Calx Europe Blog

The Battle of The Giants

2009-11-12T07:47:00.004Z

It had to happen. One of the outcomes of most recessions is that there are some fearfully large consolidations of big companies - and yesterday saw another big announcement in a market sector that is heating up big time.

Hewlett Packard announced it was acquiring networking company, 3 Com, for around $2.7bn in the same breath as producing better than expected profits on lower sales last year. For those in the industry, this the annual musical chairs time at the computer giant, HP, and many will find that a few more chairs than usual have been whipped away as they keep making sure they are as lean as possible.

Ostensibly, the acquisition is to give HP a footprint in the lucrative Chinese market where 55% of 3 Com's sales come from. However, there are other motives as there have been major moves by networking giant Cisco to move into the server market at the datacentre which is a direct threat to the giants of that market, HP, Dell and Sun. The 3 Com acquisition, in that context, is all about augmenting HP's portfolio of networking switches and infrastructure devices to ensure they have all the pieces of the server, storage and networking products required to maintain their market position as Cisco put their formidable weight into this market.

There is more. Cisco's market play into the server market takes it from its luxurious, high profit network business where it dominates into the grimy and lower margin world of PCs and servers where HP have great skill in thriving. It could be argued that Cisco will find it hard to apply its typical cost models in the server market to be able to compete or make a decent profit. HP's move is certainly a clever defence of their position, although in reality, 3 Com has only a single digit market share in Cisco's core markets and was no longer the big player it used to be. Some analysts feel that companies like Brocade would have been a better buy, but in the great scheme of things, any old company in networking would have done.

HP have learned how to acquire and absorb big companies very quickly. Starting with the huge takeover of Compaq which cost Carly Fiorini her job, they have more recently acquired EDS which almost doubled their workforce. Meanwhile, their arch rivals in the PC and server market, Dell, has been building out its portfolio to compete by adding Equalogic and Perot into its midst making it a much stronger company.

What does this all mean for companies, large and small? Well this period of formidable consolidation will likely increase the massive competition in what is already a highly competitive market for PCs, servers, storage and networking. It is likely to drive prices down further which may be a good thing - but for those companies who sell these products, the decreasing profit margins in selling solutions based around these companies and Microsoft is squeezing the life out of what was a vibrant market to be in. I don't think this will make life much better for them.

It certainly means that Cisco and HP are now toe to toe and head to head in the market. It will be a battle royal to win the loyalty of the customers.

A Sad Demise

2009-11-11T05:55:00.006Z

Would you want to be a shareholder in Lloyds Banking Group right now?

Those who own Lloyds shares will wistfully remember the good times of a steady bank which paid good dividends, made some shrewd acquisitions and maintained a good share price. Theirs were a share renowned for a good long term performance and a company for its sensible management.

Just about a year ago, all that changed. From a peak of £8.20 the shares of the bank dropped to a low of 25p. In the face of the credit crunch, the bank made its most disastrous move in its long history when it made a bid for the beleaguered HBOS, who had been guilty of some of the most reckless corporate lending amongst other sins. As the bank suddenly realised the extent of HBOS' woes and the incredible strain on its own finances as the crunch took hold, it frantically tried to renegotiate the deal and even back out, despite the fact that EU competition rules were temporarily waived to allow the new group to own a whacking 28% of the UK mortgage market.

It was a collision of management incompetence and all consuming greed.

Then in stepped the final bunch of meddlers - the Government. It is widely believed that the PM himself personally intervened at the 11th hour to urge this merger to go through. Incredibly, the handshakes had barely stopped when Lloyds saw the folly of what they had done, tried to mess with the price of the deal and then went cap in hand to the Government to shore up the group's finances in order for the deal to go ahead and for the two companies to survive. As the whole mess unravelled, the taxpayer came to the rescue and took a 43% stake in the new group to stop BOTH banks sinking. The shareholders at Lloyds, after years of content, suddenly saw their investments collapse to virtually nothing.

So here we go again. Today, Lloyds launch the biggest rights issue in history. A further £21bn is required to shore up its capital which is only around £22b now, principally so that it does not have to join the Asset Protection Scheme (APS), the euphemistic name for the financial cesspit where toxic debt is to be parked and underwritten, in full, by the taxpayer - the premiums for which, Lloyds deem too expensive.

It's remarkable. They deem the insurance premium for APS too expensive - less than a year ago, they would have paid anything to be saved. As taxpayers, we should be happy, I suppose. Lloyds was always a dedicated stock market performer, so it would make sense to see it steadily rise again so that our 43% can be sold and returned to us. In the short term we will need to pay a further £4bn as our part of the rights issue so our stake rises but we would all believe it is money well placed?

That's if the management know what they are doing. Remember, the same bunch of individuals, which is a truism of all the management of all banks with the exception of RBS, the Lloyds Chairman and Andy Hornby of HBOS, are running the show. The daft investments they all made are being made again across the board as banks feed on the frenzy of a nicely depreciated market courtesy of the taxpayer. Across the globe, banks are accruing nice bonus pots for their good work and in the Sunday Times, the CEO of Goldman Sachs claims that his bank is doing 'God's work'.

Many economists are now coming to the conclusion that it would have been better and cheaper in the long term to have just guaranteed the deposits of savers, created a central mortgage bank and let the rest go down the swanny with the idiots who took them there with it. We would not be talking about bonuses and reforms now, we would have a new look banking system based around sensible criteria and practice.

I find the fact that genteel Lloyds shareholders having to stump up to pay for the whims of a management that nearly bankrupted the company abhorrent. Further, to pay for the suicidal practices that led to this sad demise of a once great bank, 5,000 staff at Lloyds will have to lose their jobs - people who were not involved in the abysmal decision making that got them to this point. That act alone has been described by unions as 'arrogance' and I agree. At all banks, we see low level staff paying the price while people like Stephen Hester at RBS accrue bonuses equivalent to the salary bill saved - in just one year at the helm of a company propped up by the taxpayer so that he could not possibly fail. Even then, he has us all pay more and been let off around £10bn of debt he owes us - for that he accrues £9.6m.

You could not write a script with such a plot as no one would buy the book - it would have been deemed too far fetched. The problem is that within a year, we will have all forgotten what and how it all happened. We will carry on and allow the whole process of rebuilding the house of cards again, ready for the next gust of ill wind to sink the whole lot.

Monumental hubris and arrogance at the most senior level in the banks, the regulators and the Government are at the witch's cauldron stirring up a foul future for the lot us. They will do nicely though, thanks to the taxpayer.

Lack of Role Models?

2009-11-10T05:15:00.004Z

It is fair to say that young people are sometimes wrongly led by modern role models. In a recent survey, careers at the top of young people's lists are no longer doctor or lawyer but singer or sports star.

I'm not sure how such careers got to the top of the list but certainly there is a growing belief, it seems, that success comes on a plate ala X Factor or scouts just arrive from Premier League clubs at your municipal sports ground. It appears that hard slog is no longer on the agenda - and some would say this a direct result of our 'Can Have' rather than a 'Can Do' culture of materialism and new found affluence, perhaps fuelled by the credit boom years since 1997. I don't know.

So scouring the Sunday Times on the weekend, I came across an article in the Appointments Section which intrigued me. Under a general article on the Law as a career, there was a pull out biography of a Mike Pullen, described as a 'Class Warrior'. Mr. Pullen has no doubt had an extraordinary and hard career, having not attended school until 12 as a fairground child. The rest you can read for yourself but suffice to say he is now at the top of his profession and he advises countries on how to deal with the EU and the World Trade Organisation. He cites that he gets on well with Iraqis as he also comes from a 'tribal society', having not lived in a brick building until he was 26. A great 'rags to riches story', it appears - the stuff of role models.

He claims he fought the class system as his accent was a negative for getting into the City, but he did. Pity for us Welsh too but we each have our cross to bear. Then it all goes belly up as he says, "If you want to be controversial, you would say the most disadvantaged minority is the white working class male. They've no role model, apart from drug dealers and footballers."

There was a bit of 'lawyer speak' up front so that you cannot say it was his real opinion but it is clear that it is by glancing at his background. It's the kind of comment that would appeal to Nick Griffin and the BNP Party - successful white lawyer fought prejudice to get to the top and it is a story tinted with colour. White working class men are at a disadvantage - and they don't even have role models.

I think his comment is both dangerous and laced with racial connotations and is not worthy f a successful person. You only have to look at people Lord Sugar or Sir Philip Green to see how people who come from a working class background can get to the top. I am always moved by the story of Bruce Oldfield who came from a Barnardo's Home to rise to the top of his profession - ah, but he was more advantaged because of his colour? There are many, many stories of not just sports people but business people who have made a great fist of their lives yet came from a working class background - and they would be people of any race, sex, colour, or disability. We might find that most people from a working class background who have made success are white - we may not. I would be more interested to know if coming from a working class background is a disadvantage at all - the opportunities are there for those with the commitment to to better themselves. I would suggest there are sectors of society far worse off than white working class males - if Mr. Pullen wants one great role model, look to Simon Weston. Neither his accent or his horrific burns or lack of education has held him back when any one of those could.

I don't see why white working class males should have a role model who is the same as them in terms of colour of their skin - what has that to do with it? I doubt if Tiger Woods thought about his origins when rising up to become the most brilliant golfer in the world in a sport dominated by white people, nor Arthur Ashe or Barack Obama for that matter but in professional careers and business we can all think of many people who rose to the top from working class backgrounds. Looking across the array of successful business or legal people, I suspect that there is a whole array of stories of hardship to get to the top, and it would have involved all sorts of race, sex and disability stories to go with it.

I come from a working class area although my father, a man with no degree, worked his way up from a working class background to become a highly rated professional in the oil business that gave me an advantage in life that I was very grateful for. He was always my role model because he worked hard for what he got and he developed skills and expertise of his own to become an invaluable commodity to his company, BP. It killed him in the end but that is a different story.

It also taught me that you may think you are disadvantaged in life but if all you do is wallow in your situation then it is highly likely that you will stay there. In my final year at college, I was the only graduate in my class who had got a job before my course ended. There was a good reason for that as we were in the turmoil of miner's and steel strikes - the same time as Mike Pullen was graduating the 'University of Life' - I applied to 72 companies, got 55 first interviews, made 23 second interviews and got offered two jobs. I went to work for Hewlett Packard, about who I had no idea when I applied, and the interviews were with real managers who were looking for something different in what was then, and now, a company that held talent in high regard rather than looked at your home background. My accent or background never held me back.

I think Mike Pullen is doing himself a disservice but he is definitely doing a disservice to others. I fail to resonate with his point and I think it is remark savoured by the wrong sort of people and serves as little inspiration to any working class person let alone white males. It is the kind of remark that is at the heart of the BNP's illogical ideal - if you are a white working class male, blame everyone else for your plight except yourself as you are disadvantaged.

How you better yourself has plenty to do with race, colour, age and disability and Britain has a track record of prejudice in all those areas. But to say that white people are discriminated against in Britain is worthy of the BNP only and it's why it is representative of the 'blame culture' that is growing in our society.

We are in a modern world and opportunities to grow ourselves abound. Mike Pullen could be a role model but he didn't have to be white to be one. If he wants to see what disadvantage is all about, take a trip to Africa and see at first hand. His eyes may just get opened.

"Succeed or Fail Together"

2009-11-09T05:53:00.004Z

Is it me or does Bob Ainsworth, our Defence Secretary, sound like Mr. Gumby of Monty Python fame?

He is some card - in the face of claims of letting of troops down in Afghanistan, he claims numbers have gone up to nearly 9,000 and an extra 500 are pledged if certain conditions are met. It is not clear what those conditions may be - the weather perhaps or when Mr. Ainsworth's new TV turns up - but there are conditions. Most likely the biggest condition is to see if the US puts in a further 40,000 troops - a ratio of 50:1.

Meanwhile, while Lord Foulkes has sniped away at discrediting the Armed Forces commanders by calling them disloyal because they speak up for the troops they command, having had no experience of either armed forces or war himself, now the PM has said that "we will succeed or fail together".

Talk of failure was not what the troops had in mind when they are already questioning the Government's commitment to them and the war they are fighting - pledging that £1bn has been spent on armoured vehicles since 2006 is cold comfort when roadside bombs continually blow them to pieces. While Lord Mandelson wheels his shopping cart around buying things for the armed forces, allegedly, it may be an idea to have a Minister for War who is isn't play acting for the public and is dedicated to the cause - and perhaps someone should tell Mandelson who won't find arms in Tesco. It may also help if those in charge of re-equipping our troops are not nine to five Civil Servants in the Ministry of Defence but armed forces personnel working war hours.

What is clear is that whatever the strategic objectives of the entire campaign are, we risk failure they way we are going about it now. Further, it appears the Taliban are getting stronger, we have supported a corrupt 'democratic' Government and the heroin supply has gone up despite all those pledges 8 years ago. Laissez faire Government has been the hallmark of the last 12 years and we have lost more lives in service in this year since the Falklands conflict 27 years ago for which Thatcher got roundly vilified for. Limbless heroes break our hearts but over 90 have died this year alone. And finally, the PM cannot even spell a soldier's name right when writing to the bereaved family.

I watched a program called the Somme on Saturday night - it should be compulsory viewing for ministers who think they now how to run a war because politics and war don't mix.

Our brave troops deserve more than this.

Litigious Britain?

2009-11-08T14:43:00.004Z

They say we are becoming a litigious society.

Perhaps the scandal of MP Expenses and daft Government policies would suggest we are not litigious enough. Between the Iraq and Afghanistan wars, where it is clear we are sending troops into dangerous situations without adequate numbers, armour and transport, a few hundred have lost their lives while we do not even get a sense of how many have been maimed, badly injured, wounded and psychologically affected by the wars. Already it is legally dubious under UN rules that we ever should have invaded Iraq while our participation in abetting torture of those captured has put our leadership into the spotlight but no one seems to have the guts to challenge them legally.

On top of this we hear that slack immigration rules as reported in the Sunday Times has meant that we have almost certainly allowed in potentially dangerous people into Britain without proper checks. It could be a ticking clock as to the next homeland atrocity but would the Immigration Service and the Government be legally culpable for negligence?

This week we also learned that last year over 39,000 serious assault offences which would normally carry up to 5 years in prison for the offenders, if found guilty, have been allowed to go by with mere cautions - no wonder the crime figures seem so low. What if the next victim of one of those cautions is not so lucky to be seriously injured or even killed by lapse rules and target-led policing?

I am not one for a litigious society but some policies are just barmy and are asking for trouble. Perhaps ministers should be exposed to the power of the law for their most stupid of mistakes that leave people in direct danger?

A Dark Cloud Gathers

2009-11-06T12:41:00.003Z

The news that personal insolvencies are up 28% is not a good sign that we are emerging from recession. While the rate of unemployment slowed last month, it still actually rose.

Many people talk about upturns and green shoots of recovery, but at the business coalface, some businesses are only now trimming their cloth after trying to grin and bear the recession. BA have just increased the number of layoffs planned and many of the High Street banks are culling serious numbers in staff despite making very high paper profits.

But perhaps the worst news is that as we exit the recession, hopefully in the next quarter, some of the Government initiatives are due to expire. At the consumer end, VAT is set to return to 17.5%, and there are rumours even of a hike. Meanwhile, for those businesses who have taken up the HMRC's offer to defer their corporation tax payments, pretty soon the calls will come to get those tax bills paid.

Far worse for businesses, much more than not making profits even, is the starvation of cash. It is, indeed, king - the fuel of any business. No bank will lend just to pay tax bills - it's money straight down a drain in their eyes and it is an act of desperation to ask for it. Many small businesses, in particular, will be fearing a call from the HMRC in the early new year. HMRC are notoriously rigorous about their follow up and not very forgiving. Now that the temporary arrangements are over, they will apply all pressure to get payments in. In fact, the tax coffers are so strained at the moment, that the Government is experiencing sharp shortfalls in revenue and this is a contributory factor.

Some suggest that as we come out of recession, there will be a new wave of company insolvencies as the demand comes to settle their tax bills. It may mean a re-invigoration of the rate of growth in unemployment - possibly around election time.

It needs an initiative right now.

Oh Willie, You're Not So Fine

2009-11-06T08:01:00.005Z

Oh dear. In a week where the union, Unite, launched a legal action against BA in order to try and stop the imposition of new contracts, the news has just got worse.

Far worse.

BA's results to the end of September showed a £292m loss - far greater than had been predicted by most analysts. Revenue was unsurprisingly down by 13.7% and Willie Walsh, BA's clueless CEO, could only forlornly point to the fact that there is a recession on - a real 'no sh*t Sherlock' moment. Lord Sugar would surely have slapped him about the face for saying so, not least as Ryan Air had only released their figures a week before with excellent profits buoyed by a 40% decrease in fuel costs over the same period.

If that was factored into BA's results as well, it makes these results not just grim but catastrophic.

Confidence in the airline was not helped in the period as Walsh himself was involved in the high profile launch of what many believe to be a 'white elephant' new all-business class service between London's City Airport and New York, carrying just 32 passengers and stopping in Ireland on the way to refuel. Given much of BA's woes have stemmed from a dramatic decline in business class sales on other services, this seemed like either monumental madness or callous hubris in the face of the sacrifices made by staff in a desperate bid to save costs. It just seems a huge waste of money on a service almost certain to make a loss in the short and medium term - if ever - given two previous attempts to have a business class only service went belly up in happier times about a year ago and at least they had more passenger capacity and flew non-stop to their destinations.

I really am stumped over BA's strategy. They continue to just try to reduce costs and do the same thing when the industry has moved on. They are caught between offering premium services but trying to compete at the budget end and are failing at both.

I also find it hard to believe that shareholders grimly keep the faith with a CEO who is so clearly out of his depth, obsessed with using his dwindling funds to buy another struggling airline, Iberian, as his last, desperate and hopeless fling of the dice.

He really needs a strategy that hangs together before he spends so much wasteful money. At this rate he needs to horde as much as he can as BA is going nowhere fast.

Enterperise Biz-Tsar

2009-11-05T14:22:00.006Z

It's good to know that our Enterprise Tsar, Lord Sugar, is there batting for all us small businessmen in his role to advise the Government on such matters that affect us.

His professional and positive approach was to explete vehemently with his back to the camera when asked, at an Exhibition on How To Survive a Recession, what did he advise for businesses in the recession. He then came back to the camera, visibly upset, to say we should stop talking about a recession as there is not one. Despite the fact his own Government's figures tell us that, in fact, we are still in one.

During his speech in Cambridge he was critical of small businessmen who 'whinged' and implored they should get on and 'adapt'.

While his bull faced staring down of the recession is a positive and bold attitude, calling small businessmen whingers in the face of their pleas to be heard by the Government was not exactly what people wanted to hear - except those who could afford to be at the exhibition. Once again, it is worth reminding ourselves, Lord Sugar and the Government that small businesses represent 97% of all the companies in Britain and employ 13m people, paying a disproportionate amount of tax into the coffers via Corporation and PAYE tax. In the scheme of the vast stimulus packages wasted on the financial system, the amount of credit to such businesses has been reduced by nearly £15bn this year. It is not even a small crumb of comfort that interest rates have been again pegged at 0.5% and QE has been increased by £25bn when most of that aid does not flow into the economy at large.

It would help if an Enterprise Tsar stopped representing his own views and values and understand how this recession is affecting small businesses, many of whom will not survive this year and have contributed disproportionally to the rising figure on unemployment.

To take just one example from the weekend's papers. Small, independent shop owners have gone to the wall at an alarming rate this year while huge supermarkets announce growing profits and sales - over 500,000 have lost their jobs in that sector alone and some 12,000 businesses have failed. Tesco, Waitrose and even Marks & Spencer, meanwhile, have thrived.

Perhaps Lord Sugar should down into the detail and look at which businesses have been favoured in the stimulus strategy. No doubt, companies like Viglen, which he owns, have benefited nicely from increased Government spend in the schools sector.

For a man who is normally well at ease when he has plenty of script to work with in front of the cameras, he was pretty poor when asked about his supposed specialist subject ad hoc.

The Patient is Not Responding - Hit Him Again

2009-11-05T08:57:00.005Z

The operating theatre euphoria dies down as the man in the white coat and thick glasses points at the bank of monitors and speaks in a weak voice.

“Em, I said it looks as if the patient’s recovery has faltered,” said Dr. King in a frail voice. L. Ron Mandelson gave him a look of pure evil. The rest of the team looked down at the patient, a Mr. British Economy, who had looked as if he was recovering from his massive open heart surgery in the wake of a severe heart attack suffered due to incredible over indulgence.

“But I thought the surgery went well,” stammered Nurse Darling. "All the other people operated on from France, Germany, Japan and USA have recovered while the Italian one is getting better despite being fatter and with all that plastic surgery that he had too."

“The expensive sticky plaster is holding the heart in place nicely, indeed,” remarked a man in an expensive suit, a Dr. I. Banker. “The vital signs have wained but a new boost of intravenous QE should sort it out. Get another bag.”

“Hold on,” said Dr. King. “That’s bloody expensive stuff you know – we’ve put in £175bn so far. We are not made of money, you know.”

“To my mind, you are,” replied I. Banker tersely. He gave L. Ron Mandelson a nod. He smiled back and turned to King and twisted his ear.

In the corner, a man with manic look on his face was putting weights on a rubber band scale which was connected to a speaker which made an annoying ‘weee, pop’ noise.

“Who is that idiot making that noise,” asked Professor Brown.

“That’s Dr. Sants,” replied and adviser. “He’s besotted with his new Stress-Testing Machine. I’ll tell him to stop.”

“Tell his boss to tell him,” snapped Prof. Brown.

“Erm, he is the one in the corner tied to a chair and gagged, sir. The one with the notice saying ‘Loony’ around his neck at the request of Dr. Banker, sir.”

A lady shuffled forward. “Before you put that bag of QE on the drip, I would like to point out that the last lot of QE had no effect. In fact I think it isn’t getting into the patient at all but it’s been diverted by another tube into this drain which says ‘Financial System’.” Whoever she was, L. Ron Mandelson cuffed her on the head and told security to remove her.

“I wouldn’t give the patient QE, try cannabis,” said a man. L. Ron Mandelson immediately cuffed the man on the head and had Porter Johnson remove him.

“I don’t pay you to advise, Nutt,” remarked Johnson. “ I pay you to toe the line.”

“You don’t pay me at all,” remarked the man.

“Precisely my point, Nutt” hissed Johnson as he threw him out.

“Right,” said Dr. Banker. “All agreed?”

Everyone looked at one another before L. Ron Mandelson dug his elbow into Prof. Brown’s ribs with some venom.

“Ow,” screeched Prof. Brown. “Yes, yes, of course, all agreed.”

“Good,” said Banker. “I’ll add that to our fees and £25bn extra QE via drip please, Nurse.”

“Wait, wait,” interjected Nurse Darling excitedly. “What about that idea of the Government being a Hedge Fund and buying further into our hopeless banks. It sounds as if everything is just going down the toilet.”

“Trust me,” replied Banker. “I know what I’m doing - as if I would ever lose you billions? You don’t think you pay all those fees for nothing, do you? Just buy the shares and put the QE in and stop asking irrelevant questions. "

It's Management, Stupid!

2009-11-04T05:43:00.004Z

I have always believed that banking has been stocked with poor managers - I don't mean retail banking but the stuff where they make the profits and blow them. Regularly.

This is not a new phenomenon. Indeed, Gordon Brown has always labelled the Conservatives as 'Boom and Bust' merchants and that description was largely attributed to their cycles driven by investment banks making big profits and then blowing them in relatively short order. Nicholas Taleb contests that banks only ever really make money out of loans, mortgages and other products to businesses and people - all the other profits they make they surrender.

While the above statements are not entirely accurate, banking is one of the few industries where an incredible focus goes on making money with money to lavish huge rewards and then as busts come, they simply surrender the profits, make a ton of backroom people redundant and then carry on as if nothing has happened. Why would you run a business to do that?

This particular cycle, although a massive crisis around the world that has taken more then just surrendering profits to resolve, is not different. At the core of it is not just the bonus culture, it is not even the derivative type products that can be so destructive, it is not even that the financial system has its own in-built self-destruct or that many of the products are for banks alone to play with - all of which are highly toxic when mixed together. Nope, you can survive all these things so long as you have decent management - and that has always been what was missing.

If we drove our car recklessly and crashed it as a result, we would tend to learn our lesson and so not do it again. But there are those in life who actually thrive on the risk of crashes and love the sensation of speed. Normally, such people would try their hand at racing cars and exercise their urge at purpose made circuits where their activities are well managed and the dangers are minimised. But there are those who insist on continuing their hobby on our roads - they are a huge danger not just to themselves but to us all. Their activities can damage our cars or even hurt us. In extreme, they can kill.

In all cases, these people can, at some point, do it again. Unless, that is, we make them drive slower. We can put cameras and signs up, put bumps in the road or more traffic lights but ultimately if they want to speed, they will. The only real way to slow them down is to make their cars slower.

This analogy is like management. Managers will be reckless if left in an environment where there are few controls, all of which can be ignored if not enforced rigorously. Even the threat of transgression fuels the urge. Not until the business is modified so it cannot do the dangerous things, will managers stop doing them. In banking, this is precisely the issue. They are driving fast cars on our roads and they can kill. Unless we make them modify their cars, they will kill just as they have done in the last year.

The heart of the issue is not the free availability of fuel (money), it is not the way they transact business (the roads), it is not they way they drive (their bonus culture) - it is the cars they use. Give them lesser cars and they can only drive slower.

This will take a different type of manager.

The management of banks, having suffered their reprimands having caused untold damage have clambered straight back in and they are driving just as, or even faster than, before.

Henry Mintzberg, Professor of Management at McGill University, has an interview in this month's Director Magazine. It augments exactly the point I make.

Is the Worst Over?

2009-11-03T14:13:00.003Z

You really can do without a patronising person looking down their nose at you telling us we are all idiots. But on Radio Five Live this morning we got just that with Barbara Knight of th British Bankers Association (BBA), as she droned on like a very disinterested mimic of Margaret Thatcher.

She epitomises the attitude of the finance industry that has got us into this mess - the attitude of don't focus on the losses as they were 'extraordinary' (a word she used a lot) but to focus on the profit. She pointed us at sub-prime as being the root cause of the crisis when it is patently obvious that any one part of a high risk house of cards that is the financial system could have brought it down. She seems to think that had Governments not stepped in, many banks would have survived which is not true as the whole mess is so inter-related that each part affects another and even vice versa.

Meanwhile, a chap called Kaiser who presents a show called the Oracle, laughed at the stupidity of the way we have piled so much money, and more again yesterday, into a broken system when he believes we still have more bad news to come on debt write offs. In fact, he argued that far more of the bailout money should have gone on saving jobs which has been a theme of mine having seen how Germany and France and have directed their cash and are out of recession now.

The words of Brown saying how he always called the right shots look ever more deluded as we continue to pour money into a system that is happy to absorb it for its monumental and colossal losses. How we have let these bankers get away with it and how they can live with themselves in taking bonuses is beyond most decent people.

Finally, it seems that RBS executives are doing us some sort of favour by deferring their bonus as I predicted they would - until 2012. The question is, for what should we reward them when they have just got the taxpayer to write off a further £10bn of debt they no longer have to pay? And where is this mythical talent Knight says we should be paying top dollar for when the same priceless idiots lost so much in the last year? The whole finance industry needs a shot of cold reality.

We need a radical change at the top in this country as it is costing us our future.

Fighting For Democracy

2009-11-02T20:46:00.003Z

Gordon Brown was one of the first to congratulate Hamid Karzai for his 'walkover' win of a second term as President of Afghanistan as the only candidate withdrew, knowing he endangered the lives of his threatened citizens if he continued.

I am sure there will be celebrations at Barracks all over the country to see this great piece of democracy that so many brave people have died for.

It's not worth writing any more on the subject but the whole election was a fiasco and rigged - now we have the culprit back in power to run the corrupt regime again.

As we learn of the death of another brave British soldier killed on the last day of his tour of duty by a roadside bomb he was defusing, it was predictable and cynical that our PM phoned his congratulations to Karzai than call the wife of Olaf Smit to console her.

We are all very proud of men like Olaf and all those who have died or been injured in the line of duty in Afghanistan and Iraq - today was a body blow to their fight for us, on top of the controversy about whether they are adequately supported in terms of kit, transport and reservists.

Bring them home, now.

What a Great Deal?!

2009-11-02T20:22:00.005Z

You couldn't make it up but I suppose it's to be expected.

Today, our prize investment, RBS, having just got the details of the extra £30bn we are pumping into it, has announced it is shedding around 4,000 jobs.

It makes you stop and think. Recently, there was a lot of controversy in that RBS' investment bankers will be getting fat bonuses this year and, indeed, their CEO, Stephen Hester, is in line for a £9.6m. They may get some deferred but that will really sit well with the 4,000 who will pay for them. In fact, around 16,000 jobs have already been shed from the back room, branches and other places - the sort of jobs that the expensive adverts on TV about NatWest and their push for more personal banking might be lead us to believe have not gone.

4,000 jobs and let's say the average salary is £30,000 per annum - that would be £120m off the wage bill this year. That will probably be less money saved than the bonus bill.

But it gets better. 700 branches of British banks will be sold to other companies in the fire sale of the decade as the EU rules that banks that got state aid must split. Private Equity houses and foreign banks will love this as they will buy already stripped down versions of the banks branches with redundancies already paid for by the taxpayer and because so many branches will be up for grabs they will be sold at rock bottom prices, once again leaving the taxpayer with the mired end of the stick.

It gets better than that. Having given away the jewels of the banking industry cheap and subsidised by us, they will be precisely the same buildings, staff and products as before just owned by someone else who will reap the profit on our loans and mortgages rather than us at least contributing to the value of our 'investments', i.e. the banks we saved. We are told it will promote competition - sure it will. Why would anyone buy the banks and then trash the price when there is so much cash and profit to be made? Prices will remain the same, believe me.

And is it good that Tesco buys into a bank? They squeeze the living daylights out of suppliers and only pass on part of the savings to customers which makes them ever more profitable. We are handing them a cash business to make them more money. Meanwhile, Virgin must be laughing as they offered to buy Northern Rock when no one else would and when it was leaching money - now they get to buy the cleaned up good part at a knock down price with a great deal more advantageous loans from the Government to lend at a large profit.

Alistair Darling kept a straight face as he announced all this. He didn't want to let on that we have all just been right royally shafted. The smiles will come later.

The Recruitment Industry Is Broken

2009-11-02T14:36:00.006Z

Recently, on announcing sharply decreased profits, the CEO of high end recruiter, Heidrick & Struggles (H&S), L. Kevin Kelly, dourly warned that the recruitment industry's 55 year old business model was broken.

Citing the growth in DIY recruiting tools now available to firms and the waves of online search facilities at companies like LinkedIn, there is no doubt that there is a huge squeeze at the mid-market and low end. Finding candidates is no longer hard and the best value recruiters can be is an external sifting resource on generally available candidate information rather than having CV repositories as in the past. It certainly means that the age-old James Caan mantra of 30% of the first year remuneration as a fee per hired candidate is no longer a viable structure in this market and, as the recession bites, companies have not only reined back on recruiting activities but are now shopping around a great deal more.

It was inevitable really - recruiting in its regular form has had a good run for the money and the money has been exceptionally good. Even at the high end where H&S headhunt highly remunerated Board positions the market is also experiencing an erosion of fees as web based matchmaking services come onto the market to compete at much lower prices. H&S is a super, debt free and cash rich company and can survive but it now sees its future in a radically changed market model. In the past, search has yielded around 90% of its fees - in the future it will shrink to only 50% while 40% will be taken up by executive retention and coaching services, another 10% on tools to support this. For this to change, H&S is actively seeking acquisitions with its $183m cash war chest.

That sounds fine for companies like H&S but for smaller players, heavily exposed to the contingency recruiting market, this is impractical. Few have the cash resources to acquire such services and skills while many are still clinging desperately to an increasingly valueless model. There is no way companies will pay 15-30% of first year remuneration for a few clicks of a mouse and a first interview at best. Few recruiters have 'skin in the game' like performance linked fees and few come from the industry they are recruiting into, let alone have done the roles of the people they are identifying as talent.

Value is the key to the future for recruiters or volume, and the latter means more streamlined, web based service. Clients in the industry haven't helped the process with many driving the value out of recruiting by hammering on fees to the extent of running web based reverse auctions for volume placements. The whole recruiting industry is being squeezed from both ends in a market in recession. With the credit crunch to boot, it has been the 'Perfect Storm' and many recruiters who have suffered badly may never regain the lost ground as the market must change to deliver greater value to clients.

Companies like H&S are moving in the right direction when it comes to their high end market. But for mid to low end salary ranged specialists, life will get ever tougher as they are at most risk by the low cost, high volume models from the web. Even James Caan's golden touch has tarnished as his latest investment has struggled badly and only the agents in the City have done well recently.

There is a desperate need for a daring change in the business proposition and model in the recruitment industry that needs to resonate with clients and deliver real value. The days of large contingency fees for a few hours work are long over. Who will deliver the new model? Will clients respond?

The next year is crucial to the recruitment industry.

Anthony Holmes - Management Idiot?

2009-11-01T19:37:00.004Z

According to his biography in today's Sunday Times Appointments Section on page 6, Anthony Holmes describes himself as an international corporate turnaround specialist and transitional leadership expert. Sounds good.

His article is about the Postal Strike and situation at the Royal Mail asserts how a leader is required and not a manager. It is his opinion that Winston Churchill would be the ideal man for the job to solve the current stand off between Union and management as his wartime 'quintessential leadership' would help take the situation by the scruff of its neck.

Anthony Holmes is no doubt an intelligent man but Churchill, while indisputably a fantastic wartime leader who led Britain to survival and victory at our direst hour, had previous form when it came to strikes.

Churchill solved the General Strike by sending in troops - an action that arguably strengthened the resolve of workers and unions in Britain for the best part of 90 years. His actions were despised so greatly that someone as mild as my grandmother could not speak his name without invoking the dire days of his methods to solve the strikes which profoundly affected the people in South Wales in particular. It even tarnished his undoubted genius of wartime leadership in her humble eyes.

If Holmes had bothered to look into Churchill's past, he would have realised that Churchill would have had only one method of solving the stand off - to send in troops to break the strike and force the workers to accept whatever their fate was deemed to be by a truly incompetent and overpaid management. What a super idea that would be.

Perhaps those employing Mr. Holmes for his specialism and expertise aren't actually too worried about his experience, qualifications, knowledge of his subject or historical characters. Like Ron Sandler, his price is reassuringly expensive enough to not ask questions.

Air Shots

2009-11-01T08:11:00.004Z

Some while ago I blogged on how many golfers, when faced with an immovable object like a tree blocking their route to the green, will choose to hit through the tree rather than round it in the vain hope that there is more clear space than branch to be hit.

I argued that the reality is that by using a club of a specific loft and length you actually narrow the area of tree you are aiming at and in that 'corridor' of the shot you actually increase not decrease your chances of hitting branches as you increase the amount of space occupied by the branches in the corridor with respect to the total available space in that corridor. When you think about it, you are taking the very randomness of the tree's branch arrangement out of the equation by hitting at it. The logical course of action would be to take the tree completely out of the equation and go around it using two shots rather than risk wasting shots.

I would argue this is precisely what happened on Quantitative Easing (QE) by the Government. In piling a ton of cash at a problem, they viewed the financial crisis as a tree blocking their way to rescue. Their logic was that if you pile so much money at the problem some of it has to get through. But that was the wrong assumption as banks needed an extraordinarily large amount of money to shore up their huge lending gaps - RBS' alone was £161bn and the total QE to date has been £175bn.

What has happened is that the QE has been horded by the banks as free new money which they use to play casino banking or just keep. Very little of it has got into the wider circulation as the recent M4 figures on money supply has shown. In fact, the money measure M4 decreased despite QE.

This was the equivalent of a golfer hitting a ball directly at the tree and hoping they hit a gap to get through. If only someone had stopped and thought what the real cause of the banking crisis was then QE would not have been the best measure to deal with it or at least they could have thought of a better way to introduce it. In fact, by buying bonds in our own debt, they played right into the hands of the very banks that caused the entire problem who had been commanded by the Government and FSA to do precisely what QE allowed them to do - increase their capital to lending ratios without lifting a finger.

In hindsight it was obvious but it has been the modus operandi of the Government in this whole crisis. They have paid millions for duff advice from bankers and think they did the right thing. Now all the real measures of our economy like GDP and money supply show that what they did was either wrong or wrongly executed. You cannot argue with the figures, our management of the crisis was sheer panic measures.

Now we have the great bank sell off bonanza to come. The proposal is that new high street banks will be created in the new market conditions free of encumbrances. Investors are going to have a field day as we split profitable businesses from bad ones and sell them off nice and cheap and just watch how much profit foreign and private investors will make on our business. You can feel exactly what will happen and a few years down the line we will find every single one of our High Street chains of banks will be owned by foreign companies profiting out of our mortgages and lending needs.

You don't believe me? Our utilities have already gone that way in water and power, many High St banks are foreign owned already like Alliance & Leicester, Abbey, HSBC and the Royal Mail will be sold to a foreign company. In each case, the dirty end of the stick will be held by tax payers as we pay the profits of our mortgages to foreign companies.

You could not invent a better strategy to waste tax payers money by constantly leaving them with the bills while the profitable bits of the businesses they bought are sold off. But that is the key to the Government plan - the taxpayer is there to fund the rubbish.

As a quick for instance, the good part of Northern Rock will be sold for £1bn and we will still be owed £27bn when that happens plus the liabilities. Great deal, eh? Just watch the rest of them.

Meanwhile, us would-be golfers have learnt our lesson - it's better to hit round the tree than at it.

'At Every Point, We got it Right'

2009-10-31T07:29:00.007Z

Gordon Brown must prepare for bed each night mumbling this simple mantra to himself and perhaps he sleeps with one of those nighttime self-help tapes playing the same message from under his pillow. That way when he wakes up each day he has actually convinced himself that what he has done in the face of the economic obvious has been right.

It must come as some surprise then that despite all his evening preparations that the reality each morning is somewhat different. I mean, take away the spiteful snapping terriers in the other Parties who constantly fail to appreciate his economic genius, there are those daft sets of figures that just doggedly won't seem to tell the truth.

This week has been yet another bad one in a long succession but the news that Britain still wallows in contracting quarters GDP-wise was bad enough, then there was the news that Italy's economy is now bigger than ours while they are also set to announce the end of their recession, then Brown's good mate, Barack Whatsisname, has prevailed over a US economy that did not just emerge from recession but actually grew at a very acceptable 0.9%.

Britain remains in the dunce's corner.

The saving grace is that no one seems to think that the policies followed by our Government were wrong. From the day Northern Rock was saved, Brown seems to think every subsequent event was met with the right action and that Britain benefited for it. And guess what, it seems the public have agreed. True, there are those annoying issues like bankers earning stunning bonuses having caused the whole crash and the Postal Workers seem to defy all best advice to surrender their jobs, but on the whole the disaster of The Sun not supporting Labour has been averted and Britain believes Brown is the best man in a crisis.

Well that's what the tapes say.

What perhaps was not part of the script was that this week Brown had to go to Europe and start campaigning for Tony Blair to be EU President when patently he would prefer to sit in a bath of hungry piranhas with bovril smeared on his private parts. That was certainly not part of any script but it is the price you pay when you have been 'rescued' by Peter Mandelson. It's almost as bad as having to repay £12,500 on expenses for dry cleaning and such while McNulty, Smith, Blears et al get away scot free in the expense bonanza affair for selling houses.

That's the trouble with reality - it tends to be, err, reality. We could all like to keep saying the same things over and again to our bosses about how well we have done and how things are just around the corner, but there is no arguing with reality. If you do your job badly, reality says that the outcome is rubbish. For all the PM's self-help mantras and tapes, the fact remains that our economic position was nothing like how he described and has not responded to the stimulus he gave it afterwards.

Quantitative Easing (QE) is a classic example. The economic patient lay critically ill on the bed and intravenously money was fed in. Sadly it never got to the vein as an unforeseen valve led the money away to different bank vaults who have just used the money to go play 'casino banking' again and shore up their balance sheets as the FSA wanted them to do while hardly any of it has got into the real world where it was needed. Indeed, this week the Broad Money supply called M4 showed that the amount of money in the country is falling, showing QE has effectively gone down a drain. It has propped up our Government Debt market and that could be equally dangerous when the whole thing finally ends before we descend into being a banana republic.

Our real stimulus money for the wider economy was VAT decrease and scrappage plus a few minor things. Loan Guarantees are a mess because the Government has used the same criteria to lend as banks and the decisions still lie with banks anyway. Reams of form filling and economic data has meant many businesses have just given up on it. Oh, numbers look fine with some 200,000 businesses allegedly going for it but again reality says it was banks just getting the Government to underwrite existing debt - nice fiddle.

Meanwhile Toxic Debt has been the biggest winner. Thanks to our loans, guarantees, insurance and capital, banks have been able to write down debt positions to the point where it all looks cheap again. Guess what? Reality bites and all the banks are making hay by trading in them once more and bonuses are up again.

Our whole strategy was to save the banks and that's what we have done making rich people richer on the back of their failure. The rest of the country has suffered. Meanwhile heroes in Afghanistan die as we equip them poorly while fighting our wars, don't give them enough of the right transport and propose to send untrained reservists.

It's a script you could have been hard pushed to write as it was so patently wrong. Yet that's what happened and our PM still claims he was right. Despite the 47% rise in coffee houses in Britain in the last year, he still can't smell any.

Perhaps the whiff of Government Bull is too overpowering.

'It's A Way of Life'

2009-10-29T08:18:00.006Z

'Victoria, it's a way of life'. Such was the plaintive yet patronising plea of MP, Margaret Beckett, in the face of the new regulations on MP Expenses. The poor lady has employed her own husband, Leo, since 1983 as per 'Personal Assistant' and she believes the new reforms stopping such arrangements will make potential MPs think twice about becoming one.

As I sat in the car, I expleted gently to myself on hearing the interview. Beckett is one of the Ministers responsible for bringing forward many of the new laws on employment in this country that has taken away a great deal of the power of an employer to choose staff according to its own needs. True, there needs to be greater transparency in employee selection and there needs to be a level playing field when it comes to race, sex and disability - I think all employers would agree with that, but much of the law is now getting far too onerous.

So why should MPs be exempt from their own laws?

The whole MP Expenses saga has revolved around this issue from the start, quite apart from them all feeding from a trough. Now we have Beckett trying to justify that the job of an MP is more than just any old career, it is a way of life. It made me cringe as 3 times in the last 20 working days I have got up at 3.45am to catch the first flight at 6.00am from Heathrow and in September I spent just 3 nights at home during the available working days.

I, as is Beckett and are all MPS, am in the upper quartile in terms of salary in this country, and it is implicit, if not explicit, that working hard is part of the territory and you have to make choices in terms of the balance you want in your life. You want to be in that earnings bracket, then working hard, long hours and being away from home goes with the territory. If you want a 9 to 5 job and no calls over the weekend, then choose something else. No one will think any the less of you for doing so and I respect all that do.

In doing this 'Way of Life' job that I have, if I were to employ an assistant I would have to show I have advertised the opportunity and given a fair chance to all people who apply against the criteria for the job I have mandated. I cannot just go and employ my wife to be that assistant without due process - that is the law these very people have created, and I actually think that is a good law. My wife would argue very strongly that I have chosen this 'Way of Life' and it is hard on us both sometimes but that is what we have chosen and we may have gripes but we would not choose another way to have our standard of living.

Then we get the issue around Capital Gains Tax (CGT) for MPs. Sir Christopher Kelly's recommendations have gone into territory that Legg refused to go and the Members Estimates Committee (MEC), chaired by Harriet 'Goody Two Shoes' Harman told him not to and that is into the issue of second homes. Kelly says that MPs should not be able to claim mortgage interest payments and should only claim for rented accommodation. There is an uproar about it already.

Just think about it. You come to Westminster with about every expense you could want paid for by the taxpayer. So you buy a home in London and watch the value rise as taxpayers' fund that home for you - not just the interest but the decorating, renovations, maintenance, cleaning, gardening, the TV, the meals your dry cleaning - every dam thing. Then, at your leisure, and as often as you want, you can sell that home, even buy others and sell them, as many times in a period as you like, and pocket the full profit, tax free.

Meanwhile, some clever MPs can live in a rented room and claim their family home is their second residence and get all the expenses paid on that including the mortgage - some go as far as employing their husband as well who may appear to be a professional porn watcher to boot. After all it is a 'Way of Life' and clearly it needs 'relief' from the stresses.

Bizarrely, in the ensuing phone in, members of the public began sympathising with MPs who no longer can employ family members.

To my mind, an MP's life is no different to mine - you have to go where the work is if you want the money. I dare say they want to be an MP for a different 'calling' to mine and that's fine but don't try to make out it is a career that should be exempt from laws that all others have to abide by and that they themselves have made.

I mean, we don't want all officials to be like Baroness Scotland, do we?

Social Networking Costs Business

2009-10-29T07:49:00.005Z

Look out, the boss is coming. Make sure that Facebook page is hidden and make it look as though you are doing work.

We have been here before. I can remember when everyone told us that word processing was the biggest drain of office productivity as everyone started writing their own documents instead of handing them to typists. Then we had the lunacy of email when we would send a mail to someone seated next to us rather than talk to them, then chat facilities like MSN started to catch our attention. Well now it's Social Networking.

In a recent study, social networking sites like Twitter and Facebook are estimated to cost UK businesses around £1.3bn of lost productivity according to research done by Morse, a systems integrator.

There are now cases of companies banning such sites from use on company networks, while many others are changing their Employee Handbooks to include notices that stop workers from using such sites during working hours and only on breaks. I worked at one company where virtually the entire sales floor had Facebook as their homepage and throughout the day people would be sending messages to one another via their pages yet they sat not a few feet away from each other. I felt quite the old fart for not using it and sniggering along to rude pictures and jokes circulating around - most likely about me.

However, in the Morse survey, around 76% of the people surveyed responded by saying their employer had yet to issue guidelines on the use of social networking sites during working hours. But more worrying was that around a third of those surveyed said that they had seen sensitive information posted, but 81% reckoned that they should decide what they should be able to post. This a warning bell for any company.

This particular issue is of great importance to companies. A growing problem to companies and individuals is what is posted on social networking sites. It could be sensitive data, it may be compromising pictures or it could defamatory remarks. The potential for lawsuits is growing and many users of such sites often post material without regard to the potential issues they may cause or worry about who reads it.

There is a real urgency for company HR departments and management to get to grips with their policy documents and ensure that they protect themselves as an organisation from the potential outcomes of postings by their employees.

There is a whole legal debate yet to be had about whether the information posted on sites like LinkedIn, Twitter, Facebook, Bebo, MySpace, YouTube et al is construed to be the property or thoughts of a company rather than an individual. In the case of LinkedIn, there is already a case in UK Law which ruled that the entries were governed by employer confidentiality and property clauses in contracts. If that is the case, then postings made to social networking sites during work hours might possibly lead back to the companies the people work for. It's best to make sure you are properly 'disclaimered' for such circumstances.

A further concern is that many people follow links on social networking sites despite the fact that 81% of those asked thought there may be potential security risks in doing so. It seems people cannot resist a good potential link and that is hugely dangerous for a corporate network.

It all points towards companies taking a real interest in protecting themselves both legally and technically against the growing use of social networking. Quite apart from the loss in productivity which is bad enough, companies are exposing themselves to potential security and legal threats which could amount to a far greater cost to the business.

It can be no longer the case of 'What goes on on tour, goes on Facebook'. Companies need to be aware of the potential threats to their business from social networking.

'My Farts Smell Better Than Yours'

2009-10-28T13:14:00.007Z

I think most people would agree a fart is a fart. I suppose there are those connoisseurs of the subject who would claim that some are more powerful, deadly or obnoxious than others but in reality they are pretty unpleasant generally.

Why do I mention this odd subject? Well, I have just listened to the weekly puerile urinating contest which is euphemistically called Prime Minister's Question Time. It has been a dodgy old week for the PM as the news that the size of our economy has been over taken by Italy's was not ideal but the fact that we have now experienced 6 quarters of successive contraction of our economy denoting the most prolonged recession since records began has taken some precedence. It gets worse for the PM as he has been somehow persuaded to go lobbying in Europe to have Tony Blair elected as the first permanent President of the EU. It could not have got much worse when David Cameron fired a few salvos at him about the economy.

Perhaps the PM has led a sheltered life but he grimly clung onto the notion that despite the obviously dire economical position the country finds itself in, when he has repeatedly claimed that Britain had a superb economy and so would not be badly affected by any recession, he actually argued well at least it was better than if the country had followed the Conservative policies. To round that illogical argument off, he claimed that unemployment was ONLY 2.5m and that he had proved that for every decision he had made on the economy he was right and the conservatives were wrong.

It's the kind of daft thinking that comes from desperate people but sometimes you have to believe your own bull. He basically argued that he had 'farted' but at least it wasn't as smelly as Cameron's.

The fact remains that prior to the whole crash the bill for those claiming benefits for being unable to work was at an all time high while unemployment is now at a higher percentage than when Labour took office. Finally, despite all reassurances to the contrary, our recession continues to dog us despite the enormous amount of 'Stimulus' we had given it and we have not even tried to get rid of wastage on the annual public sector budget, let alone start prioritising spends.

It could be described as monumental hubris as opposed to sound financial acumen, yet that has been the path followed in order to get us into this mess so we should not be surprised that it is the same methodology used to try to rescue us.

The one moment of 'victory' for the PM was the announcement that the EC will not stand in the way of the plan to split up Northern Rock so that the profitable bit can be sold off while the smelly bit with all the dodgy debts in is retained and underwritten by the taxpayer. In doing so, the PM claimed this had saved 3,000 jobs by nationalising the bank and now the public could get some of its money back while underwriting the toxic debts of the 'bad bank' left behind.

For those of us with an iota of intelligence, we will have noticed that the first prospective bidder is none other than Virgin who actually made an offer for the bank when it hit the crisis. At that point, the Government argued that the deal did not inject enough capital in and so rejected it for nationalisation instead. A while down the line, Virgin will bid for the profitable bit and not have to provide any capital for the smelly part. It may be argued that the same deal could have been done at the onset of all this and the same number of jobs been saved as the public would have had to have underwritten the whole thing then and now. So we have paid £90,000 per month for Sandler's fees and much more for the army of consultants used just to get back to the same basic position. Some 'victory'.

It about sums up the whole economic policy of this Government - a whole load of knee jerk reactions costing £1.4 trillion which has not got us anywhere. The whole process of rescue has been one colossal 'fart'. But at least it smelt better than the Conservative's fart, had they indeed been in a position to exercise their muscles.

Small comfort as we view the potential cost of the economic mess we are in.

The Sage of Omaha

2009-10-27T06:40:00.005Z

I dare say I was one of millions who watched Evan Davis' program on Warren Buffett last night.

I was probably not the only one who sat there, glued to the TV, pen poised above a notepad ready to scribble down the learning points from the 'Sage of Omaha' that would lead to my transformation into a multi-millionaire investor - make that multi-billion. Pithy remarks, wise anecdotes, shrewd insight, clever techniques and unique methods were the sorts of things I wanted to hear about. Instead, we found a homely old fellah living in a nice house, with a cheap car, a tiny office and none of the trappings of a man motivated by money. Indeed he had not only pledged to give it all away but his children seemed perplexed by the idea of it being passed down the family lineage.

I sat there at the end of the program and thought to myself, 'If he didn't seem to like money, why did he actually go out an make it?'.

Also, many of his investments seemed to be haphazard and almost suicidally hopeful as to believe that he could easily be hoodwinked or conned or, worse still, have no idea what he was doing. The phrase 'due diligence' was never used and seemed to be not in his vocabulary and there were at least two company purchases that he did in his career where he did not look over any financials or check any contracts beforehand. In fact, they interviewed the owner of a mobile home house builder who stated with surprise that he never met anyone from Buffett's company beforehand and the whole deal was done over the phone with the remark, 'Just send me any financials you produce each quarter'. For that, the former owner was hailed one of Berkshire Hathaway's greatest stars.

I am sure there is more rigour and greater acumen involved, but Buffett just came across as a strumming, would-be folk singer who just 'tap danced' his way to his small office each day as he loved his work so much. Indeed, when asked why he did not have much more than his 85 year old partner, Charlie Munger, on his staff, he replied, 'Why would I employ someone to just read the paper after me?'.

There is no doubt that during his career he worked a 'Lord Hanson' on some underperforming companies but it was clear that interacting with people about tough decisions was not his style - Rottweiler managements did not suit him. When he came up against bad ethics and mismanagement at one of his buys, Salomon Bros Bank, he personally pledged to the Fed that he would sort it all out and his word was taken as an invaluable bond to save the bank. Probably no other businessman in the world would have been taken so seriously.

Buffett likes to invest long term and he likes to invest big. He doesn't have any modern technology to monitor his investments, no office computer and he even rarely answers his mobile phone as Bob Diamond at Barclays famously found out. He doesn't visit his portfolio of companies and when he was led around the Microsoft's campus for half a day he joked to Bill Gates that he had seen more of Microsoft that any business he had owned. He doesn't monitor stocks and shares - he views companies as farms, watching how much they produce from the land rather than what the price of the farm would be.

He eats poorly, dining most nights at the same low grade restaurant, hates vegetables, and drinks lots of sugary drinks - indeed his daughter claimed she had never seen him drink a glass of water in his life. In the same vain as his friend Gates, he seems to thrive on just about anything a doctor says is bad for us. On top of all this, he lives in a leafy street in Omaha where his house of 50 years, bought for $31,000, is not even the best on the street and is his only property in the world. His car was bought by his daughter as she always did, at a discount because it was hail damaged.

So what picture are we building of this incredibly simple and likable man? To him investing seems very simple. The formula he and his partner use is obvious, repeatable and not rocket science. He may have started by punts on obscure, undervalued companies but he now tends to focus on household names like Coca Cola and Goldman Sachs. His engine is the cash business of insurance and his mantra is never to get into debt. But as much as he expounds a common credo you find he breaks his own rules all along.

The one thing I have always taken from Buffett is that debt is bad for business. He claims more smart people went out of business through 'leverage' or debt than unsmart people who succeeded and did not use debt. I like that mantra and I think it is something that most businesspeople should take seriously. Today, there is a huge focus on debt as being good - Buffett is one of the many cash businesses that has taken advantage of the depressed markets so dependent on debt to make $billions in tough times.

The other thing I took from the program cheesed me off. Buffett, despite the fact he will give all his money away and tells us to invest not speculate, has invested in the derivative products which he rightly labelled the 'financial weapons of mass destruction' that would tear down the financial world and did so. He now owns such products because he believes the fundamentals are right. That really did not square with the man's supposed philosophy and he visibly squirmed in the chair when Davis mentioned it. He was embarrassed. It was pure speculation and it had nothing to do with investing as clearly such instruments are not for long term investors. What he does believe, like most banks today, is that the whole market for such products has been 'written down' so much by taxpayer money that they are now all cheap again. The 'equity' that had been consumed by mad price spirals has been returned at much cost to everyday folk and he is ready to capitalise on it as any greedy bank would.

The one thing I asked myself at the end of the program was why? If he was indeed unmotivated enough by money as to give it all away so people less fortunate than him can benefit and to not live the life of a rich person, why would you capitalise on the misfortune of others so blatantly? And why, knowing who has paid for the market reset, would you play the market so cynically?

The answer is that if you want to make serious money in life, there is no other way, you have to profit on the misfortune of others. In fact, over on the other channel on 'Have I Got News For You' a capitalist credo was shown which I barely can recall but went something along the lines of, 'Inequality is a good thing as it makes sure that enough wealth can be generated to help everyone.'

That's the kind of circular logic that clever rich people use and believe in. It's the one thing worth writing down on your notepad. It's why bank bonuses are a good thing, allegedly.

That'll Show Them

2009-10-27T06:23:00.004Z

George 'School Snitch' Osbourne is a complicated character. He looks like a cross between a snooty school bully who operates largely behind everyone's backs and something a little more sinister.

Then he opens his mouth and, while he is trying to make a point, garbage seems to fly out. Yesterday was a classic example.

In an attempt to boldly take on the City bonus culture he firmly said that he would curb bonuses to just £2,000 of cash and the rest in shares. That way the banks could use the precious savings, estimated so far as around £6bn of accrued bonuses, as money they could lend.

It was a daft policy on many counts.

Not least, he defined he would use the policy for this year only. In a recent reality test conducted by most citizens, it appeared that Gordon Brown and Alistair Darling were still, albeit by the skin of their teeth and arguably not for much longer, at the helm of the country. So the chances of it ever being more than just a stream of words from his well educated but inexperienced mouth was absolutely zero. Secondly, the fact was that despite the incredible sums of money poured into banks via new money printing, loans, capital and guarantees, lending is down by some £15bn. So the evidence shows that banks would just hoard the cash to make their balance look good if that was what they were compelled to do with it in the last resort.

But Osbourne missed a vital point in is idea, which was about as a worthy as that of an 11 year old winner of a class project. Banks are devious fellows and they would have paid the bonus in the form of some other precious and valuable commodity - en primeur fine wine or platinum or gold as good examples. True they all would have had to have large cupboards and the nous to realise the value but give these whizz kids some credit.

Far be it for me to say this was just political grandstanding but that's what it was. The trouble is that it was not very intelligent grandstanding from a guy with a lot of education but no common sense. It perhaps sums up the whole Tory challenge - a lot of wet wind and flannel but no real substance.

The danger is that we have people like Osbourne in high office and we start actually wanting Darling back.

What a nightmare scenario that would be.

When Savings Got A Bad Name

2009-10-26T06:53:00.006Z

When I was young, my parents and grandparents drummed it into my head that I should always save some money. I followed their advice when I could, starting my first bank account as early as possible and setting money aside.

Their advice certainly helped me buy my first home soon after I started work as I had plenty for the deposit. Bizarrely, I followed the advice of a rugby playing mate and went for a 100% mortgage and a whopping life insurance policy on an interest-only mortgage despite being single - his advice was to blow my savings on material things that had no long term value. Later, after meeting and marrying an Independent Financial Adviser (IFA), I got things back in check. But it was only when she opened my eyes to what I would need in retirement without the buffer of one of those super company or public service pensions that I started to really save.

Over the last 10 years or so, there has been a huge focus on getting credit in Britain. Banks and credit card companies have fallen over backwards to literally throw cash at us, not just to buy homes but to fund a fantastic lifestyle of flashy cars, superb holidays, up to date whizz gadgets and big TVs and much more. We have never had it so good as we used our own financial instruments to supplement our dwindling (on average) household incomes. In the meantime, our level of real savings has been negative. It was almost crazy to save, in fact, so cheap was the money thrown at us.

Pensions probably fared worst but savings generally have been negative in comparison to our monthly income. Beyond my pension, my wife and I save with ISAs regularly and this year we cashed some of those in at a lowish point and then bought back in using a scheme I had no idea existed called OICs. By doing this we have fared very well and the OIC alone has increased nearly 40% so we have not lost anything during the crisis and our savings are still tax free.

It struck me though, that savings seem to be the last thing on everyone's mind. Although the level of debt on credit cards has actually come down by the odd percent for the first time in ages, outside mortgages, Britons have over £1 trillion of unsecured loans. In trying to kick start the economy, one of the first things that was focused on was rekindling the 'Asset Backed Security Market', or housing markets to us mere mortals. While it made sense to get money into people's pockets in the short term by leveraging their assets, it was clearly exactly the same plan that had got the nation into a financial mess. So long term, there has to be a plan to get Britain saving more.

The problem is that it is not as easy as it sounds - we all know the score. Just when I think I'm on top of things, the washing machine breaks down or the carpet gets stained, the floor needs repairing, the lounge suite is suddenly wearing. With all the juicy sales on all year round these days, there is a temptation to think we are getting a bargain all the time and if we don't spend we will miss out. Saving in a disciplined manner is a hard task in our current environment of materialism fuelled by cheap credit. At least when interest rates were high we could see our savings grow and we borrowed less. Now, my Halifax building society account offers zero interest on our balance and we have had to go elsewhere to get something for our small monthly savings - it's crazy.

The whole market seems geared against savings. There is little focus nationally on pensions and saving for retirement and my wife's IFA business has changed dramatically over the years with structuring and restructuring credit as being her main business versus investment and retirement planning. She firmly puts this down to the attitude of Government, banks and people - it cannot be any one of those alone, it has the right combination and time. At this time, saving for the future is not a priority generally and the whole market is geared toward lending more.

In her opinion, as it is mine, the whole credit crunch was an accident waiting to happen.

Warren Buffett calls it 'capitalism overshooting periodically'. At the height of the crash he invested $5bn into Goldman Sachs and is now sitting pretty. My meagre funds went into the OIC. I am no Buffett but thanks to equally sage advice I have ridden out the storm well. Like Buffett, my pension is down around 25% still, as are his overall assets, but in reality my whole financial situation is as good as it could be in the face of what we have experienced and my pension is clearly for the long term. I am now focused on saving as much as I can. We reduced overall credit card debt to zero by releasing our Halifax savings to make sure we paid no interest while I have been putting as much as I can into my pension.

But how many others have done the same? In fact, the whole panic that has gripped us has seen the focus shift toward getting credit back to previous levels. Britain will soon get back to borrowing more and saving less. Surely, at some point that vicious upward spiral has to end and let's hope it is not as spectacular as last time.

My point here is not a swipe at the Government who have their share to blame. It is not even at the banks who fuel their cash by lending more in their bizarre world of finance. It really is a swipe at us, the public. It really is time to save and invest as the future could get nasty if we don't. Pensions should be brought to front and centre for every working individual and, personally, I don't think retirement planning should be voluntary. I think there should be massive tax incentives to save, instead we get tax on pension dividends, I think insurance premiums should have no tax attached, I think there should be no tax on savings generally.

Realistically, the Government should plan long term - the more we save, the less we will burden the state in our old age. It just makes sense.

Current finances in the country are a mess and it will take a bold Government that thinks long term in this way. However, it really is not rocket science. The more we all save today, the less vulnerable we are to downturns, the less of a burden we will be on the State and the less the system will incentivise us to borrow as banks will see the profit in investments over debt in the end - hopefully.

I have a feeling that pigs may fly first, but I live in hope.

Podcasting Our Way Out Of Recession

2009-10-25T07:34:00.005Z

In the face of the heinous postal strike, our glorious leader has embraced modern technology and launched his latest piece of 'reassurance propaganda' on YouTube to show that, contrary to all indicators, the economy is behaving exactly as it should and he's on top of the situation.

Rather like the superb 'legal' promise that he and his team would halve debt by 2015, he has now pledged that Britain will have an upturn by the turn of the year. No, he was specific, he did mention 2010 for those sceptics amongst you. He got right to the point. Part of the deal was that he would reform banking and make those suddenly, vilified types embrace the kinds of values that we all share - 'hard work, responsibility, integrity and fairness'.

Of course, it does make you wonder why he tolerated such people who earned millions and did not adhere to those values beforehand, but hindsight is always 20:20, is it not? The hollow words of Lord Mandelson must chime in his ears of how Labour did not mind people making loads of money under their regime. How that has come back to haunt them all.

Another piece of late hindsight is that he will clamp down on lending sharp practice like credit card people and those who raise interest on loan repayments putting people into difficulties. He must not use a credit card himself as interest rates on such instruments have always been at least 10 times that of base rate interest, and some are multiples of that again. It is again, one of those stark moments of realisation for the poor PM where he finds out what is going on in the financial world. There is a good reason why the financial industry is almost without exception very well off and that is because they have carte blanche to do exactly as they like. It's nice of him to change this now but, to be frank, if he ever gave a damn other than saving his political neck, he would have stepped in long ago. It is not as if this is an issue that has arisen recently - it has gone on for years.

Just like the whole banking bubble which is busy re-inflating as we speak.

The final call to arms was that he was working with an international melee of leaders to ward off a Second Great Depression. I should imagine he has missed a few headlines as most other countries, including Italy, have returned to growth while Britain languishes bottom of the league table for economic dunces. He pleads that 'It would be suicidal to put recovery at risk by suddenly cutting off the funding and investment that is supporting young people, families and businesses'.

The funding and investment he talks about is pretty pathetic. While VAT is reckoned to have had a £12bn stimulus to the economy, profiling how it helps us is in real terms would be an interesting exercise. You see, even in modern monthly bills, power, fuel, insurance, food and school things are high on the agenda which are not affected by the VAT decrease. Meanwhile, consumer items are and that was the aim, to keep the High St going. It wasn't to help families and young people.

Over 1m of the unemployment number are now young people - this whole recession and crisis has affected them worse - so where is this mythical help he is giving to them? As for support to businesses, apart from copying the Continental scrappage scheme on a minor scale, he has done little beyond complex loan guarantee schemes to help business and overall business lending is down by nearly £15bn.

The vast majority of any stimulus money went into saving the very industry he now vilifies - how clever was that?

Perhaps he should have thought of that before he gave them a blank cheque to save their businesses, decrease the value of toxic debts so that they are now bargains again and allowed the banks to rekindle their feeding frenzy at the trough of easy money. Not one single, stupid bank was allowed to fail, sending the one message they all wanted to hear to them - 'If the brown stuff hits the fan, then we will get bailed out. So let's party like there's no tomorrow, we have zero liabilities'.

Perhaps, podcast rhetoric would have been unnecessary had the PM thought of all this before he handed out our hard earned cash to save those greedy bankers and gave the proceeds of all those who earned their money through, 'hard work, responsibility, integrity and fairness' to them to help them preserve their current millions and earn more millions again.

It's like Communism in reverse.

What a fitting epitaph for the biggest failure of a PM we have had, perhaps ever.

Spelling It Out

2009-10-24T11:10:00.004+01:00

I have been asked by one of my blog readers, what do I mean when I say 'There is a shortage of houses to be sold at £10m+. Go figure.'

It's a good point. What I mean is that the top earning and most wealthy individuals of this country and those who work here but are classed as non-domiciled for tax reasons have been the least affected by the financial crisis over the last period - in fact, they have mostly benefited from it. There is a good reason for that and why Britain is still in recession despite the fact that super-wealthy people cannot find enough £10m+ homes to use their money on. It's because our bank bailouts ensured that the way these people earn their money was not just preserved but actually the whole system has been 'reset' at taxpayer cost so that they can earn far, far more from the kinds of products that mean nothing to us and society in general.

Our Government, very different to Governments of France, Germany and Japan, poured almost all of their 'stimulus' money into saving the banking system. Germany, for instance, put €10bn into directly subsidising wages so that workers were not laid off and into major education rejuvenation projects and technology plus stimulating directly, and substantially, the car industry. In contrast, we have really provided little stimulus and what we have provided mostly went down the throats of banks in the form of Quantitative Easing who used it for their high risk casino banking.

That is the reason why we have remained in recession and why the only way out to service our long term debt will be to make the low earners disproportionately less well off as tax increases will be aimed at those first.

It's hard to spell it out any clearer - but there is a tiny percentage of very wealthy people who helped cause the crash who are far better off because of our Government's policies on economic rescue. Sarkozy and Merkel told Brown he was wrong in trying to bail banks out too readily, they have been proved right.

This year over 100 banks have failed in the US and not a single saver has lost their money - nearly every one of those banks were small regional players that did not participate in the activities of the greedy banks - yet they took the brunt of the economic catastrophe. Meanwhile the newly revitalised investment banks like Goldman Sachs and JP Morgan Chase are talking in terms of record profits and bonuses.

The solution to our problems are actually making the problems worse.