I reckon the 'debate' about pay at the banks could take a turn for the unpleasant if the banks themselves don't start behaving a bit more sensibly. This week we learnt that Goldmans (which is one of the US banks taking a helping hand from the taxpayer) is going to pay out about £7bn in bonuses, a move that even the Daily Mail decried.
It's not as straightforward as some of the populist commentary suggests. I bet a lot of this is contractual, so it's not easy for the banks to get out of making the awards without the agreement of the individuals concerned. And A LOT is owed. That said, it's amazing that there isn't a little bit of restraint on the part of bankers, purely out of self-interest.
The gossip from the RBS clearout was that Goodwin actually argued for a pay-off, even as the Government was tying up the part-nationalisation. What the hell was he thinking? Next in the departure lounge is most of the HBOS board. It will be interesting to see if they try and negotiate any kind of pay-off (the chair and chief exec have already said they won't I believe).
It's a dangerous time for banks not to demonstrate a bit of sense about pay. Surveys that have been done looking at who the public thinks is to blame for the current crisis repeatedly put banks top of the list. The dominant view seems to be that bankers have mucked things up for the rest of us, and paid themselves handsomely in doing so. Further examples that seem to confirm this impression are only going to inflame the situation.
PS. The ABI is floating the idea of clawback provisions. It might not be a bad idea for the future.
Friday, 31 October 2008
Wednesday, 29 October 2008
Mutual funds backed bank pay
Another plug for the ace FundVotes.com website. It's just published this report (PDF) on mutual fund voting on say-on-pay resolutions at the banks that the Government has taken stakes in. No surprise (to me anyway) to see that a number of the big houses (Putnam, Fidelity, Vanguard) didn't back any of the resolutions.
It's not a smoking gun. Voting decisions don't tell us too much about the interaction between between companies and there shareholders. But it does suggest that only a few months ago the big mutual funds apparently did not see any serious issues with pay at the banks.
It's not a smoking gun. Voting decisions don't tell us too much about the interaction between between companies and there shareholders. But it does suggest that only a few months ago the big mutual funds apparently did not see any serious issues with pay at the banks.
The risk of rising shares
This is a rather graphic demonstration of the risk that investors run when they are shorting. When you go long you can lose up to 100% of what you have invested, but when you go short the amount you can lose is basically unlimited (because the shares may keep on rising). It demonstrates that one is not the mirror of the other, in addition to showing that shorters are not necessarily better informed (or more rational) than long-only investors (as implied by the argument that shorting can prevent the emergence of bubbles).
UPDATE: Nick says I'm talking ballax (see comments). I might be! A bit.
UPDATE: Nick says I'm talking ballax (see comments). I might be! A bit.
Tuesday, 28 October 2008
Every time I learn something new it pushes some old stuff out of my brain
So says Homer in one episode of The Simpsons. But maybe Homer actually "misunderestimated" (Copyright G W Bush) himself by falling for the metaphor of the mind as a container. It's a very tempting metaphor, because it seems to get across the way that we access and 'store' new information. Here's a thumbnail sketch of the idea from the essay 'Is there a problem in explaining cognitive progress?' by Aaron Ben-Ze'ev in Rethinking Knowledge: Reflections Across the Disciplines.
"In this view, the mind is an internal container, and cognitive progress is a quantitative increase in the amount of internal representations. In such a mechanistic paradigm, the cognitive system remains more or less stable, the only difference being that its empty shelves are gradually filled with more information. Cognitive progress is attained by adding a certain part to an existing system. When this mechanistic picture is applied to to the realm of scientific knowledge, science is conceived of as essentially taking pictures of the external world; the more pictures science has, the more adequate the science is. Hence there is always linear progression. Both the individual person and science as a whole are constantly marching toward a better understanding of their surroundings."
But is this really how our minds work? In the essay he suggests adopting a different approach - the schema paradigm. In this view the mind is made up of capacities and states. In the container metaphor, when you want to recall information presumably you send the little bloke in your head off into the information warehouse to retrieve what is required. In the schema paradigm, however, the container metaphor doesn't work because key elements - capacities and states - are retained rather than stored.
"The capacity to play the piano and the state of being beautiful are retained but not stored. Similarly, capabilities are not brought out of storage but are realised or actualised. The state of a car in motion is not stored in its engine when the car is stationary; rather the car has the capacity to repeat its state of being motion. And by the same token, when a squeaky toy does not actually squeak, it retains (rather than stores) its capacity to squeak."
This, he argues, also explains something about the organisation of the brain:
"In a storehouse, it makes very little difference how the items are disposed or organised. Something may be stored at the right or left side of the storehouse without being affected. However, in the schema paradigm, organisation is an essentia property, not a later addition. The importance of organisation and relations in memory can, for instance, explain that it is much harder to recall the months of the year in alphabetical order than in their chronologial sequence. A junkyard or tapre recorder model of memory is feasible and even natural in the container paradigm, whereas the schema paradigm stresses the importance of the relations and organisation among the carious items. Many phenomena indicating the sensitivity of memory to organisation attest to the greater suitability of the schema than the container paradigm for memory."
Notably George Lakoff (yes, him again) has been here already, and has identified the container metaphor as one the most prevalent. You can also see that it crops in other areas - what about set theory in maths for example? But as a way of understanding how we learn, perhaps it simply doesn't work. Sorry Homer.
"In this view, the mind is an internal container, and cognitive progress is a quantitative increase in the amount of internal representations. In such a mechanistic paradigm, the cognitive system remains more or less stable, the only difference being that its empty shelves are gradually filled with more information. Cognitive progress is attained by adding a certain part to an existing system. When this mechanistic picture is applied to to the realm of scientific knowledge, science is conceived of as essentially taking pictures of the external world; the more pictures science has, the more adequate the science is. Hence there is always linear progression. Both the individual person and science as a whole are constantly marching toward a better understanding of their surroundings."
But is this really how our minds work? In the essay he suggests adopting a different approach - the schema paradigm. In this view the mind is made up of capacities and states. In the container metaphor, when you want to recall information presumably you send the little bloke in your head off into the information warehouse to retrieve what is required. In the schema paradigm, however, the container metaphor doesn't work because key elements - capacities and states - are retained rather than stored.
"The capacity to play the piano and the state of being beautiful are retained but not stored. Similarly, capabilities are not brought out of storage but are realised or actualised. The state of a car in motion is not stored in its engine when the car is stationary; rather the car has the capacity to repeat its state of being motion. And by the same token, when a squeaky toy does not actually squeak, it retains (rather than stores) its capacity to squeak."
This, he argues, also explains something about the organisation of the brain:
"In a storehouse, it makes very little difference how the items are disposed or organised. Something may be stored at the right or left side of the storehouse without being affected. However, in the schema paradigm, organisation is an essentia property, not a later addition. The importance of organisation and relations in memory can, for instance, explain that it is much harder to recall the months of the year in alphabetical order than in their chronologial sequence. A junkyard or tapre recorder model of memory is feasible and even natural in the container paradigm, whereas the schema paradigm stresses the importance of the relations and organisation among the carious items. Many phenomena indicating the sensitivity of memory to organisation attest to the greater suitability of the schema than the container paradigm for memory."
Notably George Lakoff (yes, him again) has been here already, and has identified the container metaphor as one the most prevalent. You can also see that it crops in other areas - what about set theory in maths for example? But as a way of understanding how we learn, perhaps it simply doesn't work. Sorry Homer.
Monday, 27 October 2008
Fairness, blokeyness and selfish gits
I'm at home feeling ill today, so trying to fit in a bit of reading. I thought I'd have a flick through another book on behavioural economics that I took a punt on recently which is Advances In Behavioural Economics, edited by Colin Camerer, George Loewenstein and Matthew Rabin. The paper I've been reading is Fairness and Retaliation: The Economics of Reciprocity by Ernst Fehr and Simon Gachter, which is all about... err... reciprocity. The influence of reciprocity is pretty well-established and comes in two forms - positive and negative. In the former case we respond co-operatively to friendly actions, in the latter we seek to punish hostile actions, often in quite a brutal way.
In a well-known experiment, two participants are given a prize, say £100, to divide between themselves. The way it works is that participant A gets to make the offer of how the money will split, and participant B gets to decide whether to accept it or not. The important points are that the offer can only be made once, and if participant B doesn't accept it then neither participant receive any money.
Now, if we were only driven by maximising self-interest, and not 'fairness', participant B should accept any offer, even if it is £1 for him/her and £99 for participant A. But actually, in the hundreds of times the experiement has been run, it turns out that many (in fact probably most) of us would rather reject an 'unfair' offer. In practice an offer where participant B will get 30% or less of the total is very likely to be rejected. Importantly this holds up even when the amounts of money involved are significant.
Notably further work has been done looking at male behaviour in these experiment and testosterone levels and there's a correlation. Males who reject 'unfair' offers have higher testosterone levels than those who accept them. I don't find this that surprising, as it seems like the expression of the desire not to be ripped off. That may undermine the cartoony views of some Righties that a desire for fairness is the whiney voice of the weak and feeble (it may also suggest that lefties have hairy backs).
It's worth noting in these types of experiments that we don't all act the same. While a majority of us exhibit reciprocal behaviour, both positive and negative, a large minority - 20% to 30% - behave completely selfishly. So actually behavioural economics provides some confirmation for typical Left and Right views of human nature. Most of us do want to reciprocate, but don't base your policies on that assumption, because one in three of us is a selfish git who will muck things up for you.
In a well-known experiment, two participants are given a prize, say £100, to divide between themselves. The way it works is that participant A gets to make the offer of how the money will split, and participant B gets to decide whether to accept it or not. The important points are that the offer can only be made once, and if participant B doesn't accept it then neither participant receive any money.
Now, if we were only driven by maximising self-interest, and not 'fairness', participant B should accept any offer, even if it is £1 for him/her and £99 for participant A. But actually, in the hundreds of times the experiement has been run, it turns out that many (in fact probably most) of us would rather reject an 'unfair' offer. In practice an offer where participant B will get 30% or less of the total is very likely to be rejected. Importantly this holds up even when the amounts of money involved are significant.
Notably further work has been done looking at male behaviour in these experiment and testosterone levels and there's a correlation. Males who reject 'unfair' offers have higher testosterone levels than those who accept them. I don't find this that surprising, as it seems like the expression of the desire not to be ripped off. That may undermine the cartoony views of some Righties that a desire for fairness is the whiney voice of the weak and feeble (it may also suggest that lefties have hairy backs).
It's worth noting in these types of experiments that we don't all act the same. While a majority of us exhibit reciprocal behaviour, both positive and negative, a large minority - 20% to 30% - behave completely selfishly. So actually behavioural economics provides some confirmation for typical Left and Right views of human nature. Most of us do want to reciprocate, but don't base your policies on that assumption, because one in three of us is a selfish git who will muck things up for you.
Sunday, 26 October 2008
Strange stats in The Observer
There's a freebie magazine with The Observer today all about sex and attitudes to it. In the survey section there are odd results when people have been asked about the threat to children from paedophiles. Here they are -
Do you believe that children are more at risk from paedophiles than they were 10 years ago?
Yes: 80%
No: 20%
Twenty years ago?
Yes: 72%
No: 28%
Fifty years ago?
Yes: 66%
No: 34%
If I'm reading this right, doesn't this mean that people think that the past was riskier?
If you answer the question 'no' then surely you must think that in the period specificed the risk was the same s now, or perhaps even greater. So if we say the risk today is 'high' then just 20% of people think the risk 10 years ago was also 'high' (or greater), but 28% think the risk 20 years ago was at least the same, and if you look back 50 years a third of us think the risk was at least the same as today. So that suggests that people answering these questions think that the threat from paedophiles had been dropping since the war until a spike in the last decade (coinciding with the 'election' of the ZaNuLieBore junta!).
I say it's odd because I suspect people didn't think they were answering the questions in a way that gave that impression, they probably wanted to express their view that things had got riskier recently. Would be interesting to find out what order the questions were askd in to see if this made a difference, but more broadly I guess it demonatrates what a waste of space these types of surveys are.
Do you believe that children are more at risk from paedophiles than they were 10 years ago?
Yes: 80%
No: 20%
Twenty years ago?
Yes: 72%
No: 28%
Fifty years ago?
Yes: 66%
No: 34%
If I'm reading this right, doesn't this mean that people think that the past was riskier?
If you answer the question 'no' then surely you must think that in the period specificed the risk was the same s now, or perhaps even greater. So if we say the risk today is 'high' then just 20% of people think the risk 10 years ago was also 'high' (or greater), but 28% think the risk 20 years ago was at least the same, and if you look back 50 years a third of us think the risk was at least the same as today. So that suggests that people answering these questions think that the threat from paedophiles had been dropping since the war until a spike in the last decade (coinciding with the 'election' of the ZaNuLieBore junta!).
I say it's odd because I suspect people didn't think they were answering the questions in a way that gave that impression, they probably wanted to express their view that things had got riskier recently. Would be interesting to find out what order the questions were askd in to see if this made a difference, but more broadly I guess it demonatrates what a waste of space these types of surveys are.
Saturday, 25 October 2008
Brace yourself, cos this goes deep
Googling around for info on the legitimation of ideas, I came across a paper on the Challenger shuttle disaster which looks like it might be an interesting read. Here's a chunk of text from the paper about how ideas come to be accepted -
"Analogy in combination with the social mechanisms identified here—professional legitimacy, conversation, technologies, time, networks, social support—seem to be ingredients fundamental to the diffusion of expert knowledge. Scholars interested in the production of knowledge and the diffusion of ideas have tended to approached the problem one of two ways: reputation or content fit (Camic 1992; McLaughlin 1998). The reputational perspective accounts for the rise and fall of ideas based on historical and cultural context, geography and national traditions, institutional, organizational, and network arrangements, or individual characteristics of the author and scholarly life. This case affirms the reputational model’s findings about institutional arrangements and networks, adding to it by emphasizing the actor-network association (Latour 1987, 1988) and by suggesting that technologies of dissemination might be usefully incorporated into the study of knowledge production, regardless of type of knowledge or historic period. The second approach has explained the acceptance or failure of an idea by its content. Camic, discussing the role of the content-fit model in a theorist’s selection of intellectual predecessors, implicitly suggests analogy: “The relationship exists chiefly because of the fit between the arguments, concepts, themes, materials, orientations, or methods of certain earlier figures and some aspect(s) of the work of the thinker under study” (1992, p. 423). The fit with the content of an idea is affirmed by the empirical analogies that enabled the theory of the Challenger accident to travel to the Columbia tragedy. These analogies and the structural equivalences between the two problems suggest that the form of an idea or theory in relation to its application to other empirical situations may also be significant in the legitimation of ideas, their acceptance or rejection and dissemination."
The paper is NASA Revisited: Theory, Analogy, and Public Sociology by Diane Vaughan.
Title hat-tip: Mike Skinner
"Analogy in combination with the social mechanisms identified here—professional legitimacy, conversation, technologies, time, networks, social support—seem to be ingredients fundamental to the diffusion of expert knowledge. Scholars interested in the production of knowledge and the diffusion of ideas have tended to approached the problem one of two ways: reputation or content fit (Camic 1992; McLaughlin 1998). The reputational perspective accounts for the rise and fall of ideas based on historical and cultural context, geography and national traditions, institutional, organizational, and network arrangements, or individual characteristics of the author and scholarly life. This case affirms the reputational model’s findings about institutional arrangements and networks, adding to it by emphasizing the actor-network association (Latour 1987, 1988) and by suggesting that technologies of dissemination might be usefully incorporated into the study of knowledge production, regardless of type of knowledge or historic period. The second approach has explained the acceptance or failure of an idea by its content. Camic, discussing the role of the content-fit model in a theorist’s selection of intellectual predecessors, implicitly suggests analogy: “The relationship exists chiefly because of the fit between the arguments, concepts, themes, materials, orientations, or methods of certain earlier figures and some aspect(s) of the work of the thinker under study” (1992, p. 423). The fit with the content of an idea is affirmed by the empirical analogies that enabled the theory of the Challenger accident to travel to the Columbia tragedy. These analogies and the structural equivalences between the two problems suggest that the form of an idea or theory in relation to its application to other empirical situations may also be significant in the legitimation of ideas, their acceptance or rejection and dissemination."
The paper is NASA Revisited: Theory, Analogy, and Public Sociology by Diane Vaughan.
Title hat-tip: Mike Skinner
Thursday, 23 October 2008
Marx on financialisation
"To the possessor of money capital, the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money- making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production."
Nicked from John Plender.
Legitimation
This is a random request for info. Has anyone read anything anywhere about the process of legitimation of ideas? It is something that a) I find really interesting and b) think the Left could have a look at in terms of being more effective in getting it's arguments across.
Reading and Googling around I've come across some stuff by Jurgen Habermas, but this seems primarily about the legitimation of power - and potential crisis in its legitimation, rather than the legitimation of ideas (though obviously the two are linked).
Any ideas?
Reading and Googling around I've come across some stuff by Jurgen Habermas, but this seems primarily about the legitimation of power - and potential crisis in its legitimation, rather than the legitimation of ideas (though obviously the two are linked).
Any ideas?
Odds & ends
A few things worth looking at...
CalPERS (the giant US public sector pension fund) says recent market turbluence won't affect contribution rates. Despite the Right's irrational hatred for them, I suspect funded public sector DB schemes could come out of all this looking good and demonstrating why DB is a good way of sharing and spreading risk over the long term. Too bad we've killed these schemes in the UK.
Also in the US, the NYC pension fund is looking into making local infrastructure investments. This seems like a really good idea - could we try something similar with our own funds?
This paper about the effects of leveraged buyouts on wages an employment is worth a read, though it basically says there aren't really any. The research was done by the Centre for Management Buyout Research, so they come with an agenda, but worth a read anyway. Hat-tip : Sandy
There's a good post from Paulie here.
And here's a paper from a few years back on behavioural biases at play in fund management.
CalPERS (the giant US public sector pension fund) says recent market turbluence won't affect contribution rates. Despite the Right's irrational hatred for them, I suspect funded public sector DB schemes could come out of all this looking good and demonstrating why DB is a good way of sharing and spreading risk over the long term. Too bad we've killed these schemes in the UK.
Also in the US, the NYC pension fund is looking into making local infrastructure investments. This seems like a really good idea - could we try something similar with our own funds?
This paper about the effects of leveraged buyouts on wages an employment is worth a read, though it basically says there aren't really any. The research was done by the Centre for Management Buyout Research, so they come with an agenda, but worth a read anyway. Hat-tip : Sandy
There's a good post from Paulie here.
And here's a paper from a few years back on behavioural biases at play in fund management.
Wednesday, 22 October 2008
Pluggity plug plug
I recently flagged up the Tomorrow's Company report Tomorrow's Owners. I've just got hold of the full report, and it is definitely worth a read. It actually poses a lot more questions than it answers, but it covers a lot of ground, and is the first report I've seen to try to grapple with the changing nature of company ownership (as hedge funds and private equity have displaced 'traditional' shareholders). It also makes the case for other forms of ownership - like family firms and employee-owned businesses. If you are interested in this sort of stuff it is worth getting hold of (it's £35).
Is Osborne in serious trouble?
Things aren't getting any better for hopeless millionaire shadow chancellor George "rubbish" Osborne, as former Bullingdon Club chum Nat Rothschild isn't backing down. In retrospect, Osborne looks a bit daft for putting out that Clinton/Beckham style denial yesterday since it only made him look more shifty. And the whole episode comes across as pretty seedy since most of us don't spend our time on yachts trying to get £50k out of a billionaire.
Clearly the Right of the Conservative Party don't like Osborne for some reason, so he's taking fire from his own side too. Tebbit knows exactly what impact he will have by having a pop today, for instance. But if he becomes a public relations problem for the Cameroons what value does he actually have?
So in a sense it would almost be good news if he stays, as he brings a nice seedy super-rich thing to the Tory front bench. On the other hand, if he goes that's one half of the dynamic duo out of action, and the simplistic narrative that Dave and George are the Tories' Blair and Brown is also knackered. So it's a bit of a win-win at the moment.
Tuesday, 21 October 2008
Ex-RCPers in The Times
The Thunderer has a bit in today entitled Karl Marx: did he get it all right? They then ask six lefties to give their view on the bearded one’s prophetic powers. What is surprising is that three of the six (Frank Furedi, Mick Hume and Claire Fox) are ex-RCP. Whilst well-known on the Left for its contrarian stance and cult-like membership, the RCP was pretty small outfit so they’re a strange mob to go to for comment (in comparison the much larger former CPGB only gets two – Martin Jacques and Eric Hobsbawm). Some might think this is further evidence of the RCP’s alleged media entryism. Probably more likely is lazy journalism. Hume is a Times columnist, so it’s not too much of a stretch to ask two of his mates to knock out a 100words is it?
Fun with Tory funding
There’s more dodgy Tory funding news this morning, linked to rubbish millionaire shadow chancellor George Osborne. He’s definitely the weak link in the Tory front bench and we ought to target him as a result. In the words of Admiral Ackbar: “Concentrate all fire on that super star destroyer!”
Inspired by Osborne’s claim to have merely been walking past when a possible £50k donation to the Tories was coincidentally discussed with a Russian oligarch (rather than actually “soliciting” it) or something, I thought I’d have another look at City outfits funding the Dark Side. As I’ve blogged several times before, there are a couple of investment businesses that are open Tory supporters.
First a quick update on the “generally non-partisan” fund manager Fidelity Investments, which has given the Tories half a million quid over the past few years. Fidelity just picked up a £250m global equities mandate from the Tory-controlled North Yorks pension fund. Anyone in touch with the Labour group up there might want to alert them to Fidelity’s donations in case they don’t already know about them.
The other outfit of note is investment trust Caledonia Investments, which has passed resolutions at its last two AGMs giving it authority to provide funding to the Tories. It passed these resolutions with the support of a number of fund managers. A quick search on the Electoral Commission register last night revealed that Caledonia’s donations are now starting to feed through to local Tory associations. Ealing Central and Action received £3000 earlier this year, whilst Milton Keynes and Sutton and Cheam got £5000 each. Anyone in touch with the CLPs in those areas might want to pass this info on.
I’ll keep posting the info as I get it. Next one to watch for is whether Fidelity gave the Tories anything in Q3 this year. They’ve given the Tories £60K so far this year.
Inspired by Osborne’s claim to have merely been walking past when a possible £50k donation to the Tories was coincidentally discussed with a Russian oligarch (rather than actually “soliciting” it) or something, I thought I’d have another look at City outfits funding the Dark Side. As I’ve blogged several times before, there are a couple of investment businesses that are open Tory supporters.
First a quick update on the “generally non-partisan” fund manager Fidelity Investments, which has given the Tories half a million quid over the past few years. Fidelity just picked up a £250m global equities mandate from the Tory-controlled North Yorks pension fund. Anyone in touch with the Labour group up there might want to alert them to Fidelity’s donations in case they don’t already know about them.
The other outfit of note is investment trust Caledonia Investments, which has passed resolutions at its last two AGMs giving it authority to provide funding to the Tories. It passed these resolutions with the support of a number of fund managers. A quick search on the Electoral Commission register last night revealed that Caledonia’s donations are now starting to feed through to local Tory associations. Ealing Central and Action received £3000 earlier this year, whilst Milton Keynes and Sutton and Cheam got £5000 each. Anyone in touch with the CLPs in those areas might want to pass this info on.
I’ll keep posting the info as I get it. Next one to watch for is whether Fidelity gave the Tories anything in Q3 this year. They’ve given the Tories £60K so far this year.
Monday, 20 October 2008
Who is to blame for the crisis?
The bankers primarily, according to both Newsnight viewers, and Europeans as a whole. From the FT:
Notably short-sellers come pretty high on the blame list in the FT poll.
Carried out between October 1 and October 13, the poll found 80 per cent of European Union respondents said commercial and investment banks were “completely responsible” or held “a lot of responsibility” for the recent financial turmoil.
Central banks were also said to share much of the blame, with a surprisingly high score of 70 per cent giving them a lot or complete responsibility.
Notably short-sellers come pretty high on the blame list in the FT poll.
Don't get excited
By this. It was inevitable that we would make ground on the Tories as a result of the bank bailout, but remember how apocalyptically bad it looked before, and there's probably a lot more bad news to come.
Sunday, 19 October 2008
Pay again
Via Simon Caulkin's enjoyable little rant in today's Observer business section, I came across an article in Economist from a week or two back on regulatory efforts to intervene in respect of pay in the finance sector. Now I'm sure this will come as a major shock to you, but the Economist is NOT in favour of such intervention. Yet despite (as usual) not sharing their perspective, they do (as usual) make some good points. Here's one:
"If the foolishness of Congress setting corporate pay levels is an old lesson, the financial crisis is teaching some new ones to shareholders. First, forget the received wisdom that paying people in large amounts of shares in their own firm ensures they take sensible value-maximising decisions. In the collapse of Lehman Brothers and Bear Stearns, the management did not just take reckless gambles with other people’s money. Dick Fuld and Jimmy Cayne took reckless gambles with their own—and still they failed to do the right things and ended up losing most of their fortunes."
Amen to that, but they don't really sketch out any alternative (though they give a thumbs up to the FSA/Nick Drew(!) plan of linking remuneration to capital adequacy). I think Caulkin is actually more on the money by arguing that current events demonstrate that performance-related pay is incredibly difficult to get right.
"The credit crunch has written it out in huge red letters: incentive pay may work for Chinese peasants, but in situations of any complexity, and especially where the quality of the decisions made is only apparent in the long term, pay that truly reflects performance is not only unachievable: the attempt to make it so is catastrophically counterproductive."
To finish off, here's the final line from the Economist article:
"But in the end companies and shareholders are better at setting salaries than bureaucrats."
At what point are we going to acknowledge the very simple truth: shareholders do not set executive pay. At best the big institutions get prior consultation on particularly controversial proposals in order to try and prevent an embarrassingly high oppose vote at the AGM (though even then only a tiny proportion of companies even lose the vote). Most often shareholders are simply rubber stamping what companies tell them they want to do.
And even in this largely reactive role shareholders haven't don't a great job. If remuneration policies within banks were, with hindsight, so obviously flawed, then presumably shareholders must have voted down the remuneration reports at the likes of RBS, HBOS, Lloyds TSB? Er... no. Not even close. Not a single bank has even come close to losing the vote on its rem report. As Caulkin says, if shareholders are "better" at "setting" pay than regulators, then what does "worse" look like?
As I've argued plenty of times before, the idea that "shareholders" do/will/want to act like owners, and as such play a useful role in executive pay oversight is misplaced as things currently stand. Unless we address the failure of ownership in the public company model this is unlikely to change. Those from the Right who continue to argue that pay must solely be a matter of companies and shareholders are therefore either ignorant of reality or deliberately advocating a weak oversight mechanism. Either way it's an argument that needs challenging every time.
PS. In case you were wondering about the lack of links, I've knackered Firefox somehow and my replacement browser doesn't let me make hyperlinks in Blogger.
"If the foolishness of Congress setting corporate pay levels is an old lesson, the financial crisis is teaching some new ones to shareholders. First, forget the received wisdom that paying people in large amounts of shares in their own firm ensures they take sensible value-maximising decisions. In the collapse of Lehman Brothers and Bear Stearns, the management did not just take reckless gambles with other people’s money. Dick Fuld and Jimmy Cayne took reckless gambles with their own—and still they failed to do the right things and ended up losing most of their fortunes."
Amen to that, but they don't really sketch out any alternative (though they give a thumbs up to the FSA/Nick Drew(!) plan of linking remuneration to capital adequacy). I think Caulkin is actually more on the money by arguing that current events demonstrate that performance-related pay is incredibly difficult to get right.
"The credit crunch has written it out in huge red letters: incentive pay may work for Chinese peasants, but in situations of any complexity, and especially where the quality of the decisions made is only apparent in the long term, pay that truly reflects performance is not only unachievable: the attempt to make it so is catastrophically counterproductive."
To finish off, here's the final line from the Economist article:
"But in the end companies and shareholders are better at setting salaries than bureaucrats."
At what point are we going to acknowledge the very simple truth: shareholders do not set executive pay. At best the big institutions get prior consultation on particularly controversial proposals in order to try and prevent an embarrassingly high oppose vote at the AGM (though even then only a tiny proportion of companies even lose the vote). Most often shareholders are simply rubber stamping what companies tell them they want to do.
And even in this largely reactive role shareholders haven't don't a great job. If remuneration policies within banks were, with hindsight, so obviously flawed, then presumably shareholders must have voted down the remuneration reports at the likes of RBS, HBOS, Lloyds TSB? Er... no. Not even close. Not a single bank has even come close to losing the vote on its rem report. As Caulkin says, if shareholders are "better" at "setting" pay than regulators, then what does "worse" look like?
As I've argued plenty of times before, the idea that "shareholders" do/will/want to act like owners, and as such play a useful role in executive pay oversight is misplaced as things currently stand. Unless we address the failure of ownership in the public company model this is unlikely to change. Those from the Right who continue to argue that pay must solely be a matter of companies and shareholders are therefore either ignorant of reality or deliberately advocating a weak oversight mechanism. Either way it's an argument that needs challenging every time.
PS. In case you were wondering about the lack of links, I've knackered Firefox somehow and my replacement browser doesn't let me make hyperlinks in Blogger.
Friday, 17 October 2008
Banks and their pension schemes
This is interesting:
Defined benefit (DB) pension liabilities of some of the world largest banks are now significantly greater than the bank’s equity market value, according to Pension Capital Strategies (PCS).
The advisory firm’s latest report on the FTSE100 pension schemes revealed equity investments held by the pension schemes of HBOS, Lloyds TSB and RBS may outstrip the bank’s own equity market values.
Regulation, regulation, regulation
There's an interesting piece in today's Grauniad where Larry Elliot interviews Adair Turner. I've always been impressed with Turner. His book Just Capital had some great stuff in it (there's a great passage comparing the neo-liberal ideologues to marxist students in the 60s) and the Pensions Commission reports were great bits of analysis (I would have loved to work on something like that). As such I think he's a great bloke to head the FSA.
The most interesting thing about the interview IMO is the reflection of how quickly the crisis has opened up opportunities to examine new ideas, or re-examine old ones, a point I've been banging about a bit recently. The very fact that he can say that light touch regulation is over is significant in itself, but I particularly liked this bit:
Exactly, though it is a temporary window. One thing following the post-Enron reform movement in the US taught me was just how quickly vested interests seek to reassert themselves. It may be that this crisis is significantly serious to make that less of a factor, but I certainly would not assume that.
Also it looks like the FSA is going to snap up a few ex-City types to beef up its understanding of how some of this stuff actually works. There was a very telling bit on the (rather rubbish) Panorama special last night where an ex-Barclays treasury bloke said that FSA staff that same to see them were way out of their depth. Hopefully we now have the oportunity to put a few of these faults right.
The most interesting thing about the interview IMO is the reflection of how quickly the crisis has opened up opportunities to examine new ideas, or re-examine old ones, a point I've been banging about a bit recently. The very fact that he can say that light touch regulation is over is significant in itself, but I particularly liked this bit:
One result of the crisis of the past 15 months, Turner said, was to free the FSA from the charge that it was stifling the City with bureaucratic controls. "If a year and a half ago, the FSA had wanted higher capital adequacy, more information on liquidity - had said it was worried about the business models at Bradford & Bingley and Northern Rock - and had wanted to ask questions about remuneration, the fact is that we would have been strongly criticised for harming the competitiveness of the City of London, for red tape, and for over-regulation," he said.
Exactly, though it is a temporary window. One thing following the post-Enron reform movement in the US taught me was just how quickly vested interests seek to reassert themselves. It may be that this crisis is significantly serious to make that less of a factor, but I certainly would not assume that.
Also it looks like the FSA is going to snap up a few ex-City types to beef up its understanding of how some of this stuff actually works. There was a very telling bit on the (rather rubbish) Panorama special last night where an ex-Barclays treasury bloke said that FSA staff that same to see them were way out of their depth. Hopefully we now have the oportunity to put a few of these faults right.
Thursday, 16 October 2008
Does Gordo read the Investors Chronicle?
I recently came across a copy of Investors Chronicle from a month or so back. On the front is the headline "10 companies in demand - the shares that everyone's snapping up". Turning to the feature itself it turn out that first in the top 10 is.... RBS. The article says: "[I]f you don't think the economy will collapse, RBS is a good bet."
Given that we have abolished boom and bust, it should be a good punt...
Given that we have abolished boom and bust, it should be a good punt...
DC schemes fours times worse than public sector pensions
That's the way to respond to this kind of thing. The PPI report is worth a read if you're a pensions geek, but the TUC is right to warn that its findings will be selectively quoted. And below is exactly how we should argue these points (in Lakoff-speak, don't accept the frame):
The most important questions are why are private sector DC schemes so bad, and what do we do about it. Everyone sensible in the pensions industry acknowledges that the contribution rates to DC schemes are far too low to pay out pensions anything like as good as the DB schemes they replaced. So let's fix the problem rather than trying to make all pension schemes equally bad.
'The problem is not fair and proper public sector pensions, but the retreat by private sector employers from their responsibilities. The solution is to level-up, not strip away pensions from vital public servants.'
The most important questions are why are private sector DC schemes so bad, and what do we do about it. Everyone sensible in the pensions industry acknowledges that the contribution rates to DC schemes are far too low to pay out pensions anything like as good as the DB schemes they replaced. So let's fix the problem rather than trying to make all pension schemes equally bad.
Public companies RIP?
This bloke is from a private equity outfit, so maybe he’s not playing with a straight bat. In addition, let’s wait and see just how well some the recent wave of LBOs turn out. But some of these points ring true.
PS. There's a letter in response to this piece from the chair of the FRC in today's FT, but I can't link to it for some reason.
There is another victim of the credit crunch: the publicly traded model of ownership. The near-collapse of many of the large banks in perhaps a dozen countries shows that such corporate structures do not work.
I have served on the boards of various public companies for more than 20 years and most such constructs were dysfunctional. Interests were not aligned and there was more focus on pointless, ritual corporate activity than underlying profitability and productivity. Everyone tries hard, but the disconnect between management and ultimate ownership leads to the profound issues our economy now faces.
Large public companies are mostly owned by a hugely fragmented shareholder base. Most of us have pension and insurance policies, through which we all invest in equities; everyone owns them and yet no one does. No owner has control, so the hired hands rule the roost. Fund managers meet executive directors twice a year for an hour and expect to understand what is going on. Too often they judge management based on their ability to carry off a presentation rather than their true skills as leaders. Professional investors have stakes in 100 companies or more and expect to have real insight into all of them: a fantasy. Meanwhile, the top directors of a large public company can spend a fifth of their time visiting hundreds of actual or would-be shareholders.
PS. There's a letter in response to this piece from the chair of the FRC in today's FT, but I can't link to it for some reason.
Northern Rock was no-one's fault
Here’s the snippet from NR’s trading statement issued the other day announcing that there would be no legal action against either former directors or the auditors.
Of course, one can make the argument, as Applegarth did, that the events that floored NR were unforeseeable. In addition I’ve never really bought the argument that the auditors were at fault - yes they earned money from work on securitization, but what exactly does that make them responsible for? And more broadly I’m a subscriber to the “s**t happens” school of thinking. Just because something has gone wrong/failed doesn’t necessarily mean someone is to blame. But somehow it seems an odd conclusion the issue, and Unite don't like it.
Maybe it’s the Government’s fault…?
“A review of the conduct of the previous Board in respect of funding and liquidity has been undertaken with the assistance of external advisors, Freshfields and KPMG Forensic. The Board has concluded that there are insufficient grounds to proceed with any legal action for negligence against the former Directors, and has no intention of bringing any such action. The Board has also completed a similar review in respect of the Company’s auditors and has determined that no action is warranted.”
Of course, one can make the argument, as Applegarth did, that the events that floored NR were unforeseeable. In addition I’ve never really bought the argument that the auditors were at fault - yes they earned money from work on securitization, but what exactly does that make them responsible for? And more broadly I’m a subscriber to the “s**t happens” school of thinking. Just because something has gone wrong/failed doesn’t necessarily mean someone is to blame. But somehow it seems an odd conclusion the issue, and Unite don't like it.
Maybe it’s the Government’s fault…?
Wednesday, 15 October 2008
Credit crunch confusion!
The a continuing lack of comprehension of what recent events mean is rather helpfully demonstrated by a quick read of a couple of the pieces in the Grauniad's comments section.
Jonathan Freeland makes the point that the crisis open up opportunities to explore new ideas, and resurrect old ones. I agree, but saying 'how come we can bail out the banks but not fund the NHS better?' doesn't really take us much further. And he falls for the dumbest line of the lot: "This is to finance-driven capitalism what 1989 was to Soviet communism."
What is 'finance-driven capitalism' and in what respect have we seen the regimes that adhere to it as their over-riding ideology crumble? I'd like to see a serious look taken at what capital markets actually contribute to the economy, but I am under no illusions that they are going to disappear. Calm down dear, it's only a bit of part-nationalisation!
In the other corner, Simon Jenkins has a much better sense of proportion. It's a knock, not a knockout blow, and it's in now way a serious challenge to capitalism as a whole. But someone has been dripping pure poison into his ears about who is to blame for where we are - what's this lurking at the bottom of is article?
I do think it's true that politicians made mistakes, but they are more likely the result of misunderstanding not deliberate policy IMO. The highly-remunerated finance types on the other hand in many cases knew exactly what was going on. Credit crunch where it's due (boom boom!).
Jonathan Freeland makes the point that the crisis open up opportunities to explore new ideas, and resurrect old ones. I agree, but saying 'how come we can bail out the banks but not fund the NHS better?' doesn't really take us much further. And he falls for the dumbest line of the lot: "This is to finance-driven capitalism what 1989 was to Soviet communism."
What is 'finance-driven capitalism' and in what respect have we seen the regimes that adhere to it as their over-riding ideology crumble? I'd like to see a serious look taken at what capital markets actually contribute to the economy, but I am under no illusions that they are going to disappear. Calm down dear, it's only a bit of part-nationalisation!
In the other corner, Simon Jenkins has a much better sense of proportion. It's a knock, not a knockout blow, and it's in now way a serious challenge to capitalism as a whole. But someone has been dripping pure poison into his ears about who is to blame for where we are - what's this lurking at the bottom of is article?
"Though bankers are more fun to blame, it was politicians whose laxity and craving for popularity lay at the root of the present trouble."You what now? I'm not a Dubya fan (!) but I don't think he was personally frog-marching mortgage salesmen around telling them to feed on the low-paid and poorly-educated. I don't think all those people in financial institutions of all types who knew where things were wrong but declined to say so when the party was in full swing were following a communique from the politicos.
I do think it's true that politicians made mistakes, but they are more likely the result of misunderstanding not deliberate policy IMO. The highly-remunerated finance types on the other hand in many cases knew exactly what was going on. Credit crunch where it's due (boom boom!).
Tuesday, 14 October 2008
Government as shareowner
Here's a great line from a journo mate of mine writing in Financial News (you'll need a sub to read the whole thing) that hammers home the point about the failure of shareholders as owners -
And here's a bit of commentary from the TUC in the same territory -
"The Government achieved the ousting of RBS chief executive Sir Fred Goodwin, who took advantage of lax market conditions to purchase Dutch bank ABN Amro at the top of the market. Despite his mistake, shareholders had failed to achieve Goodwin’s ousting, despite consistently grumbling about the deal. You cannot get a better example of a Government forcing a solution on a market that cannot achieve results on its own."
And here's a bit of commentary from the TUC in the same territory -
In RBS at least, the Government is now the majority owner, and in other banks it will be by far the biggest shareholder. It now has major responsibilities as an owner that cannot be passed to an arms-length body. The lack of proper control by the owners of banks - shareholders and investment funds - has been a key cause of the crisis.
The banks today have received as much cash as the annual defence budget. Tax payers will want to see big changes in return. It is not enough to limit cash boardroom bonuses for a year and accept a few ritual resignations. There cannot be big pay-offs for those who go, as was the case with Northern Rock. There needs to be a wholesale review of bonuses and pay throughout the upper levels of these banks, not just a year long ban on boardroom cash bonuses.
Taleb talks
I went to see Nassim Nicholas Taleb talk at LSE last night. Interesting bloke, some of the presentation was over my head (there were, like, graphs and equations and stuff) but the message was generally the same as usual - mathematical models for measuring risk are flawed, we know a lot less than we think we do, one big event can completely reverse a previous trend.
To some extent I wish I had understood some of the more techie bits better, as there is obviously some very intersting stuff in there. He made the point that in many markets a single observation can account for a huge chunk of the return. I'd really like to get my head around more of that kind of stuff, but the presentation assumed a bit more knowledge than I (and probably quite a few of the several hundred other people there) had. Also it was a bit of shame that he didn't really go into the philosophical side of his ideas more, which I find really interesting.
The Q&A was great though (unless you are involved econometrics...) as he came across very much like the iconoclastic person you imagine from his books. He is extremely sceptical about the abilities of the current and former chairs of the Fed, and was scathing of the merits of economics as a whole.
PS. There's an S&M post on Taleb today too.
To some extent I wish I had understood some of the more techie bits better, as there is obviously some very intersting stuff in there. He made the point that in many markets a single observation can account for a huge chunk of the return. I'd really like to get my head around more of that kind of stuff, but the presentation assumed a bit more knowledge than I (and probably quite a few of the several hundred other people there) had. Also it was a bit of shame that he didn't really go into the philosophical side of his ideas more, which I find really interesting.
The Q&A was great though (unless you are involved econometrics...) as he came across very much like the iconoclastic person you imagine from his books. He is extremely sceptical about the abilities of the current and former chairs of the Fed, and was scathing of the merits of economics as a whole.
PS. There's an S&M post on Taleb today too.
Monday, 13 October 2008
Reverse Clause 4 moment?
So, we own the banks then, at least in part, and in the in the case of RBS we're the majority shareholder. The Government is, understandably, to some extent downplaying the significance of part-nationalisation of the banking sector. But let's not lose sight of the enormous failure of private sector management that this represents.
Already the Government has used its ownership to bring up some changes in behaviour. No cash bonuses this year, a shift to share-based bonuses in future (I'm not sure this is the right answer actually, but anyway...), and Pesto says that the banks also have to maintain 2007 levels of lending to individuals and small businesses (nice idea, but how does that work?). State direction of what the banks can and can't do may yet go further.
In political terms it's way too early to tell what the impact of these events will be. Certainly opinion within the Labour party is, rightly or wrongly, turning Left. And - so far - the crisis has brought the party back into line behind Brown and even reinvigorated some disillusioned supporters. (As a side point personally I think the whole crisis has also exposed George Osborne as a real lightweight and I'd like to see us direct a lot more fire in his direction.)
More broadly the obvious failure in the City is going to bring lots of ideas that had been off limits back into play. It may be that all that occurs as a result of all this is a minor tweak, and then the reconstruction of the financial system pretty much as it was. But there is a temporary opportunity to push for something a bit different (if you have any ideas as to what this 'a bit different system' is). If you don't ask you don't get.
PS. Here is the HMT statement. Here's what the Govt gets to do -
Already the Government has used its ownership to bring up some changes in behaviour. No cash bonuses this year, a shift to share-based bonuses in future (I'm not sure this is the right answer actually, but anyway...), and Pesto says that the banks also have to maintain 2007 levels of lending to individuals and small businesses (nice idea, but how does that work?). State direction of what the banks can and can't do may yet go further.
In political terms it's way too early to tell what the impact of these events will be. Certainly opinion within the Labour party is, rightly or wrongly, turning Left. And - so far - the crisis has brought the party back into line behind Brown and even reinvigorated some disillusioned supporters. (As a side point personally I think the whole crisis has also exposed George Osborne as a real lightweight and I'd like to see us direct a lot more fire in his direction.)
More broadly the obvious failure in the City is going to bring lots of ideas that had been off limits back into play. It may be that all that occurs as a result of all this is a minor tweak, and then the reconstruction of the financial system pretty much as it was. But there is a temporary opportunity to push for something a bit different (if you have any ideas as to what this 'a bit different system' is). If you don't ask you don't get.
PS. Here is the HMT statement. Here's what the Govt gets to do -
As part of its investment, the Government has agreed with the banks supported by the recapitalisation scheme a range of commitments covering:
maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels;
support for schemes to help people struggling with mortgage payments to stay in their homes, and to support the expansion of financial capability initiatives;
remuneration of senior executives - both for 2008 (when the Government expects no cash bonuses to be paid to board members) and for remuneration policy going forward (where incentive schemes will be reviewed and linked to long-term value creation, taking account of risk; and restricting the potential for "rewards for failure");
the right for the Government to agree with boards the appointment of new independent non-executive directors; and
dividend policy.
Sunday, 12 October 2008
What have we learnt?
It's obviously still early days to say what the events of the past few weeks will mean for the longer term. Personally I think the most important question is what do we learn from all this.
There's got to be a major impact on economic thinking amongst all politicos. I remember a few years ago a colleague at the TUC who was a bit older and considerably more well-informed than me remarked that there was no longer really an alternative Left view of economics. This was in marked contrast with the earlier history of the labour market. That has surely been proven to be right on the money by the fact that we have struggled to know how to respond. I suggested the other day, maybe the unions could try and recruit ex-City people to beef up their expertise, but more broadly this must be a time for lefties of all stripes to pick up those economics textbooks.
Robert Peston argues on his blog today that the decision to take stakes in the banks is one of the most significant economic developments for decades. He also suggests that it is the death knell for a least one element of Thatcherism. But what comes next? Certainly the idea that we just let the City do its thing and gratefully take the tax revenue has expired. De-regulation certainly seems to have played a role in the curremt crisis, but let's not oversell the ability of regulators to spot problems that the director sof the companies they regulate cannot.
More broadly this will not presage a significant shift back towards major state intervention in the economy. Perhaps there will be renewed interest in a state role in certain sectors (see the Tomorrow's Company report on ownership for example) but I think the main impact will be a more positive view of the role of the state in resolving economic problems, rather than as an owner itself. In the short-term I would not rule out seeing Government appointees on the boards of those firms taking public money. But as exciting a prospect as that might seem for lefties whose principal perspective on politics is the need to obtain positions of power, I would suggest that's actually amongst the least interesting areas of future policy work. If only it were as simple as getting 'our' people in the right places. What we need to be thinking about is how we get organisations to do the things they are supposed to effectively.
I also think there has to be recognition that asset price bubbles are a serious public policy issue. It's incredible when you think about it that we have witnessed within a decade the implosion of two bubbles - in the stockmarket and in housing - with relatively little comment. Let's learn the lesson this time. As I've blogged many times before, Robert Shiller is a great bloke to read on this stuff - not just to see how bubbles form, but also his description of the cultural and psychological effects of bubbles.
This might require some serious thinking about capital markets. Do all of them play a valuable role? If so is there a way we can make them behave less erratically and more reflective of economic reality. That might sound like a huge issue, but right now we have a window of opportunity to ask these really big questions. And don't forget that this feeds into other areas. The big falls in the stockmarkets recently have punched another hole in the funding of pensions. (we might also ask equities really suit the needs of pension provision effectively - bear in mind that pension funds haven't always had such large equity portfolios).
It's a truism that stockmarkets are driven by greed and fear, As such is there anything we can take from behavioural finance that can help us make tweaks to markets or design early warning systems? Equally can behavioural economics provide us with some ideas for how to structure remuneration? To date the idea that you provide extra pots of honey to incentivise certain types of behaviour doesn't seem to have worked very well. I think we should get the very clear message from this that some of our ideas about incentives don't really get on very well with human nature. Remuneration consultants will no doubt argue that we need even more complicated remuneration structures to make sure we really are incentivising the right kind of behaviour, but perhaps we should also take a look at whether a simplified system would be better.
And finally there's my own hobby horse - shareholders as owners. They haven't been doing a very good job have they? I think if we are going to keep the public company model alive we have to acknowledge the failure of ownership. I still think we should try and make it work, but the crisis should knock on the head once and for all the idea that ONLY shareholders should be involved in governance issues like pay. They are simply too weakly-incentivised to do the job properly and those that argue that pay is simply a matter for shareholders are in my opinion advocating a very dangerous governance model.
There's got to be a major impact on economic thinking amongst all politicos. I remember a few years ago a colleague at the TUC who was a bit older and considerably more well-informed than me remarked that there was no longer really an alternative Left view of economics. This was in marked contrast with the earlier history of the labour market. That has surely been proven to be right on the money by the fact that we have struggled to know how to respond. I suggested the other day, maybe the unions could try and recruit ex-City people to beef up their expertise, but more broadly this must be a time for lefties of all stripes to pick up those economics textbooks.
Robert Peston argues on his blog today that the decision to take stakes in the banks is one of the most significant economic developments for decades. He also suggests that it is the death knell for a least one element of Thatcherism. But what comes next? Certainly the idea that we just let the City do its thing and gratefully take the tax revenue has expired. De-regulation certainly seems to have played a role in the curremt crisis, but let's not oversell the ability of regulators to spot problems that the director sof the companies they regulate cannot.
More broadly this will not presage a significant shift back towards major state intervention in the economy. Perhaps there will be renewed interest in a state role in certain sectors (see the Tomorrow's Company report on ownership for example) but I think the main impact will be a more positive view of the role of the state in resolving economic problems, rather than as an owner itself. In the short-term I would not rule out seeing Government appointees on the boards of those firms taking public money. But as exciting a prospect as that might seem for lefties whose principal perspective on politics is the need to obtain positions of power, I would suggest that's actually amongst the least interesting areas of future policy work. If only it were as simple as getting 'our' people in the right places. What we need to be thinking about is how we get organisations to do the things they are supposed to effectively.
I also think there has to be recognition that asset price bubbles are a serious public policy issue. It's incredible when you think about it that we have witnessed within a decade the implosion of two bubbles - in the stockmarket and in housing - with relatively little comment. Let's learn the lesson this time. As I've blogged many times before, Robert Shiller is a great bloke to read on this stuff - not just to see how bubbles form, but also his description of the cultural and psychological effects of bubbles.
This might require some serious thinking about capital markets. Do all of them play a valuable role? If so is there a way we can make them behave less erratically and more reflective of economic reality. That might sound like a huge issue, but right now we have a window of opportunity to ask these really big questions. And don't forget that this feeds into other areas. The big falls in the stockmarkets recently have punched another hole in the funding of pensions. (we might also ask equities really suit the needs of pension provision effectively - bear in mind that pension funds haven't always had such large equity portfolios).
It's a truism that stockmarkets are driven by greed and fear, As such is there anything we can take from behavioural finance that can help us make tweaks to markets or design early warning systems? Equally can behavioural economics provide us with some ideas for how to structure remuneration? To date the idea that you provide extra pots of honey to incentivise certain types of behaviour doesn't seem to have worked very well. I think we should get the very clear message from this that some of our ideas about incentives don't really get on very well with human nature. Remuneration consultants will no doubt argue that we need even more complicated remuneration structures to make sure we really are incentivising the right kind of behaviour, but perhaps we should also take a look at whether a simplified system would be better.
And finally there's my own hobby horse - shareholders as owners. They haven't been doing a very good job have they? I think if we are going to keep the public company model alive we have to acknowledge the failure of ownership. I still think we should try and make it work, but the crisis should knock on the head once and for all the idea that ONLY shareholders should be involved in governance issues like pay. They are simply too weakly-incentivised to do the job properly and those that argue that pay is simply a matter for shareholders are in my opinion advocating a very dangerous governance model.
Friday, 10 October 2008
A few bits and pieces
I meant to plug the GMB's struggle with OFGEM much earlier!
Shuggy has a very sensible post about the left & the crisis.
There's an interesting paper right at the bottom of this rant on the TPA blog about the superior returns available from 'sin' stocks.
The Grauniad now seems to think the FSA WON'T be tackling bank bonuses. Seems a bit odd given earlier comments.
And the Network for Sustainable Financial Markets is carrying out a survey of views on the crisis.
Shuggy has a very sensible post about the left & the crisis.
There's an interesting paper right at the bottom of this rant on the TPA blog about the superior returns available from 'sin' stocks.
The Grauniad now seems to think the FSA WON'T be tackling bank bonuses. Seems a bit odd given earlier comments.
And the Network for Sustainable Financial Markets is carrying out a survey of views on the crisis.
It's all about ownership
The current crisis that is - so says Tomorrow's Company in its report out this week. I've got a lot of sympathy for what they say:
And here's what they say the future issues will be. Again there's a lot of common ground.
Good stuff, in theory. But are the big investors going to up their game and play the ownership role properly in future? It will require a big cultural change in my opinion...
“The current crisis reflects a failure of ownership. We have reached a turning point. Ordinary people now recognise that it isn’t enough to put their investments in the hands of clever technicians. They will, rightly, want more vigilance over how the money is being made on their behalf. This is what we mean by stewardship – looking after assets for the long term, and being more aware of what is being done in your name – whether the money is going into debt or equity – and having the assurance that those who handle that money are doing so in a principled way. ”
And here's what they say the future issues will be. Again there's a lot of common ground.
- What can be done to address the lack of alignment between the interests of some investors and some companies?
- What regulations or frameworks are needed to underpin stewardship – protecting the long-term health of a company and supporting global growth?
- Can regulators and the law continue to treat all shareholders in the same way?
- Why should a CEO extend the same time and co-operation to a short-term investor seeking to profit by movements in the company’s share price as to a long-term intrinsic investor?
- What does stock-lending do for the concept of stewardship?
- Why do pension funds allow stock-lending across the board when it can harm their longer term approach in particular situations
- Doesn’t the practice of borrowing shares to vote negate the stewardship role?
- Why don’t pension funds do more to influence the activities of the hedge funds and private equity vehicles through which they invest, especially where the actions of those funds can compromise their longer term interests?
- Government ownership has been extended to a number of strategic financial institutions recently. Is it necessary to review the case for state ownership of strategically important industries –energy, defence, food - or could foreign ownership help to guarantee economic interdependence and its wider benefits?
- Shouldn’t responsible investment criteria apply to debt holders as well as equity?
Good stuff, in theory. But are the big investors going to up their game and play the ownership role properly in future? It will require a big cultural change in my opinion...
And these people are investing your pension
If a fund manager is seriously still spouting this sort of guff we are in trouble.
"If one bank holds down pay, then staff will leave and go to one that doesn't," said one fund manager. "And if London becomes badly paid then there will be an exodus to Mumbai, Shanghai or Dubai."
Thursday, 9 October 2008
Why bank nationalisation isn't radical
Because Simon Heffer says it is. I suspect Heffer's Law is at play again.
Exec pay - who needs shareholders?
Just confirmation that the FSA is going to issue a code in respect of bankers pay. Rather obviously this does not reflect well on the role of shareholders in policing executive pay in the financial sector. I don't think a single bank has even come close to losing the vote on its remuneration report over the past 5 years that mandatory pay votes have been in place. Yet now there is widespread agreement that pay was a driving factor in the mess the banks created.
Do shareholders (even the large institutional shareholders) take the wrong approach to pay, for example failing to assess the potential risk? Are they simply not that interested in pay as long as the share price is going up? If so do how do we get them to do the job properly? Have we completely messed up the way we remunerate those running businesses because we don't understand human nature? Perhaps big incentives trump intrinsic motivation to do the right thing. Maybe behavioural economics can help us get this stuff right in the future.
Whatever the case, shareholder oversight of pay in the financial sector has clearly not worked effectively and for now the job is being taken over by the regulator. But if that's right for banks, why not other public companies?
Do shareholders (even the large institutional shareholders) take the wrong approach to pay, for example failing to assess the potential risk? Are they simply not that interested in pay as long as the share price is going up? If so do how do we get them to do the job properly? Have we completely messed up the way we remunerate those running businesses because we don't understand human nature? Perhaps big incentives trump intrinsic motivation to do the right thing. Maybe behavioural economics can help us get this stuff right in the future.
Whatever the case, shareholder oversight of pay in the financial sector has clearly not worked effectively and for now the job is being taken over by the regulator. But if that's right for banks, why not other public companies?
More pressure on pension schemes
At the risk of stating the obvious, the turmoil in the financial markets is bound to kill off more of the remaining defined benefit pension schemes out there. Pension funds still stick at least half of the money they put into equities into the domestic market, which has taken a hammering, but it's not like other markets aren't under pressure too. This will inevitably increase scheme deficits and in turn require bigger contributions to try and get out of the hole.Here's what the NAPF says.
Some people will argue that this is exactly why companies shouldn't run DB schemes. They shouldn't be taking on that kind of unpredictable risk. But someone has to shoulder it. DB to DC doesn't get rid of investment risk - it just passes it onto the employee (along with longevity risk, risk in respect of fund selection etc).
And look what the FTSE100 has done in one year. For all those new members of DC schemes with money in UK equities (me included) the experience will have been one of watching your savings disappear. I wonder if there will be any kind of backlash.
Some people will argue that this is exactly why companies shouldn't run DB schemes. They shouldn't be taking on that kind of unpredictable risk. But someone has to shoulder it. DB to DC doesn't get rid of investment risk - it just passes it onto the employee (along with longevity risk, risk in respect of fund selection etc).
And look what the FTSE100 has done in one year. For all those new members of DC schemes with money in UK equities (me included) the experience will have been one of watching your savings disappear. I wonder if there will be any kind of backlash.
Wednesday, 8 October 2008
Bank nationalisation
I'll be honest, I've thought in the cases of B&B and Northern Rock that the use of the term 'nationalisation' overstretched the point. But with the latest extension of part public ownership to the UK's biggest banks I think we are much closer to the real deal. In addition I think this has the potential to have significant ramifications in terms attitudes towards forms of ownership more generally.
First consider this sentence in the Treasury statement on the bail-out:
This potentially gives the Government significant influence over governance and strategy issues at the banks. And this is only what is made explicit. Why wouldn't the Government consider whether it could use its ownership stake as a way to knock on the head some of the more annoying consumer rip-offs of recent years? Paul Mason thinks the Government may indeed be thinking this way. Is his Trot past leading to some wishful thinking or is that on the cards? Surely it's worth the Left pushing this agenda in any case.
More broadly I am leaning towards the view that this bailout will pose some questions for the public company model as a whole. Check out these lines in the Beeb's blog on the debate in Parliament -
The FSA is going to have a significant role then in remuneration policy. So what does this say about the role of existing shareholders, both in the past and in the future? Looking back the implication is that they failed to play the ownership role effectively, looking forward it appears that they get to vote on FSA-approved structures.
Let's remember what Kitty Ussher said about this just a few months back -
That is all out of the window now, with all the politicos wanting pay amongst banks to be regulated. But if shareholders don't/can't/won't be allowed to be responsible for policing for pay in the banks, what about other listed companies? Does anyone seriously believe that the track record of shareholders in respect of executive pay is uniquely bad in the financial sector? Another can of worms has just been opened up.
And inevitably, someone has asked the obvious question. If we can bail out the banks, why not other bits of the economy? I'm not suggesting that this would be a good thing, just pointing out that such arguments have been strengthened by today's news.
Ultimately my innate scepticism leads me to the view that actually there won't be a significant change in direction. But I'm less sure of that than I was.
First consider this sentence in the Treasury statement on the bail-out:
In reaching agreement on capital investment the Government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers.
This potentially gives the Government significant influence over governance and strategy issues at the banks. And this is only what is made explicit. Why wouldn't the Government consider whether it could use its ownership stake as a way to knock on the head some of the more annoying consumer rip-offs of recent years? Paul Mason thinks the Government may indeed be thinking this way. Is his Trot past leading to some wishful thinking or is that on the cards? Surely it's worth the Left pushing this agenda in any case.
More broadly I am leaning towards the view that this bailout will pose some questions for the public company model as a whole. Check out these lines in the Beeb's blog on the debate in Parliament -
1215: Mr Cameron raises the question of big bank bonuses and "rewards for failure". Mr Brown says he wants to reward responsible risk taking and end irresponsible risk taking. The FSA will shortly publish proposals on regulating bonuses, he says.
1220: More on executive bonuses. David Cameron says there should no bonuses this year for executives at banks who have taken the most risks. Gordon Brown says financial regulators will take bonus policy into account when setting new guidelines for how much capital banks need.
The FSA is going to have a significant role then in remuneration policy. So what does this say about the role of existing shareholders, both in the past and in the future? Looking back the implication is that they failed to play the ownership role effectively, looking forward it appears that they get to vote on FSA-approved structures.
Let's remember what Kitty Ussher said about this just a few months back -
"We will resist the calls that have been made for direct regulation of executive pay," Ms Ussher will say in her speech. "Of course, remuneration packages should be strongly linked to effective performance, and incentives should be aligned with the long-term interests of the business and shareholders, and we don't support rewards for failure."
But she adds: "I'm clear that executive pay is a matter for boards and shareholders, not for governments and regulators."
That is all out of the window now, with all the politicos wanting pay amongst banks to be regulated. But if shareholders don't/can't/won't be allowed to be responsible for policing for pay in the banks, what about other listed companies? Does anyone seriously believe that the track record of shareholders in respect of executive pay is uniquely bad in the financial sector? Another can of worms has just been opened up.
And inevitably, someone has asked the obvious question. If we can bail out the banks, why not other bits of the economy? I'm not suggesting that this would be a good thing, just pointing out that such arguments have been strengthened by today's news.
Ultimately my innate scepticism leads me to the view that actually there won't be a significant change in direction. But I'm less sure of that than I was.
Union reactions to the bailout...
TUC:
Unite:
GMB:
Responding to the rescue plan for UK banks, announcement today (Wednesday) by Chancellor Alistair Darling, TUC General Secretary Brendan Barber said:
'We welcome this bold package, but it is vital that the vast sums of taxpayers' money are used to change bank behaviour, not just bail them out. Fat cats must be put on a strict diet. They must start to lend to business again, and they must cut the cost of borrowing.
'Most importantly, the Government must make sure the banks can never gamble with peoples' livelihoods again. A very different banking system must emerge at the end of this.
'But more must now be done. The Chancellor must suspend the 'Golden Rule' on borrowing tonight to head off spending cuts, and must start to plug the gap by taxing those who have made millions from the asset bubble.
'And tomorrow the Bank must follow the Australian lead with deep cuts in interest rates of at least one per cent.'
Unite:
Derek Simpson, Unite joint general secretary, said: "Unite welcomes the decisive action today by the government to inject capital into the markets. The union is demanding that this financial support is tied to clear commitments to secure vital jobs in the financial services' sector. This government finance must serve to make the industry more transparent and accountable.
"It is not acceptable for the government to socialise the risks taken and continue to capitalise the rewards in the finance industry. The measures announced today must be extended to include undertakings by the banks of no job losses, no repossessions of homes, and no rewards for irresponsible risk taking or failure.
"It is imperative that the financial measures announced today marks the turning point in the world of banking and finance. Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get a firm assurance that the financial lifeline extended to these large organisations will be used to protect jobs and the public."
GMB:
Paul Kenny GMB General Secretary, who has been vocal since 2005 in criticising role of financial sector in the real economy, responded to the decision last night by the UK government to bail out UK banks. He said “The Government were right to bail out the UK banks as "there is no alternative" to taxpayer funding to keep the financial sector afloat. The old saying now applies with a vengeance” he who pays the piper calls the tune”. GMB members who are paying the piper want too see swift action to ensure that the bankers responsible for the crisis are held accountable and dealt with.
GMB members will want to see bankers’ heads roll. In particular Bob Diamond of Barclays should be sacked for his role in organising the £4.9billion loan to private equity in summer 2007 for elite, including Tim Parker, to walk away with £300m from AA sale. This was the last big deal done before the sub prime crisis hit. He is not the only one who should be sacked.
GMB members are not be prepared to see bankers get bonuses in 2008 paid for by taxpayers when public sector workers were denied an inflation level pay rise that across the entire public sector would have cost a mere additional £1.5 billion.
“Business as usual” is over for the City elite that organised this disaster. They will have to get used to living on normal incomes and paying their taxes now that the taxpayer is propping them up and calling the tune as result.”
Tuesday, 7 October 2008
Behavioural economics & financial capability
I've just come across this fascinating paper (PDF) commissioned by the FSA, looking into what behavioural economics can bring to attempts to improve financial capability. The section entitled The curse of knowledge which starts on page 49 is particularly worth a read.
There's a great line in the conclusions: "What should be taught may not be explicit financial capability but thinking skills."
There's a great line in the conclusions: "What should be taught may not be explicit financial capability but thinking skills."
Plugs
First, a quick plug for the Financial Inclusion Centre, which was set up by ex-Which? policy supremo Mick McAteer. Mick has been tearing a strip off the financial services industry for 15 years or so now. Most recently he had pop at Ros Altman for scaremongering about Personal Accounts. He’s also one of the few lefties out there really interested in how markets work.
Obviously it’s a bloodbath out there in terms of banking stocks, which does beg the question what impact the shorting ban has had.
Mr Gray welcomes the appointment of Paul Myners as City minister.
As we all know, the public sector is hugely inefficient, the state is rubbish at doing anything and the 'wealth creating' private sector is best left to itself to generate, invisible hand stylee, benefits for all of us. We know this because groups like the TaxPayers Alliance have been reapeating this mantra for years.
Today the TPA blog Burning Our Money says: "Government money is the only realistic option for shoring up our banks' balance sheets quickly. And if that fails to restore confidence, outright nationalisation is the only thing left."
And finally, David Aaronovitch has a good bit in today’s Times about the crisis that hammers home the lack of answers out there:
Obviously it’s a bloodbath out there in terms of banking stocks, which does beg the question what impact the shorting ban has had.
Mr Gray welcomes the appointment of Paul Myners as City minister.
As we all know, the public sector is hugely inefficient, the state is rubbish at doing anything and the 'wealth creating' private sector is best left to itself to generate, invisible hand stylee, benefits for all of us. We know this because groups like the TaxPayers Alliance have been reapeating this mantra for years.
Today the TPA blog Burning Our Money says: "Government money is the only realistic option for shoring up our banks' balance sheets quickly. And if that fails to restore confidence, outright nationalisation is the only thing left."
And finally, David Aaronovitch has a good bit in today’s Times about the crisis that hammers home the lack of answers out there:
there is my old comrade Bea Campbell, declaring that, within two decades, unrestrained capitalism “in doing its thing, unrestrained, it has brought the world to the brink”, though she doesn't say what of. Then, admitting that “progressives” are disorientated and unorganised, she adds: “And yet, and yet... progressives interested in a dynamic, inventive, co-operative, democratic and egalitarian esprit didn't create this conjuncture, but it is the moment we have been waiting for.”
The moment we have been waiting for to do what? I mean given that the world is supposedly “on the brink”? Bea might have used the word socialist, because at least that connoted a belief in an alternative economic system. But now there is no such belief, and what the “Left” seems to argue for is some kind of odd return to the capitalist settlement as at 1980, before Reagan and Thatcher got their hands on the policy levers.
So where does this fantasy - which could easily seduce a section of the Labour Party - take us? Thatcher partly won the legacy battle because, having opposed the privatisation of British Telecom, even the most purblind social democrat could see that she had been right and didn't want the old BT back. They could also see, with the Common Agricultural Policy, where protectionism got us. Don't just say “better regulation” or “taxes on the fat cats”, comrades. That's not a new dawn.
So these gentle mumblings will turn out to be like Monty Python's Boring Prophet from The Life of Brian who predicts merely that things will be put inside other things. We have yet to experience the real consequences of the credit crunch - the joblessness, the spending cuts, the creation of a pessimistic generation. When those hit us we can expect the more exciting prophets, the soft sellers of millenarian brands, the BNPs, the scapegoating anti-capitalists of the near fringes, to begin to affect the mainstream politics of the country.
Monday, 6 October 2008
Quickies
Zedman has been providing some very useful corrective comments on hastily-posted rants, so I'm going to give his blog a big plug. Here's a bit on why shorting actually decreases when share prices drop.
Also lots of useful links on there like to this article which covers similar ground about shorting to my recent attempt. That in turn led me to this paper (PDF) on shorting constraints and over-pricing which looks worth a read.
On a totally unrelated point here is a great piece by Marxist economics commentator Doug Henwood which cheerfully slaughters a number of my sacred cows. Always worth reading critical voices though.
Also lots of useful links on there like to this article which covers similar ground about shorting to my recent attempt. That in turn led me to this paper (PDF) on shorting constraints and over-pricing which looks worth a read.
On a totally unrelated point here is a great piece by Marxist economics commentator Doug Henwood which cheerfully slaughters a number of my sacred cows. Always worth reading critical voices though.
Work is the blight of the blogging classes
Too busy to post much today. There's a big piece in the FT about shorting that is well worth a read. It's much more sympathetic than I am. Two bits stuck out, this first from a side-bar -
This is the sort of thing I was trying get at the other day. Shorting just doesn't seem to me to be the mirror of going long.
And this bit from the main bit of the article -
Fine, but it's a double-edged sword of an argument. It undermines the claim (made by a hedgie elsewhere in the article) that you need shorting for prices to stay close to the 'truth'. Doesn't this suggest that you don't?
Separately I managed to miss the fact that Paul Myners has joined the government as City minister. Great move I reckon. He knows what he's talking about and isn't afraid of being radical. Unfortunately it looks like he's coming off the PADA board. But I reckon the Tories would have booted him anyway.
Unlike traditional long-only investment, where the maximum loss is the amount put up, short sellers face potentially unlimited losses if the stock they are shorting rises.
This is the sort of thing I was trying get at the other day. Shorting just doesn't seem to me to be the mirror of going long.
And this bit from the main bit of the article -
Research on trading in banks such as HBOS in the UK and Morgan Stanley in the US appears to show that levels of shorting were far lower before the ban than during the summer, and had barely risen. Hedge funds say the blame lies not with short selling but with selling by mutual funds, pension funds and other traditional investors. “There’s a lot of long-only intelligent money that is looking at the fundamentals [of the banks] and saying this is not good,” Mr McGrath says.
Fine, but it's a double-edged sword of an argument. It undermines the claim (made by a hedgie elsewhere in the article) that you need shorting for prices to stay close to the 'truth'. Doesn't this suggest that you don't?
Separately I managed to miss the fact that Paul Myners has joined the government as City minister. Great move I reckon. He knows what he's talking about and isn't afraid of being radical. Unfortunately it looks like he's coming off the PADA board. But I reckon the Tories would have booted him anyway.
Sunday, 5 October 2008
Thinking big!
Robert Peston has come up with a radical suggestion for sorting out the banks - let's take a big stake in them via Personal Accounts -
He argues that it's better to do this than let the super-wealthy hoover up the bargains there might be out there.
Fascinating idea, but I thought idea was that the fund options available in the PA scheme should be run by external managers? Not sure how this would fit in. In addition it would no doubt be attacked by the Right as creeping nationalisation. Still, at least someone is thinking big.
My suggestion is that the Government could lend, say, £50bn to the PADA, and it could then use that cash to buy cheap stakes in banks, to help them recapitalise, and also - perhaps - to pick up other distressed assets.
He argues that it's better to do this than let the super-wealthy hoover up the bargains there might be out there.
Fascinating idea, but I thought idea was that the fund options available in the PA scheme should be run by external managers? Not sure how this would fit in. In addition it would no doubt be attacked by the Right as creeping nationalisation. Still, at least someone is thinking big.
A few random thoughts
1. There's a mounting number of ex-City workers looking for new jobs. I wonder whether this isn't a bit of an opportunity for unions and NGOs to pick up some insider financial knowledge on the cheap. There have alaways been people in the City whose views are quite a bit to the Left, but have decided to make money while they can. In addition there will now be quite a few embittered ex-City folk who may be willing to swap teams. Seems worth exploring to me?
2. Wouldn't it be great if a politician did a Joe Kinnear? A lot of the football 'news' that gets reported would make a tabloid gossip columnist blush, so I had a lot of sympathy when I read his rant. But politicians get it far worse (though some of them obviously court this type of press), so I would love to see an MP get stuck into a journo for their constant focus on personalities and 'what X said to Y about Z' 'revelations'.
3. This S&M post about ownership is obviously right up my street. Given that we now have a window of opportunity to re-examine what has worked and what has not in the past 30 years of capitalism, a review of the ownership strikes me a central question to address. As much as there has been an increase in emphasis on getting the 'shareholder as owner' model to work, at the same time we've seen a surge in trading suggesting an increasingly short-termist attitude on the part of investors. And 'owners' appear to have failed to get pay - on of the key governance issues - under control. How can we make it work better?
The question of ownership feeds through into lots of other issues. It's one of the factors in the private equity boom - some argue it's a better governance structure, whilst some directors prefer the model because it gets away from ceaseless short-term pressure in the public market. It also links to what we think about issues such as stock-lending and shorting.
Tomorrow's Company is already carrying out some work in this area as part of it's What is happening to ownership? project (PDF). But I'd like to see something come out of the Left. What about it?
4. I am obviously a little bit biased, but I think the TUC blog is great and exactly what we were missing in the lefty blogosphere - a regular policy-oriented blog linked to a respected labour movement organisation.
2. Wouldn't it be great if a politician did a Joe Kinnear? A lot of the football 'news' that gets reported would make a tabloid gossip columnist blush, so I had a lot of sympathy when I read his rant. But politicians get it far worse (though some of them obviously court this type of press), so I would love to see an MP get stuck into a journo for their constant focus on personalities and 'what X said to Y about Z' 'revelations'.
3. This S&M post about ownership is obviously right up my street. Given that we now have a window of opportunity to re-examine what has worked and what has not in the past 30 years of capitalism, a review of the ownership strikes me a central question to address. As much as there has been an increase in emphasis on getting the 'shareholder as owner' model to work, at the same time we've seen a surge in trading suggesting an increasingly short-termist attitude on the part of investors. And 'owners' appear to have failed to get pay - on of the key governance issues - under control. How can we make it work better?
The question of ownership feeds through into lots of other issues. It's one of the factors in the private equity boom - some argue it's a better governance structure, whilst some directors prefer the model because it gets away from ceaseless short-term pressure in the public market. It also links to what we think about issues such as stock-lending and shorting.
Tomorrow's Company is already carrying out some work in this area as part of it's What is happening to ownership? project (PDF). But I'd like to see something come out of the Left. What about it?
4. I am obviously a little bit biased, but I think the TUC blog is great and exactly what we were missing in the lefty blogosphere - a regular policy-oriented blog linked to a respected labour movement organisation.
Short positions
The Observer has an extra section today focusing on the credit crunch. It's actually not very informative. Will Hutton's piece in it (which doesn't seem to be on the website) is worth a read.
The business section does has one interesting story in it about the shorting in respect of a number of companies (as indentified by level of stock-lending). Here's what it says -
Debenhams is the interesting one for me, as it has become one of the examples people like to give of a bad private-equity buyout (take private, load up with debt, refloat). So perhaps not surprising to see market sentiment being pretty negative about it.
The business section does has one interesting story in it about the shorting in respect of a number of companies (as indentified by level of stock-lending). Here's what it says -
According to figures from City research firm Data Explorers, 18.28 per cent of Wetherspoon's shares are on loan, nearly as much as Northern Rock's (20 per cent) at the time it became the first UK victim of the credit crunch last year. The proportion of Punch's shares on loan stands at nearly 17 per cent.
Mitchells & Butlers, another pub company, has 9.35 per cent of its shares on loan, while retailer Debenhams has 12.7 per cent, says Data Explorers.
Debenhams is the interesting one for me, as it has become one of the examples people like to give of a bad private-equity buyout (take private, load up with debt, refloat). So perhaps not surprising to see market sentiment being pretty negative about it.
Friday, 3 October 2008
Bubble troubles
Via S&M I came across this ace post which helpfully details US economic commentators who denied that there was a housing bubble. One name that sticks out like a sore thumb is Kevin Hassett, who is based at the right-wing think tank the American Enterprise Institute.
In addition to not buying that there was a housing bubble he was also famously co-author of the confidently-titled Dow 36,000. Published at the end of the 90s, this was his prediction for the level of the Dow within next few years (based on the idea that we had entered new territory). It was kind of the mirror to Irrational Exuberance, and I think we can fairly say Shiller won that one (Dow today is around 10,500). If you're sad enough, have a read through some of the comments on Dow 36,000 on US Amazon.
But there's another reason why his name sticks out - he's senior economic adviser to John McCain.
In addition to not buying that there was a housing bubble he was also famously co-author of the confidently-titled Dow 36,000. Published at the end of the 90s, this was his prediction for the level of the Dow within next few years (based on the idea that we had entered new territory). It was kind of the mirror to Irrational Exuberance, and I think we can fairly say Shiller won that one (Dow today is around 10,500). If you're sad enough, have a read through some of the comments on Dow 36,000 on US Amazon.
But there's another reason why his name sticks out - he's senior economic adviser to John McCain.
Interesting stuff at LSE
A few interesting bits coming up in the next few weeks -
Nassim Nicholas Taleb is speaking a week on Monday.
Then there's a presentation on sovereign wealth funds the end of the same week.
And a bit on instinct and decision-making the following Monday.
Nassim Nicholas Taleb is speaking a week on Monday.
Then there's a presentation on sovereign wealth funds the end of the same week.
And a bit on instinct and decision-making the following Monday.
What a difference a month makes
It was only a few weeks back that Righties with an interest in the US election were declaring Sarah Palin to have transformed American politics. This was seemingly based on the fact that she's attractive and can do folksy soundbites. Slam dunk! After a number of lacklustre meejah performances opinions underwent a serious revision, with some conservative commentators in the US even questioning whether she was a liability to the campaign. So a lot hung on last night's debate with Biden.
According to reports it looks like no out and out winner, though the post-debate polls seem to suggest Biden probably shaded it. I wouldn't be surprised to see some Righties try and portray this as some kind of victory (for not completely fouling it up), but if they do take that line compare and contrast with what they were saying a few weeks back.
UPDATE: Iain Dale says "But I do think Palin edged it, simply because she didn't make a single gaffe and surpassed everyone's expectations."
I think The Finkster is more accurate: "By not winning Sarah Palin lost."
According to reports it looks like no out and out winner, though the post-debate polls seem to suggest Biden probably shaded it. I wouldn't be surprised to see some Righties try and portray this as some kind of victory (for not completely fouling it up), but if they do take that line compare and contrast with what they were saying a few weeks back.
UPDATE: Iain Dale says "But I do think Palin edged it, simply because she didn't make a single gaffe and surpassed everyone's expectations."
I think The Finkster is more accurate: "By not winning Sarah Palin lost."
Thursday, 2 October 2008
Worth a read
The latest issue of Renewal that is. Plenty of stuff on where next for the Left, and a really good article on Andrew Glyn.
A bit wrong
Guido has another pop at 'hypocrisy' in respect of shorting but I think he's off-target.
Except that -
1. If you read the FT article (to the end, like) you find this para:
"A House of Commons spokesperson said pension fund trustees were “not able to opt out” of the terms of stock-lending arrangements required by managers of pooled funds in which the scheme held equities. In separate segregated funds, however, the custodian of assets appointed by trustees was not permitted to lend stock."
So the trustees have blocked lending where they are able to, but not where they... err... can't. If there's an issue here I think it's the lack of power of clients in pooled funds.
2. It's not clear to me either that an investor in a pooled fund would necessarily benefit from stock-lending in respect of the underlying securities (since they are technically a unit-holder, not the owner of the shares). Maybe the fund manager hoovers up the lending fees rather than the fund's investors. Anyone got any views either way on that?
3. We don't know that the stock that was lent in respect of the fund's pooled investments was used to short (on the basis of the article at least). As one investmemt consultant pointed out recently, most lent stock isn't used for shorting. So we simply don't know..
UPDATE: Actually Zedman points out I'm a bit off the mark on point 2 - managers usually do split the fees with clients. So Guido has a bit of a point afterall.
It gets even better, the FT has discovered that MPs' own pensions are invested in a hedge fund manager, Quellos. Not only that, in addition the MPs' pension fund also made money lending stocks out to hedge funds to enable them to short shares. The hypocrisy is huge here, they condemn short sellers publicly and yet they roll up the profits of short selling in their pension plans.
Except that -
1. If you read the FT article (to the end, like) you find this para:
"A House of Commons spokesperson said pension fund trustees were “not able to opt out” of the terms of stock-lending arrangements required by managers of pooled funds in which the scheme held equities. In separate segregated funds, however, the custodian of assets appointed by trustees was not permitted to lend stock."
So the trustees have blocked lending where they are able to, but not where they... err... can't. If there's an issue here I think it's the lack of power of clients in pooled funds.
2. It's not clear to me either that an investor in a pooled fund would necessarily benefit from stock-lending in respect of the underlying securities (since they are technically a unit-holder, not the owner of the shares). Maybe the fund manager hoovers up the lending fees rather than the fund's investors. Anyone got any views either way on that?
3. We don't know that the stock that was lent in respect of the fund's pooled investments was used to short (on the basis of the article at least). As one investmemt consultant pointed out recently, most lent stock isn't used for shorting. So we simply don't know..
UPDATE: Actually Zedman points out I'm a bit off the mark on point 2 - managers usually do split the fees with clients. So Guido has a bit of a point afterall.
Private equity and pension funds, again
I must be thick, but this story doesn't seem to make much sense to me.
Err... so almost a third of the pension funds in the PPF are those attached to private equity owned companies. Surely we need to know what private equity ownership accounts for as a proportion of companies as a whole before we can say that these figures show there isn't a correlation between PE ownership and failing pension schemes. And I'm sure it isn't a third!
A couple of caveats. Firstly I reckon it's likely that the set of schemes in the PPF is skewed towards those run by SMEs - hence the large proportion of privately-owned companies' schemes in there. And some PE (the venture end) both focuses on smaller companies, and is high risk. Secondly, PE folks themselves would argue (with some justification) that in many cases the presence of PE (via a MBIs at least) indicates a company in trouble, and many of them won't make it. So perhaps we shouldn't be too surprised to see so many PE-backed companies' funds in there.
But still, I just don't see how the raw stats back the argument. Unfortunately I can't find the original research on the Close Bros site to see how it stacks up.
PS. A reminder of the GMB report (PDF) detailing PE's links to insolvent pension funds.
UK – Claims that private equity firms are driving pension funds into the control of the Pension Protection Fund (PPF) have been challenged by new research.
According to the research conducted by Close Brothers, companies backed by private equity firms accounted for 29% of the pension schemes that had been forced to end to the PPF. Of the remaining companies with schemes in the PPF, 58% were privately owned and 13% were from publicly listed companies.
Err... so almost a third of the pension funds in the PPF are those attached to private equity owned companies. Surely we need to know what private equity ownership accounts for as a proportion of companies as a whole before we can say that these figures show there isn't a correlation between PE ownership and failing pension schemes. And I'm sure it isn't a third!
A couple of caveats. Firstly I reckon it's likely that the set of schemes in the PPF is skewed towards those run by SMEs - hence the large proportion of privately-owned companies' schemes in there. And some PE (the venture end) both focuses on smaller companies, and is high risk. Secondly, PE folks themselves would argue (with some justification) that in many cases the presence of PE (via a MBIs at least) indicates a company in trouble, and many of them won't make it. So perhaps we shouldn't be too surprised to see so many PE-backed companies' funds in there.
But still, I just don't see how the raw stats back the argument. Unfortunately I can't find the original research on the Close Bros site to see how it stacks up.
PS. A reminder of the GMB report (PDF) detailing PE's links to insolvent pension funds.
Wednesday, 1 October 2008
Short thoughts
I thought I'd splurge some general thoughts about short-selling because I'm not sure that (so far) I agree with any commonly articulated viewpoint. These aren't very technical arguments, so I'm very open to comments/corrections from more expert views on what really happens. Anyway here goes.
1. I've always thought, and recent events reinforce my view, that stock-lending to facilitate shorting is an odd thing for long-term investors like pension funds to engage in. Put simply, you are renting your asset to someone who is going to tell the market that it's overvalued. By definition they expect the value of your asset to drop, and hope it does. And they aren't going to be shorting a company if they only think it's a bit over-priced. So unless you are making a bundle out of stock-lending to offset the potential drop in value this seems a bit counter-productive.
2. I don't think I buy the argument that shorting brings prices back to realistic levels. As I posted previously, academic evidence appears mixed. And real-world experience seems to point in the other direction - see the TMT bubble for details. Also this argument implies that those shorting are more rational, or have a better idea of the 'true' value of the stock, but why should that be that case? And even to entertain the idea that it were true perhaps - again thinking of the TMT bubble - the sceptics will never be strong enough to overwhelm the rampers. So perhaps all shorting does is accelerate and accentuate the drop when it comes.
3. Is shorting, as is sometimes implied, really just the mirror of going long? If so where do selling, and not buying fit in the spectrum? Isn't selling the opposite of going long and as such shorting almost a sort of leveraged position?
4. Pointing in the other direction, let's not fall into the trap of thinking that shorting is inherently more speculative than buying stock. Yes, those shorting typically only borrow stock for a limited amoung of time, but is this any different from those trying to profit from a post-IPO surge, buying shares in companies about to enter key indexes (and hence whose shares will be boosted when index-trackers have to buy), or engaging in momentum trading?
5. Equally let's be careful about the way we describe shorting. It's not really selling something you don't own, which makes it sound to the average punter to be almost fraudulent. It's renting something, selling it, buying it back, and returning it. Put like that it makes it much clearer that the person shorting is undertaking a risky activity but the ownership issues are clearer.
6. Time to hold our hands up - the corporate governance & responsible investment world I inhabit has appeared irrelevant by not making more of an issue out of this. We (me personally) have tended to focus on the obvious ownership policy issues - like what happens to voting rights when stock is lent - rather than focusing on the big stuff. The ability to vote on the report and accounts doesn't matter much if the company ends up being taken over/nationalised/etc.
So - where am I right and where am I wrong?
1. I've always thought, and recent events reinforce my view, that stock-lending to facilitate shorting is an odd thing for long-term investors like pension funds to engage in. Put simply, you are renting your asset to someone who is going to tell the market that it's overvalued. By definition they expect the value of your asset to drop, and hope it does. And they aren't going to be shorting a company if they only think it's a bit over-priced. So unless you are making a bundle out of stock-lending to offset the potential drop in value this seems a bit counter-productive.
2. I don't think I buy the argument that shorting brings prices back to realistic levels. As I posted previously, academic evidence appears mixed. And real-world experience seems to point in the other direction - see the TMT bubble for details. Also this argument implies that those shorting are more rational, or have a better idea of the 'true' value of the stock, but why should that be that case? And even to entertain the idea that it were true perhaps - again thinking of the TMT bubble - the sceptics will never be strong enough to overwhelm the rampers. So perhaps all shorting does is accelerate and accentuate the drop when it comes.
3. Is shorting, as is sometimes implied, really just the mirror of going long? If so where do selling, and not buying fit in the spectrum? Isn't selling the opposite of going long and as such shorting almost a sort of leveraged position?
4. Pointing in the other direction, let's not fall into the trap of thinking that shorting is inherently more speculative than buying stock. Yes, those shorting typically only borrow stock for a limited amoung of time, but is this any different from those trying to profit from a post-IPO surge, buying shares in companies about to enter key indexes (and hence whose shares will be boosted when index-trackers have to buy), or engaging in momentum trading?
5. Equally let's be careful about the way we describe shorting. It's not really selling something you don't own, which makes it sound to the average punter to be almost fraudulent. It's renting something, selling it, buying it back, and returning it. Put like that it makes it much clearer that the person shorting is undertaking a risky activity but the ownership issues are clearer.
6. Time to hold our hands up - the corporate governance & responsible investment world I inhabit has appeared irrelevant by not making more of an issue out of this. We (me personally) have tended to focus on the obvious ownership policy issues - like what happens to voting rights when stock is lent - rather than focusing on the big stuff. The ability to vote on the report and accounts doesn't matter much if the company ends up being taken over/nationalised/etc.
So - where am I right and where am I wrong?
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