Saturday 31 January 2009

SHARE releases annual proxy voting survey

SHARE, the excellent Canadian labour-aligned shareholder activist group, produces one of the proxy voting surveys that trade unions have pioneered (note that unions got interested in analysing fund manager voting long before investment consultants). SHARE's annual survey has just appeared and can be downloaded here.

Exec pay factoid

Some work colleagues have been crunching a few numbers on exec pay in the UK since 2000.

Change in total cash remuneration (ie excluding options, LTIPS etc) for directors of FTSE100 companies from 2000 to 2008: +80%
Performance of the FTSE100 over same period: -30%

Obviously if you include share-based awards the disparity is even more dramatic.

Friday 30 January 2009

Select committee stuff - shareholder bodies

The Treasury committee has been holding its inquiry into the banking crisis over the past few weeks, and you can now access written evidence via the committee website. I thought I'd take a look at what some of the big investor bodies had to say about the role of shareholders so here are a few snippets. (There's also some stuff from the ISLA (stocklending trade body) which I'll do in a separate post.) I've emphasised the bits I think are most interesting.

ABI (page 67 onwards in this doc):
Insurers as investors recognise the responsibilities of shareholders to ensure that companies in which they invest are properly managed. The ABI’s activities in corporate governance reflect both members’ role as long term shareowners in their own right and also their responsibility to policyholders who depend on the investment return.

45. The government has acknowledged that institutions have made strides forward in recent years, but it is clear that more could be done to improve the techniques and approaches to dialogue. We are keen to work on this, with particular focus on improving mutual understanding between independent directors and shareholders, how they interact at times of corporate stress, and on ensuring that dialogue appropriately addresses key issues such as risk management.

46. We also wish to work with companies and others to promote greater focus on long-term investment issues. Partly because of the ambition of brokers to generate fee income from trading, analysts have tended to place great stress on the impact of short-term developments, including quarterly financial statements. It is now clear that the desire for short-term profit encouraged some financial institutions to take excessive risks, which subsequently led to serious losses. We need to shift the culture away from this. This objective will not be achieved through regulation, but the aim of introducing a longer term perspective should be an important priority for dialogue between shareholders and companies.

47. Dialogue between companies and shareholders is not guaranteed to work, however. Ownership of UK equities has become more fragmented in recent years with the insurance industry now owning only around 15 per cent of the market and pension funds somewhat less. With other owners sometimes less concerned about governance, this makes it easier for companies to override efforts by concerned shareholders to achieve change. It is important therefore that there is more consensus in the shareholder community about the need to hold Boards to account.

48. It is vitally important that corporate engagement, especially on corporate governance and sustainability issues, is integrated effectively into the investment management processes. Such engagement is resource intensive. Therefore, beneficiaries and their representatives, such as pension fund trustees should ensure that appropriate resources are available.

The IMA has a long subimission (page 226 onwards, same doc as above). This is from the introduction:
The role of investors

12. There are two broad ways by which shareholders exercise discipline over the companies in which they invest: by selling shares or engaging with management and boards. Both were used in relation to the banks in the period leading up to the crisis. But neither was effective in preventing it.

13. From about 2005, a number of active investment managers concluded that the strategies being followed by many banks were unsustainable, and that they should not keep their clients invested in the sector. The resulting sales of shares were likely to have been one factor in the underperformance of the banking sector relative to the market as a whole, which was by some 9% in 2005. But these market signals appear to have had little or no restraining effect.

14. During this time, those managers not in a position to sell their shares, for example those running index funds or with mandates from pension fund clients which did not allow them to depart very far from the index, began to express concerns to some bank boards about strategic direction, and stepped up the amount of engagement they undertook. However, it is now apparent that this engagement did not achieve the desired results, and this highlights the limits on what engagement can achieve. We expect this to be confirmed by the IMA’s fifth survey of shareholder engagement, which is currently underway and will be published later this year.

15. Although shareholder approval is required for major corporate actions they do not set strategy nor are they insiders, in that they only have access to information that is available to the market as a whole. Managers compensate for such information asymmetries by diversifying portfolio construction. Furthermore, it is now apparent that some bank boards and even managements seem to have been unaware of the risks they were running, so it was difficult for shareholders to second guess them.

16. The IMA considers that the investment management industry needs to consider carefully the events of the last two years in banking and to draw lessons for the future.

And this from the more detailed bit on shareholder engagement:
112. However, it is now apparent that this engagement was not necessarily effective and it is important to recognise that there are limits on what engagement can achieve. In particular at a time of relatively easy credit banks are able to raise funds at very fine prices, and may become less reliant on their shareholder base.

113. First, investment managers are restricted in terms of the information that is made available to them. They do not have insider status and were not privy to the same information as the executive or indeed the non-executive directors. Furthermore, in many instances it is now apparent that the boards and management of financial institutions failed to fully appreciate the risks on their balance sheets, thus, investment managers could not have been expected to either; this was not a problem which could have been avoided by better engagement. Managers compensate for such information asymmetries by diversifying portfolio construction.

As most of you will probably realise, this all rings very true with me. I'm skeptical that institutions engage with companies as much as these excerpts suggest (they need to cover themselves obviously), but I have no doubt that the broad outlines are accurate. Even institutional investors are relatively weak in terms of their restraining influence on companies, even if they seek to exercise what power they do have, especially when the bubble is expanding. Meanwhile the IMA says that you can't expect shareholders to second guess risks that boards themselves haven't spotted. I agree entirely.

But then the obvious question is why on earth do we genuflect to this ideal of shareholders as owners when it patently does not work effectively - as shareholder representative groups themselves acknowledge above? This is vitally important to remember for example when (inevitably) some remuneration consultant or other apologist repeats the idiotic claim that executive pay is a matter for companies and shareholders. That model is patently broken. Obviously I am not suggesting that shareholders play no role in governance issues, but a shareholder-centric model has clearly failed because of both inherent flaws and the lack of desire for shareholders to act like owners. The sooner we recognise this the sooner we can try and figure out what should come next.

PS. NAPF does not appear to have made a submission.

Thursday 29 January 2009

Oh well

I said I wouldn't post it, but

Legislation, decrees, and interventions reflect the views about how the economy is affected by financial institutions and instruments held by our rulers and their court intellectuals. Behind all but the crassest special-interest legislation lies some theory about how markets behave and how they affect the economy and therefore the common good. Legislated changes, such as the reforms that took place during the Roosevelt years and the deregulation mania of the late 1970s and 1980s, reflect some theory. If the theory is at variance with the way the economy behaves, the reforms will do little good and may do great harm.

If with the passge of time the behaviour of the economy changes, the intellectual foundation of particular legislation may be undermined. At that time, legislation, and the institutions and usages that it created, can lose its legitimacy. The regulated financial structure was thus legitimised by the financial debacle of 1929-33, and the deregulation mania occured in the 1970s and 1980s after a long run without a fully realised debacle.

Random thoughts

1. Isn't it bit odd that some shareholders push for the legislation of rights to bring about changes that they can't achieve alone? Just thinking about the demans for a say on pay (vote on companies' remuneration policy/report), this is desired because it would presumably enable them to rein in execessive pay. But, since in most cases such votes are advisory, what extra power does it give shareholders, shouldn't their ownership enable them to do this without a vote? And in any case the right only has power if shareholders are willing to use it. Would it not be easier for shareholders to demand legislation to directly address problems with pay, rather than the rights which may not be used or be effective?

2. A mate at a fund management company I met recently implied that some companies in which they invest are overmanned and that the crisis ought to see a bit of thinning out. It only struck me afterwards (given that I basically view active management as a giant swindle) what a mad perspective this is in my understanding of the world. (ie people who are paid lots of money to cream money off your pension think you should be out of a job).

3. This and this are interesting.

Wednesday 28 January 2009

Market beliefs and regulation

I thought I'd probably posted enough Minsky quotes to last a year, but then I stumbled upon a nice paragraph the other night where he talks about the ideas that sit behind financial regulation. I'm not going to post it up because I have posted far too much from his book already, but basically he says that the regulatory environment is inevitably (if not explicitly) influenced by some view of how markets work.

This background view of how markets work which influences how we design regulation is itself informed by economic experience, so from the 1930s onwards the regulatory framework was informed by the Great Crash and following depression. In contrast the deregulatory impulse of the 70s and 80s was based in a view of markets formed in a period when there had been no systemic crisis of comparable size.

Inevitably there will be a change in regulatory stance in coming years as a result of the current crisis, so presumably this also indicates that our view of markets has also changed in some way. Certainly it isn't difficult to find quotes these days from recanting former true believers. Joseph Ackerman perhaps put it best when he said last year "I no longer believe in the market’s self-healing power."

But what new belief system is going to replace the very liberal view of market operation (at least financial markets) that appears to have been discredited? It presumably will be different from the post-Great Crash view because, although we're in for a rough time, people in the developed world aren't likely to be starving like their grandparents were. If that were the case then John Thain might have more to worry about than a subpoena and few nasty headlines. So I don't expect to see a shift towards anti-capitalism.

But equally we must be in for a significant shift in thinking, and one that will change the way we think about markets (at least in the back of our minds) for a prolonged period, until our kids have forgotten the experience that shaped the background views.

Personally I think if we take the current crisis and the experience of the TMT bubble not long before it this must point us in the direction of a view of markets that is more informed by psychology. The emergence of behavioural economics was already bringing this perspective to our understanding, but recent events must push us further in this direction. Or are there other competing alternatives out there?

Monday 26 January 2009

Flawed peers

I agree completely with the views of Dave, Paulie and Tom. If the Labour peers cash for influence story has any truth to it then we need to get rid of those concerned.

Sunday 25 January 2009

Rationality and policy

A snippet from Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies about the differing policy prescriptions that emerge from differing views of how markets operate.

“The rational behaviour paradigms… imply a restrained role for policymakers. Regulations that interfere with investors’ pursuit of profit opportunities or the flow of information will be detrimental to financial market efficiency. In those models where frictions are identified… enlightened public policies will attempt to eliminate those frictions by removing restrictions on trading (e.g. lock-ups) and financial innovations. Behavioural finance models… have substantially different implications. Regulations should be tightened on self-directed retirement plans and the access that “unsophisticated” investors have to sophisticated and risky financial products. Transaction taxes effected to retard speculation would be a radical intervention… [T]ighter regulations on accounting and advertising and greater penalties for false reporting would seem warranted.”

Saturday 24 January 2009

More good stuff from Myners

This interview is well worth a read, more evidence that he was a smart appointment by the govt. Some good stuff on pay:

“There is a need to look at the whole approach to compensation. To me it seems hugely challengeable that those at the top of our corporations — not just our banks — have seen their remuneration grow exponentially over the past 20 years. Perceived fairness is very important.”

“I've met more masters of the Universe than I would like to, people who were grossly over-rewarded and didn't recognise that. Some of that is pretty unpalatable. They are people who have no sense of the broader society around them..."

And all this nodded through by the people managing your pension remember.

Shorting again

There's a nice bit from Robert Peston about the end of the shorting ban here. It's a good defence of the practice, and he's come out clearly against the idea that the end of the shorting ban explains the slide in bank shares over the past week:

Most of the share price movements in the big banks have been caused by conventional selling of shares by the normal gamut of investment institutions.
Some of these investors may have sold because of their conviction that the shorts were selling the stock down to zero. In fact a number have told me precisely that.

The second sentence is the one that interests me. If, like me, you think stock markets are a lot more about psychology than efficient factoring of information into prices, then this makes a lot of sense. Short-selling may indeed have a minimal influence directly on share prices, but it can have a seconday impact because of the influence it has on other investors' views. I don't know if anyone has done any research on this subject, but I suspect if we want to get anywhere in a proper discussion of the rights and wrongs of the practice it's something that will need to be considered.

There's another bit earlier in Pesto's piece that grated with me though because it seems a bit inconsistent:
As we surely must now appreciate, as we live with the bitter consequences of the popping of the debt bubble, the euphoric buying of assets by manic investors is highly dangerous - so it can be very helpful that the market contains short-sellers expressing a contrary, negative view.

This is a very common argument, but is it actually proven? It doesn't make a lot of sense to me. I mean we've had shorting in the bank stocks for all but a very brief period, but they still became over-valued and had to crash back down. Ditto during the TMT bubble. So I don't think shorting really brings anything extra in terms of market effciency or rationality, it's just more trading so more costs.

I think the problem (for both its critics and defenders) is the implicit idea that shorting is some kind of inherently different technique, when surely in reality adopting and then unwinding a short position is ultimately just another couple of trades. Viewed in this way shorting doesn't look so evil, but neither does look like it brings anything different to the market. And in any case, people who think certain shares are over-priced sell them every day, so negative sentiment is already expressed. Why else would bank shares fall (as Pesto says) even when there isn't much shorting going on.

It seems a bit inconsistent to me to argue both that markets are capable of major 'corrections' in prices without the presence of shorting, and that shorting is valuable because it prevents stocks becoming over-valued.

Friday 23 January 2009

Pension fund spin

Lots of hooha today about the details leaked from the forthcoming NAPF Annual Survey that 1 in 4 large private sector organisation plans to close its final salary (the most common type of defined benefit (DB) scheme) to future accruals.

Just to be clear, the first wave of DB closures were to new members, so if you were already in the scheme you kept on building up benefits, but if you joined the firm post-closure you were offered something different. The second wave will mean that even those in DB schemes won't be able to accrue any more benefits within them, though previously accrued benefits remain untouched (until the third wave...?).

A few things to remember, as the BBC correctly noted last night, the NAPF has an agenda here. They want employers to have more freedom of movement, and their threat is that if they don't get it then more of this type of closure are in the pipeline. And they have a bit of a point.

Something else to watch out for is the way this will no doubt be used by anti-pension campaigners on the Right like the TPA as evidence that final salary schemes are unaffordable. A few points to counter - first, this is in one sense just a cost-cutting exercise by companies. They may simply want to spend less on pensions - it doesn't necessarily mean that they couldn't keep the schemes open to current members. Second, in a way this is a result of closing the schemes to new members in the first place - they can't rely on ongoing contributions from incoming members to play about with in terms of funding. Thirdly, the cost pressure on schemes is in no small part due to the extraordinary economic picture. We don't (well, most of us!) argue that private sector banks are fundamentally flawed because they currently need state support. Why does an extremely difficult economic climate say anything particular about different modes of pension provision.

Unfortunately the real losers are the members of the DC schemes that employers and the Right are so keen for us to be in. A mate at a fund management company I met the other day reckoned some retiring on a typical DC scheme today will probably get a pension worth one quarter of what they previously expected.

I'm not naive enough to think that we can bring back DB schemes in their previous form to the private sector. Once FDs woke up to the risk inherent in them they got shot quickly, and I suspect there's no appetite to go back. But neither can we simply ignore the scandal waiting in DC provision (which will be exacerbated by the Right by forcing more people into poor DC schemes if we are not careful). There must be space in the middle?

Thursday 22 January 2009

NAPF and stock-lending

I'm think this headline - NAPF chairman urges schemes to restart stock lending programmes - might oversell what the NAPF chair actually had to say, which was:
"Don't abandon your securities lending programs. Having stock to lend and borrow is crucial for efficient markets."

But still I find the pro-stock-lending stance from a trade body meant to represent pension funds - not custodians - a bit odd. For one, arguably he's endorsing a particular strategy - why not tell his members they must do commission recapture? Secondly pension funds also remain split over this issue. In addition shouldn't the membership give the steer to the representative body, not t'other way round?

And what about sentence two - is having stock to lend and borrow "crucial" for efficient markets? Is there evidence that markets without stock-lending are less efficient, and in what sense do we use the term? The existence of stock-lending implies more trading, which means more costs. So that might actually be less efficient - if you think extra trading simply increases frictional costs - from a pension fund point of view, surely?

A bit of a strange perspective all round, especially in light of this.

Nationalisation? No thanks!

We're being given the clear steer now that the Government really doesn't want to nationalise the banking sector. Paul Myners' piece in the FT (one of the sources for this interpretation) does say the Government would rather not nationlise, and both the Pink 'Un and Pesto infer that's what we are sposed to read into recent events, so I'm assuming that this is the party line.

Journalism meets complexity

I was wondering why the reports of Adair Turner's speech didn't really say anything. Having had a quick read of the speech (which is here) the reason for the vague reporting, I suspect, is that it's actually got a lot of stuff in it. It's a serious attempt to have a look at the crisis and how to respond. I'll need to set aside a bit of time to read it properly, so pity the poor journo trying to summarise it.

For example, the Beeb says:
There must be profound changes in the banking system if a repeat of the current crisis is to be avoided, the Financial Services Authority has said. Lord Turner, head of the City watchdog, said parts of the regulatory system were "seriously deficient". He recommended that banks should be forced to build up capital during good times, so they could more easily weather an economic downturn.

And The Torygraph says:
In a lecture to business leaders, Lord Turner said: "We need to increase capital requirements not just marginally but by several times."
Banks would be required to build up substantial capital buffers in good economic times - well above minimum levels - so they can run them down in tougher times.
He accepted that these changes would result in "a significant contraction in the scale of trading books".
In the future, the FSA would regulate liquidity as well as capital adequacy, he said. In line with capital requirements, banks would have to have a certain level of liquid assets.

Reading either of the reports of the speech, I think you would get the impression that Turner was trying to [consults pre-fab meejah-phrase handbook] "talk tough" and/or acknowledge the regulator's own failings. Both reports capture very little of the content of the speech, and (because of the need for a news hook) suggest an emphasis that (as far as I can see) wasn't really there.


UPDATE: Charlie correctly points that at least one journo - Paul Mason - did read the speech in detail, and get into the meat of it.

Wednesday 21 January 2009

Fund managers as 'owners'

It's a regular theme of mine that the idea that shareholders are 'owners' of companies in anything more than a very limited sense is looking wobbly. This week as part of a project at work I came across more evidence of this. It turns out some of the biggest fund managers don't even bother to vote in all markets. No, I'm not talking about simply not voting your two Moldovan equity holdings because you have to send in a hand-written parchment six months ahead of the AGM. I'm talking about not voting in markets like Japan, Europe and so on. I was genuinely shocked.

Now I know there is an argument to be made that voting doesn't often achieve that much, and the costs sometimes outweigh the benefits, for example if there is share-blocking. But if you are really serious about trying to improve governance, and actually want the 'shareholder as owner' model to work, surely you have to better than this? The other thing of note was just how few people are actually involved in looking at corporate governance in some of the big houses. The research I was looking at suggested that just a handful (one hand!) are looking after several thousand companies, and assets of several hundred billion pounds. I don't think that's going to work!

The problem is exacerbated because the small number of fund managers that do actually resource voting and activism to a significant degree don't win many mandates from pension funds. Trustees instead almost always delegate responsibility for this stuff to whichever manager they appoint to run a particular chunk of assets, regardless of whether that manager has any strength in this field. Notionally pension funds call the shots, and as the ultimate 'owners' they could tell fund managers to step things up. But pretty much every fund manager I have spoken to over the past 5 or 6 years says they get very little interest from clients in how they vote etc. So, most managers don't do it well plus their clients don't provide any pressure or incentive to do so. Not looking good is it?

Add one final twist to the story. I don't think the shift from DB to DC provision has really been thought through in terms of its impact on shareholder-driven corporate governance. As explained, at the moment I think oversight by shareholders is weak, plus oversight OF shareholders - as in fund managers - is also weak (and this is without touching upon fund manager conflicts of interest etc). But in a DC world whatever ownership power there is resulting from owning shares (whether or not it is actually exercised in practice) will shift over to the fund managers, because by and large they don't even have trustees to deal with. So there will be even less pressure to engage over corporate governance.

The one plus point is the the Personal Accounts scheme, which will become the biggest in the UK, will have trustees. So it will have an opportunity to make a real impact. However it won't be up and running until 2012 - after the next election. Based on my experience of public policy in this field, where the Tories repeatedly sided with the fund management industry in an effort to stall reform (public voting disclosure for example) I think a change of government may therefore affect the Personal Accounts trustee board's ability to be a leader in this area.

Not good.

John McFall tells FSA to keep an eye on shorting

Shorting ban ends, banking stocks go mental. Here's what the chair of the Treasury select committee has said to the FSA in an open letter to the regulator:
In the light of the extreme market turbulence in bank shares in the week since the ban was lifted, could you please confirm that the Financial Services Authority is actively monitoring the connection between the volatility in bank shares and the repeal of the ban on short selling. I am particularly concerned given that I have heard disturbing anecdotal evidence that some hedge funds have been shorting stocks in UK banks. To this end, could you also please confirm that you will not hesitate to re-introduce the ban if it is found that short selling has contributed to the undermining of stability in the banking sector.

Tuesday 20 January 2009

Ignoring the stockmarket

There's an interesting throwaway line in Andrew Hill's Lombard column today:
The government must also learn to ignore the whining of the stock market. RBS's slide yesterday reflects the one consistent message from public interventions since the credit crunch began: that shareholders tend to lose out. They could lose out again. But equity market volatility is not a sure-fire sign of whether yesterday's plan (let alone the banks themselves) will succeed or fail. That must be measured in other ways.

I'm not saying anything new here, but it is interesting how quickly we (with the aid of the financial press) grasp market movements that are flickers on the screen in the long run as evidence of... err... anything we choose. Much as I believe that you can infer very little of genuine value from short-term equity market moves, I still find myself looking at them, and sometimes subconsciously feel they validate a particular opinion or other of mine. That little bit of data helps flesh out the narrative we have about a company, trend or issue.

But actually, as Mr Hill suggests, often the best strategy is to shut it out. There's apparently evidence that people who check their portfolios a lot are unhappier, and make worse trading decisions - though they no doubt feel that they are 'managing' the problem. At the corporate level, I suspect many people would these days argue that fixing the chief exec's attention on the share price is actually a dumb idea. Broadening this point out a bit I wonder whether agency theory has a lot to answer for - it may have led us to 'fix' the principal-agent problem in a way that has made things worse.

And finally, is there any way we can counter the idea that the stockmarket is a barometer for economic performance more generally? All we are actually looking at is the consensus of views of those who hold shares of the value of companies that issue shares. There's a lot more to what happens in society than that. (Nice quote from Robert Shiller on this here).

PS. On an unrelated point, is it simply a massive coincidence that the banks' shares have gone all roller-coaster on us so soon after the FSA's shorting ban ended?

Odds and ends

Some union reaction to yesterday's initiatives in respect of the banks.

TUC says:
'The Government is absolutely right to take further action to bail out the banks. The alternative would be not just a prolonged recession, but slump.

'But ministers must also realise that there will be public anger that even more tax payers money has had to be put into the banking system, particularly among those who face losing their jobs or homes because of the irresponsible policies pursued by the banks.

'Fighting recession must now take priority, but voters deserve answers to such simple questions as to why banks have such big black holes in their accounts and where the money went. There needs to be a public inquiry into the behaviour of the banks, their advisers and their auditors.'

GMB says:
Paul Kenny, GMB General Secretary commenting on the latest bail out of the UK banks said, “I do not think that the politicians fully comprehend the depth of anger felt by the public at the irresponsible behaviour by the top directors of the UK banks which has necessitated this multi billion bail out. What GMB members want to know is when will prominent individuals like Bob Diamond at Barclays, who was paid £21 million last year, be sacked.

The lesson has to be learned that banks are just another public utility that the economy requires to function effectively. Like all the other public utilities they need to be under strict control of the state and be run for the benefit of UK citizens. We need them run by managers who know what they are doing and we need to clear out the irresponsible gamblers that brought about the bankers recession.”
And John Gray reports on a talk by Graham Turner, whose book I blogged briefly about here.

Monday 19 January 2009

Pension funds could be part of the solution

Here's an interesting initiative led by the TUC, but with the backing of some key Labour MPs and other progessive types.
Government urged to press pension funds to become responsible investors
The TUC, MPs and leading figures from the pensions and investment industry are today (Monday) urging the Government, institutional investors and fund managers to back a series of proposals on responsible investment to help address the practices that contributed to the current financial crisis.

The joint statement says that 'recent events have shown how the failure to hold corporate leaders to account for their decisions about risk can have a catastrophic effect on the financial system, the economy, the corporations themselves and ultimately the well-being of members of pension schemes.'

Signatories include Treasury Select Committee Chair John McFall MP, Work and Pensions Select Committee Chair Terry Rooney MP, founder of Hermes Stewardship Services David Pitt-Watson and TUC General Secretary Brendan Barber.

The statement calls for pension funds to insert a 'do no harm' clause into their statement of investment principles. This would require fund managers and advisors to satisfy pension fund trustees that their investment decisions are not causing systemic harm to the financial system.

The statement also calls on institutional investors to sign up to the United Nations- backed Principles of Responsible Investment (PRI). The principles set out commitments for investors on engagement around corporate governance, environmental and social performance.

The group have written to the Prime Minister urging the Government to back the proposals in the statement and, if progress is not made, to consider making the 'do no harm' clause a statutory responsibility for pension funds.

The full statement is here (PDF).

Sunday 18 January 2009

A state-run banking sector...

It's hard not reach the conclusion that greater public ownership of the UK's banking sector is on the cards, and with it may come a change in emphasis in what banks do. If some of the stories around today are on the money we might not only see RBS taken wholly into public ownership (an outcome many people expect now), Lloyds/HBOS might need more money, Barclays may also need to come back for taxpayers' money (and surely this will mean someone on the board has to go), and Northern Rock might be used as a people's bank to get lending going again. Add to this the Government's planned insurance scheme to (as far as I understand it) effectively put a floor under the value of the banks' toxic assets if necessary.

Now, as other have pointed out, the banking system always ultimately has the state as a back-up. But in today's UK the state is heavily involved in many aspects of what banks would normally be expected to do. This ranges from mortage product design (the idea of allowing people payment holidays), to lending policy, to valuation of toxic assets, to deciding on key senior bank personnel. How much further would outright nationalisation (though with the likes of HSBC and Standard Chartered presumably staying independent) really push things?

People will argue that the state will lack the skills to run banks effectively but a) I don't think HMT is going to avoid drawing on experienced private sector people to make a political point and b) anyway, look at where we got to leaving private sector genius to itself - a system that has almost destroyed itself. So we are in the bizarre situation now where what would have been regarded as a far left fantasy (a socialised banking system) is looking not only a possibility, but also an outcome which many 'reasonable' people would consider a fair one.

As I've argued a bit before, this kind of shift has serious implications in other areas. I'm already busily arguing with various people that if we have this level of radicalism in economic policy, why pussyfoot around in financial reform. For example, in the bit of the world that I inhabit the idea that shareholders are the primary constituency to be considered in corporate governance has been dominant for a very long time. But given the many flaws in an approach based solely on this way of looking at things, surely the current environment will see this reappraised? This is one of those times where you try and drag the boundaries of debate as far as possible in your direction.

Times have changed

Mandy on how the crisis will affect the UK going forward, from the Beeb:
Business Secretary Lord Mandelson told the conference Britain was likely to see the economy move away from a dependence on financial services.
He said problems in the financial sector were going to take more time and ingenuity to resolve.
"We've got to identify... what specialist businesses we are going to invest in, where are we going to make our contribution to the global economy," he said.
"We are going to have to find new competitive advantages in Europe. That's going to require both innovation and activism on the part of government."
Lord Mandelson also said there were "important questions" over massive bonuses in the financial services.
"Why have so many incentives for individuals in the financial services sector ended up destroying value rather than creating it?
"What does it mean for the valuable concept of earning your wage in society?"
But he added: "We shouldn't have a problem with high pay for high performance. I see nothing wrong at all in giving rewards for those where you are rewarding excellent performance."

Friday 16 January 2009

Bellway b*ll*cked

I was right about Bellway. There was a serious investor reaction to the remuneration report - 59% against. Strange quotes from the company in reaction to the vote though:
However, a spokesman for the company said the vote will be taken just as a vote of no confidence in the remuneration committee and will have "no impact" on the directors' pay for last year.


I'm being a rubbish blogger this week to to a mixture of work and pre-parenthood pressures. Just a few snippets today.

First up, Bellway looks like it has raised the white flag in its fight with investors over awarding its directors bonsues despite poor performance. I can't find the poll results of the AGM (maybe they lost the rem vote?) but they have put out the following:
The Board has noted shareholders' views on the Report of the Board on Directors' Remuneration and believes it was wrong in not consulting with major shareholders earlier. It therefore proposes to review future policy on this matter, in consultation with them, in the coming months.

This LSE research on the shorting ban (PDF) looks interesting from a techie perspective.

And finally yet another Minsky quote. This one stuck out because of this post on Touchstone before xmas.
[R]elative prices are the result of how market power over price is exercised; in a world in which firms have market power, the "optimality" of market-determined prices is a figment of the imagination of neoclassical economists.

Thursday 15 January 2009

Another bank nationalisation

Anglo Irish this time, from the Beeb:

Anglo Irish Bank is nationalised

The Irish Government has said it is to nationalise the Anglo Irish Bank.
The state had planned on pumping 1.5bn euros (£1.4bn) into the bank, but decided that recapitalisation was not the way to secure its future.
Ministers had been due to hand over the money in return for 75% shares with an annual fixed dividend being paid to the government of 10%.
A lack of liquidity has made it increasingly difficult for the banks to lend money to their customers.
The Bank of Ireland and the Allied Irish Bank are still set to get help.

Jello Biafra (PBUH) on fundamentalism

Massively off-topic, but I've been a big fan of Jello Biafra for years. I got my first exposure hearing California Uber Alles at a club as a teenager. I still think it's a great song, the aggression in it... but his voice and lyrics really stuck out too, and I've been a big fan ever since. I can still quote long chunks of DKs lyrics from memory (pretty boring experience I'm sure) and the Jello plus Ministry outfit Lard are still a regular feature on my iPod. Anyway, a few years ago I came across a great interview with him in a zine, which I've just managed to find online again. This bit stuck in my mind, and is a great swipe at zealotry of any stripe:
Biafra: I don't want to put it in black and white fundamentalist terms where it's like the more radical-then-thou are the only people who are doing right, and if you don't do as much as I do you're against everything, I mean, that's bullshit. It turns people off to good ideas as badly as fundamentalist Christians do. I mean, there's fundamentalist radicals, fundamentalist punks, fundamentalist vegans, I think we all know a few of that. Fundamentalism is poison. So, we do what we can and doing something is better then doing nothing. But it also means picking up actions and a life style you can live with and live up to, instead of something that makes you miserable to the point where you cross over to the other side 'cause you don't see any other way out 'cause you see stuff in too much of a black and white way because you're a radical fundamentalist. I try to encourage people to get away from that. I mean, there's a side of me that's a decadent rock-and-roller as hell, and some people don't like that, but that's me too.


Hampton to chair RBS?

According to the Torygraph. This obviously has implications for UKFI, as they say:
Sir Philip's appointment to the RBS chairmanship would oblige him to step down as the chairman of UK Financial Investments (UKFI), the company set up by the Government to hold its stakes in RBS, the merged Lloyds TSB and HBOS, and, eventually, Bradford & Bingley and Northern Rock.

Glen Moreno, the former chief executive of Fidelity International and the chairman of Pearson, the media and education group, is a likely candidate to replace Sir Philip. If the move is confirmed, Mr Moreno, who was named a non-executive director of UKFI on Monday alongside three other City heavyweights, would become one of the most powerful men in British banking.

The Treasury originally indicated an intention to recruit three private sector non-executives to the board of UKFI. The appointment of a fourth director this week is understood to have been made with Sir Philip's potential move to RBS in mind.

Alongside Mr Moreno, the other non-executives are: Peter Gibbs, the chairman of the trading platform Turquoise; Michael Kirkwood, the former head of Citigroup in the UK; and Lucinda Riches, a former head of global equity capital markets business at UBS, the investment bank.

Wednesday 14 January 2009

The state as owner

Following on from my previous post, and drawing further on Hansard you get an idea from Paul Myners’ responses to questions on the Banking Bill of how the Government is thinking about its role as a major shareholder in the banks:
In the case of Royal Bank of Scotland, the Government are acting not as a sleeping shareholder but as a responsible shareholder. We are engaged with the board of that bank in strengthening its membership in the interests of all shareholders. It would be inappropriate for the Government to involve themselves in commercial, day-to-day banking decisions. The Government do not have the appropriate skills to do that. We find the right skills in the private sector, and we act in the interests of all shareholders. As a responsible lead shareholder, the Government ensure that the board is appropriately resourced, that the company’s approach to risk is professional and consistent with protecting and enhancing the value for shareholders and that the company’s control regimes and its approach to remuneration comply with the best standards. It would abusive of public shareholders for us to act as if we own 100 per cent of the company when we own only 56 per cent and we did not intend or wish to own that much if things had worked out differently. Ideally, we would not have wanted to have been put in this position at all.

Who decides the nationalised and part-nationalised banks’ strategies?:
In the case where we are but one shareholder—albeit the largest shareholder—it will be put to all shareholders. Royal Bank of Scotland’s strategy will not be solely approved by the Government with complete disregard for other shareholders, with no engagement between the bank and other shareholders as would customarily be the case where the UK Government was not a large shareholder.
In a case such as Northern Rock and Bradford & Bingley, where the bank is currently, temporarily, 100 per cent in public ownership, the process is rather more direct, but there is a very clear difference between those who are charged with developing and executing strategy—the board and the management—and those who are charged with approving strategy, the shareholders.

And also the need to improve the governance of financial institutions:
There is a pressing need to strengthen the board of directors of a number of UK financial institutions. In cases where the Government have invested, UKFI, under the chairmanship of Sir Philip Hampton, the chairman of Sainsbury, and the leadership of its chief executive, John Kingman, is actively engaged to work with boards of directors to strengthen them through new appointments. I would not want those new appointments to be described or understood as being government appointments. I believe that the Liberal Democrat party and the Official Opposition support the concept of a unitary board in which the board is responsible to all shareholders. The concept of having directors who sit around the board table to speak for one shareholder to the disregard of others and who potentially take instruction from outside the boardroom or impart information from the boardroom back to one shareholder is alien to our core beliefs about corporate governance and correct practice.

However, stronger boards we need. In the case of the Royal Bank of Scotland in particular, several directors, including the chairman, have indicated their intention to leave the board. Therefore, those boards, their major shareholders and UKFI need to work together to make first-class appointments. Finally, I add that those appointments should not necessarily be wholly and exclusively people with banking experience because, as the noble Lord, Lord Newby, said, and as was covered in an earlier debate in this House on the subject, we need to ensure that other issues such as technology and customer focus are appropriately represented around the board table.

Myners on shorting and stocklending

Yesterday saw some interesting banter in the House of Lords. Given the FSA's decision to let its ban on the shorting of financial stocks lapse, the Archbishop of York asked the following rather pertinent question:
To ask Her Majesty’s Government what steps they are taking to ensure that the lifting of the ban on the short selling of shares in financial companies does not adversely affect the market.

The Government's pointman on this kind of thing is, of course, City minister Lord Myners, and he provided some good commentary in response (though anyone expecting a denunciation of shorting will be disappointed). I'd recommend reading the whole transcript of the section of the debate on shorting, but the key part in it is where the link to stock-lending is made. Here's what Myners had to say about it:
It is important to note that just about every major pension fund and every major endowment in this country is in some way or another involved in short selling. However, my noble friend made a fundamental point about stock lending practices. I have asked the FSA to look at whether those practices are sufficiently understood by practitioners and subject to appropriate regulation.

Obviously this right up my street, and it's great to hear that the Government wants the FSA to take a closer look. I've droned on about this a few times in the past, but there are a few issues for supposedly long-term shareowners if they lend out stock. Fundamentally there is the question of whether it's counterproductive if stock is returned at a lower a value, but what about governance issues such as the use of voting rights? I'm not sure many pension fund lenders bother to recall for the purpose of voting, for example. So it will be interesting to see what any FSA review covers.

Very encouraging stuff!

Tuesday 13 January 2009


Just a quickie, Richard Murphy has a snippet about the make up of UK Financial Investments, the Treasury's asset management arm that will be handling our stakes in the banks. All industry folks by the looks of it.

Too busy to blog properly

so here's a couple more random chunks of Minsky broadly on the impact of government deficits during recessions:
If the wage bill in consumption and investment decreases because investment decreases, then in today's economy transfer payments increase and the tax take from wages drops, thus raising the deficit. If the increase in the deficit offsets the fall in the wage bill in investment goods production, then the unit markup on labour costs for the smaller consumption output will rise even as employment falls. As a result, profits and prices may both rise even as employment declines; this happened in 1975 and 1981-82.
[T]he effect of government depends on its size relative to the size of the economy. If government is small, the deficit that can be attained may not have an appreciable effect in stabilizing profits or prices. Contrariwise, a government that is large enough to stabilize profits will put upward pressure on prices even as employment fall: inflation is one result of the mechanism by which we have successfully avoided deep depressions since World War II.

Monday 12 January 2009

Investors hold their hands up

There's a nice piece in FTFM from the chair of the IMA (the fund managers' trade body):
[W]hile the banks created and sold the stuff, we investors (ahem, please don’t tell anyone) bought it. Not all mind you. Indeed, so little that the banks had to create their own special investment vehicles to absorb the avalanche of paper. (And, many of the rejects remain on the banks’ books to this day.)

Still, the investment community participated to a greater degree than we care to admit. There is no way around it – many investors were saps.


The investment management community is not “just” the custodian of client capital; we are also responsible for our shareholders’ money. Both functions have been damaged because of a system that has gone wrong. It has gone wrong through excesses some of us warned against, others profited from, and others ignored altogether.

Sunday 11 January 2009

Myners on the money

There's some good stuff in today's Observer. First thing to catch my eye was obviously what City minister Paul Myners has to say about the role of institutional investors as owners of the banks:

"I'm disappointed there's not more evidence that institutional investors have been seized by the challenge of addressing the shortcomings that have emerged in corporate governance as a result of this crisis," the minister for the City of London said.

"Institutional shareholders need to be asking themselves: were they appropriately engaged in asking questions about the risk appetite of our banks? Were they asking sufficient questions about competency of directors, and were they appropriately engaged in examining and approving compensation cultures?"

Myners expressed disappointment that organisations such as the Association of British Insurers have not taken a harder line against quoted banks.

"There must be a challenge put to investors that they failed to query the irrational exuberance that we now see as characterising the age of irresponsibility. Now there's a danger of 'reckless caution', and I don't see evidence they are much concerned about that either. If banks now lack the self-confidence to extend credit, this is going to cause further damage in the portfolios of our institutional investors."

This is great stuff, and a welcome change of tone from some of the stuff the govt was coming out with last year about exec pay. I thought Myners would be a good appointment in this role, let's hope there's some policy forthcoming to back up the rhetoric. A few ideas he could consider - why not get the Investor Governance Group set up to take forward the Myners Principles process to undertake a study of the damage done by the crisis to pension funds, and whether better practice could have mitigated it. And why not call on the investment institutions to fund some research in the behavioural effects of incentive pay?

Actually on this latter subject there's another decent rant from Simon Caulkin who says:
As we now know, "performance pay" was a misnomer, an incentive for financial engineering that has destroyed value on a heroic scale. But it's not just shareholder value that has suffered. By severing any common interest between top managers and the rest of the workforce, fake performance pay has fatally undermined the internal compact that makes organisations thrive in the long term.

Finally, Nick Cohen's piece on Joan Bakewell is also worth a read, since it gets into the thorny issue of intergenerational tension as a result of the ageing population. The interesting thing about it is that he (rightly) highlights David Willetts as one Tory who really has thought about this stuff, and he also sees the recent Tory policy annnouncement on tax breaks for savers as a pitch for this vote. Would be interesting to hear what WIlletts genuinely thinks of the policy.

Friday 9 January 2009

Splits in the investor camp over shorting

Just a quickie, but I couldn't help noticing quite a difference in opinion about the disclosure of short positions between, broadly, investment managers and insurers. Here's what the ABI says:
“We support the moves outlined by the FSA today. Short-selling usually provides a useful role in the market, but there is a need for transparency. It is important to know who is taking a short position.”

But here's what the IMA says:
We are opposed to public disclosure of short selling information, which has the potential to increase downward selling pressure, facilitate the frontrunning of a fund's security positions and reduce the incentive for proprietary research. While it is critical that market regulators have access to trading information of individual market participants to protect against market abuse, public disclosure should be designed to promote market confidence and not to facilitate trading strategies. We believe that if any public disclosure regime is to be established effectively, this is best achieved by a market or regulator publishing a single aggregated net short-interest position for each stock on a periodic, but sufficiently delayed, basis.

It's a bit odd, as there's quite a bit of overlap between the ABI and IMA membership (because many insurers have fund management arms). My initial thought is that presumably the FSA disclosure rule doesn't really hit ABI members, whereas the broader IMA membership might be caught. Or maybe the ABI is trying to be a bit more politically savvy (it's a very FSA-friendly statement).

Pay problems

Here is a great piece about executive pay by the Standard's Anthony Hilton. It's right on the money from my perspective:
The institutions are up in arms but really they have only themselves to blame.

This is because, for the past 15 years, they have encouraged performance pay without ever seeking to define what they mean by performance, with results that arguably have been hugely damaging for British business.

At their worst extreme, irresponsible pay systems have played a major part in driving executives to take the risks that have all but destroyed the banking system.

But elsewhere, and probably more perniciously, they have encouraged short-term thinking, inhibited long-term investment and encouraged the exploitation of existing assets rather than exploration of new opportunities for the future.

They mitigate against long-term investment management, research and development and brand development, all of which take too long to pay off. They reward acquisitions-driven volatility much more than steady organic growth. They have rewarded people for making their businesses bigger rather than running them better, which is one reason why there are so many value-destroying and just plain daft acquisitions.

Performance pay schemes push managements to close down or sell difficult businesses rather than spend time nursing them back to health.

They encourage managements to spend half their time touting for a takeover bid so they can sell out and cash in even quicker, and they create a hugely unhealthy obsession with the share price in most boardrooms.

Managing that becomes more important than managing the business, and the most rewarding investment becomes a share buyback. All this has happened under the institution's noses but they have done nothing-about it.

I could have written that myself. I've seen numerous fund managers argue that both the absolute level of reward, or its level relative to other staff is unimportant. What matters is performance linkage. Yet the payoffs have become huge (meaning you can get big bucks very quickly) and, as the man says, most incentive schemes pay out quite a bit of the total, which suggests everyone is outperforming...

And obviously his argument that there is little thought given to the type of behaviour that such pay schemes encourage is right up my street. Is pressure for reform building?

Thursday 8 January 2009

A journo's take on the crisis

Following on from Nick Drew's Q&A, I thought I'd ask a financial journalist for their views on the current crisis. Hugh Wheelan runs the rather ace Responsible Investor website, here's his take on things.

How bad do you think the crisis is/will get?

I think this crisis is certainly the biggest of the last 30-40 years, both financially and psychologically (it’s unreasonable, I think, to compare its effects to that of the Wall Street Crash post 1929, which had such a serious social impact on incomes/job losses and poverty, even if it bears many of the same financial hallmarks: bank solvency issues, etc). It could (and I say this with no little sceptical caution) start to re-define the way financial markets operate. One reason is that I think that society at large has become much more aware (and distrustful) of the operations of financial markets and the potential impact on their daily lives. I believe, and hope, that will create an onus for a back-to-basics, honest broker approach from financial providers with much more intense external scrutiny. Large parts of the financial markets had become too large, complex and unwieldy (not to say potentially fraudulent), to the extent even that many of the biggest financial players on the planet were brought to the abyss. That can’t be allowed to happen again, both for moral and financial hazard reasons. The opacity of the $8.5 TARP bailout in the US, as well as the terms of taxpayer funded bailouts in Europe and the UK are breathtaking to my mind, as is government reluctance to stipulate favourable terms/influence for the taxpayer for its cash injections (which is what the markets would do). I can’t help thinking that if this is not resolved then taxpayers will ultimately have been taken for a very big ride, even if part of the blame for the credit crisis lies in the public desire for cheap lending and government desire for lax regulation and short-term wealth creation. These latter points merit a great deal of self-reflection on the kinds of societies we wish to live in.

I also feel that we are only really at the beginning of the long-term knock on effects of the crisis on the real economy, which will be felt increasingly on several fronts: restricted lending, falls in real estate and other asset values, lack of consumer confidence. Instinctively, I think global interest rate cuts are the right move to ease the burden, but they must be short-term. Banks that have been bailed out must not toughen lending criteria on companies, and non-bailed out banks should be leant on not to do so either. Governments can and should be patient in waiting for their investments to be realised; repayment should not be at the expense of the real economy.

Finally, the long-term impact of the crisis on the future of the US economy ($1.2 trillion in debt and counting) will be fascinating/frightening to behold under Barack Obama. How long can the US economy go on bucking its indebted status (bond downgrades anyone?) and the dollar continue to be the global fiat currency when the country’s books are so seriously in the red? Both could raise serious questions about the future shape of the global economy and the shift/rebalancing of capital/financial markets to the east, notably China. Obama’s New Green Deal is certainly wise in terms of climate change realities, but is it enough of an R&D boost to reinvigorate the US economy?

We’ve seen a big growth in socially responsible investment (SRI) in the UK since 2000. Can the SRI world claim any sort of insight into the crisis?

It can’t claim much insight into the credit crisis, although one SRI research agency did ring early alarm bells about ‘sub-prime’ or predatory lending as it used to be known and the potential hazard of foreclosures on mortgage backed securities. But, in reality the SRI movement has done little yet to raise systemic issues/problems as part of its social responsibility. I think SRI investors could and should be better placed to do this than mainstream investors, who tend to follow the trend while it’s in the money. They’ll have to be bold and prove themselves though. It’s no mean feat to cry wolf over systemic issues (nor is it easy to know what to then do about it), but as we’ve seen, investors lose a lot of money when markets blow up and the recent tendency has been for these to occur rather regularly (Enron, LTCM, Russia, tech)…boom and bust is not good for long-term investors, particularly for personal pension plan holders!

You’ve reported that several institutions have cut their research into environmental, social and governance (ESG) issues in recent weeks. What’s the significance, and do you think it’s a mistake?

It’s a sign, I think, that some banks didn’t believe that much in it. SRI research teams were amongst the first to go when cuts were being made at investment banks. It’s difficult because SRI research doesn’t generate huge commissions for banks. Personally I think it’s a mistake because I think investors will start demanding much broader equity and bond research, including environmental, social and governance factors, which I believe have much to inform stock selection decisions, albeit only if investors are really serious about demanding longer-term buy and hold strategies from their fund managers, which I think they should, and increasingly will be. It's worked for Warren Buffet!

I think research in areas such as environmental risk/value creation, human capital, staff training, pay ratios, corporate ethos, brand reputation, internal governance, management controls, etc, is seriously under valued in today’s investment decisions.

What impact (if any) do you think the crisis will have on the way pension funds invest in the future?

As per above really, back to basics focus on long-term equity/bond/property returns with more focus on duration than short-term risk/return plays. There will also undoubtedly be more private equity money, hopefully in venture capital in the environmental space…with the necessary risk caveats, and in transparent long/short hedge strategies.

I think ESG (environmental, social and governance issues) will be a play a much bigger part in stock selection (in all these areas), although I would say that as editor of a magazine called Responsible Investor.

Shorting and stock-lending have both come in for criticism, is this justified?

It’s a long and complex debate. I have nothing against the principle of shorting (in fact I think the idea of the value of a company being inherent in the share price has almost become laughable these days). I do, however, have serious concerns about the increasing tendency for the market to be able to almost short companies out of existence in a kind of rapid, self-fulfilling prophesy (short stock, share price bombs, ratings downgrade leads to further share price drop and more expensive debt, etc) and to spook the market en masse, particularly in the nervous crisis period we are living through now.

Institutional investors tell me they make good money from stock lending, but in what context? I think there needs to be a serious discussion about the impact/breadth of market shorting, the amount of stock now on loan, the effects of shorting on overall market values. There is far too much discussion about shorting these days rather than the creation of good, long-term responsible businesses, which is what we should be encouraging. A world in which hedge fund managers are feted more than entrepreneurs is not good.

Do shareholders, as the notional owners of businesses, bear any responsibility for what has happened?

Yes, I think so, notably in the financial sector. Shareholders (notably asset managers) in financial services companies should have been much stricter about the way the companies they invested in made their money/business models (off balance sheet vehicles, for example) /risks/incentive structures, etc. However, for the large part it’s the old debate about getting the police to police themselves – there’s too much aligned self-interest. Fund managers operate largely under the same parameters (and often in the same groups) as the banks and insurers whose stock they hold (bonus structures, etc). It’s the same reason why the issue of tax is rarely brought up in the context of socially responsible investment, despite tax evasion being one of the most socially irresponsible practices globally.

As a result, the real shareholders (pension funds/insurers) who delegate to fund manages, need to be much clearer in the instructions they give their fund managers about the way their money should be managed. They need to be much clearer about what investment principles they believe in and justify them.

What actually needs fixing, and are there any legislative or regulatory changes you would like to see?

It’s difficult to be specific here (partly because there is much that needs legislating in my opinion.) However, there are principles I think need to be applied. Regulation must be more protective for investors and transparency for financial markets should be absolute when decided upon, not exist in pockets. Philosophically, I think we need to apply overall market health criteria to the approval of financial products. The idea that regulation stifles market innovation doesn’t wash with me. I see little real healthy innovation in financial markets in reality. I’d like to see more innovation in the real economy, notably in environmental sectors, backed by long-term patient capital and less large-scale trading.

Wednesday 7 January 2009

Just a bit more on shorting

Hat-tip to Charlie for highlighting this paper (PDF) which appeared last year which focuses on the impact of restrictions on shorting. I've had a very quick skim, and it looks right up my street. The broad message is that the shorting bans haven't made any difference, here are the main conclusions:
Our main findings can be summarised as follows:

1. We find no strong evidence that the imposition of restrictions on short selling in the UK or elsewhere changed the behaviour of stock returns. Stocks subject to the restrictions behave very similarly both to how they behaved before the imposition of restrictions and to how stocks not subject to the restrictions behave.

2. Further, comparing behaviour across countries where the nature of the restrictions differs, we fail to find systematic patterns consistent with the expected effect of the new regulations.

3. We also find no sign of the expected detrimental impact of constraints. Autocorrelation coefficients and goodness of fit statistics are if anything slightly lower in the post‐restrictions period.

4. Regression analysis suggests that any change in the key statistics is mainly driven by sector‐ wide influences than the restrictions on short selling. That is, some systematic changes in the behaviour of financial sector stocks could be discerned but no strong evidence of a systematic impact of the restrictions could be identified.

The main thing to draw from this seems to be that the regulators' interevention was a bit of a waste of time. But point 3 is worth considering too, since this would seem to undermine one of the arguments in favour of shorting. The short preamble to the report is also worth a read, as it sets out some of the academic views on what the effect of a shorting band would be.

FSA and shorting again

Actually, I didn't read this properly Monday. The FSA is going to extend the disclosure of short positions in respect of the banks until June, plus it will be issuing a paper shortly setting out its plans more broadly in respect of shorting. Could be interesting.

For what it's worth I reckon investors (say ABI, IMA, NAPF) ought to fund some serious research into the impact of shorting, looking at issues such as volatility and price formation. It may well be that there is no case to answer, and to be honest I am leaning to the view that shorting is more a waste of money than anything else, but at the moment the debate seems to take place with very little evidence. So why not get the big investors to cought up some cash to fund some decent analysis?

Economics and lefty blogging

Maybe it's my imagination, but there seems to have been a real increase in the amount of economics-related stuff around in the left blogosphere of late. Obviously, there's always been some, but the number of different blog posts on Cameron's savings policy has been pleasantly surprising. Notably, with the exception of Chris Dillow, we're broadly of the same view - it's the wrong policy to incentivise saving in a recession (Chris says the policy won't make much difference). Still, it's a good sign I reckon.

Pointing in the opposite direction, here's a bit of cold water splashed on the value of our collectively rediscovered enthusiasm for economics - although it's easy to make broad points, it's difficult to really predict what outcome given policies will have. Here's a bit from a recent John Kay column .
Some economists... believe there is a deep underlying structure from which laws of economic behaviour that are universal in time and space can be deduced. I think that search is a wild goose chase and that the best we can do is to identify empirical regularities that apply to particular contexts. Whoever is right, it is evident more work needs to be done in understanding the relationships.

But the killer is that dynamic complexity interacts with non-linearity. If that statement sounds like an extract from a monologue by Gordon Brown, UK prime minister, recall the (false) story that your predecessor, Richard III, lost the crown at Bosworth Field for want of a nail in the shoe of his horse. The point is that small differences in initial conditions can have dramatic differences in ultimate outcomes. The problem is often expressed through the metaphor of the butterfly which, by flapping its wings on one side of the world, sets in train a chain of consequences that results in a tornado many thousands of miles away.

The nature of such complex, dynamic, non-linear systems is that we may be able to say a lot about their general properties, while being unable to make specific predictions. You will recognise this characteristic in the work of your Meteorological Office, which can tell you fairly reliably when spring will follow summer, or how much cooler or warmer it will be when you visit far-flung outposts, but which can never predict what the weather will be more than a few days ahead, or even with certainty what it will be like tomorrow.

McDonalds isn't lovin' EFCA

A quick plug for this SEIU campaign to encourage Maccy Ds to stop organising against the Employee Free Choice Act.
McDonald's has more than 600,000 employees in the US, many of whom earn less than $10/hour. But last year its CEO took home more than $13 million. Now McDonald's leadership is actively organizing to prevent its employees from standing up for themselves at work.

Write to McDonalds and say employees need the Employee Free Choice Act - we'll send your letters to McDonald's headquarters to make sure they get the message.

Tuesday 6 January 2009

FSA shorting ban to end

And most people seem to think it was a waste of time, except Jeremy Warner who says:
Banks are, at root, little more than elaborate excercises in investor trust. By borrowing short and lending long, they perform the vital function of maturity transformation without which no modern economy could function. But they depend crucially on confidence to stay afloat. If everybody wants their money back at the same time, they are in no position to pay.

Short traders greatly contributed to the breakdown in confidence that now bedevils banking and the wider economy. It's all very well selling a share that you actually own, but there is something obviously immoral in selling securities that you don't in the hope that eventually you create such blind panic that the underlying company goes bust.

But across the board, those who lend the stock that enables short selling to occur need to re-examine their practices. Can it really be in the interests of long-only clients willingly to participate in this wholesale slaughter of the equity markets?

Market (in)efficiency

S&M returns from the holiday season with a post on efficient markets. Chris says:
The claim “markets are inefficient” can imply at least two things:
1. The job of allocating capital to investment projects will be badly done by markets.
2. It’s possible for an individual to out-perform stock markets without taking on extra risk, by spotting under-priced assets.

This reminded me straight away of this paper (PDF) by Alfred Rappaport which is worth a read, even though I'm not 100% convinced by it any more. Rappaport basically says that 1 can be true, even if 2 is not. Markets can be informationally efficient (available information is immediately factored into the price) but allocatively inefficient (because the info is duff/irrelevant, investors are biased etc). So you can't beat the market, but the market can still be off-target. Which is a neat way of explaining things, but (I argued previously) perhaps doesn't tell us all that much.

Monday 5 January 2009

US unions push for financial reform

Just a couple of nuggets from reform proposals being floated by the AFL-CIO and Change To Win. I'm picking a couple of brief bullets and just shareholder-focused stuff for now, as you can imagine there's a lot about ratings agncies, role of the SEC, financial stability objectives etc. I'll also post up links to the original docs.


12. Address Time Horizons in US Capital Markets (regulatory and legislative):
The SEC and the IRS should examine what steps could be taken to improve a long-term focus in the capital markets and US business. This would include structuring initiatives like proxy access to empower long term investors, improving disclosure for short-term oriented investors like hedge funds, looking at increasing capital gains taxes for short term trading relative to long term investing, and initiatives such as examining the accounting rules to determine if they are disadvantaging long term investments by companies, such as investment in human capital.

9. Create incentive that encourage long-term investing and discourage excessive risk-taking.
For example, empower long-term investors with tools to hold managers and boards accountable (e.g. access to the proxy); require executive pay at federally insured institutions to take into account risk and sustainability of performance (e.g. by not paying bonuses annually, eliminating stock option compensation, and requiring substantial equity holding requirements, as UBS has done); and require asset managers to disclose the performance period for portfolio manager incentive compensation.

Hat-tip: Michael L.

Risk mismanagement

There's an interesting NYT article here about the role of Value at Risk in the run up to the crisis. Taleb crops up quite a bit understandably, but it's more sympathetic to the role of VaR than he is (not difficult really).

Treasury committee on the banking crisis

Back into work, and the year kicks off with the Treasury committee inquiry into the banking crisis. Oral evidence sessions are next week (see some of those scheduled to give evidence here), the deadline for written submissions is tomorrow midday.

There are some interesting (to me anyway!) questions on the agenda. Here's the full list -

1. Securing financial stability
1.1 The role of auditors in the banking crisis, and whether any reform to that role is desirable.
1.2 The role, and regulation, of credit ratings agencies in the banking crisis, and whether any reforms are desirable.
1.3 The role, and regulation, of hedge funds in the banking crisis, and whether any reforms are desirable.
1.4 Ongoing reforms to the operation of the Tripartite Committee, and cooperation between the relevant public sector authorities.
1.5 The impact of European Union directives on financial stability, including “passporting”.
1.6 Possible reforms to the remuneration structures prevalent in financial services.
1.7 Reforms to regulatory capital and liquidity requirements.
1.8 Possible improvements to the architecture of international financial regulation and maintenance of global financial stability.
1.9 Regulation of highly complex financial products, and the future of the “originate-to-distribute model”.
1.10 Risks to financial stability emanating from non-bank financial institutions.
1.11 The role of the media in financial stability and whether financial journalists should operate under any form of reporting restrictions during banking crises.
1.12 Monitoring and surveillance of financial stability problems by the public sector.
1.13 The role of the banking system within the overall economy.
1.14 The impact of short-selling in the banking crisis and its regulation.

2. Protecting the taxpayer
2.1 The advantages and disadvantages of the UK Government’s response to the banking crisis, including comparisons with alternative approaches adopted in other jurisdictions.
2.2 The nationalisation of Northern Rock and Bradford & Bingley.
2.3 The Government’s recapitalisation programme, and part-nationalisation of major high-street banks.
2.4 The aims, objectives and exit strategy of the Government’s investments in UK financial institutions.
2.5 The role of UKFI and its relationship with the part-nationalised banks.
2.6 The impact of current Government policy on future taxpayers, including the impact of moral hazard.
3. Protecting consumers
3.1 The role of banks in receipt of public investment in fulfilling the Government’s aspirations for assisting customers, and small businesses, in financial difficulty.
3.2 The importance of retail banking as a “utility”, and whether retail banks should be separate from other activities such as investment banking and insurance provision.
3.3 The competition impact of further consolidation within the retail financial services sector.
3.4 The product pricing of credit facilities, including mortgages, credit cards, store cards and small business loans.
3.5 The protection of UK citizens investing funds in non-UK jurisdictions.
3.6 The impact of deposit protection on both consumers and competition.
3.7 The role of financial advisers in the banking crisis.
3.8 The impact of the banking crisis on consumer confidence in financial institutions.
4. Protecting shareholder interests
4.1 The rights of shareholders in the context of new sources of investment, including the UK Government and sovereign wealth funds.
4.2 The responsibilities of shareholders an ensuring financial institutions are managed in their own interests.
Presumably as usual many organisations will make their written evidence publicly available, so I'll try and post up stuff as I see it.

Thursday 1 January 2009

More Minsky

I'm really getting in to this book now, another snippet below. Neo-liberalism is all well and good, until you have a finance sector...
In market economies prices distribute outputs among households, and they allocate productive resources, which have alternative uses, to the production of various outputs. The price system therefore has distributional and allocational functions in the world of neoclassical price theorists. In a world with capitalist institutions, however, prices will or will not validate past financing and capital-investment decisions as well as distribute income to workers and to owners of capital assets. But the relations between capital-asset compensation and the allocation of capital-asset services to various outputs is not as direct and simple-minded as the relation between labour compensation and the allocation of labour services to various poductions. Time, investment, and finance are phenomena that embarrass neoclassical theory; once problems with capital accumulation in a capitalist environment are introduced, the theory breaks down.


Some interesting stuff from Andreas and John Ross.