Monday 31 March 2008

Recuperative reading and top tunes

I'm at home today feeling really rough. Had a really unpleasant night and wasn't able to get to sleep until past 4.00am so I'm feeling wiped out. The one plus point is that a few books I had ordered have turned up in the post this morning. They are:

The Logic of Life: Uncovering the New Economics of Everything by Tim Harford

Bought this because I quite liked his first one (The Undercover Economist) and it also has a section on why bosses after overpaid which I thought might be quite useful for work. However I have now read that chapter, and whilst it is quite good I think it could have done with a bit more about the role of shareholders. For example arguably it's rational for institutional shreholders to not kick off about high executive pay because it's not their own money they are investing.

The New Financial Order: Risk in the 21st Century - Robert Shiller

Been meaning to get this for quite a while. Again I really enjoyed Irrational Exhuberance, plus I have flicked through this a few times in Borders and thought it looked very interesting. He also talks about unions being one possible provider/advocate of risk insurance.

Telling Lies: Clues to Deceit in the Marketplace, Politics and Marriage - Paul Ekman

This one is a bit of a punt. I'm quite interested in learning more about dishonesty (actually there is a decent section in Predictably Irrational about this) and I thought it might be quite useful in my day job.

Meanwhile I've decided to set aside (for now) one of the books I got last year and just don't seem to be able to get properly into - Capital Flows and Crises by Barry Eichengreen. Although it's obviously very relevant currently I just can't make headway with it. So I think it's going to be one for reading on the beach in the summer.

Finally, inspired by the way that blogs like A Very public Sociologist and Someday I Will Treat You Good include current top tunes and downloads, I thought I would bung up a list of my own. In no particular order -

Rossz Csillag Allat Szuletett by Venetian Snares
Excepts from Your Mum's Favourite DJ by Kid Koala
Music Has No meaning by Consolidated

Sunday 30 March 2008

Business narratives

I bought the Sunday Times today because by the time I went for a paper The Observer had run out. The business section has a couple of interesting bits in it - lots about the corporate governance battle looming at M&S, and something about the FSA's probe into the shorting of HBOS (basically they are having trouble proving anything so far).

But it's the commentary section that interested me the most. It includes some classic examples of narrative dressed up as knowledge. Get a load of this bit about the FSA and Northern Rock -

The regulator has to recruit top-drawer people who have the skills to police a financial environment that is becoming ever more complicated. These individuals must roll up their sleeves in the way that senior investment bankers do and engage at the highest level. That process is under way, but it has further to go. The negligence at Northern Rock was a failure of people, not a failure of the system.

If you don't think too much about it then it might sound like a reasonable bit of commentary. But read it closely and you realise that it's just blah.

The regulator has to recruit top-drawer people who have the skills to police a financial environment that is becoming ever more complicated.

They should recruit people who can do the job properly.

These individuals must roll up their sleeves in the way that senior investment bankers do and engage at the highest level.

The people they recruit should work hard.

That process is under way, but it has further to go.

The FSA should do what it is doing already, but better.

The negligence at Northern Rock was a failure of people, not a failure of the system.

Individuals make mistakes.

I don't means to single out any particular journo, since this sort of commentary is very widespread. But I do wonder whether we might get better business coverage if business journos spent more time writing news and less time writing commentary. So little of it seems to provide anything insightful.

Predictably Irrational review

Because I'm lazy I'm just reposting the review I've bunged on Amazon -

I bought this having seen Dan Ariely speak at LSE recently. He was an engaging speaker and his research sounded interesting.

Having read the book I was left a bit underwhelmed, because I found that I was already familar with both some of the research and a number of the concepts, and was tempted to give it 3 stars. However on reflection that's probably a bit unfair. This is actually a good book for people interested in learning about the field of behavioural economics. It's nicely written with a chatty style, and some of Ariely's research is very interesting.

Just a few snapshots to give you an idea of what this book covers. He looked at subscription packages for The Economist and found that and obviously bad deal led people to choose an option that was like it but obviously better (because it gave them a way to measure the options). In contrast when there were two options that were different but hard to compare they tended to just go for the cheap option.

In a maths test where subjects were given a cash reward based on the number of problems solved and were given an opportunity to cheat, he found that asking them to recall the Ten Commandments ahead of the test appeared to make them less likely to be dishonest.

And in taste tests people prefer Pepsi to Coke when tasting blind, but prefer Coke to Pepsi when they know in advance when they know what they are going to drink. This suggests that we prime ourselves to enjoy something we expect to enjoy.

If this all sounds 'obvious' to you, to some extent you are right (although there are many examples in this field that are counterintuitive). But people like Ariely make the point that although in a 'common sense' way we know that we are easily influenced and 'irrational', policy is often still made with the assumption in mind that we behave as rational self-maximising economic agents.

One point that can be, and often is, made in return is that although behavioural economics is good at describing seemingly irrational behaviour, it is yet to prove itself as a useful resource for designing better policy (although opt-out, rather than opt-in, approaches to both pension saving and organ donation are arguably influenced by behavioural insights). And in fact Ariely's book is at its weakest when he tries to suggest ways that his research findings might inform policy (I'm not surprised that the bank didn't call him back about his credit card idea!).

So for someone such as me interested in policy the book is enjoyable, but a bit limited in value. However if you are new to this field and interested in finding out more this is a good starting place, and you may well find yourself surprised by some of the findings.

Friday 28 March 2008

Unexpected benefits

I was at Unison's national seminar on the LGPS this Tuesday. John Gray has blogged baout it here and here so I won't cover this in detail. Two things worth mentioning are that Fidelity's donations to the Tories were raised, and that the TaxPayers Alliance report on council pensions is thought of as "academically shoddy" by senior civil servants. (The TPA might think this is simply self-interest. Personally I think the obvious conclusion is simply that it was a poor report).

However the thing that really struck me about the afternoon sessions is how Unison's drive to get proper member representation on the LGPS has a) already had an impact and b) opened up other interesting avenues. In terms of the former, although the DCLG's response to date has been limited, the requirement for funds to disclose a governance policy is at least putting some pressure on, and officials there think there is movement. But on the second it's clear that by trying to get to the bottom of the apparent resistance to member representation, Colin M and his crew have found out quite a lot more.

For example, before Unison got stuck in how many of us knew that local government funds lend to authorities at below market rates? How acceptable would you find that in a private sector scheme? Had anyone outside the civil service looked at how the Government was interpreting EU directives on pensions, and how this might affect the LGPS? These are not small issues, yet they wouldn't have emerged without the drive to get member representation (which is itself a stepping stone for the Unison capital stewardship programme).

A similar thing happened when the TUC started its voting survey. This was intended as way of giving trustees information about how fund managers exercise ownership, with the aim of making this a factor in mandate decisions. However the refusal of most of the fund management industry to play ball meant that we were handed a great campaigning issue - voting disclosure. I can honestly say that if fund managers had simply co-operated with the survey in the first place it is unlikely that we would have pushed for a mandatory disclosure regime - we wouldn't have needed to. Although we still haven't got there, the Government now has a reserve power that could mandate disclosure the ISC has published disclosure guidance, and a number (not a large number!) of fund managers now publish their full voting records.

I also learnt a lot more about how the City operates. Early on when we first launched the survey I went to visit one fund management house that wasn't going to participate. One of their people explained that they couldn't give us the information because it was client confidential, what's more they had checked it with their compliance people and found it was actually illegal to disclose the information to us. About a year later the same fund manager started publicly disclosing its full voting record. I guess it must have become legal somehow...

Similarly in the first survey we found that one fund manager only voted its shares where it held 5% or more of a company. This was a midsize fund manager so that meant it wasn't voting much at all. And if you think it through it probably means that they were less likely to vote at larger companies - big public companies usually have a wider shareholder base, and it simply costs more to acquire a bigger stake. This had a further consequence - a trade union pension fund that employed this manager complained, and the fund manager subsequently said that it would revise it spolicy and from then on vote all it shares.

All this grew from a much much simpler objective - getting people to respond to a survey. Just like the wealth of information Unison is amassing on the LGPS is driven by the much more basic objective of getting trustees om pension funds. Sometimes doggedly sticking to a campaign objective can deliver significant unexpected benefits.

Thursday 27 March 2008

Co-op's sin stocks

Ealier in the week The Guardian ran this piece about Co-operative Insurance not investing in six companies because of corporate governance concerns. A couple of them are very well-known (in my bit of the world) as corporate governance basket cases - French Connection and Euromoney (which I used to work for back in the dim and distant).

The interesting bit for me is the performance figures quoted in the article:

French Connection's performance is almost a negative 50% [relative to the All Share], Euromoney Institutional Investors close to 40%, N Brown almost 30% with Carnival not far behind. Amstrad's underperformance is close to 10%.

The question is what is driving that? Is poor governance the sympton, the disease, or is it a self-fulfilling prophecy? Are the companies underperforming because they have poor governance and are therefore badly-run. Or are the companies badly-run, and thus have poor governance? Or is it simply that the market believes that companies that have poor governance will underperform, and so discounts them?

Given that FCUK and Euromoney are at the extreme it is interesting to see that they are also the worst perfomers. On the face of it to does seem to suggest that investors ought to use corporate governance as a factor in investment decisions. Maybe that is enough.

Unite on FSA & Northern Rock

Not sure it says a lot?

Unite reaction to FSA report on Northern Rock

Graham Goddard, Unite Deputy General Secretary said: "The failures which resulted in the crisis in Northern Rock mean that some 2,000 jobs will be lost at the bank. Unite recognises that the FSA has accepted their responsibility in relation to their monitoring of the bank. We are calling on the FSA to ensure that their supervision practices are strengthened so there can be no repeat of the mistakes that occurred in Northern Rock.

"Unite wants to see a full investigation into the events which lead to the troubles of the Newcastle based bank. This enquiry must take a broad perspective of all those involved, including the previous management of the company. The hard working staff at Northern Rock deserve to know what went wrong and that lessons will be learnt.

"At a time of massive uncertainty for employees in the financial services sector it is vital that the Government and the FSA are able to demonstrate that those who contributed to the failure of Northern Rock are held to account. Unite cannot accept that anyone whose actions contributed to the problems in the bank are able to walk away without any questions being asked of their conduct. We will be pressing for a full investigation."

Wednesday 26 March 2008

Terror-free investing

I kid you not. Check out this story on Global Pensions. Of course it's not quite as exciting as it sounds, seeing as how Al-Qaeda isn't a listed company. Rather this is about avoiding companies that do business with regimes the US sees as linked to terrorism.

As ban aside I did like the idea of a terrorist attack prediction markets, but it got canned.

Tuesday 25 March 2008

The sky is falling in and I want my mommy

I remember listening to Bill Patterson (then at the AFL-CIO, now at Change To Win) talking about 5 years ago about the post dotcom market slump and the wave of US corporate scandals (Enron, Worldcom etc). He said that although it had undoubtedly beena very damaging time for working people in America, it also provided a window of opportunity for the labour movement, and more specifically the capital stewardship wing of it, to assert itself in demanding governance reforms. I think he was spot on, and indeed the US unions really cemented their reputation as serious activist investors in the following years.

I think we now see a similar major window of opportunity emerging. The ongoing financial crisis is trashing both a lot of reputations and some fundamental assumptions about markets and regulation. Cases like Northern Rock and plenty of otthers from the US show that extremely well-paid financial professionals a) can get things badly wrong and b) can cause a great deal of damage when they do so.

Just to give you a very quick taste of some of the re-evaluating going on, have a read of Martin Wolf's piece in the FT today:

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.

I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion. A vast amount of risky, if not downright fraudulent, lending, promoted by equally risky finance, has made securitised markets highly risky. This has damaged institutions, notably Bear Stearns, that operated intensively in these markets.

This ought to be an opportunity for the labour movement globally to develop a coherent challenge to financialisation. Unfortunately I don't think we are anywhere close yet. Another bit from the FT today worth reading is Michael Skapinker's column. Though he shares Wolf's view that fundamental assumptions about markets are being challenged by reality, he is also correct in my view in asserting that the Left doesn't know how to respond:

So what sort of change might be we witnessing? If the Thatcher-Reagan era is at an end, what might replace it? Trawling leftwing and far-left websites is instructive, because they clearly have not got a clue either.

They are not demanding the nationalisation of the banking system, perhaps because that has already happened, either explicitly or implicitly. But they do not seem to be calling for anything else.

In The Nation, the leftwing US magazine, Nicholas von Hoffman lays into "our crooked, avaricious, heedless and duplicitous financial system", but admits: "We are in unknown territory facing situations that have never arisen before and taking measures that have never been tried."

Surely Britain's Socialist Workers party can do better than that? Not really. "Now more than ever, we need to present a different vision of how the world could be run - one in which the needs of the many come before the greed of the few." Like what, exactly? Even in crisis, capitalism remains fortunate in its enemies.

It won't do to simply rehash broad critiques of capitalism, we need some concrete ideas about what we think has actually gone wrong (not as straightforward as it sounds), what could realistically have been avoided (as opposed to bad luck) and, most importantly, what we think needs reforming.

I think this is an opportunity to be pretty radical. As a society the UK has showered money over the financial services industry through high salaries and has been very wary of legislative intervention because of a fear of killing the goose that laid the golden egg. Now that some of the very well-paid professionals have done so much damage a fundamental re-evaluation is surely in order. But who is going to start the ball rolling with some practical ideas?

Headline hat-tip: Jello Biafra and Nomeansno

Monday 24 March 2008

Sovereign wealth funds - friend or foe?

Interesting to see that sovereign wealth funds (SWFs), which at one time looked set to become the next bĂȘte noire of the capital markets (after hedge funds, and then private equity) are now being talked up as a potentially stabilising force. The idea is that these funds ought to be long-term investors, and as such maybe able to provide what we used to call 'patient' capital.

SWFs were given the thumbs up by the WEF at Davos recently, see this press release. More interesting is the statement from the International Corporate Governance Network (ICGN) on their website (third link down in the 'What's new' section). According to the ICGN "sovereign wealth funds share the economic objectives of traditional long-term institutional investors such as pension funds and insurance companies."

The funny thing is that I'm fairly sure that the ICGN had a veiled dig at SWFs not so long ago (I will check this out). If my memory is accurate there was a bit of concern about political interference. If I am right maybe the ICGN just changed its collective view, as other have done.

To make a fairly obvious point as with hedge funds, and to a lesser extent private equity, it's a bit misleading to see SWFs as an homogenous group. They have different histories, even different investment objectives, and, obviously, originate from countries of varying politics. Therefore any labour movement response probably needs to work case by case. Also from my limited reading on SWFs it seems pretty clear that their collective assets are still substantially smaller than pension funds. So whilst they are important, and we should keep an eye on them, we shouldn't overestimate their role. As I said at the outset they are probably attracting policy interest these days more as a fresh pool of capital than as political threat.

Sunday 23 March 2008

The emotional turmoil of ATM charges

Whilst I was thinking about prices and how they affect us I was reminded of the irritating impact of ATM charges. A point raised in both Predictably Irrational and The Undercover Economist is how far we would go to pay a lower price for something. Of course it's relative. I might cross town to get a CD for £10 if the place nearest to me charges £15. But if I'm buying a suit worth £200 would I make the same journey to save £5? I seriously doubt it. Of course the proportionate value of the saving is much less in the second example, but it's still £5 I don't need to spend. (Incidentally I asked my other half the same question, and she said she probably wouldn't make the journey in either case.)

This isn't just an abstract issue for me. A year or two back the ATMs at Blackfriars station, which I pass through to and from work every day, changed from being NatWest, where you pay no charges, to those ones you increasingly see these days where you have to pay a fee to get cash out. In the case at Blackfriars the charge is now £1.85 per transaction, which is the highest I have seen anywhere so far. The result is that I now avoid those ATMs like the plague, whereas I used to use them all the time. In other words I will go out of my way to avoid the £1.85 charge.

I guess this is what the idea of loss aversion should make us expect. In effect ATM charges are a form of guaranteed loss (since I know I can get the service for free at numerous other locations). I can definitely attest that the idea of incurring that £1.85 charge is emotionally painful and I will do a lot to avoid it.

Unfortunately once in a while I am forced to use the ATMs at Blackfriars. Sometimes between leaving the office and getting to Blackfriars my wife texts me to ask me to get cash out of our joint account for shopping or whatever. If I have enough of 'my own' cash (funny concept when you're married I know but that's mental accounting for you) in my wallet I won't use those ATMs. But if I don't have enough cash I feel I am effectively forced to use them (using the nearest 'free' ATM would mean I have to leave the station and walk a fair distance, which in turn means I would miss my train and have to wait for another).

On the rare occaisons that I do have use these ATMs I now make a point of getting out a lot of cash. Usually the Mrs only needs me to get £20 out, but somewhere in my mind a £1.85 charge on a £20 withdrawl is getting on for 10% of the value of the cash. That seems ridiculous to me so I will typically get at least £40 out even if I don't need the extra £20 (and even then I feel very irritated by incurring the charge). Somehow I feel I am cutting my losses.

It's interesting to recount how I feel when I do incur the charge. Somehow I feel that I am being sort of punished for using the ATM, and that I have made the 'wrong' decision (rather than simply an adequate one) by using it. For me that is actually helpful. The emotional pain of the charge reinforces my desire to avoid those ATMs if at all possible. But I can't see how that can be a good thing long term for the company running the ATMs (why would you want to make your customers feel punished for using your service?). Obviously they must have concluded that the income they can derive from operating ATMs in a prime location is sufficient to put up with scaring off many potential customers.

More broadly the overall result of the introduction of charges at these ATMs for me is that I feel that a useful and convenient service has effectively been (emotionally) priced out of my reach. I can't believe that others don't feel the same way and I would be really interested to find out how traffic has changed at the ATMs since the charge was introduced. My totally unscientific view is that the ATMs are much less busy than they were. It used to be the case that in the morning there was often quite a big queue. Since the charge kicked in I don't think I have even seen a queue. Whilst that still makes sense in the narrow terms of the ATM operator's profits, somehow this seems to be an example of pricing having a very negative outcome.

A final point about my stupid reactions to the ATM charge. I am pretty sure that if the ATM operator were to now drop the charge to £1 per transaction I would use those ATMs more often. £1.85 is now the anchor, so something less than that will seem less painful and unfortunately I suspect I would therefore be willing to incur it more often. Whereas if the ATM had gone from being free to charging £1 a transation I bet it would have had a similar impact on my behaviour to the introduction of the £1.85 charge. So if I was the ATM opeator I would seriously think about reducing the charge. I hope I am strong enough to see through it if they do!

A different view of price formation

Well, I decided I'd better get Dan Ariely's book Predictably Irrational after being fairly impressed with his talk at LSE last week. I'm already a fair way through it and it's proving to be quite a fun read. A slight criticism would be that I think his version of 'traditional economics' is a bit of a straw man.

There's been nothing ground-breaking for me yet, though it's useful to hear how some of the insights from behavioural economics have demonstrated in experiments. For example the accounts of various experiments focusing on the impact that anchoring has on our view of prices really do get across the point that a lot of the time our ideas of what is 'cheap' or 'expensive' are pretty arbitrary. Therefore I think he is right to argue that the irrational way we respond to prices should make us think more about price formation.

Here's an excerpt from towards the end of the second chapter:

"[A]ccording to the standard economic frameowrk, consumers' willingess to pay is one of the two inputs that determine market prices (this is the demand). But as our experiements demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don't in fact have a good handle on their own preferences and the proces they are willing topay for different goods and services.

"Second, whereas the standard economic framework assumes that the forces of supply and demand are independent, the type of anchoring manipulations we have shown here suggest that they are, in fact, dependent. In the real world, anchoring comes from manufacturers' suggested retail prices, advertised prices, promotions, product introductions, etc. - all of why are supply-side variables. It seem then that instead of consumers' willingness to pay influencing market prices, the causality is somewhat reversed and it is market proces themselves that influence consumers' willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply."

Friday 21 March 2008

Executive pay: the failure of shareholder activism

In the UK we now have five years experience of a shareholder approval vote on directors' remuneration. That strikes me as enough time to assess whether giving shareholders a direct say - if only an advisory vote - has made any significant difference.

What we can say is that giving shareholders a vote has led to more dialogue between companies and their notional owners over remuneration. Usually there will be quite a bit of engagement ahead of AGMs, especially if something unusual is suggested.

There has also been a small number of cases where companies have lost the vote. Glaxosmithkline is still the most high profile example. Actually there haven't been many others at all. You might get two or three a year, and rarely a sizeable company. Even if companies do lose the vote, what does that actually mean? There are some fund managers I have spoken to who don't think the GSK rebellion really achieved anything.

Remuneration-related resolutions attract a higher average oppose votes than others, but it's still low overall (I think about 9% last time I looked, will double check this when back at work). And from looking at the limited publicly available voting data you can see that some fund managers rarely vote against remuneration reports.

Meanwhile executive rewards have continued to rise. Base salaries have continued to increase ahead of inflation and ahead of increases for other employees. Meanwhile it's in the 'performance-related' bit of remuneration (bonuses, LTIPS etc) where there has been serious increases. Both the potential awards and actual awards made have increased.

So if we put the low level of opposition to remuneration resolutions up against the ever increasing levels of directors' remuneration, isn't it fair to conclude that shareholders must overall be happy with things as they stand?

Part of the the problem is the principal-agent issue. This is not just about management being the agents of shareholders, but also the fact that fund managers are agents of those whose capital they invest. Ultimately it is primarily fund managers who decide how votes are cast on remuneration, yet it's not their money that they are agreeing to spend attracting, retaining and motivating "world class talent".

That means shareholder engagement over pay may actually serve to legitimise undeserved rewards. The company whose policy has been approved can fairly say that shareholders have backed it, and if 'shareholders' think it is OK who is to disagree. More broadly the focus of fund managers on executive pay serves only to reinforce the idea that only those at the top of an organisation are responsible for its performance and deserve to be rewarded for it.

There are some in the investment world who think that the introduction of the shareholder vote on pay was not really intended to deal with high executive pay. Rather it was a way to take the political pressure out of the issue by looking like it was being 'managed' by shareholders. If that was the case then it has been a success. Those of us who are bothered by ever increasing executive pay (not just for reasons of equity, I personally also think it's simply a waste of money) have spent/wasted five years trying to make the new system work, only to conclude that it doesn't really achieve anything.

Too many investors don't vote against enough remuneration resolutions. By focusing on those they see as the worst, they send the message that the rest of the market is OK. But I think many of us involved in this stuff at the coalface would conclude that there is a market-wide problem.

If on the other hand the Government really did think that shareholder engagement would rein in executive pay, I think it is time they took another look at the problem. If fund managers won't/can't do the job, someone else should.

Thursday 20 March 2008

Credit crunch rhapsody

Sing to the tune of Queen's Bohemian Rhapsody

Is this the real price ?
Is this just fantasy ?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High yielding casualty

Because I bought it high, watched it blow
Rating high, value low
Any way the Fed goes,
Doesn't really matter to me, to me.

Mama - just killed my fund
Quoted CDOs instead
Pulled the trigger, now it's dead

Mama - I had just begun
These CDOs have blown it all away
Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Benanke ! Can you save the whole market ?
Monolines and munis - very very frightening !
Super senior, super senior
Super senior CDO - magnifico

I'm long on subprime, nobody loves me
He's long on subprime, CDO fantasy
Spare the margin call, don't blame me for all !
Easy come easy go,
Will you let me go ?

Peloton !
No, we will not let you go !
Let him go Peloton!
We will not let you go !
Let him go, Peloton !
We will not let you go !
Let me go !
Will not let you go
Let me go (never)
Never let you got
Let me go
Never let me go - ooo
No, no, no, no, no, no, no

Oh mama mia, mama mia, mama mia, let me go !
S&P had the devil put aside for me for me, for me, for me.............

So you think you can fund me and spit in my eye?
And then margin call me and leave me to die?

Oh - can't do this to me
Just gotta get out, just gotta get right outta here

Ooh yeah, ooh yeah
No price really matters
No liquidity
Nothing really matters
No price really matters to me
Anyway the Fed goes...

SHARE newsletter

A quick plug for the always excellent SHARE newsletter which came out this week. You can access it here.

Loose lips sink banks

A couple of recent developments make you realise what a fragile state market confidence is in right now, and how unscrupulous people use that to their advantage. The collapse in HBOS's share price earlier this week is a case in point. The FSA has announced that it is going to scrutinise unusual trading in HBOS shares. The clear implication here is that some in the market have been talking down the bank in order to make money by shorting it.

Sally Dewar, managing director, wholesale and institutional markets, said:

"There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them.

"We remind market participants of the need to take extra care, in this market climate, to adhere to the market code of conduct."

So what, you might ask, that's what happens in markets. But, as the FSA quote above says, we are living in risky times. The recent Bear Stearns crisis demonstrates the problem. Only just over a week back the bank put out one statement saying that rumours of its liquidity problems were unfounded. However the market was already spooked, and investors pulled their cash, so the liquidity problem became a self-fulfilling prophecy and just a few days later Bear Stearns issued another statement confirming its acquisition by JP Morgan.

We are in a situation where greed and fear are rampant and a few whispers can start a market storm that can do serious damage. Just listen to what this fund manager has to say:

Financial markets have become a treacherous place of late and the risk of firms getting 'talked into going bust' is now very real, according to Neil Dwane, CIO for Europe at RCM.

'What is genuinely terrifying for financial markets is the power of market rumour,' he said.

Dwane points to the plight of Bear Stearns which, despite claims it had adequate liquidity and funding, found itself insolvent after a 48 hour period in which various counterparties withdrew their lines of commitment.

Dwane believes the most scary thing is the speed with which rumour can spread in the current climate with potentially fatal consequences: 'Talking to various contacts within the market, one thing becomes clear; you can get talked into going bust in these financial markets.'

This is an interesting/scary point. The HBOS incident makes you realise that there are some market participants who prioritise making money through speculation over financial stability even as we teeter on the edge - their returns are more important than causing unnecessary damage to a major bank. But then what are professional investors doing? A company's share price surely can't fall by almost 20% without some institutional investor involvement. Are they simply tailing the shorters to avoid getting stung?

Anyway, days like this are worth remembering next time someone tries to tell you that stockmarkets are about the efficient allocation of capital.

Wednesday 19 March 2008

Guy Hands threatens to leave UK, crowds weep in the streets

According to the Pink 'Un, Terra Firma head honcho Guy Hands has warned that his business may at least partially relocate overseas.

“We are concerned by the recent changes to the UK tax laws,” says Mr Hands, the first buy-out boss to warn he may flee the country since the government started fiscally targeting rich private equity executives last year.

“Recent developments in UK policy may well drive global firms and highly skilled individuals away from London at significant cost to the UK economy in terms of lost revenues and lost taxes,” Mr Hands says.

Unfortunately the FT (in my view) falls for the self-serving guff and goes on to worry about the significance of his comments.

However, it is ominous that the warning comes from Terra Firma, a UK-based firm, run by a British citizen, employing 100 staff and owning some of the UK’s best-known companies, such as music group EMI and cinema chain Odeon UCI.

As I have argued before, I think maybe it is time that we called the industry's bluff on this one. Let's see what a big difference it makes if a handful of private equity execs move to Switzerland. As should be clear to anyone with an open mind, the impact of the industry on jobs is not clear, and there is evidence to suggest that overall it is negative. Therefore it could have a positive (though small) effect on employment ;-)

Tuesday 18 March 2008

Bear Sterns & self-investment

Interesting to see that Bear Sterns is already the subject of legal interest. In this case the focus is on whether the employee savings plan was inappropriately invested in the company's own stock. Unfortunately, despite the lesson of Enron, it seems that some companies still stuff 401k plans full of their own stock rather than a properly diversified portfolio.

Bear Stearns faces lawsuit over employee share plan

Move adds to pressure from other investors over cut-price bail-out.

SEATTLE (Thomson IM) - Law firm Keller Rohrback LLP said it has commenced investigations against Bear Stearns Companies Inc for potential violations of the Employee Retirement Income Security Act of 1974, focusing on investments in Bear Stearns stock by the bank's employee stock ownership plan.

A breach may have occurred if the fiduciaries failed to manage the assets of the plan prudently and loyally by investing the assets in company stock when it was no longer a prudent investment for participants' retirement savings.

Specifically, the law firm claims, Bear Stearns and the plan's other fiduciaries continued to invest in and hold Bear Stearns stock in the plan despite the company's apparent mismanagement of the risk of assets held by it and its failure to maintain adequate capital and liquidity.

Information cascades and eating on holiday

Just a quick follow-up on the Dan Ariely lecture last night. He had a very good way of explaining information cascades (and how apparently 'popular' choices could be based on very little information). He gave the example of when you are trying to choose a restaurant to eat in on holiday. If there are two places to eat in a popular tourist spot, but neither has people in it, the first person to choose will make an uninformed choice. However the next tourist to choose will see that one restaurant has one person in it, and the other has no-one in it. So he will likely choose the former. The third tourist will see one restaurant with two people in it and one with no people in it, and again is likely to choose the more popular option. After this has taken place several times one restaurant will look very popular and the other will not. Yet this very clear trend is not based on relevant information (ie quality of the food), but rather is simply the result of the uninformed decisions of the first person to choose.

Worrying innit?

Monday 17 March 2008

Behavioural economics for all the family

This evening I went along to a lecture on behavioural economics at the LSE by Dan Ariely. He's a good speaker and peppered his talk with lots of examples from both his research work and real life.

He started by comparing the way that cognitive biases work to the way that we fall for optical illusions. We can properly know that an optical illusion is making us see things wrongly, but we still see it that way. (In fact this comparison is also used in Inevitable Illusions: How Mistakes of Reason Rule Our Mind by Massimo Piattelli-Palmarin, which is worth a read).

He went on to use some examples, including this excellent one. Watch the video very carefully and count the number of times the players in white t-shirts pass the basketball to each other. Just follow passes from white t-shirt to white t-shirt. Then just watch the video back again without trying to count the passes.

He recounted some experiments that demonstrated the impact of framing and anchoring. In the former case it was interesting to hear about the significant impact of an obviously inferior option in a spread of choices. Basically if you are out on the pull it pays to tag along with someone who looks similar to you but is less attractive.

He also did quite a bit on tests about cheating. An interesting insight here was that people were willing to cheat to a greater degree if it was to obtain something without a direct financial value (though it could lead to cash) than for a straightforward cash reward. He made the point that this might help explain how executives could be willing to fiddle options schemes, whereas they wouldn't steal from petty cash. And he said that small amounts of cheating had a much larger economic impact overall than cases of outright fraud, yet society focuses far more on the latter. Interesting point and it sounds like quite fruitful territory for further research.

He made a very good point in closing about how behavioural economics could/should be applied. He said that lots of goods and services were built with the limitations of the human body in mind, yet in lots of areas the limitations of the mind were overlooked and as such expected outcomes were not delivered. He suggested that behavioural economists could therefore be a part of improving policy-making. I agree, and I think that's why we need to bring it further into the mainstream.

Anyway, a good lecture. I think I'll get his book.

Answers versus decisions

A great woman* once said, in reference to magazine cover designs, that there are no answers, only decisions. It strikes me that this rather insightful comment can actually be applied far more widely, and probably explains why we get ourselves in a mess about politics so often.

We like the idea of 'answers' because they are clear, and unambiguous. On the other hand 'decisions' involve judgment and compromise. Our desire for 'answers' is tied up with the idea that there are 'correct' responses to problems, whereas 'decisions' suggest that things are a lot more finely balanced than that, and that we actually have significant scope for choice. The idea that there are definitive answers also makes life seem much more knowable. With hindight it looks like we can see what the best thing to do was, so we can see if someone chose the 'correct' option, or at least a 'good' one. But surely a field like politics, where many things cannot be empirically proven, must always be primarily about decisions rather than answers.

It's definitely a muddle that affects politics. For example, a lot of non-Labour lefties can tell you what socialism isn't, and why examples of it in practice are not 'real' socialism. They often are rather less good at pointing to real-life examples of what they do like, as opposed to text book theories or very limited experiences from many decades ago. In some cases the correct version of socialism hasn't even been implemented, yet despite this they 'know' that it is the right one, and will be good thing for those of us that will experience it. That suggests to me a rather large focus on a very specific 'answer'. I'm not sure if it's just a coincidence that it's an answer that is very hard to prove wrong.

In case you haven't guessed, I prefer the 'decisions' camp. I think we spend out time more effectively considering the actual decisions that our leaders make, and whether they have a positive or negative impact, than attacking them for failing to provide the right 'answer'. Much of the rhetoric about Labour's 'betrayal' looks a bit daft when you think in these terms. Sometimes you get a good result with the wrong answer.

On a personal level I'm really bad at making decisions myself. And that's in no small part because in the back of my mind I think there is an optimal choice that I will be able to identify if I only take the time. I'm always grappling for 'the answer'. But at least in politics I think I'm teaching myself to spot what is good enough, rather than 'correct' and I think that is a smallish step forward.

* Mrs Tom

Change To Win targets Morgan Stanley

Change To Win Investment Group is calling for votes against two directors over sub-prome failures, plus a vote against the chief exec John Mack who combines CEO and chair roles. A bit like Stuart Rose...

Saturday 15 March 2008

Bye bye Fidelity 2

Wow, this is big news! According to Unison superhero John Gray one of the local government pension funds that employs Fidelity has said privately that it won't reappoint them because of their partisan political donations. I suspect that that lost fee income from one local authority fund would outweigh the value of the donations they have made so it's a nonsensical thing for Fidelity to keep doing from a business perspective.

Unison LGPS conference

From the Unison site (you can download an application form there):

Who controls your pension?
25 March, central London
The Local Government Pension Scheme in England, Wales and Northern Ireland has assets worth more than £100bn.

This is the LGPS members’ saving plan – yet there are no member reps on the scheme’s investment funds. Why aren’t they there in the same numbers and with the same status as employers’ reps?

The law says other funded schemes have to have member reps, why not the LGPS? What’s the union doing about this? For that matter, what’s the government doing about this?

These questions and many more will be answered at a free national seminar on LGPS governance and the UNISON campaign for member representation. Get your registration form in now (see below).

Introduced by UNISON general secretary Dave Prentis. Includes speakers from the Department for Communities and Local Government, the Environment Agency, and Thompson's lawyers.

The new look LGPS has a governance working party overseeing proposed changes to the its governance arrangements.

At present there are no statutory rights for member representation on the LGPS: of the 89 funds in England and Wales only four have member-nominated representatives with voting rights.

UNISON and the other LGPS unions have pressed for statutory representation; the government has refused. It is leaning towards a scheme of best practice guidance, with no sanctions or teeth.

The LGPS unions, led by UNISON, have opened a dual campaign to participate in the government’s reform programme and seek legal opinion on bringing the LGPS up to modern standards so that investments are run in the sole interests of the beneficiaries.

Find out more on Tuesday 25 March, 10.30am-3pm, lunch provided.

Venue: NUT Headquarters
Hamilton House
Mabledon Place
London WC1H 9BD

Friday 14 March 2008

Hmmm... not sure about this

See this story on IPE. I'm not sure I agree with this bit:

In the March edition of his famous monthly letter, Ambachtsheer discusses his views on effective decision-making to prevent so-called predictable surprises - extreme negative impact events that were predictable, and predicted, before-the-fact, such as the subprime crisis.

I am super way of the idea that a lot of things that happen are knowable in advance. Things look like they were very obviously going to happen when you already know that they did happen. To what extent did people really predict the sub-prime crisis in any useful sense? I mean beyond more complex versions of saying that at some point people with poor credit ratings may default on repayments.

It's a bit like the way that people claim that the anti-Iraq war campaigners have been proved 'right'. Anti-war people made a lot of claims, ranging from the vague to the very specific. They were almost bound to get something right. If you make a vague prediction without any time horizon (ie the invasion will lead to civil conflict) you give yourself a lot of opportunity to get it 'right'.

I had thought the rise of ideas like those of Naseem Nicholas Taleb was leading people to be a bit more realistic about what is actually knowable. But no, it seems apparently it was obvious how the sub-prime crisis was going to play out. Perhaps someone should tell the investment banks, monoline insurers, Northern Rock directors etc etc.

Will post more along these lines tomorrow.

Thursday 13 March 2008

Active rant

I'm hugely sceptical about the value of active management in a market like the UK. I've just read too many studies over the years that suggest that it is practically impossible to outperform over the long-term. Just the other day I was talking to a bloke who works for a quant house who said that some researchers had run experiment where I think they used a Monte Carlo engine to generate random fund manager performance. Apparently the dispersion of results looked exactly like the dispersion of actual fund manager performance...

Of couse there's a problem - we can't all invest passively, what would the resultant shares prices mean? And actually that would surely create opportunities for people to sensibly take an active approach. So I suppose we need active investors to ensure that prices actually make sense. But in that case aren't clients of active managers actually providing a service to the market?! Why then do they have to pay through the nose for the privelege of making the market work properly? It seems rather back to front.

Obviously if you're a pension fund that has 'selected' a fund manager that is doing 'well' no doubt you'll think that this is a load of guff. But bear in mind that someone can 'win' at a game like Deal Or No Deal too just by luck. No doubt when they do win their 'system' for opening random boxes seems very reliable too.

Active fees are not a small cost either and, as Watson Wyatt recently pointed out, investors' desire for the Holy Grail of alpha means they are handing over ever more. My hideous week in Edinburgh last week reminded me of this - all that champagne has to be paid for. At the end of the day if you are a trustee you are paying for your own 'free' tickets to the football/rugby/other sporting event identified by institutional marketing as being popular with the 'typical' middle-aged, male trustee.

Wednesday 12 March 2008

Willis to leave Burma

This is a lift from the Burma Campaign UK website. Expect to see more pressure on insurers in the future.

Willis pulls out of Burma
05 Mar 2008
Willis Ceases Cover to Burma, Pressure Mounts on Insurers Operating in Burma

The Burma Campaign UK welcomes the undertaking by the world's third largest insurance broker to end their involvement in Burma. The decision follows the company being placed on Burma Campaign's ‘Dirty List’ in 2004 and the creation of an advisory panel of insurance experts in November 2007. The 'Dirty List' exposes companies that are directly or indirectly helping to finance Burma's brutal military dictatorship. It is the official policy of the British Government to discourage trade and investment in Burma

Burma Campaign UK has today written to all insurance companies that operate out of the United Kingdom urging them to follow the example of Willis, Swiss RE and AON by ceasing to insure companies operating in Burma. The campaigning group has evidence that many other UK based insurers are providing cover to companies operating in Burma. Insurance companies operating in Burma face a public relations disaster as the Burma Campaign UK prepares to shine the spotlight on the role of the insurance industry in facilitating trade and investment with Burma’s brutal dictatorship.

"We are delighted that Willis has taken the principled decision to stop doing business in Burma. Today we call on all insurance companies to stop supporting the Burmese generals by covering the foreign companies that are the regime’s financial lifeline," said Johnny Chatterton, Campaigns Officer at The Burma Campaign UK. He continued "The world was shocked at the brutal repression of the peaceful protests last year, insurance companies must realise that by providing cover to companies operating in Burma they are helping to fund a dictatorship that uses rape, torture and murder to oppress its own people.”

Burma's democracy movement has called on companies not to invest in Burma, pointing to the fact that foreign investment and trade has enriched the regime, but not benefited most ordinary Burmese people. The regime spends around half its budget on the military and just 1.4% on education.

Naing Ko Ko, Secretary of International Campaign Dept. for the Federation of Trade Unions - Burma, also welcomed the news from Willis "We have repeatedly called on insurance companies to end their involvement in our military junta run country. They are not playing a positive role in our economy. They are helping to keep the military in power and so increasing poverty in Burma."

Willis joins a long list of over 100 companies that have ended their involvement in Burma in recent years following pressure from The Burma Campaign UK, including Swiss RE, AON, Rolls Royce, British American Tobacco, Premier Oil, WPP, PwC, and Carnival Corporation.

Tuesday 11 March 2008

Conservative supporter attacks Labour policy shocker

Why should we regard Tory-supporting financial institution Fidelity's comments today about Personal Accounts as free of political bias? Before I was aware of Fidelity's links with the Tories I might have taken their analysis seriously. Now I take it with a fistful of salt and wonder whether it is simply politically motivated, especially since the Tories have openly threatened to break the political consensus around Personal Accounts.

I wouldn't expect a Conservative supporter to accept trade union criticism of their party's policies as politically neutral. Perhaps any passing Tory could tell me why I shouldn't consider an attack on Labour policy by a major Conservative Party donor, which also employs a Conservative MP, to be simply the action of a political ally.

On the same subject I'm pleased to report that Fidelity's political orientation is definitely becoming more widely known. I can't give details but a couple of recent conversations - in completely different bits of the market - have shown that the message is definitely getting through to people with influence over investment decisions...

Monday 10 March 2008

Private equity job figures

Just spotted an interesting bit on the BVCA site (click on the link 'Professor Mario Levis: expert academic analysis of BVCA report'). It's a response to John Moulton's recent claim that the BVCA was using 'dodgy' figures about the industry's job creation record.

The short two-page statement makes a number of points about the statistics used. The main one is to address the 'survivorship bias' problem - namely that if you survey firms about employment levels you can only survey those that exist. Hence PE-owned firms that go bust won't be included in the figures. So the survey will only reflect the success, or otherwise, of surviving firms and as such doesn't provide a really accurate picture.

The note says that this is a problem, and that the BVCA's survey does not address survivorship bias, but adds that it probably wouldn't make a significant difference to the figures overall. The reason for this is that although there is a fairly high failure rate amongst PE-owned firms (20% if I am reading it right) its tends to be smaller businesses that go under, so the impact on overall figures won't be that great.

I think the other point that the statement doesn't address is how do we know that employment growth in PE-backed companies is due to the nature of ownership? If Boots does well is that because it has been bought out by PE, or because it was a good business that was going to grow anyway?

Finally I am intrigued by this line at the end of the BVCA statement:

My view, having looked at the report and other supporting evidence, is that labeling the employment growth data “dodgy”, at least for venture-backed companies, remains totally unfounded.

"at least for venture-backed companies" eh? Is the implication that the story might be different for buyouts then?

David Pitt Watson appointed as Labour GS

According to the Beeb. I reckon it's a good thing for Labour. Big loss for Hermes though.

Inside Hamas

Massively off topic but I finally got around to watching the Channel 4 programme Inside Hamas last night, having recorded it a few weeks back. I was interested to find out a bit more about what Hamas is like in power. Unfortunately I am not convinced that this was a great exploration of the issues concerned.

The central message was pretty simple - Hamas is having a lot of trouble transitioning from an armed resistance movement to an administering party in government. This transition includes Hamas politicos having to decide how tolerant they want to be of political opponents, and there was quite a bit of footage of Hamas security beating up Fatah supporters and harrassing other critical voices (like unemployed Palestinian workers).

There were a couple of interesting interviews. One was with a demonstrator who was beaten by Hamas security. Afterwards he explained that all his family were Hamas supporters and had urged him join, but had decided to join Fatah instead. The other was with the mother of a Hamas "martyr" who said the movement kept asking for more sacrifices, but never got any results. This seemed to be message two - the Palestinian population is turning against the Hamas government.

But after watching the programme I feel little more informed. My limited knowledge of Hamas is that they built up support amongst the local population in part because they provide welfare schemes, in addition to attacking Isrealis. Surely then they do have administative experience, and are not simply the fighters-turned-politicos portrayed. In addition the Hamas election victory was widely interpreted as being in part due to the fact that Fatah was regarded by many voters as corrupt. So if people are now fed up with Hamas are they turning back to Fatah, or looking elsewhere? It wasn't made at all clear.

So overall the programme came across as a simply negative snapshot of Hamas in power. Maybe that is enough, and certainly I am sympathetic to the views expressed. But I think it was a bit of a missed opportunity to explain what is really going on.

Sunday 9 March 2008

Galloway drives listeners to despair

How do people write stuff like this without realising how daft they sound? This is a genuine quote from a report of a recent George Galloway speech in Manc:

Not surprisingly, by the time George finished many were in tears.

Well, I think we have all felt like that at times... ;-)

Hedge funds and opinion polls

One of the stories I spotted last week was the news that online polling outfit YouGov plans to form a joint venture with a hedge fund. According to this piece in The Times, the idea is that YouGov polling could be used identify changes in public opinion towards, say particular retailers.

In fact this isn't a new idea. I remember reading a piece in the FT probably at least two years ago suggesting that opinion polls might be used by retail analysts. I never saw anything come of it though.

The Times piece is pretty short of details - no doubt YouGov wants to keep its cards close to its chest. It does make you wonder about a few things though. Will opinion polling tell you anything that isn't already happening and thus, in the case of listed companies, is already factored into the share price? And isn't there a danger that people might be dishonest about, say, supermarket preferences (are many going to say Lidl is their favourite?).

There is something deeply old school about the idea that I do like. Afterall all the guff usually given to explain investment choices this one looks like it could be nice and simple. We ask the public what companies they like and then invest in them.

Saturday 8 March 2008

Language and knowledge

Here's an interesting thought. Do you think you can understand any concept, providing that it is explained clearly enough? Sometimes (I won't say how often) when I am reading things I struggle to make sense of what the author is trying to get across. Is that because I am unable to grasp the concept, or is it because the author is failing to communicate clearly enough? When I have asked people this question I am surprised how much faith we have in our own intelligence. Most people think they can grasp any concept provided that it is explained clearly enough. So if people only wrote better books we would all be experts.

I am not convinced. Yesterday whilst I was killing time before my flight I was reading a section of AC Grayling's Wittgenstein: A Very Short Introduction where he sought to get across a point about different 'language games'. I must have read and re-read those few paragraphs about six times struggling to get the meaning, and I still don't quite grasp it (maybe I'll have a cuppa and another go later). I would put money on it that AC Grayling is smarter than I am, and that he is quite capable of explaining things clearly. So I have to assume I am (or was being) a bit dense.

What's more, I became aware that in trying to get my hands on the meaning of the passage I was trying to find something familiar in it. In other words I think I was trying to understand the concept by sort of sub-dividing it by something I do already 'know'. Of course it's partly mental laziness. In fact someone I posed the original question to said that yes you can grasp anything, provided that you want to. I am sure that your attitude must play a role but don't quite agree. My view is that it's about familiarity. It's hard learning new things, it's much easier sort of 'spotting' concepts you already get. People seem to derive great enjoyment from doing well what they know how to do. Maybe the same process is at work when we try to understand something - it's more enjoyable to think about it in a way we already know how to think. We enjoy the familiarity.

In epistemology one of the big theoretical divides is between "knowledge that" and "knowledge how". Here's how the Wiki article on epistemology explains it:

For example: in mathematics, it is known that 2 + 2 = 4, but there is also knowing how to add two numbers. Many (but not all) philosophers thus think there is an important distinction between "knowing that" and "knowing how", with epistemology primarily interested in the former. This distinction is recognised linguistically in many languages, though not in modern English except as dialect (see verbs "ken" and "wit" in the Shorter Oxford Dictionary).

I guess in this instance "knowledge that" is what I describe above as "familiar". So what surprises me is that even in an area like philosophy "knowledge that", or maybe our desire for "knowledge that", can play a big role. And it leads me to question whether maybe a lot of what we take to be "knowledge how" is actually "knowledge that". Because it is very familiar to us we think it is more conceptual than it actually is.

The caveat is of course that maybe this is just the way my mind operates, maybe other people approach knowledge differently. Indeed I do think that people have differing tastes for certain "forms" of concepts, and that these can be developed. But I think generally we are more similar than we are different and as such others must suffer from the same failings that I do.

Thursday 6 March 2008

Eddie George and Northern Rock

Still up at NAPF... Yesterday started with an interesting session - a speech by the former Governor of the Bank of England. Though it was politically diplomatic (he easily dodged some loaded questions) it was illuminating stuff. A few bits stuck in my mind. One was his admission that he didn't really understand how a lot of the new instruments (CDOs etc) that have caused so much damage lately actually worked. If he doesn't get it, that makes you worry. Leading on from that he said that no-one to his knowledge had predicted the type of problems we have faced, such as credit markets freezing up.

Most interesting for me were his comments about Northern Rock. Although he said the regulators needed to learn from the example, he was sceptical that the FSA could have stepped in earlier. He said that would suggest that the FSA was able to spot a future problem before the directors of the company could. And leading on he said the primary responsibility for the crisis therefore laid with the board of directors.

No doubt those that want to see the NR crisis as the fault of regulatory regime will read this him defending his old turf. I take the view that he was simply being straight up. People are not perfect and cannot know the future. Too much of the reaction to Northern Rock has involved people spotting what was 'obviously' wrong (and therefore could have been dealt with) with the enormous benefit of hindsight.

Wednesday 5 March 2008

Conference blogging & airport reading

Well, seeing as I am here, bored, and have internet access, I might as well...

Just a quickie to say that whilst waiting for the flight this morning I had a quick read of the new book by Robert Peston (the Beeb's business editor, much better than Jeff Randall) called something like Who Runs Britain. I indulged my usual bad habit when reading business/economics books and turned straight to the section on pension funds. I know it is bad, but I think that if they have an accurate or at least interesting take on the nature and role of pension funds then I feel more comfortable reading the book. Major cognitive bias no doubt!

Anyway the section in Robert Peston's book on pensions is well done. He doesn't fall for any of the simplistic narratives that seeemingly explain why DB schemes have closed. He's also pretty clued up on the politics around pensions reform over the past few years. And he's obviously in thick with Adair Turner (which I think is a good thing by the way).

So based on my entirely unscientific 'read the pensions chapeter first' analysis, I reckon it should be a good book.

Tuesday 4 March 2008

Taking a break...

I'm off to the NAPF Investment Conference tomorrow till then end of the week, so unlikely to be blogging again for a few days.

TaxPayers Alliance again...

I don’t have time to do this in detail, but there’s an understandably defensive piece on the TaxPayers Alliance website now trying to stand up their wobbly report on council pensions. As I predicted, they have taken the fact that the unions disagree with their report as proof that they must have a point.

No vested interests in squeezing as much money out of the taxpayer as possible there, then.

Sophisticated stuff…

The TPA says:

we are well aware that there is a change being made to the pension scheme in April, but it is not enough of a change. It is tinkering round the edges rather than real, fundamental reform of the system.

But they don’t say what specific ‘fundamental reform’ they want. It could be career average, or it could be money purchase, with no indication of what kind of contributions or benefits might be sensible under either type of scheme. All they know is that local government employees must not have final salary pensions. Start with the answer you want, and work back to find a way of getting there.

Given that the TPA moan about spin, here’s a big dollop of their own:

the kind of pensions enjoyed by Local Government staff are in fact so unsustainable and so generous that they are almost extinct in the private sector

Later on they use a similar line:

If these pensions aren't gold-plated, how come they are unaffordable to everyone else?

The problem is that a few seconds research can prove that yet again they are talking rubbish. I have lifted the following sentence from an NAPF press release issued this January:

around a third of private sector defined benefit schemes remain open to new members

So ‘almost extinct’ means ‘a third of the population is still alive’. Strange definition!

Finally they to try and argue that £3,800 (the average LGPS pension quoted by Unison) is a princely sum:

even if we take this average figure it means that local government workers are better provided for than those that struggle to pay council tax.

Except of course that the exact opposite is true. The average occupational pension in payment last time I looked was about £7,600 per year (check out the DWP’s Pensioners’ Incomes Series reports). So actual LGPS pensions in payment are about half the average.

Sunday 2 March 2008

Rees-pect news

Don't ask me why but I was looking at the website of Rees-pect (SWP wing) earlier and in amongst the usual guff I spotted something actually slightly interesting in this story. Have a butchers at this:

The meeting erupted when Deputy Mayor Bill Tyson ruled against taking motions from Respect councillor Michael Lavalette (on pension disinvestment in the arms trade)...

So Rees-pect is now backing disinvestment from arms companies. As I have blogged about before, I am not a fan of disinvestment except in extreme circumstances. I think engagement is a better strategy, even with defence companies. I usually find calls for disinvestment to be knee-jerk reactions to a given issue that aren't properly thought through, so I guess I shouldn't be surprised to see the SWP and its fellow travellers involved in such a move.

Elsewhere it's all going belly-up for the SWP since Respect's People's Front of Judea moment. They've seen a card-carrying SWP member defect to the Tories. They've been told they can't use the Respect name in elections. They've been stung again over taking a dodgy cheque to fund a union conference. In the finest tradition of sectarian posturing they've hilariously decided to stand against a Respect (Galloway wing) candidate in the GLA elections. And they've seen Mark Steel leave after a couple of decades of membership. Those on the Galloway side of eth split hint darkly that there is more bad news to come...

Today's Observer

A few interesting bits in the business section. This piece about a private members bill seeking to ensure that private equity takeovers are covered by TUPE. Still on private equity, Richard Wachman has a pop at Guy Hands' increasingly wobbly looking ownership of EMI.

There's a good old rant from Simon Caulkin here about non-doms. I like this bit:

as Martin Wolf has powerfully argued in the FT, the financial sector is an industry 'that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders' who, to add insult to injury, then are obliged to pick up the pieces with their taxes. In the terser formulation of playwright Bertolt Brecht: 'Every 10 years a great man. Who paid the bill?'

We did. And it is at this point that the non-dom issue swims murkily into the picture. Of course, there are non-domiciled, low-tax-paying UK residents of all trades, shapes and sizes - ship owners and business-school lecturers along with City traders and bankers. But be sure that most of the irritating high-pitched drone you've been hearing these last few weeks comes not, as you might have imagined, from the famous 'mosquito' device for dispelling rowdy teenagers in our town centres but, just as repellent, from high-earners in the City whingeing about the preposterous idea of having to pay tax on all their earnings.

Finally there's this piece about a Policy Exchange report on pensions. I've had a look on their website and can't see any sign of it, so presumably it's a trail for next week. This line looks a bit odd:

He also predicts that there will have to be changes to public sector schemes, whose cost is expected to rise by a third to 2 per cent of total GDP by 2030. These schemes are still final salary-based and offer benefits on average four times as generous as those given to private sector employees.

There are all kinds of types of level of pension provision in the private sector ranging from nothing at all, to final salary schemes that are better than those in the public sector. I don't see how it is possible to say public sector schemes are four times as generous. But more evidence that public sector pensions are going to come under attack from the Right if they get back in power.

This line is more interesting from a geeky point of view:

The report says that companies should be allowed to shift more of the risk of providing pensions on to employees.

This is really what it is all about in my view. Companies want stable costs if possible, hence the shift to DC where they know what the cost will be. But unfortunately, just as stable (ie defined) benefits mean volatile costs, so stable (defined) costs (contributions) are going to mean volatile benefits. Some will do ok out of DC, some will do very badly. It will be just a matter of luck depending on market performance, annuity rates etc.

Much as I try to be a realist about policy, I can't square this one. I can't accept that the over-riding aim in pension policy is to ensure that companies have a flat line on their balance sheet. It must be a consideration, and as such risk-sharing, rather than total transfer of risk onto individuals is maybe a realistic compromise in the future. But at present the employers in the private sector have the whip and they have decided by choosing to go DC that they aren't going to shoulder any risk in future. I can't see it as anything other than a big loss.

Saturday 1 March 2008

TaxPayers Alliance report rubbished

Yesterday's TPA report on council pensions has rightly been widely slated.

The Channel 4 factchecker gave it 4 of 5 for inaccuracy (5 means no basis in fact) so that's about as bad as you can get in their view.

It has also been attacked by the GMB, and the LGA. No doubt some people at the TPA might think that provoking a reaction from the unions 'proves' that they must have a point. But hopefully, if they have any sense, they will realise what a shoddy piece of work they have put out. It is right to have an honest look at public sector pension provision, but this was nothing like it.

PS. You can comment on the report on the TPA blog here.