Monthly Archives: April 2010

From the FT’s comment section:
David Pilling: Japan’s splendid isolation may be at risk
Daniel Gros: Only Athens has the power to rescue Greece
John Gapper: A short story of a star hedge fund
Max Hastings: Why Cameron has the right character to rule
Editorial: Strong on liberty, weak on the deficit
Editorial: Hedge rows
Editorial: Oily transparency
Markets Insight: George Buckley, History holds answers to the impact of Tory fiscal tightening
Notebook: Robert Shrimsley, An invitation to govern: regrets only
Lex: The agenda-setting column on business and finance

From the FT’s comment section:
Martin Wolf: UK economy must perform a rebalancing act
Robert Sloan: The bankers need to fight back
John Kay: Economics may be dismal, but it is not a science
Wen Liao: Bismarck’s lessons for Beijing
Editorial: A Tory manifesto for the good times
Editorial: Court vacancy
Editorial: Strife in Thailand
Global Insight: David Gardner, Challenge of Jerusalem tests Washington
Market Insight: Russell Napier, Tower of debt will force roll back of free markets
Notebook: Sue Cameron, Kingmaker Gus plans his reshuffle
Lex: The agenda-setting column on business and finance

James Mackintosh

Thought the short sellers were up to no good? You’re not alone, at least when it comes to short-selling collateralised debt obligations (CDOs), one of the acronyms behind the financial crisis. And now you can sing along to the tune. US hedge fund Magnetar, according to an investigation by ProPublica, took a leading role in pumping up subprime debt by helping create the CDOs it then went on to short. Even better than the article, which should be a must-read for everyone involved with Wall Street, is the music, put together to go with it by This American Life (h/t Daily Intel).

However, we already knew that John Paulson’s Paulson & Co, together with Goldman Sachs, Deutsche Bank and other banks, had done something similar. But the scale of the Magnetar CDO creation seems to set it apart: it sourced the bulk of the CDO market in late 2006, shorting some of the CDO debt it had helped create while buying the super-toxic CDO equity, which CDO creators usually found tough to shift. Its losses on the equity were in at least one case more than covered by the eventual profits from the debt when the CDO tanked, ProPublica reports. Worth noting is Magnetar’s explanation: it insists it was net long all its own CDOs, which means it would lose money when they defaulted, and that it ran a market-neutral strategy, meaning it aimed to make money whether the mortgage/CDO market went up or down.

From the FT’s comment section:
Philip Stephens: Britain is arguing about the past
Slawomir Skrzypek: Poland should not rush to sign up to the euro
Dominique Moïsi: How France fell out of love with Sarkozy
Michael Skapinker: Replacing the ‘dumbest idea in the world’
Editorial: Labour lacks will to shrink the state
Editorial: Post-crisis malaise
Editorial: Hungarian demons
Global Insight: Matthew Green, Karzai’s gestures fail to hide strain in ties
Market Insight: Jim Paulsen, The debunking of fear signals further stock market rallies
Notebook: Brian Groom, A spotlight on the real Britain
Lex: The agenda-setting column on business and finance

James Mackintosh

Having run short of ways to distract British voters from the need for drastic cuts, both Labour and the Conservatives have seized on mutuals as part of their strategy. Mutuals, the thinking goes, are nice cuddly non-profit organisations that pose no threat to the future of the planet or the future of finance – unlike nasty profit-hungry multinationals and banks.

On Monday, Labour’s manifesto (complete with a 1930s-themed cover featuring socialist realist art designed to make one think Gordon Brown statues could soon spring up around the country) pledged more mutual involvement in everything from banks to public houses. Here’s the full list of Labour’s mutual pledges:

  • Finance: “will consult on measures to help strengthen” mutual financial services firms. Will “encourage” a mutual solution for Northern Rock (although it is clear there won’t be one, since it also promises to ensure value for the taxpayer)
  • Transport: will “welcome” bids from mutuals, among others, for rail franchises
  • Childcare: will “pioneer mutual federations running groups of local Children’s Centres in the community interest”
  • Health: “across the NHS we will extend the right for staff, particularly nurses, to request to run their own services in the not-for-profit sector”
  • Football: “Registered Supporters Trusts enabled to buy stakes in their club”
  • Pubs: “We will support pubs that have a viable future with a new fund for community ownership”
  • Old buildings: will “review the structures that oversee English Heritage, putting mutual principles at the heart of its governance so that people can have a direct say over the protection and maintenance of Britain’s built historical legacy”
  • Canals and rivers: “British Waterways will be turned into a mutually owned co-operative”

So far, so populist. After all, how could the John Lewis-shopping classes be against mutuals? (For anyone who hasn’t realised, the department store and supermarket group is owned by its employees, who shared a bonus pool of £151m last year as a result.)

I like John Lewis. But Labour – and the Tories, who are also pushing mutual ideas – have misunderstood the lesson from the success of John Lewis. Its mutual model may contribute to its culture, and give staff an incentive to help customers; but equally, it may not. After all, many shareholder-owned retailers also offer strong customer service and value for money. What is clear is that fierce competition in retailing gives the company, and hence its management and staff, a strong incentive to provide keen pricing and good customer service.

What of the rest of the mutual sector? Currently, the biggest mutual businesses are building societies and insurers, plus the Co-operative retail-to-banking group. Supporters of mutuals make a clear distinction: the building societies that converted to banks had to be rescued (Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester); the building societies that stayed mutual did not. Mutuals, supporters argue, are inherently less likely to blow up because they are “less prone than banks to pursue risky speculative activity”.

Unfortunately, this just isn’t true. It is not just that Dunfermline building society blew up spectacularly after pretty much the same misguided property investments as HBOS. It is not just that Presbyterian Mutual Society in Northern Ireland collapsed after a bank run, just like Northern Rock, and had made lots of buy-to-let loans, betting on the frothiest part of the mortgage market bubble. It is not just that 10 troubled building societies, most recently Stroud & Swindon, were rescued by mutual friends in the sector.

What really shows the lack of safety of the mutual movement is that the last major banking crisis in the US, the savings & loans disaster, was in fact a systemic failure caused by the US equivalent of building societies, most of which were mutual. Before that, America’s mutual savings banks fell as a series of dominos in the early 1980s.

Of course, this is not to say that banks are perfect, to put it mildly. But my point is: neither are mutuals.

As with everything, it is a question of incentives. Mutuals run by their staff – such as GP practices, owned by doctors, or Lambeth’s local authority leisure centres, outsourced to a mutual – are naturally run to suit their owners. This can lead to terrible service, as at Lambeth’s swimming pools, or short working hours at inconvenient times for patients, as in doctors’ surgeries. Competition can stop mutuals becoming self-serving, as with John Lewis, but it is hard to apply competition to GPs or large leisure centres.

This is why the Tory plans are also likely to fail, if implemented. David Cameron wants “to let nurses manage their own clinics, job advisers take over employment offices and teachers run their own schools”. Are they likely to favour staff or customers/patients/students? My guess is that if staff have no one but the government looking over their shoulder, the organisations will have even more trouble motivating staff to work hard and provide great customer service than other ownership models.

Here are my three top problems with mutuals:

The first is corporate governance. The people who run large mutuals have almost no accountability to their owners. True, shareholders in big businesses relatively rarely act to throw out management; but the management of underperforming companies are frequently ejected through hostile takeovers. The lack of accountability of management at mutuals is a serious problem if they operate in a less than fully competitive environment. The wave of demutualisations in the 1990s made management at the remaining mutuals far more accountable than it had been; but public pressure has died down since the prospect of payouts went away, and renewed member apathy has left management with few checks on what it can do.

Second, linked to this, is the question of efficient use of resources. In competitive markets mutuals have the same pressures as non-mutuals. But in less competitive markets, such as banking or medical care, mutuals are under little pressure from their owners to use resources efficiently; if they are staff-owned, rather than customer-owned, they are likely to face pressure from their owners for the inefficient use of resources, in the form of above-market pay levels.

Third, mutuals distort the allocation of resources in the economy, by tying up capital far more tightly than any public company. If they are run inefficiently, they cannot be taken out in a hostile takeover, and may – particularly under a Labour administration – find it easier to access state funds to keep them in business.

From the FT’s comment section:
Wolfgang Münchau: A Greek bailout at last but no real solution
Yang Yao: Renminbi adjustment will not cure trade imbalance
Clive Crook: In search of a moderate Republican
Alan Schroeder: How politicians can jazz up live debates
Editorial: Tragedy will prove Poland’s strength
Editorial: Nuclear options
Editorial: No iron grip
Lex: The agenda-setting column on business and finance

James Mackintosh

“Tory win best for economy say top bankers” screamed the Telegraph’s Friday splash headline (online, the story was downplayed and detailed, wierdly). The “top bankers” in question were Deutsche Bank’s London strategy team – great strategists, but perhaps surprised to find themselves labelled thus. Quibbles aside, a detailed strategy report from DB suggests a Tory government with plans for faster cuts to the deficit would be likely to be better for sterling, might help prevent a downgrade of the country by ratings agencies and could result in lower interest rates. Here’s what Jim Reid says in the report:

The best result for UK equities is likely to be an outright victory for the Conservative party. Although an outright Labour victory would help create certainty, the lack of urgency in their deficit reduction plans may be negative for Gilt yields and may alert the rating agencies. If Gilt yields aren’t negatively impacted by a Labour victory then their ‘spending for longer’ policy may actually be better for markets than a Conservative administration committed to fiscal cutbacks.

But the actual deficit policies from the Tories, the report accepts, don’t look much different to Labour over the term of the next parliament – the Tories have just said they would bring the cuts in sooner.

From the FT’s comment section:
Philip Stephens: Now Obama is president with an endgame
Samuel Brittan: The case for a written constitution
Zalmay Khalilzad: Iraq needs help to avoid a sectarian resurgence
Julie Dickson: Protecting banks is best done by market discipline
Philippe Legrain: Tax land or carbon emissions, but not hard work
Editorial: Airline deals won’t stem capital flight
Editorial: Freshly cut tulips
Editorial: Still hanging on
Global Insight: Tim Johnston, Fight to reverse Porsche politics
Markets Insight: Gillian Tett, Singapore’s lesson from Harvard model
Notebook: Jonathan Guthrie, Jeeves squares the business vote     
Lex: The agenda-setting column on business and finance

James Mackintosh

Corporate board members don’t quite have a fiduciary duty to oppose tax rises on their companies, but chief executives are hardly likely to be in favour. So, surprise surprise, herds of UK executives are bleating about the dangers of Labour’s planned rise in National Insurance, brilliantly rebranded the “jobs tax” by the Tories. And it has become a major problem for Labour.

Should we listen to business complaints? No, and yes.

No: after all, they would say that, wouldn’t they? As an employer myself, I’m strongly against a rise in NI, which I will have to pay. But I’m also, on the same purely selfish grounds, against a rise in income tax, in VAT, parking charges or the price of milk, against inflation, deflation and mice. Quite rightly, I just get my one vote, and no one is interested in my selfish opposition to any of these things. Ask companies whether they would prefer the tax rise in the form of higher corporation tax instead, and you can guarantee a stony silence from boardrooms.

But yes, there is a reason we should listen: The NI rise is a bad way to pay for the debt crisis. Leaving aside the question of how much of the deficit reduction should come from tax rises and how much from spending cuts, both the employer and employee parts of NI are a poor way to raise additional tax.

Employer NI is, as the Tories insist, a tax on jobs: the more people a company employs, and the more it pays its staff, the more it pays in tax. This at a time when the government claims to be doing all it can to reduce unemployment. My colleague Chris Giles disagrees completely. But while all taxes may, as he points out, be a tax on jobs, there is an adjustment period to new employee taxes during which employees have a lower standard of living, before they can demand higher wages to compensate – particularly at a time when employers are finding it easy to resist wage hikes. Raise employer NI, and there is an immediate incentive for companies to reduce staffing, which is hard (particularly in industries with collective bargaining) to pass on in lower wages. With low inflation, it takes longer to pass this on in future through lower wage rises, too.

Employee NI is also a bad tax. It is a tax on earned income, not paid by those with unearned income. Notting Hill trustafarians, as well as pensioners, thus miss out. Weird when you think about it, but Labour is increasing taxes on labour. If you want to encourage hard work, and discourage lazing about extracting rents, then tax the extraction of rent, not hard work. Duh. It would be far better to raise income tax, which treats income equally – except that Alistair Darling gambled that people wouldn’t notice an NI rise. The chancellor seems to have been right – but companies did notice.

Unfortunately Gordon Brown mishandled the debate spectacularly (EDIT: Dan Roberts sets this out nicely), accusing business of having been “deceived” by the Tories’ plan to pay for the scrapping of the majority of the NI rise through magical mystery savings, supposedly from additional “efficiency” savings (Gerry Grimstone, one of those closely involved in the government’s efficiency plan, insists such savings cannot be conjured up suddenly).

This, of course, is not relevant to corporate concerns: they don’t care whether the next government pays to get rid of NI through efficiency savings, genuine spending cuts or tax rises elsewhere – just as long as it isn’t a tax on them.

Related reading:

UK election 2010: National insurance nonsense FT Money Supply blog

From the FT’s comment section:
David Pilling: Progress and democracy collide in India
Gerry Grimstone: Improving public sector efficiency takes time
John Gapper: The iPad’s scary counter-revolution
Michael Hudson: Eastern Europe won’t pay what it can’t pay
Joerg Wuttke: China is beginning to frustrate foreign business
Editorial: America’s loveless union with Karzai
Editorial: Putin and history
Editorial: Goldman on trial
Notebook: Robert Shrimsley, Swelling the ranks of the great ignored
Markets Insight: Kenneth Rogoff, Spotting the telltale signs of bubbles approaching
Global Insight: Edward Luce, Obama closes in on Nobel-esque nuclear goal
Lex: The agenda-setting column on business and finance

FT dot comment

FT dot comment is no longer updated but it remains open as an archive.

Politics, economics, high finance and morality – this blog addresses the issues being considered by the FT’s comment team, and their thoughts.

FT dot comment: a guide

Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.