directors did not respond to short-term incentives that might encourage risky behaviour, even though they could financially benefit. They still did the ‘right thing’. That is clearly encouraging but also surely serves to undermine the idea that we respond mechanistically to financial incentives?

More broadly it is obvious to any one of us that many people who do well at work are not motivated by financial rewards. Maybe they are especially conscientious, maybe they have an engrained desire to see things done properly, maybe they just enjoy hard work. These people do not need incentivising to do the right thing (though they may view a bonus as recognition).

You also get many, many people who choose to take less money for more job satisfaction. And you get people who work for organizations because they believe in the values that they extol. I believe that this is in fact acting ‘in their own interests’. But how does this fit with Mr Clear Thinking’s leap to financial self-interest? Errr… it doesn’t. The definition is simply (and obviously) too narrow to capture why people do things and thus (the point of the article after all) how we might encourage them to do the ‘right’ things.

Reflections on elections

Thought I'd bung up a few random thoughts about this election thing in the US.

1. It's not really a landslide is it? I mean Obama certainly spanked McCain in terms of electoral college votes, and it's the biggest Dem vote for some time, but the lead in the popular vote is not comparable to say Labour in 1997. Obviously the lack of serious third party must make a difference but still it's not quite the same as what we would consider a landslide.

2. That reminds me that it would be a major mistake, therefore, to write off the GOP. Although there are already signs of the various bits of the Right coalition turning on each other it's not a given that they will be as stooopid as the Tories were initially post-1997. We obviously don't know how the next four years will pan out for the Dems either. We could fool ourselves into thinking there is a seachange, when actually this is a primarily anti-Bush and tentatively pro-Obama vote that could unwind if, say, the economy continues to experience real problems.

3. Sarah Palin. Not as a straightforward as it looks this one I suspect. There wasn't really time for her to develop in the campaign so the meejah coverage quickly shifted from one simplistic narrative to another - from pitbull in lipstick to incompetent loony (maybe those are two sides of the same coin). Obviously by the time of the vote she was alienating as many neutrals as she was energising core Right voters. But next time around those rough edges will have been smoothed. And let's be honest - there was an unpleasant undercurrent to some of the commentary about her. Even on the Beeb election programme last night there was some real schoolboy humour when her name came up. Much as I disagree with ...err... pretty much everything she said in this campaign I found some of the coverage a bit sneery, and that always seems to go down badly in the US.

4. I'm genuinely a bit shocked at the distance between reality and some of the comments of partisan supporters in this election. For example I find it incredible that Biden was asked by a reporter, in all seriousness, if Obama was a Marxist and I have seen plenty of keyboard warriors argue that he actually is in recent weeks (and I'm sure there are people amongst the Obama support who have equally loony views). I accept that we all filter information according to our world view, but to make such patently false claims about a person just because they are on the other 'side' makes me a bit depressed. Where's the truthiness?

5. At the risk of being optimistic it's got to be looking good for the Dems over the long term. Obama has put together a wide coalition of support this time, and the fact that he's sewn up so much of the youth vote must be good news for elections in the future.

Get. In.

I know we'll come to be disappointed.
I know we're all projecting our own hopes.
I know we shouldn't expect too much.

But how can you not feel your faith in humanity strengthened a bit today.

A few plugs

Blogging is light to moderate this week because of work. Here are a few things worth a look.

The latest TUC trustee newsletter. It looks loads better than I was there!

Simon Pegg on why zombies shouldn't run.

I'm really taken with some of the Jurgen Habermas stuff, so check him out on wiki.

And Nick D's piece on risks in the energy sector is worth a read.

And fingers crossed for Obama, obviously.

Maybe we need a Real Taxpayers' Alliance?

Thinking a bit more about the Taxpayers' Alliance, what annoys me about them is the way that they subvert real and legitimate taxpayer concerns to support their own ideological agenda. Really we ought be able to rely on organisations such as the Audit Commission and the IFS to provide an independent perspective and public spending and government projects. But unfortunately the TPA have (currently) hijacked the space for a taxpayer voice. What's more papers like the Mail and the Telegraph will understand completey that the TPA comes from a libertarian-right perspective, but cover their reports anyway as though they were produced by disinterested researchers.

So we have a real problem that the 'taxpayers' voice in bits of the media is actually a partial reading of what the state does channelled through the distinct ideological perspective of the libertarian right. Ever seen a TPA report that highlights what the state does well, call for greater public investment in a given project, or praises the public sector? I doubt it, why would you? These things shouldn't happen in TPA-land because the public sector is inherently flawed. All their reports start with the answer and work backwards. They 'know' that the state is wasteful and inefficient so their reports are an exercise in confirmation bias. That's why, for example, they don't know what pensions public sector workers should have, they just know that must have worse ones than those they have currently.

Needless to say this isn't a good state of affairs for those who are genuinely interested in taxpayers' money being well spent. So perhaps the alternative is to create a Real Taxpayers Alliance - an organisation that looks at government expenditure and projects but without the ideological baggage and inherent antipathy towards the public sector as a whole. Clearly this is politically a bit risky since it may add weight to the TPA propaganda campaign. However to be honest I think there has to be quite a lot of space between the TPA's ideological assault and a refusal to consider that the state might waste money.

I have no ideas about how it might be funded, or by whom (though I'm sure it would do less well from right-wing business and city folk than the Right TPA does). Or maybe we need to think of another way of addressing this problem. But it seems to me that we need to take some action. The libertarian Right is not a significant political force in the UK, and if anything I think its influence over the Right is going weaken in future. Therefore I can't see any reason why they should be allowed to monopolise the position of taxpayer advocate and misrepresent issues is support of their own agenda.

More TPA rubbish on pensions

The right-wing Taxpayers’ Alliance has another report out on pensions today. Their stuff to date has been pretty poor, and the latest one is no better. Just a few examples. On page 5 of the report they say the following –

“Most public sector schemes still have a pension age of 60…”

This is either poor research or deliberately very unclear. The normal retirement age for new entrants in the NHS, teachers, civil service schemes is now 65, and it already was in the local government scheme. It’s not hard to find this information out, a quick Google search will do it, so why does the TPA get it wrong?

I can only think that either they simply didn’t bother to check, and just assumed that NRA is still 60. Or they know that it is 65 for new entrants but simply chose to just reflect the position for members of the scheme who had joined before the change. How hard is it to write that the NRA is now 65 for new members, having previously been 60? Doesn't look good does it?

Secondly have a look at this –

“Political management of the UK pensions system has failed to provide a decent retirement income for many people and has been a painful lesson in the limitations of government. The history of the state pension system has been littered with broken promises, while it is immediately apparent that the proposed NPSS could lead to lawsuits on a massive scale. The possibility that contributions may prove to have been worthless because they end up disqualifying the individual from pension credits or other benefits is just the tip of the iceberg.”

First a trivial point. No-one calls the new scheme the National Pension Saving Scheme (NPSS) anymore – it’s called Personal Accounts and has been for a couple of years, hence the Personal Accounts Delivery Authority. Again a simple search or just reading the papers would tell you this, but it does suggest again that the TPA isn’t even doing the most basic research.

Secondly what about the bit in italics. The TPA suggests that Personal Accounts could be in trouble because of the interaction with means tested benefits. So what do they propose instead?

“The reforms in Australia and Chile point to a more practical solution in the UK, along NPSS lines. The kernel could be private pension pots (PPPs) alongside a new system of means-tested benefits paid according to circumstances and irrespective of age.”

The Aus and Chile systems are compulsory DC schemes. So the TPA seems to be suggesting full compulsion (as opposed to auto-enrolment) into a DC scheme along with means-tested benefits. Unless I'm being thick that means it would suffer from exactly the same issue of contributions potentially counting for nothing as they point to in Personal Accounts.

Barclays

I was going to do a long post about Barclays tying up its deal with Abu Dhabi and Qatar, as it ties in with what I said the other day about the dangers around bank pay, but it's all over the papers and so I've not much to add.

Needless to say it has gone down badly with existing shareholders, who wonder why Barclays wants to pay more in order to be owned by gulf states rather than part-nationalised good old blighty. And already the argument is being made that this is in part because Barclays execs don't want anyone touching their pay. Maybe not the best way to make yourself popular with your constumers!

Yesterday's Alphaville says it all:

"Can the avoidance of having the government on your shareholder register really be so great that you are prepared to effectively pay 50 per cent more for your capital?And why no pre-emption rights, especially when new stock is being offered at a 25 per cent discount?... Crass as it sounds, it is difficult to avoid the conclusion that this is about protecting executive salaries and keeping the books under wraps. And still there’s execution risk here: shareholders have to vote on this. Expect a rowdy meeting on November 24."

http://ftalphaville.ft.com/blog/2008/10/31/17674/barclays-capital-raising-the-real-cost-of-bob-diamond/

Legitimation and government

Here's a chunk from 'Habermas: The key concepts' by Andrew Edgar. Beware of typos - am copying from the book.

"At one level... [the] legitimacy [of capitalism] is secured through the plentiful production of consumer goods, and the relative secruity that the welfare state provides. However, this leads to increasingly bureaucratic or administrative interventions in the everyday lives of citizens. The welfare state intervenes, for example, in education, health and the social services, and is supported by legal and financial institutions. Crucially, Habermas suggests, the welfare state therefore entails a highly instrumental way of thinking about itself and its activities, which is to say that it is concerned with the efficient realistion of its plans, rathe than with the value of these plans and their goals. This makes the welfare state highly vulnerable to failures and inefficiencies if, for example, the consumer goods that the public demands are not made available, or, perhaps more significantly, as apparently top-heavy and over-bureaucratic state institutions seem to hinder their freedom and well being.

Such problems lead to a legitimation crisis not directly, but rather indirectly, because the 'instrumental reasoning' of the welfare state inhibits the use of 'communicative reason', and thus of proper discussion about the role of government and the purposes of the welfare state. This is compounded by the fact that the population itself is increasingly well educated and critical, and thus resistant to the state's attempts to indoctrinate it. As Habermas puts it, meaning cannot be administratively generated, which is to say that the government administration cannot dictate to the people what they should think of it, or indeed what they should make of their lives.

In practice, we continue to see a growing disenchantment with modern government in the industrialised world through, for example, falling attendance at elections (as the electorate fails to perceive a difference between the rival parties, or considers them to be avoiding the pressing issues of the day such as environmental crisis and global injustice), and the rise of popular protests (for example against the invasion of Iraq, or now routinely at G8 summit meetings). All may be seen to be symptomatic of a crisis in the legitimacy of modern forms of government."

Dunno about the last bit so much, but the idea that the welfare state follows a kind of internal logic that does not resonate with (or even alienates) the public rings true. This bleeds into systems theory, and there's some other good stuff in the book about how the way we accept systems (such as the implicit relationships in a trivial act like buying something in a shop) as crowding out more meaningful communication.