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Barclays, in the firing line.

It had to happen sooner or later: UK Uncut, the provisional wing of Her Majesty’s Revenue & Customs, have decided that Barclays, a business which moved heaven and earth in order to avoid a government bail out, selling businesses and going cap-in-hand to arab potentates instead, is now well capitalised and safe, having mostly paid off its creditors, who made a significant profit for their risk.

Well done all round – the people taking the risk profit for bailing out a business, which thaks to good management (including from the justifiably well remunerated Bob Diamond) continues to pay tax – income taxes, banking levy, NI, non-reclaimable VAT etc… and didn’t cost the UK tax-payer a penny. If maximising tax revenues, as UK uncut claim to want to do, what is their problem? But corporation tax is, like 28%, innit. Tax avoidance! Waaaaaaa!

Now I don’t need to tell you, this is wrong because, like all banks, Barclays lost enormous amounts of money during the crisis, it is allowed to carry those losses forward, and offset them against future profits, which it is now making. It only paid 9% corporation tax in 2009. I’m not going to crunch the numbers, others have done so, but should this really be surprising anyone with even the faintest idea of how the Tax system in any grown-up country actually works? Barclays is now making profits, largely thanks to the (boo!) investment bank, including the assets of (double boo!) Lehman Bros. which it bought in the fire-sale, and will pay corporation taxes when it’s used up the brought forward losses, just like every other business in the UK.

What do UK Uncut actually want? Are they profoundly stupid, or deeply dishonest?

A misunderstanding of why business works.

Remember the liberal conspiracy whinge a few days ago about Connaught? The bosses were fiddling the figures, which should have been obvious as a consistently profitable company which somehow never seems to have cash-flow anywhere near the reported profits is always a source of worry. RBS (who else?) pulled the plug and the company went into administration.

10,000 jobs of real people doing real things are now at risk.

Well, no they’re not. Morgan Sindall has bought some of the assets, and many of those jobs are now safe. The bosses and shareholders of Connaught, on the other hand have lost a lot, much of the Bonuses were paid in shares. The Chairman and Finance director have both lost shareholdings worth over £1m. No-one can deny that these people at the top of a large, public company were well remunerated, but robber barons they were not.

The financial markets have removed incompetent management and seen the businesses run better and more profitably. The tax-payer owned bank is going to get some of its loans paid back by Morgan Sindall, whose shareholders profit handsomely for picking up troubled assets cheaply (Shares up over 8% this morning). The work will still be done. Incompetent bosses lose out, the rescuer profits. The right people win, and lose.

This capitalist M’larkey sorta works, eh?

“Casino” Banking

There’s an idea, not a new one by any means, doing the rounds that investment banking and retail banking should not done by the same firm because the risky “Casino” bank could pull under a “safe ‘n boring” retail bank, and this is the main objection to Bob Diamond’s promotion from running BarCap to running Barclays PLC. Never mind that Bob Diamond’s business kept Barclays out of the grubby maw of Government – he’s the “Unnacceptable face of the Bonus culture”.

It may seem obvious that investment banking is risky, but the evidence does not back this analysis up at all. Nowhere did investment banking losses pull a retail bank down, or requrire one to take government bail-out money: let’s look at the UK banking sector:

Lloyds TSB: Safe, solvent, straighthforward Retail bank, until it was persuaded to buy HBoS by Economic Jonah, Gordon Brown.
HBoS (Halifax, Bank of Scotland): mainly retail, Large Mortgage Business, which went belly-up and took Lloyds TSB with it too.
Royal Bank of Scotland, very small investment bank, Largest UK retail operation, big Corporate loan book, whose purchase of ING ABN Amro strained its balance sheet to breaking point. It’s failure was hubris, not Investment banking.
HSBC: Universal Bank, large global retail and investment banking operations, now trading at the same shareprice it was before the crisis, and is still paying dividends.
Barclays: Large UK retail bank, overseas operations, buccaneering and ambitious investment bank, who were raised funds from private investors and just managed to keep out of Government hands.
Standard Chartered: International corporate and retail bank, mainly Asia and Africa – no problem at all.
Northern Rock: Ex Building society turned Mortgage and Retail, bailed out by a Labour government because they couldn’t bear to see anyone make money and wanted to save jobs in key marginals.
Bradford & Bingley: See Northern Rock. Eventually bought by Spanish banking group, Santander.

Let’s look at the evidence: Of the two “universal banks” listed in the UK, neither had to touch the UK taxpayer for money. HSBC was able to cope with the crash on it’s own resources and Barclays was able to use its contacts from the investment bank to touch sovereign wealth investors, who have now been paid back. The banks which had got into trouble were either Mortgage banks without a large retail business from which the Mortgages were funded: Northern Rock and Bradford and Bingley, or they were banks who sailed close to the minimum Capital adequacy ratio like Royal Bank of Scotland. Or, like HBoS, Both.

In the USA, the all but Lehman Brothers and Merril Lynch of the Large investment banks survived. Small savings and loans have gone bust all over the place, and only one Universal banks, Citi got into real difficulty, and it was its massive retail operation which pulled it under. The evidence that the “casino” banking is a bigger risk than lending to Joe Sixpack to buy his grotty suburban semi, is just not there, and anyone who uses the phrase “casino” banking can therefore be ignored on any economic subject, unless you take the view that in the economic casino, investment banks are ‘the House’, which is very good, safe and profitable business indeed. But I don’t think this is what ex-Labour MP Vince Cable means by “Casino Banking”.

The fact of the matter is that Governments in the UK, USA and elsewhere have been stoking the money supply for 30 years. They have been encouraging banks to lend “innovatively” to enable “ordinary people” to “get on the housing ladder”, which in practice meant encouraging, or compelling, banks to lend large sums at great multiples of earnings with small deposits to people who were expecting house-price inflation to do the work of paying off the loan. There is a banking phrase to describe these people: “poor credit risks”. Some banks in the UK became dependent on wholesale markets to fund their loan books, and when this dried up, the banks collapsed.

It’s interesting that much maligned buy-to-let investors allowed Paragon, an entirely wholesale financed mortgage business to survive because they lent to good credit risks with big deposits. The old rules of banking still hold. If you’ve a low income, you can’t have a loan, sorry. It’s not the bank’s job to fund a life-style.

The banks that collapsed because the merry-go-round of phantom money could not go on for ever because house-prices couldn’t go up for ever. Eventually the money to fund the bubble was pulled away, and those with unsustainable business models fell over. The proximate cause of this failure was the failure of the wholesale market, but the ultimate cause was a belief, encouraged by politicians for two generations, on both sides of the Atlantic, that the house-market would be a better source of wealth than anything else.

House prices are further away from sustainable multiples of earnings than at any time in history. The Baby-Boomers who own them are going to sell as they’re herded into care homes or move down into bungalows, and their children will fund their retirement buy buying those overpriced assets which will return precicesly nothing over the next decade or more, if we’re lucky. Anyone who thinks they’re going to make money on mortgaged property is a loon.

Which leads us to Banks. They too are not going to make money from lending to people to buy houses that are going to fall in value, so we’d all better get used to bigger deposits and higher rates. Or we can encourage another bubble by forcing the banks to lend to poor credit risks again. Anyone think that’s a good idea? There is no difference, fundamentally, between lending to a person to buy a house and lending to a company to fund its operations. If the bank thinks the company or person is going to struggle to repay, the bank takes action so that it recovers as much of possible of its money. Which is why the left’s whinge about Connaught going bust is just. It makes no difference that it’s “State owned” RBS that did it, Connaught was loss-making with dishonest management, and went bust. It happens, and given that it’s in property services, the market will not improve enough to change things. The truth is that banks were too willing to lend to speculative companies in the good times, and they’re probably a little too risk averse now. No-one said the market’s perfect (just better than economic planning).

So, companies will be denied debt finance. So what options does a good, viable company have when denied bank finance? The other sort of finance: Equity, either private or public, and here investment banks come into their own. If they’re unwilling to lend to you, maybe they will, for a fee find someone who will invest who has a greater risk appetite. That too is a banking service, and there is no reason why Banks shouldn’t do both. And why should retail deposits be invested ONLY in mortgage loan books? Couldn’t banks invest in equity and company debt through an investment banking arm? I thought lefties were against debt and funny money, and liked “investment” in businesses?

The unholy alliance between the left and the ignorant daily-mail right can bleat all it likes about “casino” banking. The truth is that the investment banks did a lot better than both Governments and retail banking during the crisis because of the idiocy of Governments and the Public in buying assets they couldnt’ afford and spending more than they earned. Investment banks like BarCap and Goldman Sachs didn’t do this, and were able to pick up quality assets in the firesale caused by the inevitable crash. And surely spreading risks in different business areas is a good thing?

Punishing the winner looks a lot to me like sour grapes.

It seems that Clegg ran on this today at PMQs, and wants to seperate Retail and Investment banking. Let’s hope grown-ups point out evidence shall we? Too big to fail is too big, it doesn’t matter what businesses they’re in.

Bureacracy Ruins Everything.

I am in the process of registering probate for someone who owns shares registered in Hong Kong. This rather wry post from the White Sun of the Desert talks about registering as a Guest in Russia, and this rather moving post from the delectible Bendy Girl on registering for Disabilty Living Allowance show what bureaucracy does.

Try as I might, I cannot see any benefit to anyone of some of the forms which need to be filled in, the permissions sought, and the time consumed. It is because we have miserably acquiessed to the bureaucrat’s convenience that we meekly tick the boxes and give them the information they want (but often have no need or use for) out of lethargy and habit. The form has become law, almost by accident. Obsessive collecting of data are the mark of the Totalitarian, separating him from the mere despot.

This informs all my dealings with bureaucracy. I am dealing with people who would do ANYTHING if the order came down on the correct form, without thinking of the consequences.

If you have ever sent anything back for being on the wrong form, or demanded that the same information be put on a different piece of paper, then you are evil. It is people like you who saw to it that the Nazi atrocities were carried out, and I despise you.

The Dance of the Dutch Skimmers

For anyone who didn’t hear it last night, I was on Radio 4’s the World Tonight yesterday, talking about BP, though there’s only so much you can get over in 2 minutes!

Right about the time Tony Hayward faced the shakedown from the House Committee, I mentioned the Jones act. This piece of 1920’s pork-barrel protectionism was preventing sophisticated Dutch skimmer ships, 4 of them, apparently with sufficient capacity to clean up 146,000 barrels of oil per day (the flow before the well was capped last night was around 50,000 barrels per day, of which about half was being recovered) from dealing with the Macondo spill because they are not US registered vessels with American (unionised) crews.


In addition, American environmental legislation aims to prevent ANY spill of oil, means the best is the enemy of the good. The skimmers are about 97% efficient, which means as they pump sea water back into the ocean there is a trace of oil left in it. This means anyone taking 100 barrels out of the water and putting back in 3 would be guilty of putting 3 barrels of oil into the water and be fined anywhere between $1,000 and $4,300 per barrel.

Both the ridiculous Jones act and the tight environmental protection legislation which is not designed to cope with desasters could have been eased by presidential fiat and these ships could have been skimming oil from the water BEFORE it reached shore, a week after the blow-out preventer failed. Instead we had dither and delay.

Having technology like the Dutch skimmers should also allow us to feel more comfortable about allowing deepwater drilling. If the skimmers work then it greatly lowers the environmental risks from future oil leaks in deep water. One advantage to deepwater wells is they are typically very far from shore, giving a long response time to clean up the problem. There would be no need to have a moratorium on deepwater drilling and having 50,000 people loose their jobs

Of course, it might not have been incompetence. It may have been a political calculation: Obama cannot defy the unions, who like the Jones act; he cannot defy the environmental lobby and suspend some environmental regulations for expediency; and his party’s left wing (of which he is a part) wants to end Offshore drilling anyway. This is of no political concern to him: Oil Workers don’t tend to vote democrat, and it’s all concentrated in red states, so who gives a shit about the red-necks Appalachian-Americans anyway? The deepwater horizon disaster gave the president an opportunity, and in taking it he revealed himself to be the chippy, left-wing union bitch his detractors always thought him to be. Perhaps he sacrificed the louisianna shoreline to create a stick to beat “big oil”, and pay off some of his backers.

However 3 days before the well was capped the legal changes were made on the quiet and the Ships are now cleaning up oil. It’s a bit late, and smacks of arse-covering.

This isn’t over: whilst for the first time in 3 months, there is no oil floating from the sea-floor in the Gulf of Mexico, but BP are still merely testing the well to see if it will leak under pressure should the valve be turned off. There is just a few feet of rock between the bore and the relief wells. There is still much that could go wrong and capping the well now is and remains a risk – the safe option would be to do nothing to jeapordise the releif well operation, and increasing the pressure in the well certainly doesn’t help. Should the well-head crumble there would be much more than 25,000 barrels a day of oil going into the sea, and almost nothing BP could do about it until they can kill the well hopefully in 3 week’s time.

Of course the economics and politics forced BP to take this calculated risk – $4,300 per barrel (does anyone think BP will get away with anything other than the maximum fine?) and 25,000 barrels per day, that’s $107,500,000 per day or a Billion dollars every 9 days in fines alone. With BP’s partners Mitsui, Anadarko and Moex refusing to pay their share of the cleanup costs, and Halliburton all being allowed to deny any responsibility; as Transocean continues to pay dividends to its shareholders whilst Exxon lies through its teeth saying “of course we would NEVER have done this that way…” BP shoulders the burden of this spill, not entirely of its own making, alone. And nothing the President has done has served to cap the well quicker or keep the black stuff of the Beaches of Louisiana. For Obama read everyone in American politics who is up for election in November. The US media has been hysterical on the issue, and as a result, every politician in the house, 34 of 100 senators and 36 Govenors are all having a “let’s beat up BP” mainly to avoid attack ads “Bob J. Clusterfuck III let BP drill in the Gulf… Don’t vote for him”. Everyone’s just serving his own base politics.

It’s about time BP had some luck. I hope the cap works and this is over (except for the cleanup) by August, and I hope American politicians grow up on November 3 and remember the little thing called the rule of Law.

Labour’s Desperate spin

The Labour line for today is that the Budget deficit is just an excuse for CUTS that Osborne & Co. would have made anyway. The Liberal Democrats are left-flank protection. And in repeating the self-serving lie that cutting expenditure now is “taking money out of the economy” at a point where the “recovery is most fragile” they demonstrate a most profound lack of understanding.

Every pound that the Government borrows, it must borrow from either domestic savers or foreign investors. Every pound borrowed by government is unavailable for lending to business. Every pound taxed is unavailable for private spending or investment. I simplify – at the margins, a bit of extra government borrowing can create demand, but the jury’s out on whether this is possible beyond the automatic stabilisers like unemployment benefits.

So on a superficial level, firing a diversity outreach co-ordinator loses some demand in the economy as one family’s take-home pay falls by £22,000 (the £30,000 these creatures are paid, less the extra benefits he’ll receive once he’s on the rock ‘n roll. This will reduce demand for goods and services and a rapid cut in the public sector wage bill by getting non-jobs off the payroll will be noticed in the short term in the GDP figures. It may even “cause” a double dip in the figures.

But if you’re not a filthy parasite in a non-job, does this “recession” affect you? Not very much, because to offset the demand drop from your local 5-a-day support worker, local businesses find it slightly easier than they otherwise would have to secure finance because the Government has to borrow £22,000 less next year, which will be available to the private sector. The money not raised in taxes is money that can be spent in shops. Whilst the victims of cuts are obvious, by all means protect front-line services. There will not be a need to fire a single nurse, police officer or school teacher because of “cuts” when there are still ‘Healthy Workplace Advisors’ or ‘5-a-day coordinators’ being employed. Even the most cursory google search will reveal that these jobs are not mythical. the beneficiaries are dispersed. And given those “victims” of cuts are some of the most generously remunerated, securely employed, idle, bolshie, people in the country some of whom have been taking massive salaries to do very little worthwhile, it is time the public sector party at our expense was brought to an end.

Finally the benefits system which keeps a boot on the face of the very poorest must be reformed. Withdrawal rates must be improved. Bureacracy must be removed. The insecure border between welfare and work must not present a risk of losing benefits as a reason to not take an insecure first job, because the benefits system does not accept that insecure first jobs flipping burgers can and do lead to more secure and rewarding employment. Maximum benefits must be cut so that people cannot make a comfortable life on the state’s teat.

One by one, the recession caused by the deflating of a US property bubble has leaked through the home-loans companies, into the Banking system and finally into the obscenely profligate governments who were running deficits during the boom. However much they may try to blame the financial woes for Government bankruptcy, the fact the UK’s Labour Government was running a serious deficit in 2007, at the height of the boom reveals the lie.

Labour’s crocodile tears about “their people” as well as revealing the profound corruption at the heart of the Labour project, demonstrates that they will do it all again if they ever get power. They will take your money and give it to their client state of welfare junkies and public-sector union slugs. Labour accuse the Tories of wanting to cut come what may – they’re just reversing what they think: Labour never saw a problem to which ‘tax, borrow and spend’ is not their favoured solution.

As a result of the profligacy, it is necessary to cut as much as possible as quickly as possible from the public sector fat. TO fail to do this is a much bigger risk than the tiny risk of a statistical recession which doesn’t affect the private sector. Just like the recipients of ‘sub-prime’ loans, Governments overreached themselves. Today’s budget is the reckoning for those who have not yet endured their recession.

I’m aright though. I’ve had my recession and it was tough. If you’re in the public sector, enjoy yours!

America is Closed for Business.

What is true for people is also true for the other tax-paying entity, the company. And what Barack Obama has done yesterday, in arbrtiarily confiscating assetts without due process or any form of contract, is to raise the fear of arbritary confiscations from other businesses which may displease the mob in the future. This is contrary to the principles of the rule of Law. This is not a defence of BP, who appear to have been reckless, but no-one thinks they are not already doing everything in their power (they are of course denied some assets for political reasons) to clean up the mess, and they have paid nearly all the claims for compensation they have already received. BP was emphatically NOT shirking its responsibility, and has endured a politically motivated lynch mob mentality orchestrated from the White house. Obama knows what he is doing is illegal and unconstitutional. BP could demand that its contracts are met, that Haliburton and others pay their share, but this would destroy them politically.

The conclusion is clear, whatever Fishermen from Louisiana think, Obama is abusing his office.

The risk of doing business in the USA is already great, and has got much, much worse. Many non-US companies already refuse to have a US shareholder on their books (next time you receive a prospectus, look for the words “not for distribution in the USA” on the front). Thus the capital markets of the world are closing to US interests. Soon internationally minded US companies will start moving their brass plaques from Delaware to London, Frankfurt, Dublin, Dubai, Hong Kong or other more kindly jurisdictions. Americans may not notice this while their domestic capital markets are wide and deep, but they may find their next recession deeper and longer as the once great nation slides back into the protectionism that caused the last depression.

Obama. By pandering to the mob by offering to keep his “boot on the throat” of BP and demanding extra judicial compensation (which WILL be used as a political slush-fund) has become the worst president in American History. And given who he followed, that was always going to be tough. A president of less historical renown (no peace prize for Mr Coolidge), but much greater stature said “the Business of America is Business“.

Not any more.