Tuesday 30 September 2008

More links

Nick at the Capitalists says the crisis is starting to hit the energy sector:

Needless to say, the financial players in the electricity market are withdrawing from long-term hedging products, which means the utilities are increasingly unable to lay off the risk. So they'll be passing the volatility through in the electricity price - and the industrials also won't be able to get financial hedges.

ooeerr.... does not sound good.

Sometimes I get disheartened that the better business blogging is done by the Righties, but there are interesting (ie not 'hang all bankers') thoughts at Bloggers4Labour, which makes me hopeful that we are starting to see the emergence of some sensible left-of-centre views.

Hat-tip to Raj for highlighting this story about the Lehman Brothers pension fund for UK staff looking to be taken over by the Pension Protection Fund. Another example of the financial sector needing the state to clean its mess up (the PPF was established by Labour to protect people's pensions when their employer went belly up).

And at the same time, in a nice demonstration of how interwoven the whole system is, UK-based pension funds are trying to take legal action against Lehmans because of their losses.

And I missed this great post from Paulie.

Those 'casino capitalists' again

You have to hand it to George Osborne, he is utterly shameless. This week he has been saying we need to clean up ‘casino capitalism’. Yet only last year he was promising to stand ‘shoulder to shoulder’ with the City against attacks from the unions on private equity in particular. And funnily enough he chose to highlight the intemperate language employed by the unions, including the phrase… err… ‘casino capitalists’.

TUAC statement on the crisis

Quick plug for this. Short excerpt below:

OECD governments are at a turning point. Central banks, treasuries and exchange authorities are not equipped with the needed regulatory tools to handle the current insolvency crisis. The monetary reaction operated by OECD central banks since the beginning of the crisis – easing access to short term government loans and/or reducing lead interest rates – were necessary to manage liquidity dry ups but insufficient to re-establish market confidence. The light regulatory approach that has prevailed in the past decade has nurtured a culture of excessive leveraging among financial institutions. This was favoured by lightly regulated entities such as hedge funds and private equity, but also by main street investment banking groups which are not subject to the same prudential rules than deposit banks. The toxic effect of leveraging was amplified by the financial “innovation” of the originate-and-distribute model of securitisation of debt: bad debt was traded under the guise of “structured products”.

The task of regulators has become impossible: not only do these “alternative” products and investment entities escape from their oversight, overseeing the activities of main street financial groups have also become a complication for them. Rather than increasing competition among institutions, the dis-intermediation of the financial system has given birth to global conglomerates that cumulate different lines of businesses which are subject to different regulations and hence different supervisory authorities.

Hat-tip: Oliver @ CWC

Monday 29 September 2008

Celebrity shock!

Totally off-topic, but whilst flicking through the channels on the TV in the hotel room the other night I stumbled on Brainiac (kind of Tiswas does science if you haven't seen it). I only caught the end of it, but it featured a bit where some D-list mate of Callum Best was given increasingly large electric shocks to see if he could take them. Nope, it wasn't an updated version of that famous experiment on authority and obedience, they were really giving him increasingly large electric shocks. And to be fair to the bloke, he took all they could throw at him. They finished up with a trailer for the next edition of the show where the same experiment was to be carried out on Vanessa Feltz. It was so tragic I couldn't stop laughing. If 'celebrities' are now allowing themselves to be electrocuted in exchange for a minute or two of airtime is it even possible to parody them anymore?

I'm not kidding by the way. Here is The Lovely Debbie McGee being fried (there's also a few glorious seconds of Neil Hamilton in the chair).

Return round-up

I thought the exciting stuff had happened before I headed off on holiday. Now I return to find that another bank (or bits of it) has been nationalised. As a number of folks have pointed out, so much for demutualisation. Incidentally Mr Slicker thinks the B&B buyout is bad news, and unjustified because it didn't pose a systemic risk.

Also the Capitalists point to latest falls in the banks' share prices as evidence that shorting wasn't the problem. But Janet at the TUC takes the opposite view. This is all tied up with what we think the shareholder-company relationship is about - is it really 'ownership' or not? If it is then it strikes me there is often a tension between shorting and long-term investment. This has been a theoretical point for some time, but the decision of some pension funds to stop stock-lending on financials (and more are doing so) demonstrates that it is now considered a genuine problem.

Also in this territory, Guido has had a pop at both Labour and the Lib Dems for taking money from hedge funds. I assume this is not unrelated to the Dispatches prog tonight on Cameron's donors. He makes a (activate Alan Hansen voice) schoolboy error in his pop at Paul Myners though, suggesting that the prize of undertaking the Myners review (2001) was in part payback for contributing to Gordo's leadership campaign (2007).

Meanwhile, John has had a look at what the SEIU are saying about the proposed bailout in the US, and there's a piece on Capital Matters about AIG, and a good round-up on the AFL-CIO site about the crisis.

Finally, I recommend the book I mentioned previously on the credit crunch, which I finished off on the beach. It's not political, just a straightforward interpretation of how we got where we are, and what we should do next. It just happens to argue that the decline of organised labour and off-shoring have major downsides.

Sunday 21 September 2008

Move along, nothing to see here

Me and Mrs P are off to Crete for a week, so no blogging for a bit.

In the meantime, wot John said.

Saturday 20 September 2008

UK's biggest pension fund stops stock-lending

This is a big deal, and other funds are taking similar measures. As I've posted previously, pension funds do well out of stock-lending in the short term, as it is an extra source of income. But there's always been a question over whether it's counter-productive over the long term. The fact that BT/Hermes, CalPERS, ABP etc are all taking a similar line is a pretty significant signal that major market participants don't accept - at least for the time being - that shorting has no downside.

One could read into these decisions the idea that the regulators may have tapped them on the shoulder and quietly asked them to have a rethink. The fact that they have all only applied the bar to financial stocks might appear significant, as it matches the move by the FSA for example, but it's also common sense really isn't it? I have no inside track here, but it's possible something is going on behind the scenes (though the fact that PGGM seems to be sticking with lending might point in the other direction).

But arguably it's more significant if the funds have reached this decision alone. Pension funds often take a long time to make major policy shifts. To give up a steady income stream because you've changed your theoretical position on how capital markets operate is quite a decision in itself. To execute it quickly too suggests a real shift in belief. Interesting times.

Political brains again

Bloggers4Labour has a more sceptical view of the study I posted on yesterday, worth a read. In similar territory, I found this interesting piece on the epic Lakoff vs Pinker throwdown.

Friday 19 September 2008

In a nutshell

For Middle Britain, the traders who bragged about their £1,000 bottles of Krug have now become as loathed as the bolshie shop stewards of the 1970s.

Judging from the views I've heard from non-political family members in the past few days I would say that pretty much nails it.

And Cameron says:
"We must not let the left use this as an excuse to wreck an important part of the British and world economy," Mr Cameron told the Financial Times after discussing the market chaos with Angela Merkel, the conservative German chancellor, in Berlin.

Big opportunity opening up here, if we have the cojones to grasp it.

Shorting again

So, the FSA has decided to clamp down on shorting in respect of financial stocks. Gotta say it's a bit hard to maintain the line that shorting is a legitimate tactic whilst trying to stop people from doing it. Also, will be interesting to see if there are any moans from non-financial companies whose shares are being shorted.

It would be also interesting to see what kind of trading costs have been incurred in all this. HBOS shares have been driven down and bounced back up. Behind all that is a lot of trading. Someone, somewhere is picking up the bill for it. Would be a shame if it's our pension funds. On that point notably CalPERS has stopped stock-lending in respect some financial stocks (including Goldmans).

The Board of the Financial Services Authority (FSA) today (Thursday 18 September) agreed to introduce new provisions to the Code of Market Conduct to prohibit the active creation or increase of net short positions in publicly quoted financial companies from midnight tonight.

In addition, the FSA will require from Tuesday 23 September daily disclosure of all net short positions in excess of 0.25 per cent of the ordinary share capital of the relevant companies held at market close on the previous working day. Disclosure of such positions held at close on Friday 19 September will also be required on Tuesday 23 September.

The FSA stands ready to extend this approach to other sectors if it judges it to be necessary.

These provisions will remain in force until 16 January 2009, although they will be reviewed after 30 days. A comprehensive review of the rules on short selling will be published in January.

Hector Sants, chief executive of the FSA, said:

"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."

The detailed changes to the Code of Market Conduct, and a schedule of the companies whose securities are covered by them, will be published before the market opens tomorrow (Friday 19 September).

Political views, brains and bodies

This is interesting (nicked from Paulie). So if you buy that political views have a basis in visceral reactions, and that conceptual metaphors are grounded in physical experiences, Lakoff's idea that Lefties and Righties have fundamentally different metaphors in respect of politics makes sense. The key question is to what extent are our reactions innate, and to what extent learned.

I've just finished reading Descartes' Error by Antonio Damasio which covers some of this stuff. Complicated area obviously as we have different brain systems dealing with different factors (and Damasio's key point is that it's fundamentally enmeshed with the body). He does suggest that whilst we are born with a lot already in place, our emotions and feelings (which he distinquishes between) affect the development of other reactions. So in effect we are a 'work in progress' until we die. That makes me think a) that political views can be altered and b) a significant visceral experience might be expected to have a big impact on views. Liberals who get mugged are one example, but equally the shared endeavour of WWII shaped politics for decades afterwards.

Ho hum.

Thursday 18 September 2008

Would stronger unions have prevented the crisis?

There's an interesting argument developed in this book by this bloke that I'm currently reading, that part of the explanation for the current crisis is labour's loss of power. The shift in power between... err... labour and capital has allowed business to increase profit ratios (not just profit levels), particularly by off-shoring jobs. However the declining share of income accruing to working people in countries like the US & UK would have had an impact on demand, so governments allowed the explosion of debt to counteract this.

Dunno to what extent I buy this, especially as I still see the labour/capital divide as a bit of a arbitrary one. But it's interesting that a book on the credit crisis argues that the decline of organised labour is a contributory factor. I think I might go back and re-read Capitalism Unleashed.

Wednesday 17 September 2008

New Lloyds logo

A Capitalist's view of the crisis

I've invited Nick Drew, who posts some interesting stuff on the rather good right-of-centre business blog Capitalists@Work, to give his take on what is going on...

How bad do you think the current crisis is?

Until recently I would have said much worse than most people think (see my posts for the past 15 months passim) but now I’d say: as bad as can be realistically imagined. Fighting-in-the-streets bad.

As you’ve gathered, I’m not one of those capitalists for whom blind optimism is a moral imperative.

Is it confined to the financial markets or is it affecting the 'real' economy?

Don’t be daft, there’s only one economy. No man is an island …it tolls for thee !

What impact do you think the crisis will have on a) financial regulation b) financial innovation?

I hope that financial regulators will take an unbendingly rigorous interpretation of their existing mandates. Had they done this over the last 10 years we would not be where we are now. It is politicians who set the climate on these things and regulators have been told to lay off. Brown (for example) is highly and personally culpable in this regard - an absolute outrage (I shall be posting on this soon).

Nothing inexplicable has happened. Due to these ‘light-touch’ and non-interventionist interpretations of the mandate, basic risk-management and risk-measurement precepts have not been followed: so financial institutions have been allowed to get away with being grossly under-capitalised. Oldest story in the world. Capital adequacy is the key (followed closely by diversification).

You can’t stop innovation. Like atomic physics, the genie is out of the bottle – people (some people !) understand how to think about finance more clearly than ever before. They will go to their graves thinking the same ideas, wherever and whenever application of them is possible.

Is the private equity boom over or just taking a breather? Was it just debt driven?

PE means many things – the first big PE funds were just divisions of investment banks and we may not be hearing much from them for a while. Some PE’s have done clever, potentially enduring things and will be around to keep playing the game. Others have just pissed their clients’ money up the wall. It was – or became – debt-driven, but then again, so did almost all investment when borrowing was so ridiculously cheap ! Even Sovereign Wealth has become accustomed to leverage.

Quite a few serious commentators have said pay in the financial sector has been part of the problem. Is this right, and if so what can be done about it?

Absolutely. Dysfunctional bonus schemes are a cancer. Because so few people bother to learn in detail what’s going on (see your final question), for those who see clearly it’s been like taking candy from a blind child. A couple of horrible similes there, and I meant them that way.

Ideally, shareholders (see below) in their own interests would carefully structure schemes that served the company’s long-term interest – it’s not difficult! As a back-stop, as I said the other day, I like the idea of the comp scheme being an input to capital adequacy calculations – that would get attention, believe me.

Is shorting a problem or not?

Intellectually, no – indeed, in theory it’s a vital mechanism (it was shorting that revealed Enron for the house of cards it had become). However, in (current) practice, it has proved too easy to play market-manipulating games using short strategies – tricks that if done on the long side would be illegal.

Clever players will generally find ways to short things. So it’s best that it is made available to all investors, put on a transparent footing, and manipulative practices clamped down on hard (back to regulation again).

Shareholder groups appear noticeable by their absence from the debates about pay, shorting etc. Does it matter, and any thoughts on why that might be?

Of course it matters: as you have endlessly and correctly pointed out yourself, it undermines what ought to be a key plank in the economic theory of the corporation.

But you can take a horse to water … let’s face it, voters in political systems don’t exactly pull their weight ! - but there should be some structural improvements made. One would be to resolve the conflict of interest where non-execs cheerfully propose crazy comp schemes because back at their own ranch they know they’ll be getting just such a scheme from their own non-execs in turn. Institutional shareholders often have parallel conflicts (as well as useless performance criteria, see Taleb passim).

Lemme tell you that in privately-held companies, shareholders don’t laze around scratching themselves. In public co’s we need the concept of the Hero Activist Institutional Shareholder - a concept that is basically lacking. He’s the one I want managing my pension-fund.

A financial crisis ought to provide opportunities for the Left to advance a critique of free market capitalism. Where do us lefties get it wrong, and do you think we have a role to play?

It should indeed be that opportunity. Lefties are fundamentally disadvantaged because (a) you are all so hooked on big, sluggish World-View ideologies with ethical pretensions (apparently it’s actually virtuous to believe the crap you people catechise so painstakingly), whereas we are empiricists, and nippy with it; (b) the world rumbled this 20 years ago and now everyone ignores you; (c) lots of you (present company excepted !) are idle buggers and some of this stuff needs heavy-duty thinking, hard sums, and hands-on, real-world working experience in finance.

Result: it’s like a bunch of medieval schoolmen trying to understand string theory using Aristotle. Of course no-one listens.

But of course you have a role to play ! Contrarian viewpoints are the stuff of capitalism. Let’s have a bit of compelling anti-thesis - get stuck in, guys !

Closing anecdote: a very dear uncle of mine, a lefty cleric, towards the end of his life said that if he had one regret it was that for 60 years he skipped the financial pages, and only then realised that they are the important ones.

Quick links

This piece on lefties' views on the crisis. Plenty of rhetoric but no answers I'm afraid.
Snowflake has practical advice.
Can't remember if I've plugged Don Young's Having Their Cake website before (the book is well worth a read too), but if not consider him plugged.

Meanwhile I'm a bit a dumbstruck by events in the US. Isn't serious innit?

Tuesday 16 September 2008

Quick round-up

A few bits that have caught my eye in the past day or so, from quite different perspectives.

Nils Pratley
Anatole Kaletsky
Dave Osler

Also I take my hat off to the Telegraph's Damian Reece and Jeff Randall for valiantly trying to stick to the line that the last few days show why capitalism works. Tough sell.

Short stuff

There's an interesting piece on Robert Peston's blog today about the FSA havning another look at shorting. The argument is, it seems, that given the current fragile state of market confidence allowing speculative attacks on, say, HBOS might create a self-fulfiling story of imminent collapse.

I just want to focus on this bit:

First, short-selling (as I've said many times) is not evil, in and of itself. In fact, short-sellers perform a public service when they take a risk to puncture the over-valuation of assets, as they routinely do.

This is the first line of defence against a clamp-down on shorting. Some argue that it's a shame we don't have a short-able market in respect of housing as that could have prevented the bubble there. But is it actually true? I've only taken a very brief glance at some of the academic evidence in respect of the impact of shorting on asset prices, but it seems that the picture is mixed.

This paper (PDF) says that "relaxing short-selling constraints lowers prices in experimental asset markets, but does not induce prices to track fundamentals". Another paper, The robustness of bubbles and crashes in experimental stock markets, seems to argue that shorting doesn't have an impact on the formation of bubbles. A third paper says the opposite - shorting brings prices back to fundamentals. Three different views on the same issue. Why therefore should be take at face value claims from those employing shorting that it's not doing damage, and actually is even beneficial?

I don't have a strong view here, though I'm inclined to think that at times like the present shorting may not be good news for the stock-lenders (such as pension funds) who facilitate it, since they have a much longer-term perspective. A crisis in confidence might take out a company in which a fund has quite a lot tied up. What they gain in stocklending fees might be offset by losses in the value of shares. As such they may think that temporary restrictions might not be a bad thing.

Monday 15 September 2008

Tipping point?

I think this is the sort of article that suggests that the sands are shifting. A mainstream, right-of-centre commentator saying we've got it wrong and something has to give. This is exactly the kind of re-evaluation of the basic idea we have about the financial sector and its place in society that I was trying to get at last week. I think it's starting to happen.

It is sobering to hear one of those up to his neck in this universe acknowledge, without embarrassment: "What is happening represents a major failure of market capitalism." There is amazingly widespread agreement within the financial world, as well as outside it, that the first lesson of what has happened is that the big beasts of Wall Street and the City were allowed to become far too powerful in their own societies. For several decades, governments have deferred to the supposed wisdom and ruthless clout of bankers. Presidents and prime ministers have walked small in the company of those whose lightest word could move trillions.

Now, instead, those same people are on their knees to their governments and central banks, trying to save their own skins. The credibility of the financial community will take years to recover. Trust and confidence, pillars of capitalism, are at their lowest ebb for decades. Nobody can decide what anything is worth - shares, currencies, oil, houses, businesses. Until a basis of belief is re-established at some level, the scary times will continue.


When the dust settles, there will be a rebalancing of relative power between financial communities and regulators on both sides of the Atlantic. The kings of the market have been proved wrong. Unless the US and Britain want to go through this nightmare again in a few years' time, it will be made more difficult for banks to expose themselves to risk so recklessly.

The question is what change is going to come about, and who is going to champion it? With the political wing of the labour movement (I think) a bit stunned that the City isn't actually all that I think the party will take its time to respond. And I don't think the Tories have any appetite for this kind of thing (they haven't shown any such inclination to date). As always, I think there is a space for the unions to develop some ideas.


Just spotted this quote from HSBC's chair on Robert Peston's blog:

"I think it is important and will become much more the focus of attention to ensure that remuneration schemes operate in a way that is lined up with the long term interests of the owners of the business. There has been far too much focus on payments that are very short term focused, people who pick up the tab for short term profits, without having to bear the costs of long term impairments. At the end of the day I think it is right for the market to set compensation levels but it must do so in a way that is consistent with the long term interest of the market as a whole and the shareholders' of a given institution in particular."

Which shareholders though? And what if those shareholders are themselves rewarded for generating short-term returns? And if they are agents (ie fund managers managing say pension fund money) what's their incentive to manage pay in anything other than a tokenistic manner?

I'm not being cynical (honest) - I just think we really need to get beyond the idea that 'shareholders' as they currently exist and are currently incentivised have a strong pull to play the ownership role, including getting remuneration at investee companies right.

Here's one idea

Let’s have a proper debate about pay at the top. I don't mean the Polly Toynbee style combination of moralising and inverse snobbery (which I actually think is counter-productive), let's focus on how top pay really works and what it can and cannot achieve.

There are myths that need to nailed once and for all - like that it is (or even can be) linked to performance. Performance of what? Linking rewards to share price has created incentives for the board to manage one indicator, even if that means encouraging them to delay projects, embark on wasteful M&A activity (PDF) or other counterproductive behaviour, rather than just getting on an running the business. And in any case trying to incentivise certain types of behaviour might overwhelm intrinsic motivation to do the right thing.

There's also the problem of the legitimising effect of excessive remuneration. High executive pay also creates the (false) impression that business success is built upon the actions of a small number of brilliant people in the boardroom. And unfortunately I think the shareholder approval vote (and the fact that so few pay policies are voted down) can actually provide a fig leaf - if 'shareholders' aren't bothered by high pay it can't be a problem.

So if shareholders (by which we really mean fund managers) can't police pay effectively, is it time to think of other ways of dealing with it? So why not explore the ideas suggested right at the end of this paper – what about limiting pay to a set % of either market value or profits? Is a maximum pay differential within companies a bad idea? And why not bar companies from providing differential pension provision to the boardroom and the shopfloor?

Saturday 13 September 2008

Pension funds acting like owners?

There's a very upbeat asssessment of of the state of shareholder engagement by pension funds in the NAPF's latest survey. I have to say it doesn't quite tally with either other research or my own experience. The headline findings are below, full report is on the NAPF site.

Board Membership: 74% of pension funds had seen changes to board membership as a result of their engagement activities - up from 67% in 2007.
Company strategy: 69% saw changes to company strategy - up from 57% in 2007
Remuneration Policy: 79% of respondents saw changes to remuneration policy - up from 74% in 2007
Social/Environmental policy: 68% of funds reported making an impact on social/environmental policy - up from 51% in 2007


Statement of Principles: A majority of pension funds’ Statements of Investment Principles refer to the ISC Principles3 (45%) or expect to do so in the next two years (34%). One third (33%) of respondents said that the Principles had been incorporated into their contracts with all investment managers, either directly or by side letter. Eight out of the ten largest funds that responded said that they had incorporated them for either all managers or some managers.

Reports and disclosure: Over three-quarters (77%) of respondents receive one report per manager per quarter and 60% receive reports on other engagement activities.

A majority (54%) of pension funds disclosed their general policy on voting and 24% reported some disclosure of voting specifics.

Responsible Investment and corporate governance policy: Two-thirds of pension funds said that Corporate Social Responsibility influences the selection of investment managers and consultants now (32%) or expect it to in the future (34%). 72% of funds have their own policies governing responsible investment. The time and money spent by funds on CSR has increased with 83% saying they spend more time and money than they did when the ISC Principles were introduced in 2001.

Impact of engagement: Pension funds are increasingly seeing the impact of their engagement activities on the companies in which they invest.

Friday 12 September 2008

Capitalism in crisis! Or is it?

There’s several million articles out there on t’interweb about the implications of the Fannie and Freddie bailout in the US. If you believe some people this marks a further decisive shift (on the part of governments, regulators and even bits of the financial world) away from the idea that markets are best left alone. Everyone loves that quote by the Chinese politburo member who said it was still too early to tell what the impact of the French Revolution had been. I suspect we could be in the same situation right now. There’s a possibility that things take a radical turn.

I used to be gob-smacked at how little reaction there was to the post-2000 stockmarket correction. I thought it was a) a real-life rebuttal to the argument that the stockmarket is efficient at allocating capital b) another nail in the coffin of active fund management and c) a big pain in the pension funds that would surely provoke a reaction.

It clearly did hurt pension funds, and in my mind is one of the supplementary reasons for the collapse of DB in the private sector (longevity is the biggest factor IMO). But unfortunately a bit of clever framing on the part of some politically-motivated types has created the narrative that the abolition of ACT credits did that (it didn’t help, but not the smoking gun). The failure of pension funds’ decades-long punt on active equity management wasn’t really called into question.

In addition discussion of the broader issues raised by the correction failed to emerge, at least outside the finance world itself (there was a good bit of introspection in the EAMA book on the bubble). If anything, as Warren Buffett noted (see page 18 of this PDF), institutions bought into the idea that they were not trying hard enough (or paying enough) to generate alpha, hence the rise of hedge funds and private equity, and of investment fees. Unfortunately, if unsurprisingly, the extra piles of cash we have thrown at the market don’t seem to have paid off.

In tandem the broad outline of political debate seemed to exclude discussion of the proper function of the financial sector. It appeared like a faustian pact had been struck with the financial services industry, to leave it alone as long as the tax revenues were coming in. I say ‘appeared’ because actually I think that the Government did have one or two attempts at radical-ish reform. The first Myners report on institutional investment remains a really good critique of how the system works, and probably informs a lot more of people’s thinking than they would care to recognize. I also think the Sandler report said a lot of good stuff, but it ultimately went nowhere.

The net result was that there was no serious challenge to the way the City works and how, and how much, people working in it get paid.

This time around it could be a bit different. The general feeling out there is that this is a crisis in no small part due to the actions of banks and other financial institutions. Whether because of outright dishonesty (ie mortgage salespeople), conflicts of interest (ratings agencies), misaligned incentives (UBS, etc etc etc), or just a lack of understanding of the complex instruments they themselves had created, the financial sector is being blamed for causing major economic damage. I can’t believe that this isn’t going to affect both popular and political attitudes to reform.

I suspect many people’s thumbnail sketch of the situation used to be that people in the City were smart, hard-working and broadly beneficial to the economy, so it was OK to leave them alone to get on with it, even if we had the odd moan about how much they got paid. Now we’re going to have a revised version where the headline view of many could end up being ‘they get paid far too much, and muck things up for the rest of us’.

At the same time, if you see your pension (or ISA if you have one) heading south, and the threat of negative equity in respect of your home, how much are you going to accept the idea that the market is getting things right? A lot of people’s assumptions have been built on the back of a long stretch of economic growth and rising asset values. If the former stutters and the latter reverses, plus prices go up, you can see how this might lead people to a fundamental reappraisal of how the world works. To nick Taleb’s analogy, we’re like the turkey that has been fed every day, and believes this is normal life, until one day just before Thanksgiving when the farmer appears with meat cleaver…

This ought to be fertile territory for the labour movement to re-establish its relevance, but it will need some sort of programme to work to. Time to get working on some ideas then...

Thursday 11 September 2008

TIGMOO blogging guide

Just noticed that Tigmoo has produced its owm guide to union-related blogging which you can download here (PDF). I'm in the top ten (5th) - woo hoo! Top slot goes, very deservedly, to Mr Gray.

(in case you were wondering - ThIs Great Movement Of Ours.)

Stockmarkets and governments

I quite like Tom Stevenson's stuff on the Telegraph (if you believe some research, this might be in no small part due to the fact that he's called Tom), and he's got a good piece in there today on the performance of the US stockmarket depending on who wins the presidential election. Here's main bit:

As for the markets, it is even less clear that the comings and goings on Pennsylvania Avenue make any difference at all. Certainly, the conventional wisdom that investors prefer the business-friendly policies of the Republicans is wide of the mark. According to Ned Davis Research, an institutional research firm, the Dow Jones average has risen 7.2pc a year on average under Democratic presidents compared with just 3.6pc a year under the Republicans. Admittedly, inflation has also been higher under the Democrats so, adjusted for rising prices, the lead is less convincing.

An important point to bear in mind when analysing stock market performance and the political cycle is that coincidence is not the same as causality. Who's to say that the performance of the market in an election year is not a reflection of investors starting to discount a new administration rather than an assessment of the current incumbent?

Of greater significance seems to be the balance of power between Congress and the White House. For example, in the years since the Second World War, when the Democrats have controlled Congress (as predicted this year) the post-election year has been a good one for investors under a Democrat President (+12pc on average) but relatively poor under a Republican (-1pc on average).

If you think stockmarket movements are informed/meaningful this is indeed a bit odd. Most of us would assume that the perceived more pro-business orientation of the Republicans would receive positive feedback from the markets.

A couple of thoughts off the top of my head - perhaps markets believe that the Republicans are pro-business/pro-executive rather than pro-capitalism, and that cronyism (which ain't good for competition/efficiency) results from the GOP winning. Or maybe it's just more evidence that you can read anything into markets, especially things that aren't actually there. Actually markets don't even tell us much about the state of the economy, as Robert Shiller has pointed out.

Finally, you might be wondering if anyone has done anything similar on stockmarket performance and election results in the UK. Well, there was some research done by a stockbroker for the Centre for Policy Studies about market performance under Labour. All I can say is that there's another good reason why red is our colour...

Money + Trouble

Quick plug for this post on the housing market over at The Capitalists.

And Socialist Unity is sticking the boot into the SWP again. Shame.

Wednesday 10 September 2008

Bonuses and the credit crunch

Well, Alistair Darling has gone a bit further on City pay than Kitty Ussher was willing in his speech to the brothers in Brighton:

And that's why pay matters right across the board - in the private and the public sector - in the boardroom as much as on the shop-floor. You're rightly concerned about excessive bonuses - especially when people seem to get money for failing not succeeding. And that's got to change. A bonus should be for hard work, not big mistakes. Excessive bonuses, which encourage traders to take excessive risks, at a time of easy global credit - one of the major reasons for the global credit crunch. We need to learn the lessons to prevent this happening again.

So how to do it?

Insights from neuroeconomics 1

An irregular update from the field of neuroeconomics, the frontier where neuroscience meets economics, and where startling discoveries are emerging.

Insight 1: Don't be trying to figure out what to eat for dinner and/or how much to pay for it if someone is firing magnetic pulses at your head at the time.

One new technique being used by some neuroeconomists is transcranial magnetic stimulation, in which a coil held next to the head issues a low-level magnetic pulse that temporarily disrupts activity in a certain part of the brain, to see if that changes the subject’s preferences—for example, for a particular food and how much he is willing to pay for it.

Source: The Economnist

Tuesday 9 September 2008

Even more on executive pay

Here's yesterday's FT report on the latest Deloitte survey of exec pay. The poor blighters have seen salary increases drop to only 6.2% last year. Luckily, this is offset by the extras they can trouser -

...because most top executives also receive a bonus – worth on average 157 per cent of their salary last year. That is 10 to 15 per cent higher than the previous year. Many also receive long-term stock awards that can be worth up to 165 per cent of salary if performance targets are met.

That means executives can now, on average, quadruple their salary if they scoop up all the available incentive pay. Compare that with the early 1990s, when incentive plans were rarely worth more than double the annual salary.

And as the Patterson Associated research I posted previously indicates, if your LTIPs don't pay out you can usually rely on the remuneration committee (advised by the likes of... errr... Deloitte) to bung you a bigger bonus to make up for it.

Monday 8 September 2008

Random round-up

My old comrades at the TUC have put out another interesting pamphlet in the Touchstone series. This one (PDF) is about the super-rich and is really punchy, polemical number. Well worth a read over lunchtime.

Still on the union stuff, I came across an interesting point about the impact of sleep deprivation on negotiations in the paper 'Out of control: Visceral influences on behavior' by George Lowenstein. Very simply, sleep deprivation is likely to make people more willing to reach an agreement, just for the sake of some shut eye. This paper, along with a stack of other interesting ones, is available in the book Exotic Preferences which is generally ace.

Snowflake has a great post on Obama vs Palin.

And Shuggy (belated addition to my blogroll) has a great post on political beliefs that I think ties in neatly with what I posted t'other day on clustering of beliefs.

Finally, as usual, reading Stumbling And Mumbling makes me question why I am blogging when someone else is doing it so much better. I reckon the title says it all. As I've blogged before, I like Robert Shiller's emphasis on the psychological/cultural impact of rising asset values. But I don't think a lot of people have yet thought through what impact a sustained reverse will have on popular ideas about society. I suspect one of the first casualties will be the argument that we should just leave the financial sector to itself as we all benefit from increased tax revenues, trickle down etc. But it could go deeeper than that.

Sunday 7 September 2008

One reason the Democrats should be less worried about Palin

Simon Heffer is talking her up. There are some political commentators on the Right I can take seriously. But I've noticed over the years that Simon Heffer's political judgment is unerringly awful. Last year he was sticking the boot into Cameron as not up to the job and saying the Tories had massively underestimated Brown. I should have known at the time we were in trouble. If I remember right he also predicted that UKIP would make a big impact in the 2005 election. So there's a sort of Heffer's Law at work - his endorsement is the kiss of death.

I think the jury is still out on Palin, much as excitable Rightie bloggers would have us believe that her speech has somehow tranformed American politics. Remember what they said about David Davis (and no prizes for guessing what Simon Heffer's view was on that revolution of a campaign that has already caused the history books to be rewritten). She might be sassy and attractive, but she's also inexperienced and on the harder edge of the Republican party. As VP she would be one heart attack away from having her finger on the button, a thought that must strike many US voters and that I think will ultimately play against her.

Let's see if Heffer's Law is in operation again.

Exec pay again

There's a bit in today's Observer about the lack of linkage between pay and performance. This bit caught my eye:

The conclusion of 30 years' experience is that pay for performance in shareholder terms is probably unachievable and often counterproductive. It is a formula for increasing pay whatever the performance. So why not abandon trying to focus top management attention on things they can't influence directly, like the share price, and concentrate on the things they can and which drive value in the long term, such as quality, resource efficiency and so on?

This seems reasonable enough but I can see several problems with it. First, are we seriously saying that without being rewarded for doing so, directors don't/won't focus on these issues? Much as I am deeply sceptical of how much control senior management can ever have, I don't think they are stupid. I'm sure they are concerned about running their business effectively. Second, on a related point, this could be a recipe for paying directors even more money to do what we ought to reasonably expect them to be doing already. Thirdly there's some evidence that if you pay people to do things they were doing already they actually don't put as much effort in (since now they can quantify the value of their effort). Financial incentives can actually 'crowd out', to use the lingo, other motivations.

Two things leap out at me from all this. First, depite executive remuneration becoming ever more complex in recent years it hasn't got any better at incentivising people to do the right things. In fact some might argue that the use of options has done the reverse. Might it not be better for shareholders to simply strip the system back to its original components of salary and bonus? Second, this is clearly an area where working assumptions are still based on homo economicus - if we just attach the right number of carrots to a given factor, directors will manage it effectively. Such assumptions could do with a bit of a rethink to say the least.

One argument against a windfall tax

A windfall tax on energy companies seems to the left-of-centre policy position of choice at the moment. But Unison capital stewardship geezer Colin suggests it can been challenged from a workers' capital perspective. Simply taking a chunk out out of the energy companies' profits looks like a 'victimless crime', afterall we all know these companies are making huge prices while the rest of us are facing rising energy bills.

Yet the big energy businesses are public companies. We own them via our pension funds and other savings. Therefore taking a slice out their profits reduces the amount they can pass on to us in the form of dividends, which in DC schemes means lower pensions. A windfall tax might seem like we're sticking it to Evil-Global-Mega-Corp PLC, but actually it might turn out that the impact of the tax is felt elsewhere.

Colin suggests that a better approach would be to get investors to work more closely with companies to achieve greater energy efficiency. Shareholders could accept a slightly reduced dividend if the retained profits are used on say a drive for better insulation.

Friday 5 September 2008

Clustering of political beliefs

This is worth a read.

d. The clustering of political beliefs
Two beliefs are ‘logically unrelated’ if neither of them, if true, would constitute evidence for or against the other. Many logically unrelated beliefs are correlated—that is, you can often predict someone’s belief about one issue on the basis of his opinion about some other, completely unrelated issue. For example, people who support gun control are much more likely to support welfare programs and abortion rights. Since these issues are logically unrelated to each other, on a purely cognitive theory of people’s political beliefs, we would expect there to be no correlation.

Sometimes the observed correlations are the opposite of what one would expect on the basis of reason alone—sometimes, that is, people who hold one belief are less likely to hold other beliefs that are supported by the first one. For instance, one would naively expect that those who support animal rights would be far more likely to oppose abortion than those who reject the notion of animal rights; conversely, those who oppose abortion should be much more likely to accept animal rights. This is because to accept animal rights (or fetus rights), one must have a more expansive conception of what sorts of beings have rights than those who reject animal rights (or fetus rights)—and because fetuses and animals seem to share most of the same morally relevant properties (e.g., they are both sentient, but neither are intelligent). I am not saying that the existence of animal rights entails that fetuses have rights, or vice versa (there are some differences between fetuses and animals); I am only saying that, if animals have rights, it is much more likely that fetuses do, and vice versa. Thus, if people’s political beliefs generally have cognitive explanations, we should expect a very strong correlation between being pro-life and being pro-animal-rights. But in fact, what we observe is exactly the opposite.

Some clustering of logically unrelated beliefs could be explained cognitively—for instance, by the hypothesis that some people tend to be good, in general, at getting to the truth (because they are rational, intelligent, etc.) So suppose that it is true both that affirmative action is just and that abortion is morally permissible. These issues are logically unrelated to each other; however, if some people are in general good at getting to the truth, then those who believe one of these propositions would be more likely to believe the other.

But note that, on this hypothesis, we would not expect the existence of an opposite cluster of beliefs. That is, suppose that liberal beliefs are, in general, true, and that this explains why there are many people who generally embrace this cluster of beliefs. (Thus, affirmative action is just, abortion is permissible, welfare programs are good, capital punishment is bad, human beings are seriously damaging the environment, etc.) Why would there be a significant number of people who tend to embrace the opposite beliefs on all these issues? It is not plausible to suppose that there are some people who are in general drawn toward falsity. Even if there are people who are not very good at getting to the truth (they are stupid, or irrational, etc.), their beliefs should be, at worst, unrelated to the truth; they should not be systematically directed away from the truth. Thus, while there could be a ‘true cluster’ of political beliefs, the present consideration strongly suggests that neither the liberal nor the conservative belief-cluster is it.

Rewards for failure, part 1937246

There's an interesting bit of analysis of chief exec pay in the FTSE100 over the past 5 years here (PDF). Its conclusions -

* Shareholders’ investment in their Chief Executive (CEO) is significant:
– 2008: Median Total Actual Pay is £8.9m, Upper Quartile is £13.3m*
* CEO compensation bears no relation to Total Shareholder Return performance
* Long Term Incentive Plans (LTIPs) are clearly driven overall by performance
* But, other elements of pay (salary, bonus) serve as a “filler” for under-performers – ensuring that those whose LTIPs are likely to fail, or partly fail to pay out, receive rewards in other ways

Hat-tip: Duncan

Categorise this!

I'm still plugging away at this Prototype Theory stuff. One interesting idea is that it even affects our views of causation. Apparently we view the sort of billiard ball model of causation (ie A causes B to C) as a 'better' version of causality than, say, change resulting from the confluence of a number of factors. I spose that might in part explain why we are drawn to simplistic explanations for events. Excuse my penions geekery but an obvious case in my mind is the idea that the abolition of dividend tax credits 'caused' the closure of final salary schemes.

In similar territory I've just come across a good example of how the way we categorise things depends a great deal of conceptual models we already have in place. The example is to think of the category 'bachelor'. I assume we all have a clear view of what this category means - a man who is not married. It also seems fairly clear that as a category you are either in it or not - it's not a gradiated category. But what about a boy lost in a jungle who grows up into an adult on his own - is he a bachelor? What about the pope? What about a gay bloke in long-term relationship?

In fact whilst initially the designation 'bachelor' seems like a very straightforward yes/no bit of categorisation it is actually built on other assumptions, for example about marriage.

Pension fund politics

Financial services group Hargreaves Landsdown has had a pop at public sector pensions today, arguing that there is 'pensions apartheid' between the public and private sectors. Funnily enough one of the business supporters of the Taxpayers Alliance, which also makes a lot of incoherent noise about public sector pensions, is one Peter K Hargreaves, chief executive of... Hargreaves Landsdown. Probably just a coincidence but it would be interesting to know if any of the TPA's campaigns are suggested/promoted/funded by their business supporters.

But what of the argument itself? According to this report it appears that while HL is saying that the public sector should shift to defined contribution provision, the current level of contributions should be maintained.

It is the contribution rate that matters, not the benefit structure. Current contribution rates to defined benefit schemes would be sufficient to buy contracted in money purchase pensions for public sector workers of between 45pc and 50pc of final earnings.

Of course the contribution rate matters, but if the contribution rate stays the same then ...errr... provision doesn't become any cheaper. So why change it? All you are really doing is saying 'public sector workers must experience more risk'. But that's not quite as snappy as 'pensions apartheid' I guess.

And actually if you are paying the same level of contributions into a scheme you're actually more likely to get lower costs in DB than DC. That's in part due to economies of scale and in part due to the admin hassle of lots of individual pots under a DC scheme. Funnily enough one US pension fund has just sussed this out:

West Virginia lawmakers were informed Monday that the movement of nearly 15,000 teachers and educational workers from a defined contribution plan to a traditional pension plan will shave about $22 million off - that’s right, shave OFF - the state’s retirement benefit expenses. The estimate given to lawmakers by state actuary Harry Mandel was radically different from early statements that the DC to DB migration would actually cost the state as much as $78 million to subsidize pensions for teachers and service personnel who transferred to the Teachers Retirement System but had limited assets in their Teachers Defined Contribution (TDC) plans.

Hat-tip: Corporate Governance

HL, unlike the TPA, does at least acknowledge the much bigger problem of poor provision in the private sector.

In the US the unions would take this kind of lobbying for an attack on employees' benefits seriously and take it up with the company. See for example the campaign against State Street when they started lobbying in favour of social security privatisation. I can't see any reason why companies like HL shouldn't be held similarly accountable in the UK.

Thursday 4 September 2008

166th toughest in the infants

I am not ashamed, I am vain enough to have had a look at whether I scraped into Iain Dale’s top political blogs list. And there I am, in at 166th. It’s even less impressive when you consider that only 590 blogs got voted for in total! Still, I’m in the top third, that’s what I’ll keep telling myself.

Notably none of the top 10 political blogs listed is a lefty one, and there are only three (I don’t count Lib Dems) in the top 20. That suggests that the list is still quite skewed by a right-of-centre readership. Also the list suffers from the curse of those Best Album EVAR lists which always include recent chod alongside the real classics (classics seemingly as defined by the readership of Q magazine that is). So you get a few newbie blogs (hey, I’ve been doing this for 18 MONTHS now) with limited track records alongside the old stalwarts.

But it’s the only list there is and as John Snow says ‘just a bit of fun’. And good to see some of my faves in the top 100. Personally I shall be knuckling down to ensure I achieve top quartile performance next year (market conditions permitting).

Wednesday 3 September 2008

Unions and pensions

A quick snippet from the TUC research What do workers want? which has quite a lot of interesting stuff in it. Most interesting to a saddo like me are the findings on pensions on page 16 of the PDF. Union members are significantly more satisfied with their pension arrangements than non-union members. That suggests that unionised workforces have done a better job at hanging on to good pensions than those without representation.

Obviously this will be skewed by union membership in the public sector, but that still demonstrates that strong unions are likely to be able to retain good pensions. The private sector has been hit worst by the DB to DC shift, and that's where unions are weaker. And which was the first big UK company to shut its DB scheme to existing members? Non-union Rentokil.

More label news

Hat-tip to Mrs Blogs for pointing me to this story about Kellogs lobbying against the traffic light system and this blog post by the Food Standards Agency's chief scientist where there is an interesting cross section of comments on traffic lights vs GDAs. Worth a read.

Tuesday 2 September 2008

I’m a label lovin’ lefty!

Further to my recent post on food labeling, I decided to have a quick look at a couple of labels on products in Tescos this morning (yes, I know it’s deeply sad).

One was a container of pâté which the label said contained 33% of the guideline daily amount (GDA) for saturates, and 24% of the GDA for fat. Except that was per 50g, rather than the 170g in the packet. It was a similar story on some of the packets of meat. One of them actually described the GDAs as referring to a ‘serving’ of 50g rather than the total contents of the packet.

There’s a reasonable point struggling to get out here – obviously most of us aren’t going to scoff an entire tub of pâté in one go. However how do you decide what proportion of the total contents amounts to a reasonable ‘serving’ to be represented as a percentage of the GDA? And does that actually help you understand whether the product itself is unhealthy? And are you sad enough to check the label that closely in any case?

Finally I picked up a bottle of soft drink where the GDA percentages referred to half the amount in the bottle itself. Presumably this is based on the assumption that people only drink half of what they buy and tip the rest away, so it’s a totally reasonable and honest way to label the product.

The bloggers gonna work it out

The TUC has entered the blogging world, so here's a quick plug for their Touchstone blog.

Gold-plated pensions

For directors that, is according to the TUC's annual Pensionswatch survey. They're not super generous just because directors get paid more, there are plenty of pension-boosting little wheezes that ensure that boardroom provision is unmatched anywhere else.

In DB schemes many directors have a better accrual rate (1/40ths or even 1/30ths compare to 1/80ths or 1/60ths for mere mortals), meaning that they can build up pension benefits far more quickly. In DC schemes many get employer contributions three or four times as generous as those available to the rest of us.

And finally, they typically have a Normal Retirement Age of 60 - that's the age they can draw a full pension at.

Here's the TUC press blurb:

UK top bosses can look forward to retiring on £200,000 a year

Directors of the UK's top companies can retire on pensions of over £200,000 a year, according to the TUC PensionsWatch survey published today (Tuesday).

The TUC's sixth annual PensionsWatch survey, which analyses the pension arrangements of 346 directors from 102 of the UK's top companies, shows that top bosses have amassed pension pots that average around £3 million each, providing an annual pension of £201,700 a year - 25 times the average workplace pension that ordinary workers receive (£8,100). Directors with the greatest entitlements at each company have average pension pots of £5.2million and can expect a pension of £333,400 a year.

PensionsWatchreveals that bosses have bucked the trend towards riskier and less generous pensions for ordinary workers, with three quarters of the directors surveyed (76 per cent) on defined benefit (DB) schemes.

The survey found that directors in defined contribution (DC) schemes received an average employer contribution of £91,700. The average employer contribution rate was around 21 per cent, three times the average rate for ordinary workers in this type of scheme (around 6.5 per cent). The top directors with the highest pension payments at each company received an average employer contribution of £149,600.

While many employers across the public and private sectors are increasing the length of time people have to work by raising retirement ages to 65, the majority of directors in the TUC study are still able to retire at 60. Of the 40 companies that provided information about the normal retirement age (NRA) for directors, two thirds (26 companies) still had a NRA of 60.

The PensionsWatch survey also uncovered a lack of transparency in the reporting of directors' pension arrangements. Of the 19 financial sector companies analysed - 18 of which offered DB schemes to at least one director - just four companies disclosed the accrual rate they use to calculate pension benefits.

The TUC is calling for greater clarity and reporting of pay, remuneration and pensions, so that investors have the information they need to scrutinise the awards made to directors. The TUC believes that more information would also make it easier for ordinary employees to see the pension arrangements of their top bosses.

Monday 1 September 2008

Be(little) the media

I got back home tonight in time to see Channel 4 News for the first time in years, to be treated to a really choice piece of political journalism. Gary Gibbon's 'interview' with Ed Balls was one of the most pointless I've seen for some time, and I still bother to watch Nick Robinson. It was just a series of questions designed in a way that if Ed balls had veered an inch from the party line he would have been portrayed as either a) admitting Brown was in trouble or b) 'slapping down' David Miliband.

At one point he seemed to be asking Balls whether he could personally vouch that no-one anywhere in the Government was talking about a leadership challenge. If you say yes it implies a) you're dishonest since it's impossible to know and/or b) control-freakish. But if you say no then it implies there could still be a challenge in the offing. And then we wonder why politicians speak in content-free and colourless soundbites.

Fair play to Ed Balls though, he almost managed to do the whole interview without blinking.

Lazy round-up

I'm uninspired this lunchtime so here are a few links to stuff worth a read.

This piece in the FT's fund management supplement reviews recent contributions to the analysis of the subprime crisis including this book which looks like it might be worth a punt. Conclusion:

The global financial crisis is not satisfactorily explained by reference to the “irrationality” of players in the housing market. Although the US mortgage market had become supremely dysfunctional, it is also wrong to suggest conflicts of interest alone can explain the current crisis. The common thread linking the various real estate bubbles around the world has been abnormally low interest rates. Loose monetary policy from the world’s central banks created a multitude of bubbles; irrational exuberance and poor lending decisions followed.

Via S&M I picked up this epic post on inequality under Thatch which is the sort of well-researched, cool-headed and thorough post that surely has no place in the blogosphere. Also several billion extra points for Ministry of Truth for having the whole of Notes on Nationalism on the blog. As I've blogged before, I think it's one of the most interesting things Orwell wrote.

There was a good bit in The Grauniad at t'weekend having a pop at the members of the fourth estate who did such a great job of fair and balanced reporting of the MMR 'scare':

It is madness to imagine that one single man can create a 10-year scare story. It is also dangerous to imply - even in passing - that academics should be policed not to speak their minds, no matter how poorly evidenced their claims. Individuals like Wakefield must be free to have bad ideas. The media created the MMR hoax, and they maintained it diligently for 10 years. Their failure to recognise that fact demonstrates that they have learned nothing, and until they do, journalists and editors will continue to perpetrate the very same crimes, repeatedly, with increasingly grave consequences.

And finally I've been reading some bloody interesting stuff about prototype theory this weekend. I came across this a couple of years back in a book on cognitive biases, but I've recently started to have a proper look at it. It's basically all about how we categorise stuff. We have a sense that some things are 'better' examples of a category than others (ie robins are 'better' birds than penguins).