Friday 29 February 2008

TaxPayers Alliance report on council pensions

Let’s be clear from the outset – this is not a good report. It is right that people scrutinise every aspect of public expenditure, but this report doesn’t even try to put across a balanced case. It is an attempt at a hatchet job on the LGPS, probably to help soften up opinion ahead of a future Right attack on council workers’ pensions.

As is (or should be) well known, the TPA acts as a bit of a front for the Conservatives, and indeed the report doesn’t do a good job of hiding the group’s un-stated political affiliations. The report eggs on the Conservatives (rather than any of the other parties) to have a go at the LGPS both locally and nationally:

There have been welcome calls for public sector pension reform from the Opposition.
The Conservative Party does not need to wait for a change of government to help alleviate the burden of local government pensions on ordinary taxpayers.

The confused nature of the report is highlighted by the fact that it isn’t even very clear on what sort of fundamental ‘reform’ is in order, perhaps because there isn’t a clear line on this yet from their political allies. They say:

The LGPS should move from a final-salary scheme to either a career-average or a money-purchase scheme for new employees.

As anyone with any knowledge of pensions can tell you there is a big difference between career average and money purchase. The former is still a form of defined benefit provision. A shift from final salary to career average provision might (depending on how it was structured) not be too bad. A shift to money purchase is a complete transfer of risk. This is not a small consideration. Yet the TPA report doesn’t attempt to explain what either of these changes would mean, ‘change’ in itself is enough.

And of course if the LGPS did go money purchase, the killer question would be the contribution rates – again something the TPA does not even attempt to explore. Average DC rates are far lower than those in DB schemes. If a DC LGPS adopted average contribution rates this would represent a huge cut in the remuneration of future local government employees. It would make it much, much less attractive to future recruits.

In reality it may be very difficult for any Government to establish a DC LGPS without matching the contributions paid to the DB scheme. But if that occurred what would be the saving for taxpayers? It would simply be a transfer of risk, and how do you pitch that politically?

At the end of the day the TPA report doesn’t ‘prove’ anything, maybe it isn’t intended to. It is simply a mindless attack on the pensions of one group of working people. The call for an attack on the LGPS is nothing more than advocating levelling down. If some in the private sector have poor pensions then we should drag everyone down to that level, rather than try and improve the poor provision that exists.

I hope one of the unions does a good critique of the TPA paper as it deserves a proper trashing. But here are a few bits that I think are worth flagging up:

In 2006-07, local authorities across the country spent a total of £4.6 billion on employer contributions to the Local Government Pension Scheme and unfunded payments and added years benefits to local government employees, teachers and fire-fighters.

I actually don’t think £4.6bn is much money at all given the size of the LGPS and the numbers of people’s pensions we are talking about. And to put the figure in a bit of context, the cost of tax relief on pension contributions (which disproportionately benefit the better off) was £17.4bn over the same period. How much could we save the taxpayer through having one flat-rate level of tax-relief?

Employer contributions, however, are far higher [than employee contributions]. The LGPS website states that, over the long term, employer contributions will be around double those of employees – i.e. around 12 per cent.

Wow. Employer contributions are double those of employees. Funnily enough that 2:1 ratio has been fairly common way to split contributions amongst final salary schemes for a long time. Except when private sector employers took substantial contributions holidays (excel file) that is.

And how do these contribution rates stack up against the private sector? According to the NAPF, private sector employers’ pension contributions are actually about a third higher at 16%.

So the “gold-plated” LGPS actually gets less generous contributions than private sector equivalents. And according to the NAPF stats LGPS members also pay more for their pension (6%) than private sector DB scheme members (4.4%).

Public sector pension arrangements are not responding to these demographic challenges:
- Between 1995 and 2004, the proportion of public sector workers enrolled in final salary pension schemes has increased from 78 per cent to 88 per cent. At the same time the proportion of private sector workers has declined from 23 per cent to just 16 per cent.

Here responding to demographic changes is clearly equated with closing final salary schemes to new members. Yet (stick with me, this is going to get technical) closing final salary schemes to new members does not address demographic changes – it just shifts responsibility for funding. Unfortunately for members of money purchase schemes, they die too, and they tend to do it after a comparable length of life to members of DB schemes. Closing DB and opening DC does not affect this – it simply shifts responsibility for the risk inherent in long-term funding of pensions from the employer to the individual. And it’s usually allied with a cut in employers’ contribution to funding pensions too.

So again the argument is leveling down. We need to ‘respond’ to increased longevity by transferring risk to the individual, because that’s what the private sector does.

unfunded public sector pension liabilities are becoming increasingly unsustainable

I think the way the report conflates the funding of the LGPS with funding of unfunded schemes is very dishonest. A lay reader will probably not know that ‘unfunded’ has a specific meaning in pension policy and may therefore misread this as meaning ‘under-funded’ or ‘not properly paid for’. The LGPS is very clearly a ‘funded’ scheme and therefore irrelevant to any discussion of ‘unfunded’ provision.

Finally check out point 5 in the appendix. It quotes the infamous claim by a consultant at Hymans Robertson that of a quarter of council tax goes to fund pensions (the firm later said it was actually around 5%!), and then admits that the figure was retracted. But they go on to suggest - with no evidence given - that this is because Hymans feared a loss of business.

It goes something like this - Here’s a figure that says something I like. Oh no they‘ve said it isn’t true! Oh well I’ll use it anyway, and suggest a conspiracy theory for why the figure I like might be true even though they say it isn’t.

Not very impressive!

IUF on private equity

A couple of bits from the IUF website. This editorial explores the recent WEF study of the impact of private equity - it found that buyouts results it job cuts, the opposite of the industry line.

Separately the IUF has also produced this guide: Private Equity and Collective Bargaining: Guidelines for Negotiating with Portfolio Companies

(hat-tip Oliver @ CWC)

Thursday 28 February 2008

Canada needs say on pay

There's a good article from SHARE about the need for an advisory vote on exec pay in Canada on the Responsible Investor website here.

Wednesday 27 February 2008

Music vs private equity

The private equity takeover of EMI continues to be quite a fun saga to follow, for all the wrong reasons. It's difficult to feel much sympathy either for Terra Firma boss Guy Hands or the prima donna music superstars like Robbie Williams. When Robbie Williams accuses Hands of acting like a plantation owner you know that perspective has been lost.

Hands' latest comments that they need to take power away from the A&R men and give it to the 'suits' is bound to provoke the gag reflex in many of us. Equally he, presumably unwittingly, does a good job of making A&R men sound dead cool and creative:

"someone who gets up late in the day, listens to lots of music, goes to clubs, spends his time with artists and has a knack of knowing what would sell"

Sounds like a pretty cool job to me!

But he's a fairly smart cookie, and I can't help feeling that he's onto something when he suggests that the music industry (and investment banks) gets things right by accident, or in spite of itself, rather than by design:

"In years to come investment banks will be seen as a classic case study of a businesses doing very very well making ever increasing profits year after year but that very success hiding where profits were really being made. To give you an example that is close to my heart, it reminds me of EMI and all the major record labels in the 1990s believing their success was due to their personal genius and ability to find and market new music, when in fact it was only due to the baby boom generation replacing their vinyl with CDs."

Alpha fees for beta performance

Think that shareholder activism is a waste of money, and that pension funds are better off sticking to doing the 'normal' stuff? Think again. We are no better at doing that, and are chucking ever more money at providers to deliver 'alpha'. See this story.

LONDON (Thomson IM) - Pension funds around the world are paying on average 50 pct more in fees than they were five years ago in their growing quest for alpha - and should 'take a hard look' at the charges they pay, according to research by Watson Wyatt.

Average fees are around 110 basis points compared with around 65 basis points in 2002, with the vast majority of these costs being paid in fees to external investment managers and brokers, the study reveals.

Paul Trickett, European head of investment consulting at Watson Wyatt, said: 'One of the main reasons for this upward cost spiral is investors' focus on 'alpha', which has increased their appetite for alternative assets.

'Investors have naturally assumed that they are paying these fees to reward manager skill, but in many cases they are wrong,' he said.

The firm said that many pension funds have been paying alpha fees for beta performance because the main driver of returns in recent years has been the strength of the markets.

This in turn has encouraged investment managers to leverage their portfolios to boost returns, which means that investors are often paying for leveraged beta.

Burma & disinvestment

As is probably pretty clear, I am not a fan of disinvestment. This is principally because I think it achieves little, and usually falls into the 'not in my name' sort of political stance which seeks to be morally pure yet is non-engaged on a practical level. I think it's usually much better to keep plugging away for incremental change rather than washing your hands because you can't get everything you want. As such the vast majority of the time I think engagement is a much, much better option.

However, the question of Burma causes me all kinds of problems. I really don't see how engagement can work either on the country or company level. Having heard quite a bit over the years from people from the labour movement and other campaigners involved with this issue I don't think it is possible for a company to do business there without supporting (maybe legitimising?) the junta. It may not even be possible to do business there in some sectors without benefiting indirectly or otherwise from the use of forced labour.

In addition the push for disinvestment is coming very clearly from Burma's democracy movement. This is not a question of campaigners outside the country importing their own tactics.

So, having thought about it a lot, I really just don't see a workable alternative to disinvestment. As such I think this is an issue that we really ought to get our teeth into from the investor perspective. I'll be posting more soon...

Just to get you started:

Tuesday 26 February 2008

SEIU calls for investment in infrastructure not buyouts

Should have posted this yesterday but work got in the way of blogging. Tsk! But it's exactly the sort of debate we ought to be having in the UK. Pension funds are putting an increasing slug into infrastructure if the NAPF's stats are to be believed, but is anyone trying to leverage that investment to ensure that good jobs are being created?

US union wants pension backing for roads
By Francesco Guerrera in New York

Published: February 25 2008 02:00 | Last updated: February 25 2008 02:00

The second-largest union federation in the US is putting pressure on state pension funds to invest part of their $2,000bn-worth of assets into domestic infrastructure such as roads and airports in an effort to keep them away from private equity groups and sovereign wealth funds.

The Service Employees International Union (SEIU), which has 1.5m members and is an influential powerbroker in the Democratic party, has floated a proposal to form an investment pool with contributions from state retirement systems.

The pool would be run by an outside manager and specialise in buying US infrastructure in competition with the many private equity groups and overseas buyers, such the Australian bank Macquarie, which have been investing in the fast-growing sector.

"It is a question of whether public pension could pool investments [so that] they would all own a piece of different infrastructure projects," Andy Stern, SEIU president told the Financial Times. "That way you don't have to put it in private hands, you keep it in public hands."

The plan, which was presented by Mr Stern to the Democratic Governors Association two months ago, is a further sign of the mounting US political backlash against private equity and sovereign funds.

As the US economy slows down, politicians of both sides are trying to allay the fears of an electorate worried about the effects of foreign investments and globalisation on domestic job creation.

Republican and Democratic presidential candidates including Senator Barack Obama, who has received the SEIU backing, have expressed concerns at the lack of transparency of sovereign wealth funds.

Last week, Bain Capital and its Chinese partner, Huawei Technologies, scrapped a $2.2bn takeover of 3Com, a computer networking company, saying that the Washington committee charged with vetting foreign investments would not approve it. Two years ago, lawmakers derailed a proposed takeover of five port terminals by Dubai Ports World because of alleged security concerns.

Mr Stern said that, although the plan was still in its early stages, some state governors including Jon Corzine, the former Goldman Sachs executive who is governor of New Jersey, had welcomed it in principle.

A spokesman for the state of New Jersey's Treasury department said the SEIU had been in touch about the project. "We are looking at a number of different options with regards to infrastructure, no final decision has been made," he added.

Infrastructure investments have been booming over the past few years in both emerging and developed markets. "During the past two years, the flood of money into infrastructure funds has been astonishing," wrote the management consultancy McKinsey in a report. "The world's 20 largest [funds] now have nearly $130bn under management, 77 per cent of it raised in 2006 and 2007."

Monday 25 February 2008

UBS in the firing line

UBS is having a fun week. According to the Beeb it is being sued by a German bank over the mis-selling of CDOs. And on Wednesday it faces a hostile audience at its EGM where Ethos is seeking a special audit to get to the bottom of the sub-prime related write-offs. Get the full story here.

Fidelity on LabourHome again

My messy divorce from major Conservative Party donors and supporters Fidelity is the subject of another post on LabourHome (thanks John!). It must be getting to be common knowledge amongst Labour supporters that Fidelity bankrolls the Dark Side.

Hopefully that will mean that Fidelity suffers financially for its partisan political orientation. All it would take is one decent size pension fund to drop them from a mandate over this issue for it to cost Fidelity more than they are giving the Tories (mind you we don't know how much Fidelity is paying Tory MP Sir John Stanley as a consultant).

I've been in touch with quite a few trustees, and people who work with trustees, to get the message across. Would be nice to see someone dump them. Think of it as a counterpoint to this.

Sunday 24 February 2008

SRI links

A couple of comments on recent posts made me think I ought to put a list of SRI news type sites together, so here are five to kick off:

Responsible Investor
Ethical Performance
Social Funds
Investing for the Soul
Green Money Mail

Any further suggestions welcome, I will update and repost the list as necessary.

Saturday 23 February 2008

Do NGOs really just want to increase the cost of capital?

I was having a chat with a mate who works in the socially responsible investment (SRI) world yesterday and we started talking about what NGOs hope to gain from their involvement in SRI. I said I thought NGO activity in the UK seemed to split between company-specific campaigns (for example War On Want shareholder resolution at Tescos last year) and attempts to get pension funds to develop SRI policies.

He made the interesting point that in the latter case, and in broader attempts at mainstreaming SRI, part of the drive was to increase the cost of capital of companies involved in, for want of a better word, 'irresponsible' activity. This should therefore act as an incentive for companies to do the right thing. However he said that even if there was an impact on the cost of capital, it might be slight and therefore not enough to shift company behaviour, except over the long term, which might be too long to address some issues (ie climate change). This sort of chimes with something I heard from another contact at a fund management house last year, who said that NGOs should be a lot clearer about the outcomes they expect from companies when active in the SRI world.

What I take from these conversations is that NGOs could waste a lot of time trying to change 'the system' to make it transmit useful information about corporate social responsibility issues more effectively. Although personally I probably find systemic reform a more interesting proposition, I think for civil society groups it arguably shouldn't be a priority. Financial markets and the products within them are continually changing, whilst many people in the NGO world have probably only just got their heads around trying to use equities as a route in. Therefore trying to develop a sort of investment counter-culture as some seem to be attempting will be a very tough job (though I think we should still be trying to do it over the long term).

In the short term I think NGOs interested in capital markets are going to have more joy if they prioritise company-specific campaigns with an investor element to them over attempting systemic change. Focused campaigns can work, even if companies only make change to get NGOs off their backs rather than because it's economically rational to do so. At the moment trying increase the cost of capital seems a very long shot.

Friday 22 February 2008

Public backs Darling over Northern Rock

Interesting poll in The Times showing that the punters (broadly) think the Government was right to nationalise Northern Rock, and a majority also don't think Alistair Darling should resign. Full story here. Notably Labour is also back in the lead in terms of the public's view of which party is best placed to handle the economy.

Although polls are notoriously volatile this is encouraging stuff for Labour, and reinforces the point that the Tories seem to have fluffed this one. The Pink Un in particular is unimpressed with the Dark Side and has openly criticised George Osborne's main line of attack this week:

"anybody who suggests that the Labour government has gone back to 1970s socialism deserves ridicule"

And yesterday it ran a piece suggesting that the Tory have "a basic misunderstanding of how securitisations worked", after they attempted to ramp up the scaremongering about Granite. Boy George has also been given a monstering by Simon Heffer (I feel nauseous just writing that!). Whilst I would normally interpret this as a good thing for the Cameroons, in this case I think he has a bit of a point.

It used to be the case that the Tories and their supporters would try and overplay a Labour mess-up or controversial policy by decsribing it as "Labour's poll tax". These days you are more likely to hear about "Labour's Black Wednesday". (We are apparently unable to understand current events unless we are given a historical comparison). However if it's a strange "crisis" for the Government that sees the public largely behind it, and the opposition given a pasting for politicking.

Not such a bad week for Labour afterall.

More bad news for DB schemes

Even those employers still sticking with DB are losing faith. The future is DC I'm afraid, no question about it:

Half of employers considering wisdom of continuing DB

by Jonathan Stapleton 21-02-2008

Half of all employers believe the cost of running a defined benefit scheme is now disproportionate to the value it provides, new research shows.

Buck Consultants’ fifth annual Key Pension Issues Survey found 50pc of the 123 respondents believed their pension scheme was too cumbersome and felt the alternative of giving employees money directly or through a defined contribution scheme was becoming more attractive.

More than a quarter (28pc) of respondents had considered inducement deals for members to transfer out and 33pc had considered buying out their liabilities.

And nearly three-quarters of respondents (72pc) said they were less optimistic about the future for employer-sponsored pension schemes than last year.

Wednesday 20 February 2008

Northern Rock & self-investment

Just a quickie, but Punter Southall have rather cheekily pointed out that the Northern Rock pension scheme would fall foul of self-investment rules in another context. From memory pension funds are limited to investing 5% of their assets in securities issued by the sponsoring employer. The NR scheme recently moved its asset allocation to include a 93% weighting to gilts. Well, the sponsoring employer will very shortly be the Government, which issues gilts...

Fidelity still at it - another £20K to the Tories in October

Well, at least I am thankful that we are no longer handing money over to a major Conservative Party supporter. I've just found out that Fidelity gave the Tories another £20k in October last year. That makes it £115,000 they gave to the Tories in 2007 alone. Search under 'Fidelity' in the 'Donor name' field here.

Conservative And Unionist Party [The]
Conservative Central Office
Fidelity Investment Management
status: Company
company reg no: 2349713
Oakhill House
130 Tonbridge Road
TN11 9DZ
£ 20,000.00

Any trustees reading this may want to take note...

Unions and housing investment

One of the things you can do if you get some degree of control over your own capital is to set some principles about how it should be used. In North America the unions sussed this out years ago, and have been developing policies and, perhaps more importantly, investment products ever since.

One of the long-standing examples of union innovation in the investment world is the AFL-CIO Housing Investment Trust. It attempts to both provide a steady, bond-like return to investors, whilst at the same time supporting the growth in affordable housing and creating jobs where unions are recognised. Here's some of the blurb:

"The HIT supports the values of the union movement through the housing it finances and the good jobs it creates. Although financial performance is its first priority, participants in the HIT have the satisfaction of knowing that their investments also create other positive, tangible benefits for working people and their communities. The HIT has financed close to 500 housing projects, creating or preserving more than 80,000 homes. That financing has generated employment for an estimated 50,000 union construction workers who have labored in the development of these projects."

In essence it's a simple idea, and there are comparable stories from Canada, but there is nothing even remotely similar in the UK. At the moment the only thing I can think of is TU Fund Managers, but it only offers straightforward equity and bond unit trusts, nothing on the property side. The day-today fund management is outsourced to Insight Investment (who are good on SRI, though their voting is a bit questionable).

Given the never-ending expansion in the types of products flogged to trustees by fund managers and others, isn't a bit surprising that no-one has ever thought about developing some TU-friendly options? There are already sustainable property investment options, why not sustainable and pro-union?

And again the Personal Accounts scheme looms large. The default fund will no doubt want to invest in a wide range of assets, and will also want to be seen to be acting responsibly. Something akin the HIT might provide an interesting opportunity. But it means that unions need to get their thinking caps on now.

Tuesday 19 February 2008

Northern Rock: have the Tories fumbled the ball?

Let's get one thing out of the way first of all. Rightly or wrongly, the Northern Rock saga has damaged the Government's reputation, and no-one is seriously claiming otherwise. But I do wonder whether the Tories' decision to take an opportunistic approach, and not support the move to nationalise the bank, combined with their "back to the 1970s" rhetoric is a rather large mistake.

For one, there have been plenty of sensible, non-Labour voices calling for nationalisation for some time. It's not a 'left-wing' or 'Old Labour' response to the problem in any sense. As such the argument that it represents a return to the 1970s shows that people using it either don't know what they are talking about or are being deliberately devious. As the FT has pointed out there were broadly similar banks rescues under the Tories in the 80s, and it is a tactic used elsewhere in the world. Add to that the Government's obvious desite to avoid public ownership if possible and it's obvious to anyone that this is nothing like British Leyland. I think the Tory line on this just comes across as dishonest.

And who exactly are the Tories trying to woo by saying they will oppose nationalisation and would rather let the bank go into administration? Superficially the anti-nationalisation bit might look like a pitch to the shareholders but a) a quick read of the business pages shows everyone thinks current NR shareholders were taking a risk and now that risk has turned out bad that is their problem and b) more importantly if NR goes into admininstration the shareholders might not get anything. Maybe it's supposed to demonstrate the Tories' free market credentials but, as Labour's stumbling but correct response demonstrates, this is a real problem that needs solving, it's not a test of ideological fidelity.

If anyone has come out of this well it's probably Vincent Cable. Regardless of what you might think of him I suspect that punters will think he is someone who has been saying broadly the same thing all the way through, and has been willing to give the Government a bit of credit when they have done the right thing. So it wasn't surpising to see him stick the boot into the Tories for their politicking yesterday. In contrast Osborne came across as a sort of anti-Pangloss - everything is for the worst in the worst of all possible worlds. It might rally the troops but it looks a bit, well, juvenile given the importance of the issue. I think maybe, just maybe, the Tories have managed to do themselves some damage.

Monday 18 February 2008

No more "greedy shareholders"

If there is one term that is routinely used by many lefties that I really hate it is "greedy shareholders". It annoys me for a number of reasons.

1. It's usually symptomatic of a complete failure (or reluctance?) to grasp the real nature of share-ownership in the UK. Rich individuals only count for a relatively small slice of share-ownership in the UK these days, and this has been the case for quite some time. Most shares are held by institutional investors like pension funds and insurance companies which are investing our money, not their own. So "greedy shareholders" include, for example, local authority pension funds.

2. As a result of the above it leads to a failure to understand who does what in the investment world, and as such how we might be able to organise it better. When lefties have a pop at "greedy shareholders" they are usually trying to attack fund managers or more recently hedge funds. But when fund managers or hedge funds are acting "greedily", who are they doing it for? Often pension funds - typically with TU members as trustees - who have said to them "go and get us X% return" without saying "but don't generate that return by doing/allowing/encouraging [insert chosen unethical practice here]".

3. I dislike the use of emotive terminology when trying to explain something, though I fall into the trap myself sometimes. This isn't just the moralistic element of it, I actually think it lets people off the hook. If your stated view of "shareholders" is that they are "greedy" you are making a criticism of their motives, not their thinking. They are simply "bad" people. But if you engage with what they are doing, rather than simply having a pop over your moralistic assumption why they are doing it, you have, in my view, more chance of tackling them head on.

I guess the last point is the most important. Although we on the Left are very quick to take the p*** out of the black and white worldview of, for example, the War on Terror (can we still call it that?) we often exhibit exactly the same tendency when discussing business and finance. The term "greedy shareholders" is demonstrative of mindset where there is an obvious and inherent "wrongness" on the part of an opponent. If only it were so simple that those of other viewpoints were clearly and objectively "wrong" and that their persistance in advocating an obviously flawed position was the result of a personal moral failing.

Still following the money

A quick update on how fund managers voted on Caledonia Investments giving £60K to the Tories at the investment trust's AGM back in July.

Hermes has just updated its voting record and as you can see here it also voted AGAINST the resolution (number 15).

The updated list of voting decisions so far -

Baillie Gifford - AGAINST
Co-operative Insurance - AGAINST
Hermes - AGAINST
Insight Investment - FOR
Newton - AGAINST

Background to this story here, other linked posts here.

AFL-CIO's John Sweeney on climate change

Just a snippet. There's an interesting bit here on the AFL-CIO newsblog about John Sweeney's speech to the INCR summit on climate change last week.

Dumbest quote on Northern Rock nationalisation so far

From the UK Shareholders Association according to the Torygraph:

"It seems the only reason that the Government has chosen nationalisation is because 'it offers better value to the taxpayers'. This is equivalent to a thief telling you it offers better value to him to steal from you, than to enter into a commercial transaction with you."

The scenario is bit more complicated than that. In this case the thing you own only has value because the 'thief' is providing funding to a bigger entity of which the thing you own is notionally a part. If the 'thief' pulled his funding the thing you own may have no value at all.

Sunday 17 February 2008

PS. Fidelity & The Enterprise Forum

I noted previously that The Enterprise Forum has removed the page from its website that disclosed that Fidelity had hosted a meeting. However you can still access a cached verion via Google. Put "the enterprise forum fidelity investment" into Google and it should come up as the third listing. Then click on 'cached'.

Non-doms and Tescos

There are a couple of interesting pieces in the Observer today. Will Hutton is on good form, taking to task critics of the Government's plans to end the non-dom tax loophole. I think the thrust of it is bang on and this line in particular hits the nail on the head:

Residency is a privilege that comes with attendant obligations. We rightly expect poor immigrants to learn to speak English as part of the contract of residency. Equally, we should expect the foreign rich to pay taxes as part of the same contract;

On a completely different subject, the Observer's foodie critic Jay Rayner talks a lot of sense about some of the self-righteous anti-supermarket blah that gets spouted. As he points out it is quite possible to be critical of the way Tescos etc squeeze producers without having a problem with the growth in the number of outlets. Here are a couple of good points:

Why, in the years before mass retailing, did one parent stay at home and the other go out to work? Because keeping the house supplied was a full-time job.


This is not to suggest that a trip to the supermarket is necessarily a pleasant experience. But nor is shopping locally, as you traipse from place to place, adding bag after bag, as if you were in some joyless and perverse round of It's a Knockout, attempting to reach the finish line. Likewise, the notion that the independent retailer is in some way a much friendlier alternative to the staff of the soulless supermarket is also little more than a myth. We love to imagine the rosy-cheeked, melon-bellied butcher who always has time for everyone and the greengrocer helpfully picking out the finest of produce for his customers. The truth is that they are just people. Which means some of them are very nice and some of them are miserable old buggers.

As I have said before, I would like a Tesco or Sainsbury's to open in our area because a) our local shops are pretty rubbish and b) I think it would act as a signal that the area is on the up.

Saturday 16 February 2008

One year and counting

Yesterday marked a year since my first post on this blog. I'm pleased I have managed to last a year as I have seen quite a few blogs fall by the wayside over less time. I've produced over 400 posts, which is (obviously) more than one a day, though quite a few are links to press releases from unions.

I estimate about a quarter of my posts have been about private equity in some way, which just shows you how important an issue it has become to unions around the world. Yet it's not a big topic on Left blogs in general. On the rare occasions it does crop up it often gets discussed in rather cartoony language, which is a missed opportunity I think.

Pensions reform has been another topic I've banged on about a lot, and again the lack of interest in this area, particularly Personal Accounts, in the left-of-centre blogosphere is a bit of a shame. Maybe it will hot up when we get closer to 2012 but I fear that by then we may have missed the opportunity to influence te design of the scheme. Just to hammer the point home once more - it will quickly become the biggest pension scheme in the UK, and no doubt one of the biggest in the world.

Looking ahead, I do think that behavioural economics is becoming more influential in policy circles, so I'll probably be blogging about that quite a bit next year. I'll also try and do more on socially responsible investing.

Overall hopefully it is pretty clear that there is plenty going on in the investment world that the labour movement ought to be at least keeping an eye on. I think we might see more interest from UK unions in the year ahead.

Time for a very limited blogroll. These are a few blogs I read on a regular basis -

John's Labour Blog

Stakhanovite hero of Labour and nice bloke to boot. Nice mix of Unison politicking, Trot-bashing, capital stewardship and stuff about the local area and its history.

Going Private
It's a view from inside the private equity industry, and not union/lefty friendly. But it's well-written, thoughtful, and even though it's on the 'other side' I find in genuinely interesting rather than aggravating.

Stumbling And Mumbling
Lots of interetsing stuff about biases and wonky thinking in an economics setting. The sort of blog I would like to write if I knew what I was talking about.

Socialist Unity
Increasingly inappropriate title for the site of choice for gossip from the SWP/Respect faction fight.

Friday 15 February 2008

Bye bye Fidelity

Today should mark the end of our relationship with Tory-supporting fund manager Fidelity. I am off to meet our financial adviser to arrange moving from Fidelity's fund platform onto Cofunds and my other half is cancelling our direct debit to Fidelity. Given Fidelity's refusal to give us a straight answer about whether they would continue to financially support the Conservative Party we felt we had no other choice.

Having been alerted to Fidelity's £415,500 donations to the Tories since 2004, £95,000 in 2007 alone, I subsequently discovered that they also employ a Tory MP as a consultant, and have hosted the Tory business liaison group The Enterprise Forum (though the link disclosing this has vanished!). Clearly there are some senior links between Fidelity and the Tories.

I don't see why any Labour supporter (or Lib Dem, or Green, but maybe SWP) would want to be either on Fidelity's fund platform or investing in any of its products. There are equally good non-Tory alternatives out there.

I have alerted both my local CLP and the Labour chair of my local authority's pension fund to the issue. I have also raised it with national officers at a number of trade unions whose members are pension funds trustees and highlighted it to a few global contacts who also work with trustees. And I also got the tip that the donations have been raised in parliament.

That's it as far as I am concerned, though I will keep an eye on the Electoral Commission register of donations and post up info about any further donations. Plus I'm still waiting to see how they voted on Caledonia's £60K Tory donation. If you want to read our past correspondence with Fidelity and other related info click here.

Thursday 14 February 2008

Supermarket queues and arbitrage

A fairly common way to describe how arbitrage works in share prices is to compare it to supermarket queues. Here for example is Tim Harford's version in The Undercover Economist:

"Which queue is quickest? The simple answer is that it's just not worth worrying about. If it was obvious which queue was the quickest, people would already have joined it, and it wouldn't be the quickest any more. Stand in any queue and don't worry about it. Yet if people really just stood in any queue, then there would be predictable patterns that an expert shopper could exploit; for example, if people start at the entrance and work their way across the store, the shortest queue should be back near the entrance. But if enough experts knew that, it wouldn't be the shortest any more. The truth is that busy, smart, agile and experienced shoppers are a bit better at calling the fastest queues and can probably average a quicker time than the rest of us. But not by much."

Though I agree with the general thrust of this, I actually think supermarket queues function a bit differently. For example, those of you who do play Runaround when it comes to supermarket queues must have had the experience where you have switched to a shorter queue only for the one you were originally in move more quickly and you end up worse off. Given our loss averse disposition that experience must have an emotional cost. If it happens a few times you might even start to think that it 'always' happens to you (because you remember the pain when it does more than the pleasure when it doesn't). And that might cause you to stop switching queues altogether.

Secondly, sometimes there is a reason why shoppers already in a queue decide not to join an obviously shorter one. This might be because the shorter line appears to be moving more slowly because of someone inexperienced on the till. Or maybe a customer is having a dispute with the person on the till that is taking up time. This might lead new entrants to join the 'wrong' queue, particularly if their queue decisions are driven by mathematical models...

Conversely it may lead others to not join shorter queues because they believe that they are shorter because existing queue members have knowledge they do not, which may say something about our desire for social proof. In fact you do see these things happen quite a lot in the queues for ATMs. Quite often people will join a queue behind one ATM when another is free, presumably because they make the assumption that the free one is broken, otherwise someone would use it.

All of which points to arbitrage not actually working that effectively in the queue scenario. Now I'm not an expert on the formation of share prices, but it strikes me that if arbitrage can be floored by some fairly important bits of wonky human behaviour in supermarket and ATM queues, it probably happens in stockmarkets to an even greater degree. So it's risky to bank on rational and efficient prices. As Keynes famously said: "The markets can remain irrational longer than you can remain solvent."

Wednesday 13 February 2008

Reasonable force

A couple of years back I was asked to speak at an internal seminar run by A Big Financial Institution about the Government's plans for pensions reform, specifically what has now become Personal Accounts.

What was interesting about it was the sharp difference in views about compulsion - not just about whether to save, but also about whether to allow people access to their pension savings to use them for other purposes. Those of us on the panel thought people should be compelled to save for retirement, and that the money saved should only be used to provide retirement income. But a couple of the people from The Big Financial Institution arguably particularly strongly against the latter point. Notably one of them portrayed the idea of compulsion as thinking that people couldn't be trusted with their own money and as such as being very Nanny State-ish. It showed a moralising streak to the Government, he suggested.

Although this is a fairly typical tactic for arguing the neo-liberal position on choice, I think it deserves a hearing each time we are considering the constriction of choice. And actually I find some of the commentary about personal debt in the current climate quite moralistic. Access to cheap debt may have been a curse to some, but it has been a blessing to others, enabling them to have access to products and services they might have otherwise always put off.

Having said that, I genuinely think that when it comes to pension provision the evidence does suggest that choice needs to be tightly managed. One the one hand people don't save (even when it is financially advantageous for them to do so) if they have make an active decision, but do if they are given a significant steer by being auto-enrolled into a scheme. However if you make people build up a big pot of savings but allow them access to it, as the bloke at seminar suggested, I think many of them are going to spend it.

Those that advocate giving people access to retirement savings often point to the popularity of 401k plans in the US. But funnily enough the US Government Accountability Office has just produced a paper that shows some of the flaws in the system. Amongst these were low levels of coverage, particularly for the lower paid, and small fund balances (so small levels of income at reirement). But most interesting to me was the finding that about half of 401k plan members cash in the full balance of the plan when swapping jobs, rather than rolling it into their next employer's scheme or an alternative vehicle. What are they going to use to fund a pension? That's not moralising, that's the real world.

So, whilst I do think we need to be careful about restricting choice, when it comes to pensions I think making people save, and making them use the money saved soley to fund retirement income, is a reasonable use of force.

Tuesday 12 February 2008

Bank of America and Washington Mutual added to sub-prime 'focus list'

It's Change To Win again. Full release here.

Washington, February 12 – Citing risk management failures that cost shareholders $71 billion in 2007, the CtW Investment Group has called on three directors of Bank of America (NYSE:BAC) and three directors of Washington Mutual (NYSE:WM) to describe what they did to protect shareholders from excessive mortgage-related risk over the past two years. Absent a compelling response, CtW said it will urge shareholders vote to against the directors at the banks’ 2008 annual meetings in April.

CtW made its request in letters to Bank of America directors Jackie M. Ward, Frank P. Bramble, Sr. and Robert L. Tillman and Washington Mutual directors Mary Pugh, Stephen E. Frank and William G. Reed, Jr. The six directors sit on the board committee designated to oversee risk for their respective banks: the Asset Quality Committee at Bank of America and the Finance Committee at Washington Mutual. CtW sent the letters last week and released them today via its web site.

“The meltdown of the U.S. mortgage market is among the worst financial disasters of the past 50 years,” said Bill Patterson, Executive Director of the CtW Investment Group. “At the epicenter of this crisis are Bank of America, Washington Mutual and four other U.S. banks whose failure to manage mortgage-related risk not only destroyed almost $300 billion in combined shareholder value, but also helped destabilize the global capital markets and precipitate a credit crunch that now threatens to throw the U.S. economy into recession.”

The addition of the two banks’ directors completes CtW’s “Subprime Director” Focus List for the 2008 proxy season. CtW previously announced that it will work to hold accountable those directors most culpable for the risk oversight failures at Citigroup, Merrill Lynch, Morgan Stanley and Wachovia. All six Focus List banks are expected to hold annual meetings in April, starting with Morgan Stanley, which could file its proxy statement as soon as next week.

CtW’s six Focus List banks account for 88% of the $87 billion in total subprime-related writedowns and credit losses announced by large U.S. banks since the beginning of 2007, according to a recent analysis by Bloomberg.

Monday 11 February 2008

Global union co-operation on SRI & shareholder voting

Hat-tip to Oliver @ the CWC (nicked from his newsletter):

ITUC - ETUC - CWC and Euresa Institute sign a "memorandum of understanding"

The International Trade Union Confederation (ITUC) the European Trade Union Confederation (ETUC) the Committee on Workers’ Capital (CWC) and Euresa Institute, on 17 January 2008 in Brussels, signed a memorandum of understanding formalising the cooperation of the last few years between the international and European labour movements and Euresa, the European network of social economy insurance companies (cooperative, mutual and non-profit insurance companies).

This agreement reflects the common will – as unions engaged in pension or savings fund management or as cooperative, mutual and non-profit insurance companies or asset managers – to promote actively practices respectful of environmental, social and governance criteria (ESG) in the companies in which they hold shares.

These organisations have consequently decided to develop closer ties by developing exchange and cooperation between their respective shareholding networks, so as to share their analyses and voting recommendations with respect to given companies, prior to their General Meetings. Such cooperation may also extend to joining forces by carrying out collective initiatives for responsible investment, thus making the most of their collective strength.

The memorandum of understanding is in keeping with the prolongation of a Joint Declaration published in 2003, in which Euresa and the ETUC agreed to establish a European "area for dialogue and exchange", and with work under way in the social sphere for a number of years, in particular on social protection.

This practical cooperation underlines the interest of trade union and social economy organisations in contributing to the regulation of social, civil and environmental issues, as well as that of economic and financial activities.

Annexe: Presentation of the signatory organisations:

Committee on Workers’ Capital (CWC)

The Committee on Workers’ Capital (CWC) brings together representatives of the international labour movement with the aim of sharing information and developing strategies for joint action on the socially responsible investment of workers’ capital.

Participants in the CWC are representatives of the international labour movement with expertise in workers’ capital, corporate governance, socially responsible investment, shareholder activism and other investment issues. Established in 1999, the CWC’s formal name is the Global Unions Committee on Workers’ Capital, in recognition of its affiliation with the major international trade union bodies, including the International Trade Union Confederation (ITUC), the Global Unions Federation (GUF) and the Trade Union Advisory Committee to the OECD (TUAC).

The CWC is chaired by Ken Georgetti, President of the Canadian Labour Congress , the national voice of the Canadian trade union movement. The CWC Secretariat is based at the Shareholder Association for Research and Education (SHARE), a not-for-profit organisation based in Vancouver, Canada, with close ties to the labour movement, in collaboration with ITUC and the TUAC.

For more information, see

Euresa Institute

Euresa Institute was set up in 2005 to carry out studies and research in the social sphere, to organise training and disseminate information to trade union organisations, consumer associations, and mutual and cooperative companies, whilst respecting the identity and uniqueness of each.

The Institute is composed of five members (Devk in Germany, Macif and Maif in France, P&V in Belgium, Unipol in Italy and Folksam in Sweden) and an associate member (Matmut in France), as well as an ex officio member, the European Trade Union Confederation. The ETUC’s representative, Mr Henri Lourdelle, is social protection adviser at the ETUC General Secretariat. He was named President of the Euresa Institute on 23 October 2007.

Continuing the initiatives implemented by certain of its members, Euresa Institute teamed up in 2006 with the International Cooperative and Mutual Insurance Federation (ICMIF), and in 2007 with the CWC, to create Voice, an international network of socially responsible investors.

European Trade Union Confederation

The European Trade Union Confederation (ETUC) speaks with a single voice on behalf of the common interests of workers, at European level. Founded in 1973, it now represents 82 trade union organisations in 36 European countries, plus 12 industry-based federations. The ETUC’s prime objective is to promote the European social model and to work for the development of a united Europe of peace and stability where working people and their families can enjoy full human and civil rights and high living standards.


Pension trustees fear private equity takeover

This survey from Aon Consulting is interesting for two reasons. First, it is clear that trustees believe that being taken over by private equity can have a negative impact both on the treatment of the scheme and its members and the overall strength of the business:

Nearly three quarters of pension trustees (72 per cent) would be concerned if their scheme’s sponsoring employer were to be taken over by a private equity firm, according to new research released today by Aon Consulting, a leading pension, benefits and HR consulting firm.

Aon Consulting surveyed over 250 trustees of Defined Benefit (DB) schemes on how they felt about the prospect of a takeover by a private equity private equity firm, as well as whether they would consider PE as an investment opportunity.

Results showed that the prospect of being bought by a private equity firm raised fears with nearly three quarters (72 per cent) of trustees. This figure rose to almost 80 per cent of responses when the results were narrowed to trustees of schemes with a value in excess of £100million.

The main reasons given for such concern related to short-term funding concerns (around 30 per cent), followed by worries about a deterioration in the strength of the covenant (around 20 per cent) and concerns about potential lack of interest in the scheme’s members (20 per cent). Trustees were also concerned simply by a fear of the unknown (15 per cent).

But secondly it also demonstrates the way that trustees also apparently fail to make the links between their own investments in the asset class and the negative effects it can have:

However, in contrast to trustees’ wariness of private equity acquisition, their attitude shifts positively when it comes to investing in privately owned companies as a means of diversification. Around a fifth (21 per cent) of trustees said that they have considered and implemented, or are currently considering, investment in PE. For schemes with a value over £100 million, where almost a third (31 per cent) say they are considering, or have already invested in PE.

Sunday 10 February 2008

Personal Accounts - where's the Left?

I've been thinking about Personal Accounts a bit this week and one thing that has struck me is the almost complete absence of the Left from the debate about the form of the scheme or the way it invests. The unions are certainly involved, at present it seems mainly on the design side (charges etc) but that is understandable given the need to keep the costs down. But on the more purely political level I have hardly seen anything from the Left.

This is surprising. Other groups certainly are taking an interest. I'm not just talking about the insurance lobby, which sometimes seems to be attempting a slash and burn campaign as it is forced out of the lower end of the pensions market. In the bit of the bit of the world that I inhabit Personal Accounts (or the NPSS as it used to be known) has already been the subject of numerous events, including at least one by UKSIF. Those in the SRI community is well aware of the potential importance of the scheme and are already lobbying the Personal Accounts Delivery Authority.

This is a once in a generation opportunity to influence the design and practices of a major investment institution - why would the Left not be interested? It will ultimately become the biggest pension scheme in the country and as such a major investor in the UK and other countries. I don't understand therefore why there is so little discussion on the Left of things like the governance of the fund (ie who the trustees are), the type of assets it will invest in or the type of social or environmental criteria it might consider. It would not be at all surprising to see the scheme's trustees want to invest chunks in private equity or infrastructure - two asset classes that might cause concerns in the unions. Personally I wouldn't support bars on such investments, rather I think we should encourage the development of responsible investment policies to cover them (including analysis of managers' past records).

I also think it's very important to ensure that ownership/engagement policies apply across the scheme, not just to a niche SRI fund. Funnily enough I heard a claim last year that of those people who do invest in socially responsible funds those that have a political affiliation are largely Labour supporters, which suggests that we should be thinking about this as an issue of concern to our own membership (though of course the membership of Personal Accounts will be very different to existing investors in SRI funds).

Others might disagree, but we should at least start having the discussion. If we don't put the effort into ensuring we have proper representation in the scheme's governance and decent policies in place we could end up with a major investor that behaves in a way we aren't comfortable with. And it will be much more difficult to bring about change once the scheme is up and running.

The USSR: it did what it said on the tin

I was intrigued by this post on the popular* Trot blog Lenin's Tomb. I guess the point is that analysis of the USSR typically fails to seriously consider alternative interpretations of what was going on in the USSR, such as those developed by Trotskyist thinkers. What the USSR actually was and why it (and other regimes like it) went so badly wrong are clearly important questions, and it is notable that in the comments under the post there are references to other books which appear to seek to defend the drive behind the Bolshevik project and separate that from what the USSR did in practice.

I just don't buy it. The more I read about the USSR the more convinced I am that it was simply a genuine and serious attempt to put a Marxist version of socialism into practice. They had 70 years to get it right, admittedly including two serious attempts to destroy the regime. For most of the time the Soviet leadership had unchallenged power and as far as I can see all they tried to do whilst in power was put Marxism into practice. This is from A Short History of Soviet Socialism (which is probably guilty of 'ideologoical conformity' too):

"[O]ne of the striking features of the theory and practice of Soviet socialism was the degree of continuity and stability exhibited between 1917 and 1985. The worldview of Bolshevik Marxism-Leninism - constructivist, rationalist, productivist, technocractic - continued to underpin the process of building socialism in the USSR after 1917 (and indeed remained during the early stages of perestroika). The CPSU also maintained a striking commitment to the core features of "socialism" as a transition phase, as derived from their readings of Marx, Engels and Kautsky and from the practice of the German war economy: central planning, state ownership, central direction of social processes, leading role of the comminist party, proletarian internationalism. The stability or rigidity of the core features of the ruling ideology has long been remarked upon by Western commentators. Although the precise meaning of many of these features was subject to periodical reinterpretation in the light of political imperatives (especially the leading role of the communist party, and the commitment to proletarian internationalism), the party maintained that socialism was a transitional society defined according to a set of structural features to be consciously constructed."

Personally I don't think it is unfair to judge a Marxist version of socialism by the results of the regimes established in its name. Whilst I think it is always useful to keep an open mind about how things might have turned out there is a lot of evidence available to us - 70 plus years of the USSR, 50 plus years of the PRC and the experience of plenty of other regimes. In effect the same experiment was run a number of times in a number of countries and yielded similar results - undemocratic, inefficient and unpopular regimes with poor living standards. In contrast those that argue that a Marxist version of socialism could have been different a) tend to rely on dispositional explanations of previous failures (ie if only Trotsky had beaten Stalin) and b) don't have anything like the same level of evidence to back up their position, it is principally theoretical speculation.

As such my view is that it is the Trots who have got it wrong - they fail to take the stated ideological aims of Marxist regimes seriously and as such allow themselves to ignore a huge amount of problematic evidence.

(* Lenin seems to get very chippy about his traffic stats.)

Saturday 9 February 2008

It's enough to turn you into a class warrior

Comments from Digby Jones on proposed changes to non-dom taxation that is. I've never been much of a fan of Diggers, not least because he never seemed to miss an opportunity to put the boot into the unions. Plus I think he propagated very simplistic messages about what helped create successful businesses. So I really was disappointed to see Gordo appoint him as trade minister.

According to the FT, Diggers has now made some negative comments about proposed changes to non-dom tax status.

He admitted that a lot of people from the City had told him it was a serious issue for the financial services industry.

Lord Jones had been frequently asked about the tax changes on trips to India and the Gulf. He feared they had reduced the attractions of Britain as a destination for skilled people.

“It has caused people to say ‘Does this mean you don’t want us?’,” he said, adding that there was a danger such changes meant the UK would lose its “badge as the place to come and bring your skill and work hard in the developed world“.

“I don’t want to be in the position where one morning we wake up and people are saying ‘Digby: no matter how good you are at doing what you do, the product isn’t as good as it was’.”

His warning follows intensive lobbying by the City, which is concerned that overseas investors and executives will pull out of the UK if Alistair Darling, the chancellor, goes ahead with the crackdown.

This annoys me on both a gut instinct level and a (hopefully) more considered one. The first one is easy - it just really winds me up to hear very rich people threaten to leave the country if we dare to touch their money.

But even if I try to think it through with a cooler head I find myself unconvinced. Are we really, absolutely sure that these people are so valuable to the UK economy that if the leave we will be in trouble? I am very sceptical that the success of a company, let alone an economy, can be attributed to the input of a handful of individuals. To be honest I am more confident that we misattribute success to key individuals when it comes to large organisations.

We should be wary of claims about the loss of expertise. Last year the private equity industry made similar threats to quit the UK and takes its expertise in creating jobs elsewhere. Subsequently a WEF study found that the industry actually has a negative effect on job growth. As such I wonder whether it might actually be worth calling the bluff of those that defend tax avoidance and see what happens.

I'm not naive enough to think that you can just clobber the top end of society without any unintended consequences. I also recognise that our economy is dependent on financial services as a key component. But what we are talking about here is changing the tax paid by probably a few thousand people. All the other tens of thousands who work in various levels of the industry will be unaffected. I just don't buy that it will be that important. I'm sure some people do consider changes to taxation when they decide where they want to live. But I'm sure there are lots of other factors too, and I wonder whether this change would really be enough to make many relocate from London, or choose not to move here in the first place.

Maybe there is an element of scapegoat politics here. There does seem to be a rising tide of resentment at tax avoidance by the very rich that changes to non-dom status appeal to. But who is to blame for the resentment in the first place and does that mean that we shouldn't do anything about it? You do have to wonder whether people like Diggers ever consider that by using the "if you tax rich people they will leave the UK" line they actually exacerbate antagonism. In contrast Nick Ferguson's comments that it seemed wrong that private equity partners paid less tax than their cleaners might actually have done the industry some good by demonstrating that at least some of its senior figures were troubled by their position.

And just because there may be some low politics involved in a crackdown on non-doms I don't think that makes the reform itself any less valid.

Thursday 7 February 2008

TUC Member Trustee News

A quick plug for the latest issue of the TUC's newsletter for pension fund trustees which can be downloaded here. This issue includes information on the Pensions Bill, responsible investment and corporate responsibility, Trustee Awards, pension buyouts and an update on the Pensions Champions project. It also contains an article about why trustees should review their investments in companies operating in Burma.

Wednesday 6 February 2008

Not blogging much this week...

I'm at home this week looking after my wife as she had to go into hospital recently for an operation that is leaving her immobilised for a bit. Apart from making me realise how much she does around the house that I take for granted it's also been a bit of an experience seeing how the NHS works when you need it. For me there have been both plus points and minuses. I have to say my other half hasn't been very pleased. Her first text to me the morning after the op was "I want to go private", which does raise some Blairite type thoughts in my mind. I might blog about this some more at a later date.

I'm still fitting in a bit of work-related stuff in my week at home. I'm currently about halfway through The Economist Guide to Financial Markets which I would definitely recommend to anyone interested in such things. Personally I'm finding that it is very useful in filling in some gaps in my knowledge and it's also (generally) very clearly written. I'm currently on the chapter about securitisation which is really interesting. I had a basic grasp of the area but I wasn't aware of the extent to which it occurs, or how various attributes of underlying assets get divided up. As I'm reading the book I find I'm actually quite impressed at the innovation in financial instruments the more I learn about them.

It makes you wonder a little at how an organisation like Northern Rock - itself obviously a financial institution - could get itself into such a mess given all the different options there are to parcel up and pass on different bits of risk. But it also reinforces the point that businesses are becoming increasingly financialised - these days they try to hedge all kinds of risks and are increasingly dependent on financial markets. As such I want to try and read a decent critique of financialisation at some point this year. This looks like it might a good US one.

Finally, I'm also dipping into Judgment under Uncertainty: Heuristics and Biases which is a collection of essays about cognitive biases, many of them based on research by the pioneers Kahneman and Tversky. A lot of good stuff here.

Monday 4 February 2008

Egg and credit cards again

This story is still rumbling on, but there still does not appear to be any greater clarity about why those with apparently good credit records are having their Egg cards taken away. A lot of the press coverage implies that the cynical theory - that they are being booted because they make the company little money - is correct. I can't find any factual support for this suggestion and all the comments in support seem pretty vague or unattributed. In contrast in a number of places Egg specifically denied the claim.

Strange one. Whatever the real story it has been a bit of a PR disaster for Egg, though if they are only annoying people they want to dump as customers in any case I suppose it won't matter. There are also reports that other companies might follow Egg's lead. It does all point to it getting harder to borrow if you are the lower end of the market.

Linking executive pay to health & safety etc

Last year BP won praise from some quarters because it slashed its directors' bonuses in the wake of some serious safety failings, most notably the fatal Texas City Refinery blast. I have to admit I'm a bit troubled that they were awarded any bonus - it does make you wonder how many proles have to get blown up before directors recognise that it might not look good if they pay themselves some serious wedge for high performance.

But BP actually at least showed some awareness of the importance of these issues. Contrast that with the directors of Jarvis who were paid bonuses in respect of their performance in the year of the Potter's Bar rail crash. It might well be the case that the directors technically hit their performance targets for that year, but surely they could have still done the right thing and waived the bonus for that year? Right-wing critics of corporate governance reform often make the the valid points that even the best systems can't turn bad managers into good ones, and that personal integrity is exremely important. But then how do you deal with cases like Jarvis where the directors are quite happy to stick two fingers up to personal integrity?

One solution has been proposed by the Local Authority Pension Fund Forum today. They have called for directors' pay to be linked much more closely to the management of so-called non-financial factors. These might include things like health & safety, environmental management, employee satisfaction and so on. The idea is that directors would only get performance-related rewards if they manage these areas as well as traditional financial metrics. One of the interesting things that LAPFF has found is that even amongst the UK's biggest companies there is little linkage between the factors that businesses say are key performance indicators (KPIs) highlighted in their Business Reviews and the factors they use to calculate executive rewards.

The logic is simple. If a certain factor is important enough for it to be a "key" performance indicator, why aren't directors incentives to manage it? It's a shame that directors need to be incentivised to ensure that workplaces are safe and as environmentally friendly as possible. But equally it is ludicrous that incidents like the Potters Bar bonuses example occur.

Saturday 2 February 2008

Egg and credit cards

There's a story out about Egg telling over 160,000 of its credit card customers - apparently about 7% of the total - that they will no longer be able to use their Egg credit cards. Egg, which is now owned by Citigroup, has said that this group of customers has become too high risk as their credit profile has deteriorated. This implies that they might miss payments. As such it seems like a fairly sensible strategy from Egg's point of view, although it will clearly irritate those affected.

The story on the Beeb about this is interesting because they quote one Egg customer who has been told to sling her hook who says she always pays the card balance of in full each month. And if you scroll down to the comments at the bottom of the Beeb story there are a number of other Egg customers making exactly the same point. Some of them have checked out their credt rating and found it to be high. Some of the comment posters suggest that Egg wants rid of them because they pay their balances off and thus aren't a very profitable group. But this seems unlikely as the language used by Egg is very clear. So what is going on?

Possibly, given the high numbers of customers being told to get lost, it is an admin error, and a few customers with good credit ratings have been wrongly identified. Probably more likely some of them are viewed as high-risk for different reasons. Off the top of my head retired people might be seen by Egg - or its Citigroup owners - as more risky because they little scope to increase their income if they did run into problems and, thinking bleakly, limited time to make repayments.

Citigroup itself has been stung by subprime exposure and so it is probably looking to batton down the hatches in case things get really nasty. It looks like another gloomy sign of the year ahead.

Derren Brown, stock spammers and doodlebugs

I only caught the second half of Derren Brown's The System last night, but as usual it was top stuff. He managed to convince a woman chosen at random that he had a system which could predict the winners of horse races in advance. Each time he sent her a prediction sure enough the horse won. It looked like he really could predict the races in advance.

The thing is he hadn't only contacted one woman. He had contacted thousands of people. In each six horse race he split the target group into six and sent members of each group a different prediction. So one group was bound to be right. For the next race he split the group that had received the correct 'prediction' in the previous race into six and again sent each sub-group a different recommendation. Again, one group would inevitably be given the correct tip. By the time this had been run three or four times you can see why someone might become convinced that there was a genuine system at work as implausible as it must initially seem.

By the end of the programme he managed to convince the woman who had been given seemingly flawless predictions that he did have a system, and as such she borrowed money to take a punt on his last tip. At this point - with the bet apparently placed - he revealed the 'system', much to her shock and annoyance! This was the only bit of the show that didn't quite ring true as at no point did I really think he had stuck her money on the random horse. He's too much of a nice bloke. But in any case the show provided a great example of how randomness can look structured.

The other great thing about Derren Brown is that he does seem to be on a mission to expose con-artists. And in fact this programme is a variation on technique that has been used in the past, only substituting share price movements for horse racing tips. Imagine if you were sent info from a financial adviser that correctly predicted, say, movements in the FTSE for four or five months on the trot. Wouldn't you be tempted to have a punt? As I am currently being targeted by some irritating stock spammers in my blog comments I was particularly grateful to be reminded of this example!

Finally the scene at the end of the programme where he revealed that he had spent all day flipping a coin in order to produce the film sequence where he managed ten heads in a row was also another great example of how we get taken in by randomness. Much as we 'know' that it is possible for such a series to arise in a genuinely random sample somehow we can't quite believe it is random when we see it. We expect randomness to look more, well, random. A great example of this I read about recently was the way that Londoners interpreted V1 and V2 strikes during the war. The Germans were using petty basic guidance technology and were simply targeting 'London'. However, when the rockets fell randomly across the capital the random distribution included a few clusters. It did not look random. This led people to believe that certain areas were more likely to get hit than others.

Friday 1 February 2008

Super-rich tax avoidance costs us £1,000 a year

I'm sure most people saw the TUC report today on tax avoidance. If not you can download it here and and the first bit from the release is below:

[T]he public purse loses £13 billion a year through tax avoidance by the wealthy and £12 billion a year through tax avoidance by corporations. Altogether this adds up to £25 billion - or around £1,000 a year for everyone at work in the UK.

I noticed an interesting comment about the background to the report in this piece about it in the FT:

The TUC believes it is tapping into a growing mood of resentment about the super-rich. The view, prevalent in the 1990s, that targeting the wealthy would be seen as a politically unpopular attack on people’s aspirations, is fading.

I think this is spot on. Because of the darkening economic picture people are fearful, and don't like seeing that some groups in society still coining it in whilst they are being told to keep they pay increases below inflation. In addition the disclosure that the richest people in the UK often pay a lower rate of tax than most of us is really starting to seep into the popular consciousness.

It will be interesting to see how this unease plays out politically given that the main parties still don't seem to think that rich-bashing is a shrewd strategy.

"Quotations" and social proof

One of the things that has really started to bother me lately is the use of quotations to bolster arguments. Again this is something I am guilty of myself, and many a paper I have written in the past has relied on a fairly extensive use of quotes. But increasingly I am trying to stop myself from simply reusing someone else's words in order to strengthen my line of argument.

I can see several problems with using quotes.

1. You may not have understood the quotation properly. The original writer/speaker might have expressed themself unclearly, or you may have missed the point that they were trying to make, perhaps by reading their words too literally. Either way it is a danger.

2. The context is hugely important. Stating the blindingly obvious, the UK in 2008 is not the UK in 1945, our standard of living has changed dramatically, as has the global situation we face. Therefore it is entirely logical that a statement of political stategy that was reasonable in 1945 is unreasonable now. To remove a quote from its context may therefore make it meaningless.

3. The use of quotes, in my opinion, is usually an exercise in social proof. We quote figures who are widely respected because their reputation is a seal of trustworthiness that we add to our argument. In our narrative they are a character who can be trusted. But their words may not actually prove anything.

For example, suppose I said I have just discovered the following passage in a lost essay written by Karl Marx:

"It is possibe, if unlikely, that a capitalist system may be able to sustain economic growth to the extent that the material condition of the proletariat improves dramatically. In such a scenario the proletariat's relationship to the means of production would be unchanged, but the nature of proletarian consciousness determined by significantly changed material conditions may give rise to a pragmatic mentality that seeks incremental reform rather than revolutionary transformation. If such a condition were to occur it may not be unreasonable for the proletariat to adjust its political programme accordingly."

If this quote genuinely was from Marx it could be used as social proof that social democratic politics was a justifiable approach in a country with high living standards for working people. Unfortunately the quote isn't Marx, it's me, but does the logic of the argument lose any strength because of it? It shouldn't do should it, but it does feel like it has lost power when you know it's not a quote from anyone important. That's because social proof is another example of us using a short-cut to understand something. The writer/speaker hallmark is what we are using to judge the quote by, not the actual content.