Shorting geekery

For those sad enough to share my interest in the pros and cons of short-selling, I direct you to the FSA's discussion document on the subject. In addition to providing a good overview of what shorting is (including varients like naked shorting) it contains a review of academic studies of shorting, and shorting constraints.

There's some really interesting stuff in there (if you find this kind of thing interesting) and the FSA's general stance is, as they often stated, that shorting is a legitimate market practice. They are also basically supportive of the idea that it allows negative sentiment to be expressed, and thus contributes to efficent price formation and liquidity (points I'm not sold on personally to be honest).

Just to be absolutely clear - so I'm not misrepresenting the paper - the FSA basically thinks shorting brings benefits.

Now I've got that out of the way I want to flag up one study in the literature review which takes a negative view:

Bris et al (2007) assess the empirical significance of concerns about the destabilising effects of short selling. They analyse cross-sectional and time-series information from forty-six equity markets around the world for the period 1990-2001. They look at both the frequency of extreme negative market returns and the skewness of market returns. Their results suggest that short sales do not affect the frequency of extreme negative returns. However, without short selling restrictions, extreme returns become more negative. To better control for cross-country variations, Bris et al also conduct an event study of the impact of removals of short selling restrictions in five countries. Once short selling is permitted and practised in these countries, the negative skewness of market returns increases marginally.

We found no other research on the hypothesis that short selling may amplify price swings. This may be because this hypothesis is difficult to separate empirically from the hypothesis that short selling conveys negative information about stocks to the market and thus contributes to efficient pricing. Both hypotheses are consistent with the observation that increased short selling is followed by negative abnormal returns.

The second para is the FSA's commentary and the bit I've emphasised is key for me because it cuts to the heart of my own wariness about the efficiency argument. To my mind it's all tied up with to what extent you can really establish fundamental value, and who is in a position to judge it. It feels to me that proponents of shorting as an aid to efficieny are taking for granted that those shorting have a good view of what the company is 'really' worth, hence expressing negative sentiment will bring valuations back to earth. But the excerpt above demonstrates that actually it's difficult to split out 'expressing negative sentiment' from 'amplifying price swings', because in order to do so you would presumably need to know what the asset being shorted was 'really' worth.

Ho hum.

A jump to the Left

Charlie is right that this is worth a read. It's a bit further Left than I usually go, but it's interesting to read a coherent view of the build-up to the financial crisis from that perspective. They argue that the process of financialisation masked a stagnating real economy, and (as we all now acknowledge) the surge in debt therefore served to stoke up demand. As Charlie suggests, the big gap in the theory is how the necessary change from an economy they see as inherently flawed will be achieved - organised labour just isn't there in enough strength or with the right political orientation to do the heavy lifting assumed by folks further out on the Left.

OOF!

Kenneth Lewis has been voted out as chair of Bank of America. What makes this particular corporate governance battle more interesting is that the US unions were right in the middle of it. It does demonstrate the potential that capital market activism has for unions. Why not here? Eh?

We've been here before, again

Another bit from The Speculation Economy. It mentions the formation of the New York Governor's Committee on Speculation in Securities and Commodities in 1908.

It was charged with determining "what changes, if any, are advisable in the laws of the State bearing upon speculation in securities and commodities, or relating to the protection of investors, or with regard to the instrumentalities and organizations used in dealings in securities and commodities that are the subject of speculation." While the Committee focused on the broad economic effects of speculation, investor protection was present as a reform theme. Despite its asserted aims, the Committee is widely understood to have been created for the purpose of forestalling more serious regulation.

The focus on the economic effects of speculation is interesting, as this is an issue that rarely gets a look in mainstream analysis of financial markets these days in my experience. Everyone knows that (for instance) portfolio turnover keeps going up, which must in aggegate be a cost, but there is no attempt to address this.

In addition the idea of setting a committee up to stifle reform has echoes today. You can bet even now there are efforts going on to head off legislative and regulatory intervention through more voluntaty code type initiatives.

UPDATE. You can download a scan of the original committee report here. There's some commentary about shorting in there which, once again, is very similar to today's debate:

Short-sellers endeavor to select times when prices seem high in order to sell, and times when prices seem low in order to buy, their action in both cases serving to lessen advances and diminish declines of price. In other words, short-selling tends to produce steadiness in prices, which is an advantage to the community. No other means of restraining unwarranted marking up and down of prices has been suggested to us.

Suedehead

Voting disclosure - one more time, with feeling

I blogged previously that it had been difficult to find fund manager voting data in respect of bank AGMs in recent years.

It struck me today that we may have (probably have?) now missed the opportunity to ever carry out any comprehensive analysis of fund managers' 'ownership activity' in respect of the banks in the run-up to the financial crisis. I hope the Government will execrise its reserve power and mandate full disclosure of voting records, though I'm not confident that it will. But even if it did so, the likelihood is that this would be a forward-looking measure. I just don't think retrospective action is likely (actually it may not even be possible under the reserve power?).

That means that, unless non-disclosing fund managers voluntarily play ball and publish past decisions, which all recent experience should lead us to expect to be unlikely, that information is out of the public domain for good. This is a major financial crisis, the failure of 'ownership' may, or may not be, a contributory factor, but it's not possible for an independent third party to carry out any comprehensive analysis one way or the other.

As I've said before, maybe voting isn't that important, and maybe more engagement by shareholders wouldn't have made much of a difference. But what is absolutely crystal clear is that the industry's successful campaign to prevent full disclosure across the industry as a whole means that a key part of the story of the crisis - which all parties could probably learn something from - probably won't ever be told. And even now the industry is trying to push the line that voluntary disclosure is some sort of success.

Being a moderate kind of lefty I'm not usually the type to get angry, but this makes me genuinely furious.

In case you missed it...

...there was a further Govrenment announcement in the Budget-

"The Government will, in a document to be published before the summer, describe its approach to the future of financial markets and set out the actions necessary to achieve it."

See page 57 of chapter three of the Budget report (PDF).

Bits n bobs

1. PIRC's governance reform agenda is here.

2. Fair Pensions has published it latest pension fund rankings, you can download the report here.

3. I hadn't spotted this, which looks like an interesdting initiative. The Bill probably won't make it, but the commentary from Lord Davies is encouraging.

Exec pensions

There's a bit about exec pensions in today's Observer. This bit rather surprised me:

The big institutional shareholders, who own the bulk of British companies, are becoming increasingly concerned about the size of executive pensions, which are not related to the company's performance.

Are they? If they are concerned they don't seem to be doing much about it. In my experience there is very little investor pressure on executive pensions despite all kinds of wheezes. They haven't even pushed for greater disclosure, despite the obviously patchy reporting. To be honest the Government's tax changes may well kill off exec pension provision, so it might not matter anyway. But let's not kid ourselves that investors have challenged things like differential accrual and contribution rates. It simply hasn't happened, only the unions have really tried to bring about reform.

Inconsistency part 2

You get a few fund managers who play down the importance of shareholder voting. They have a bit of a point, in the sense that sometimes (often?) shareholders seem able to bring about more change through direct contact with the company, than through exercising their votes. Why then are some of these same fund managers lobbying for the introduction of a shareholder vote on remuneration in the US?

You could argue, or course, that the introduction of a shareholder vote on pay in the UK has had spin-off benefits. It certainly seems to have led to more dialogue between companies and investors over remuneration, even if it has (in my view) failed to bring exec pay under control (in fact I would argue that it has to some extent legitimised ever-increasing remuneration because of notional shareholder assent). But then doesn't that suggest that you need to see the vote as something more than a mechanism to be used. It builds on the idea of ownership (leaving aside some of the issues I've raised before for a sec) and therefore acts to give the investor the sense of a right to intervene. This is all pretty obvious I think?

So is it too cynical of me to suggest that those managers which play down the importance of voting yet lobby for its extension to new areas are at least in part seeking to downplay expectations of how they will exercise their voting rights. Translation: those that downplay voting may be less likely to vote against management. Again you could say fair enough. If they don't think voting has much power, why would they use the right to challenge management.

But I can't help thinking this is hugely counter-productive for those who genuinely think shareholders are/can be/should be comparable to 'owners'. The one big unanswered question in the corporate governance part of the debate on the crisis is whether more engaged shareholders may have mitigated some of the damage. Because shareholders (and we really mean fund managers primarily here) have so rarely opposed management on remuneration, for example, we can't be sure whether it could ever have a significant restraining effect on pay. But at present, based on recent experience, you could make a good case that it's not an effective way to address remuneration - if you think there is problem (not all fund managers do).

Those managers that demand further rights, yet fail to use them to challenge management are actually undermining the case for shareholder rights, and it's not surprising therefore to see progressive voices argue against the need to extend such rights.

Soren Kierkegaard famously said "People demand freedom of speech as a compensation for the freedom of thought which they seldom use." Something similar is going on with fund manager lobbying for greater shareholder rights.

PS. Part 1.

Money

Go and read what Duncan says about it.

Fidelity and the Tories

It's been a while since I posted about Fidelity, mainly because they seem to have stopped funding the Tories (having given them £500k since 2004). But some links persist. Fidelity recently hosted an Enterprise Forum meeting on the future of financial services. It also still has its own sponsored Conservative MP - Sir John Stanley.

Lefties vs hedge funds

I was watching Will Hutton's Dispatches programme on bank failures last night, and it really (unintentionally) emphasised the point that it is impossible to generalise about hedge funds, much as many of us lefties like to. Bear Stearns was floored by its hedge funds' exposure to CDOs, as part of a big punt on subprime. Yet at the same time (and subsequently) there were hedge funds profiting from a wholly negative take on subprime.

I don't see how we can criticise 'hedge funds' as a group for their role in the crisis, given that there were diametrically opposed strategies out there (unless you consider all trading in relation to subprime to be inherently bad). It's simply too much of a generalisation to say what 'hedge funds' were up to since there was such a wide variety of activity across many different types of funds.

It's an old joke that hedge funds are a fee structure in search of an asset class, but it's got a lot of truth in it. The cartoony version that many lefties have of hedge funds (and I'm a recovering cartoonist myself here) is that they are inherently speculative and/or short-termist, and a threat to financial stability. But hasn't the crisis demonstrated somewhat that this view of hedge funds is overblown? It was the banks that really caused the problems in the end. Despite some hedge fund wipe-outs, did they really create the structural havoc that was expected by some?

Therefore in any reform response surely we've got to focus on strategies and behaviours that are problematic, rather than gunning for an asset class that is so broad as to make the definition almost meaningless.

Myners speech

Is now online here.

Heffer's Law

I suspect it is in operation again, this time on the 50% rate.

Quick thought on the 50% rate

The Tories are going to have to jump one way or the other on this. They will have to say officially whether they think it will raise revenue or not. If they say they don't then they should have no problem pledging to scrap it. But if they say they do think it will raise revenue they will both undermine a key Right argument against higher taxes on the rich, and then have to decide whether it is a reasonable policy or not.

I expect them to not pledge to scrap it, but to play down its revenue-raising potential, which is obviously inconsistent. So it's a tricky call for them.

Budget and other big news

You should be following the Budget on the TUC's Touchstone blog.

Already announced that pensions tax relief will be reduced for those on over £100k, which sounds like a decent idea.

Wow - 50% income tax rate for those on over £150k.

Other big news - Magilton has been sacked by the Tractor Boys. Not unexpected really.

Great speech from Paul Myners...

City minister Paul Myners gave an interesting speech to the Association of Investment Companies yesterday morning. There's an FT report and comment here and here, but I recommend having a read of the whole thing. It's not on the HMT website yet (I suppose they might be a bit busy) but I'll post up a link when it is.

Some things he said -

The remit of the Walker Review is going to be wider than just banks, if some of the recommendations are applicable to other financial institutions.

Shareholder activism on pay has been too focused on directors. Investors need to think about pay across companies, and what behaviours they are trying to incentivise. He said if they had thought more deeply about this stuff the widening gulf between execs and others in the same company may not have been so extreme.

Also said that there should be consideration of whether the vote on remuneration could in some way be binding.

He had a major go at the ISC (no complaint here....!) for not having published anything since last summer, despite the crisis. He wants to talk to all the ISC members about this.

Also suggsted that the Combined Code had too little in it about the role of shareholders.

Jack Jones

Sad news about Jack Jones. His life was amazing, really inspiring stuff. It’s funny to think that it could have been your own granddad who did all that stuff. I spoke to him a couple of times over the years (about pensions) and he was always very approachable. Do they make them like that anymore?

A bit of trivia, when my son was born I joked that he was another soldier in the army of labour. This is actually a reference to something I read that Jack Jones said about his involvement in the labour movement. I’ve Googled around but can’t find it – if anyone knows the original let me know.

Share-ownership debates - we've been here before

One of the books I have on the go at the moment is Lawrence Mitchell's rather good The Speculation Economy. This is a pretty exhaustive overview of the way the stockmarket rose to prominence in the US economy, and a decent read. One of the things that surprised me (which rather exposes my lack of historical knowledge of issues I regularly sound off about) is that some of the debates we are having now about empowering share-owners were played out over 100 years ago.

Reading though Mitchell's research into the discussions that were going at the time, you find early versions of many of the arguments being played out right now. Like that the best way to ensure that corporations stay on the straight and narrow is to have engaged shareholders. Meanwhile there was a lot of chatter about getting the ordinary bloke in the street to have a direct stake in the economy through share-ownership.

Most interesting to me though is a quote from the Industrial Commission in 1902 which provides an early sceptical take on how far employees could actually participate (as investors) in corporate governance:

"[I]n view of the enormous and inceasing size of units of industrial control, any expectation of an effective participation of wage-earners in the government of the great industries by any method based on their individual ownership of shares of the capital is chimerical."

You what?

off-topic but hey it's my blog!

Inconsistency...

Because I'm a bit sad, I've spent a bit of time lately looking at fund managers' voting policies and records. It's a lonely job, because not many people are interested, which is a shame as an enterprising journo could easily dig out some nice little stories.

For example, recently I came across one manager which states clearly that: "[The manager] does not support the use of shareholder funds for political donations."

A fine policy, and one I whole-heartedly support.

Being a geek I went and looked at how they had voted on the proposal at Caledonia Investments' AGM in 2007 to make party political donations to the Tories. Yep, they voted in favour.

I'm not even shocked at this stuff anymore...

Tax relief on pension contributions

There's a bit of speculation that Alistair Darling may use the forthcoming Budget to play about with the tax relief on pension contributions. Currently tax relief applies in bands, meaning that high-rate taxpayers get more bang for their buck of pension saving than lower rate taxpayers.

This is quite an interesting issue as it gets at the question of whether tax incentives actually work to boost savings. This is something we had a look at when I was at the TUC, and were pretty sceptical of the impact of incentives on saving. But before I'm accused of bias, let me point you in the direction of the Pensions Policy Institute report (PDF) on this subject. Here are their conclusions:

• There is no evidence that tax incentives increase the overall level of saving. They are complex, do not appeal to their target group, and do not solve the basic problem for most low income people; that they do not have the money to save.
• Tax incentives can encourage pension rather than other types of saving.
• But tax incentives appear not to have been effective in generating enough pension saving for future pensioners.
All taxpayers pay for the tax incentive system, but it benefits higher earners most:
• Tax relief is often described as tax deferral, but there is also an element of tax advantage.
• Most tax relief is paid to higher (male) earners.
• Almost £20 billion a year of tax revenue is foregone each year due to tax relief on pension contributions. After taking account of other pension tax advantages and the tax paid on private pensions in payment, the net annual cost to the taxpayer is more than £19 billion (1.8% of GDP). This is significant, being 25% of the cost of state pensions and retirement benefits.
• The proposed tax simplification is likely to increase the cost of tax relief on private pensions.

Not much equivocation there really. So there is a good case in theory for at least tweaking tax relief - what about a standard band for all savers? The ABI claims that getting rid of higher rate relief would be "a direct attack on the hard-working people of middle Britain", but how many people are in that box, less than 1 in 5 and falling. This isn't Middle Britain, it's well-off Britain and it's dishonest to claim otherwise.

To be honest I could see tax relief being phased out altogether in the future. As of 2012, with the introduction of Personal Accounts, we'll have a quasi-compulsory pension scheme in any case. So why will we need incentives (which don't work very well) to get people to save? We could spend the money better elsewhere. If we really want to spend smart on pensions, rather than overly-reward the already well-off, why not phase out tax relief and use the savings to increase the state pension? Just a thought, like.

Hang on a second… more on voting disclosure

Last week I had a rant about voting disclosure. As I said I have an interest in this as I have been pushing this issue for several years. Today two things struck me:

1. In June 2007 the Institutional Shareholders Committee (ISC) issued this guidance (PDF), stating that investors should either comply (make voting disclosures of one form another) or explain why not. I found lots of fund managers that did not disclose, but can’t think of any that ‘explain’ why not. The guidance is nearly 2 years old now, so plenty of time for managers to put even a boilerplate statement on their website. They don’t bother.

2. Look at the last page of the ISC’s press release (PDF) on the disclosure guidance. Ed Balls asked them to produce a report on its effectiveness in Autumn 2008, and annual statistics on compliance. I can’t see anything on the ISC website and I’m not aware of anything being produced - and I know this area pretty well. It looks like they didn’t do anything.

As I wrote last week, I think we can safely conclude that the voluntary regime has failed. Fund managers who don’t disclose don’t follow the ISC’s guidance and explain why, the ISC doesn’t seem to have fulfilled its part of the deal by producing a report or statistics, and, most importantly, the net result is that you still can’t get good data on fund manager voting at the banks.

Fund managers have been given plenty of time to address this issue, and they’ve repeatedly dragged their feet. Let’s use that reserve power…

Friday's bits n bobs

Not much blogging time today, so here's a few links.

1. an oldie that I should have spotted - ITUC and ICEM support for a shareholder proposal at Chevron.

2. Change To Win is running a vote no campaign against Bank of America directors.

3. BP's AGM yesterday - Sutherland was easily re-elected but the remuneration report saw a big vote against. There's a bit of speculation as a result that shareholders are getting tougher on pay.

AFL-CIO Executive Paywatch

Hat-tip to CorpGov.net, the AFL-CIO has released preliminary figures from its annual PayWatch research:

A chief executive officer of a Standard & Poor's 500 company was paid, on average, $10.4 million in total compensation in 2008, according to preliminary data from The Corporate Library.
Excessive executive compensation has taken center stage since the government bailout of banks that began in September 2008. Americans have expressed outrage as CEOs and other executives responsible for the financial crisis have pocketed millions of dollars from bonuses and golden parachutes. CEO perks alone grew in 2008 to an average of $336,248—or nine times the median salary of a full-time worker. Meanwhile, the economy tanked for working people while many companies were bailed out with more than $700 billion in taxpayer money, as well as low-interest loans and guarantees.

Jeff Randall fact check

Just spotted the Alan Sugar mini-me's column on pensions. It contains several of his usual bits of wobbly pen. Just a few I spotted straight away -

Claim: "And then there was Mr Brown's disgraceful tax raid on pension funds' dividends. Most independent advisers agree that this measure, introduced soon after he was given the keys to Number 11, has cost British pensioners at least £100 billion."

Fact: Actually the most commonly quoted figure is that it cost £5bn a year, which would put it at £60bn. The estimate of £100bn comes from an actuary called Terry Arthur who has a political slant (I'm not saying his estimate is wrong, just that I wouldn't consider him 'independent'). The genuinely independent Pension Policy Institute came out with a much lower figure of about £3.5bn a year (PDF), or £42bn to date, though they said it could be lower at £2.5bn a year (£30bn).

Claim: "the final-salary pensions of state workers whose schemes are largely unfunded – ie, their assets are insufficient to meet expected liabilities."

Fact: Not really. Unfunded schemes don't have assets. 'Unfunded' in terms of the type of scheme basically means you don't build up assets in a fund to pay benefits, so it refers to PAYG schemes. He's obviously aware that some public sector pensions are 'funded' because he says 'largely unfunded', but he's misunderstood what this means. The LGPS is a 'funded' scheme, because it has assets, but they currently don't meet its liabilities. Loads of private sector schemes are 'funded' and have the same problem. That means such schemes are underfunded, which is what he thinks he means when he says 'unfunded'. But because he doesn't actually know what the terms means he effectively talks gibberish. This is pretty basic pensions terminology (see page 106 (PDF)).

Claim: "The MPs' scheme is among the most lavish ever devised."

Fact: It's certainly very generous. But it doesn't come close to those provided for directors of the UK's biggest companies.

Interesting argument

Falkenblog reports on a talk by Robert Merton:

everyone castigates the markets for creating really complex instruments like derivatives, such as credit default swaps and mortgage backed securities. But, compare these assets to the assets and liabilities within a company: goodwill, deferred tax expense, intangibles, patents. Who can value these from first principles? Further, the company has the ability to change its business mix at any time, creating new products. We happily trade equities of these companies, and these are residual claims on this pyramid of assets and liabilities. Thus, the complexity of a mortgage-backed security of any sort is actually quite modest in that context.

Quite a good point, innit?

In defence of shorting

The argument in favour of shorting put by Going Private's successor blog Finem Respice.

In praise of... George Osborne

This is actually a pretty good speech, with a few caveats. First, presentationally he fluffs it a bit. He's not a charismatic speaker IMO, and he makes a few stumbles early on. Secondly I think he actually tries to have his cake and eat it in theoretical terms. He references a lot of different economic thinking, but I'm not at all sure the perspectives mesh together. It comes across like he is cherry-picking ideas that enable him to critique recent policy (which is fair enough politically, but makes for a less interesting speech).

But... there are a lot of good bits in here even if the message isn't coherent (yet). I'd love to hear a speech from a Labour MP that covered this kind of ground. Really talk about what we can learn from Robert Shiller or Hyman Minsky ought to be coming from the Left, but where is that happening? Of course Osborne may have his speechwriter to thank for all this, and in power the Tories' attachment to behavioural economics might last as long as Blair's attachment to 'stakeholder' capitalism. But however you cut it, this was a pretty good speech, and does suggest some thinking might be going on in the Stupid Party.

Aon and levelling down

Last week Aon gave everybody a bit of a shock but cutting contributions to its money purchase pension scheme. Now we're used to employers closing final salary schemes to new members, even current members in some cases, and replacing them with DC schemes into which they pay lower contributions. But cutting contributions to DC scheme is a new attack on pensions.

From a company's point of view I can see the logic. It's a straightforward way to reduce costs and you will have a prety good idea of how much it will save you. As such it might not be surprising to see more companies try this approach during the recession. However one argument that strikes me as slightly barking is that advanced by Rod Altman, who told The Times last week that the Government was in part to blame, because of the impact of Personal Accounts.

She blamed the Government for encouraging the trend. "From 2012, its proposed personal accounts will only require employers to contribute 3 per cent," she said. "I have consistently warned about the ‘levelling down’ this will entail as employers . . . cut pension contributions to the minimum ‘official’ 3 per cent level."

This doesn't make any sense to me, either in respect of the Aon story, or in general. In terms of the Aon story, though the company is cutting its contribution, the minimum appears to be 6% - twice the minimum level that employers will have to pay into Personal Accounts. If Aon really was levelling down because of Personal Accounts why not go the whole hog?

Ahh... you might say... obviously Aon knows a cut of such a scale would be too steep, but the minimum of 3% at least gives them something to aim off. True enough, but currently there is no minimum employer contribution to pensions at all. So actually Aon can aim off 0%, not 3%, and still look relatively 'generous'. So on those grounds we might expect the introduction of Personal Accounts to mitigate employers cuts to DC schemes, if more follow Aon's lead.

More broadly, if employers are going to level down, why not do it right now? Currently they could reduce their pension contributions to 0%, and only up them to 3% in 2012 when legally obliged to. Or reduce them to 3% now? If the introduction of Personal Accounts really is going to be used by employers as a way to mask major cuts in pension provision, as people like Ros Altman argue, what are they waiting for? The whole argument looks shaky.

Which brings me on to my final problem with such 'analysis'. It's classic billiard ball stuff. A will cause B to do C. But as always which such a simplistic view of how systems involving us shaved apes operate, it doesn't stack up to well against reality. The 'B' in this case are employers. Whilst I don't doubt that some will screw down pension costs, I think they will do it regardless (though they may tell pollsters that it's 'because' of Personal Accounts). Others clearly will not, maybe because they will make savings elsewhere, maybe because they fear it may damage employee morale, whatever. Employers have a choice how to respond, and will exercise that choice differently. How employers choose to respond will determine whether there is levelling down or not - not Personal Accounts. And actually experience so far shows that few employers are following Aon, and suggesting that levelling down is overplayed in any case.

It's a weak argument all round.

Stuff

1. Random TPA quote generator. Saves journos even having to phone the conservative lobby group to get their opinion.

2. VAT cut - hey, maybe it did work.

3. Some more on ownership, this time from Boffy.

4. Don't forget that Guido apparently sees himself as part of Project Cameron.

Barclays deal

I have to admit I've not been following this one as closely as I should, but Pesto has and there's some incredible stuff in there:

But it's not a sale in the sense that most of us would recognise. Because it has lent the buyer, the private-equity house CVC, £2.1bn of the purchase price...

What's even more delightful for the purchaser, Barclays will pay CVC £120m if it rats on the deal by securing better terms from another bidder (there's also provision for both Barclays and CVC to receive between £34m and £120m if either side walks away for other reasons).

Is all this to simply avoid any state ownership? If so this independence is coming at a very high price.

Politics versus business

Interesting to see Damian McBride fall on his sword, and the right thing to do in the circumstances. The meejah are in a feeding frenzy about this, understandably. On Breakfast, the presenter tried to get Liam Byrne to say that McBride should never work in Government or for the party ever again, which he sort of did (whilst clearly being uncomfortable about the commitment he was being asked to make). Realistically there's going to be heavy meejah flak if McBride does get a decent job elsewhere soon.

But does the same standard apply to business people who mess up? For example, one thing that is not in question in the Fred Goodwin pension debacle is that the early retirement deal was agreed to by the board. However you cut it, Fred Goodwin got a pension enhancement, despite having led the company to the point it needed state life-support. That is no question a reward for failure, and it took place in the midst of a financial crisis. It was an apocalyptically bad decision. So then should we conclude that the directors involved with (probably) the most high-profile reward for failure in UK corporate history have suffered enough by no longer being directors of RBS, or should if affect their other directorships?

Obviously I think that it should call into question their competence as directors, but actually BP (for example) is already spinning that Peter Sutherland is not under threat, and there doesn't seem to be (so far) much pressure on Bob Scott at Yell either. Now clearly there's a case to be made in their defence (Sutherland's going to retire anyway, him and Scott were not as central at RBS as MacKillop etc). But you do rather get the impression that if you mess up in business it only gets held against you at that one company, and if you're a 'name' you get to see your time out because it's a bit disrespectful to challenge your credentials. What's more you get a lot more cash for doing a bad job than a spinner.

In the big scheme of things which is the bigger outrage and has done the most damage - letting a bank destroy itself and giving the chief exec a pension boost for his hard work, or plotting some stupid (and no question highly distasteful) web gossip that never actually got aired? I'm in no way seeking to excuse McBride and Draper, just making a comparison of how we treat different types of people. In the case of politicos we seem to want to burn them at the stake, or a least destroy their careers, but in the business world people continue to draw massive salaries in other jobs despite having cost the taxpayer millions because of their failures.

Just seems a bit lop-sided to me.

Galbraith on regulators

From The Great Crash:

[R]egulatory bodies, like the people who comprise them, have a marked life cycle. In youth they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow, and in old age – after a matter of ten or fifteen years – they become, with some exceptions, either an arm of the industry they are regulating or senile.

Voting disclosure

The disclosure of shareholder voting records by institutional investors has been a bit of a crusade of mine for a number of years now. Slowly but surely more fund managers have started putting more information in the public domain. If you're lucky, 6 months after an AGM has taken place, you might be able to find out how half of the company's large UK shareholders voted, or be able to have a guess (because some managers only report votes against or abstentions, so if you know they held the stock you can assume they voted in favour).

This voluntary disclosure regime is, I humbly submit, a crock of ****. I've recently been doing some research into how fund managers were voting at bank AGMs in recent years. If you believe - as many profess to - that shareholders are the owners of companies, and therefore have a responsibility to engage with them where they think there are problems, then surely now the question of how those ownership rights were exercised in respect on the banks is a matter of considerable public interest.

I am pretty confident that I am one of the few UK-based people who knows this area in any depth. I can't think of many people in the UK who have spent as much time looking as this as I have. I know where to look for the info (not always obvious, believe me) and what to look for in the data. But the reality is that there simply isn't much there. In the course of this research I have only been able to find data for a bit over a third of my target group of fund managers in respect of 2008 AGMs, less then a fifth for 2007 AGMs and about one in ten for 2006 AGMs. You basically can't put together a comprehensive picture of how institutions voted at the banks.

The voluntary regime allows this - there is no prescription on issues such as the level of disclosure (so some just disclose headline stats), the timeliness of disclosure (some disclosures are only updated months later), or the provision of archived info (even some of those who make full disclosures don't give you access to previous years' data). The result is a mess of information that frustrates proper analysis. If I was a trustee of a pension fund trying to compare my fund manager against others I would give up.

Imagine if the same thing occured with performance - fund managers only telling you the results they decided, in the format they decided, in a timeframe they decided. It wouldn't be acceptable, so why is it in respect of their ownership performance, for want of a better term?

The UK also contrasts with markets like the US and Canada where initiatives like FundVotes.com and ProxyDemocracy provide the data for direct comparisons of fund managers (and some othe institutions). The AFSCME report I mentioned the other day gives you a practical example of how mandatory disclosure can provide a way for interested parties to hold institutional investors to account for own they exercise ownership. This just isn't possible in the UK because of the fudged voluntary disclosure regime the fund management industry managed to buy the Government off with.

But it does not need to be like this. The Treasury judiciously took a reserve power in the Companies Act that would enable them to mandate public disclosure. The voluntary system is not (New Labour-ism alert!) fit for purpose, and this is dramatically demonstrated by the lack of data on bank AGMs. Therefore let's tackle this issue once and for all and make it compulsory to disclose voting records, and in a standardised form.

OK?

Uptick rule to be reinstated

SEC chair Mary Schapiro had trailed this in a recent speech, but it's now definitely on the cards the FT reports. Cue much criticism from Wall Street no doubt, and accusations of regulators not knowing what they are doing. And actually there's a great line in the FT report that does not inspire confidence -

Fans of the rule - including Federal Reserve chairman Ben Bernanke and billionaire investor Warren Buffett - say its return is the easiest way to prevent bear raids on particular companies. The thinking seems to be that while there might not be any empirical evidence proving it provides any particular benefit, it does not do any harm either.

On this point, another hat-tip to Zedman who sent me some interesting research into the impact of shorting bans carried out by Credit Suisse (he also has a post about the uptick rule). They concluded that there may have been an impact, but it was dwarfed by other factors.

According to our analysis, the ban on short selling in Europe has increased bid-ask spreads on both restricted stocks and non-restricted stocks. The ban on short-selling has also removed the ability to hedge execution by going long/short an appropriate portfolio of stocks that would involve shorting the financial sector. The ban has effectively pulled the plug on a number of trading techniques incorporating this, resulting in lower intraday volumes.

This may be a sign that the ban has managed to curb part of the aggressive selling in Europe financials. However, the impact of the regulatory change has probably been dwarfed by the continuous negative news flow and sentiment on the financial sector since the ban – as demonstrated by the continued fall of the major indices following the initial jump caused by the ban.

Personally, I'm not convinced that such interventions achieve anything practical, though I'm not really decided either way as yet.

Finally, just as a reminder here's the door that Turner left ajar in his review of regulation:

Should decisions on for instance short selling recognise the dangers of market irrationality as well as market abuse?

Bits and bobs

1. CTW is calling for the clawback of ML bonuses

2. There's an RSA paper PDF encouring long-term investing. It's a bit of a rant, and some inaccruate/outdated generalisations in there (about UK pension funds' home bias in equities for example). But hey, who am I to criticise.

3. The news that Aon is cutting contributions to its DC scheme is, I reckon, a rather worrying development. It's a pay cut plain and simple. TUC response here.

On the money

Nice bit by Dave Osler on turncoat politicos, something I've blogged about a bit before. This bit is bang on target for most of us actually:

In psychological terms, when they denounce these forces, they are really denouncing their earlier self.

A lot of my critical posts about the Left are basically an argument with that ill-informed ranting 20-something I used to be. STill, at least now I have a son to take it out on...

Mixing our metaphors

This is a bit half thought-out, but one of the things I've been thinking about lately is how the financial crisis must be affecting people's understanding of individuals and organisations. What has happened must have altered the basic models people use for understanding both, to put it mildly. Pre-crisis, many in the financial sector seemed almost literally 'out of touch'. This is based on the idea that many metaphors for hierarchy and importance are based on height. Somehow the bankers were 'above' us, or we were 'below' them, because (I think) our basic conceptual model of importance is actually spatial, because our metaphors are rooted in physical experience.

Now, however, the masters of the universe have been proven to be less than impressive. So how do we respond mentally? Our conceptual model can surely no longer be based on them being above us, they are on the same level, within reach. Unfortunately I'm sure this must make a difference to people's willingness to physically attack them, but that's another story.

Another good way of thinking about how people models have changed - echoing Warren Buffet's line about people swimming naked - is the idea that bankers have been unmasked, or revealed as just as ordinary as the rest of us. The curtain has been pulled back. Again mentally this puts them on the same level - their previous elevation was based on false construction. And I think this must do some serious damage to the standing of those in the financial world, because for a while people will tend to assume that this applies across the board.

By coincidence whilst I was thinking about this I came across a great passage early into The Great Crash which puts across exactly the same idea:

In the autumn of 1929 the mightiest Americans were, for a brief time, revealed as human beings. Like most humans, most of the time, they did some very foolish things. On the whole, the greater the earlier reputation for omniscience, the more serene the previous idiocy, the greater the foolishness now exposed. Things that in other times were concealed by a heavy facade of dignity now stood exposed, for the panic suddenly, almost obscenely, snatched this facade away.

One to think about some more...

Accountable capitalism

There's an interesting new paper from The New Capitalists authors David Pitt Watson etc under the IPPR imprint. It's called Towards an Accountable Capitalism.

Unions & exec pay

There are a couple of interesting bits in the FT today about executive pay and both of them involve unions. First up, the TUC is suggesting that employees should have involvement in remuneration policy.

"What would be so radical about seeing workforce representation involved in remuneration committees of major companies to try to inject at least some sense of perspective with how the rewards at the top relate to the pay structures across the organisation?"

So says my old boss Brendan Barber.

I can already imagine the irritation this will without question have caused a couple of fund management people I had to deal with in the past who weren't exactly union-friendly, and for that alone I think this is a worthwhile proposal.... ;-) But more broadly, if any institutions do think this is a fundamentally bad idea they must be able to demonstrate a) why it would be worse than the current system where shareholder oversight has not proved effective and b) that their own track record on pay is a good one.

And point b) brings me on to the other story, which is actually based on this research. No surprise really, but US mutual funds are actually pretty weedy when it comes to voting against exec comp, or for resolutions seeking to rein it in.

And here I go on my soapbok again - I think we'd find a similar story in the UK (in fact I'm sure of it based on the data I've been able to find) but we aren't even able to produce a comparable report because fund managers aren't compelled to disclose their voting records, and as such many don't make any data public. This is a simple reform that Labour can enact, as it took a reserve power in the Companies Act that could be used to mandate disclosure. Surely the public interest argument in favour is much stronger now, so why not go ahead?

Some random Sunday evening thoughts

1. I think there's a danger of learning entirely the wrong lessons about remuneration from the financial crisis. The bottom line IMO is that incentives have not worked. I don't think most people believe that bankers mindlessly did the wrong thing because that was how they would benefit personally. The problem is that they believed in what they were doing, and as such didn't know what they were doing. Therefore seeking to resolve this problem by redesigning incentive schemes I think is missing the fundamental point.

There's an implication in here somewhere that 'good performance' at a senior level is both measurable and identifiable in advance. I'm not at all confident about the former (because of the inability of individuals to control organisations - so what exactly are you going to measure?) and I have doubts about the latter. But even supposing that you can come out with some medium- to long-term targets, why not just contractually oblige bankers to hit them as part of the job, rather than pay them more to do what they should be doing? If you still want to try and link to organisational performance at least that way if they do really badly you can sack them, rather than just paying them less. At present exec pay seems to work simply to pay out a lot more when the whole market is doing well and slacken off during market dips.

2. I've noticed a tendency most often (but not exclusively) amongst Righties, to dismiss the G20 protestors and similar as 'emotional'. Whatever you might think about last week's protests, as a pejorative term I think 'emotional' is pretty weak. It implies that there is a distinction between those reacting emotionally, and those with cool heads responding rationally. But there's a pretty convincing argument that we need our emotions in order to make decisions and are part of being rational. Therefore to label those you don't agree with as 'emotional' to me suggests a belief in the split between mind and body.

3. Post-shareholder-centric governance. It's on the way I tell ya. Look at the G20 blurb on remuneration, shareholders are relegated to being just another stakeholder:

firms to publicly disclose clear, comprehensive, and timely information about compensation. Stakeholders, including shareholders, should be adequately informed on a timely basis on compensation policies to exercise effective monitoring.

RBS pay vote looms

The (symbolic but ultimately meaningless) vote on the RBS remuneration policy is imminent. It will probably be the biggest vote against a remuneration report to date, driven by UKFI's decision to vote against. I'll post up the result when it's public. Of course the vote has no actual power, and Sir Fred can sleep easy on his money.

UPDATE: It's just over 90% against. Biggest vote ever against a remuneration report (maybe any resolution?) and the first time a bank has lost any vote.

Ownership meme

One of my recurring themes is the problematic nature of ownership in public companies. The shareholder-company relationship doesn't seem to function much like ownership (despite the best efforts of some of us) and at present I'm not sure the signs are good that it will in future (for example because of the DB to DC shift in pension provision, which will atomise share ownership further).

Both Duncan and Charlie are interested in this question too, so I'm passing the batton to you two to give your fellow bloggers a few ideas/comments on how we might make it work (or at least work better). What do we want pension funds, for example, to do? And pass this on to anyone else you think might have something interesting to say.

Shorting, market efficiency etc

Hat-tip to Zedman for pointing me in the direction of the IOSCO consultation (PDF) on the regulatory response in respect of short-selling. As he pointed out, IOSCO is basically positive about the role of shorting. This from the intro:

The Technical Committee believes that short selling plays an important role in the market for a variety of reasons, such as providing more efficient price discovery, mitigating market bubbles, increasing market liquidity, facilitating hedging and other risk management activities.

I admit my ignorance here, and I'm seriously considering buying a serious text book to get my head around such things, but I don't think I can share some of these views. As I've said before I'm broadly neutral about the impact of shorting, but the argument that it has benefits bothers me.

We have had market bubbles since shorting has become more widespread - so can we assert that it mitigates them? The academic evidence on the impact of shorting in this regard is mixed from my limited reading of it. In what sense does it aid market efficiency? This seems to rest on the assumption that markets are efficient in the first place, and even so they may only be informationally efficient and only in a limted sense (ie information is factored into price quickly, but it could still be the wrong information). Surely even the EMH allows that prices at a given time may not represent a realistic view of the future, so this 'effiency' might simply mean getting it wrong sooner.

Finally the term 'price discovery' is one of those (like 'portable alpha') that really grates with me. In practical usage it seems to actually mean price formation, and the semantics are important. 'Discovery' implies that something is there to be found - there is a fundamental truth to be uncovered - but 'formation' is more accurate IMO because it suggests that price is the aggregate of market exchanges and the views implicit in them. I don't accept that shorting is better than other trading in terms of price formation - I don't see why it would be unless shorters are somehow inherently more rational or more informed than others. And I don't accept that there is a correct price to be 'discovered'.

To finish up here's a nice quote from Benoit Mandelbrot that expresses my scepticism more eloquently than I can -

"Value is a touchstone to most people. Financial analysts try to estimate it, as they study a company's books. They calculate a break-up value, a discounted cash-flow value, a market value. Economists try to model it, as they forecast growth... All this implies that value is somehow a single number that is a rational, solveable function of information. Given a certain set of information about an asset - a stock, a bond, or a pair of wooden culottes - everybody if equally well-placed to act will deduce it has a certain value; they will all hang the same price tag on it. Prices can fluctuate around that value; and it can be hard to calculate. But value, there is. It is a mean, an average, something certain in a chaos of conflicting information. People like the comfort of such thinking. There is something in the human condition that abhors uncertainty, unevenness, unpredictability. People like an average to hold onto, a target to aim at - even if it is a moving target."
The (Mis)Behaviour of Markets, B Mandlebrot, 2004

A few more blogs to take a look at

Knowing & Making (which has a bit of a behavioural slant)
John Quiggin (Aussie social democratic economist doing a nice series of refuted economic ideas)
UKSIF Sustainable Recovery blog
RSA Tomorrow's Investor blog

McKillop steps down from BP board

I've already said my bit on this, so I think he was right to go. It also (rightly) tilts the balance back in favour of Paul Myners in terms of the RBS pensions row. But why stop at McKillop? The FT's Lombard column helpfully points out where some other ex-RBS directors currently draw a hefty salary. Bob Scott - also embroiled in Pension-gate (I'm joking) - is chair at Yell for example. One to watch.

Combined roles at M&S

There's more shareholder shenanigans underway at M&S, where the Local Authority Pension Fund Forum has filed a shareholder resolution. This seeks the appointment of an independent chair by July 2010 - in other words asking M&S to split the chair and chief exec roles combined by Stuart Rose.

An interesting test case, since separate chair and chief executive roles are the norm on UK companies, and it's a well-established governance principle here (unlike in the US). So why would any investor who claims to support the Combined Code vote against? Expect to see some tortuous arguments why not...

Just a bit more on Fred's pension

Last year's annual report says:

All UK based directors, with the exception of Guy Whittaker, are members of The Royal Bank of Scotland Group Pension Fund (‘the RBS Fund’) and are contractually entitled to receive all pension benefits in accordance with its terms. The RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement.

This year's annual report says:

The RBS Fund rules allow all members, including executive directors, who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement. The provision for an undiscounted pension on early retirement at employer request will not apply to any executive director appointed in the future. The RBS Fund is closed to employees, including any executive directors, joining the Group after 30 September 2006.

A couple of things. A lot would seem to hang on that word 'allow', which seems to imply that this is a discretion. In addition the 2009 wording seems to suggest that the discretion will not be used if future. That suggests that the RBS board could have let him take early retirement but with a reduced pension, which would contradict Tom McKillop's latest missive.

On the other hand, you could read the statement as simply setting out the current provision - no director appointed in the future will get the unreduced pension deal. But the scheme Goodwin was a member of is closed to new entrants anyway, so in a sense that is obvious. That could imply that this is a rule that has to be followed in early retirement situations.

There's an easy way to find out if McKillop is spinning or not. If there is any RBS employee out there who retired early and did not get an unreduced pension then clearly it was a discretion.