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The Credit Crunch Diaries - The
Aftermath & Recovery
28 February 2010
– A return to growth?
The big economic headline on UK growth in GDP was that for the
final quarter of 2009 the previously quoted figure of 0.1% was an
understatement. Hold ones breath. It should have been 0.3% (without
being overly cynical, isn’t that change well within the statistical
range of error?). Even so, hang on a bit. There were two bits of
economic data that did not quite get the same coverage as the
improvement in estimated GDP growth:-
• In order to get to the figure of 0.3%, the Office of National
Statistics had revised downwards its estimated for the previous
three quarters. In other words, the upgrade was only greater due to
a lower start point. In fact, the absolute level of economic output
in quarter four was £133m lower than the previous estimate.
• The revised peak to trough fall in UK economic output is now set
at 6.2%. This means it was the worst recession since comparable
records began just after the Second World War.
Those believing the UK is in for a double-dip recession may be
getting the upper hand as people learn and higher taxes bite.
23 February 2010
– Debt to equity ratio
Every finance director keeps a close eye on the business’s debt
to equity ratio or what might be called gearing or more likely for
US, leverage. What is deemed safe largely turns on the type of
business in that for (say) heavy engineering that is capital hungry,
a ratio of 2 could well be normal whereas for a services business
0.5.
Given the havoc of the credit starvation, it is interesting to look
at the same ratio for the whole corporate sector of a sovereign
state:-
• Portugal 1.89
• Spain 1.41
• Italy 0.85
• Greece 0.82
• Germany 0.46
• UK 0.39
• Sweden 0.26
For the private sector then, we can conclude that the UK has a
relatively strong balance sheet.
We all know of course that the picture is very different for
governments. The sale of bonds (gilts) by European states alone is
estimated at 1.6 trillion euros for 2010 year alone. Concurrently,
EU banks have to handle maturing debt of about 560bn euros this
year. That means competition to find buyers of debt will be intense.
Graham Secker of Morgan Stanley said, “The debt burden that prompted
the financial crisis has not fallen; rather, we are witnessing a
dramatic transfer of private-sector debt on to the public sector.
The most important macro-theme for the next few years will be how
easily countries can service and pay down these deficits. Greece may
well prove to be a taste of things to come.”
Meanwhile, a senior banker with Goldman Sachs has admitted that his
company (maybe unwittingly) helped Greece hide a slice of its
national debt by using complex derivative instruments. The debt game
is far from played out.
21 February 2010
– India booming
In my book Violets I referred to my work in the mid 1990’s
selling a successful London based business to an Indian group and
being told by the negotiator on their side that “India is booming Mr
Smith, booming.”
Grabbing statistics quoted by Ian McDiarmid in Shares Magazine this
week, it still is. As a result of government sponsored monetary
efforts effected to counter the 2008 global credit crisis, internal
demand (not just exports) has ballooned. In December 2009,
industrial output rose 16.8%, the largest rise since April 1994.
This followed November figures of plus 11.8%. By Western standards
these statistics are staggering and within the December make-up,
consumer durable production covering for instance cars and washing
machines rose a barely believable 46%.
The Indian budget due on 26th February 010 may witness the
curtailment or even the end of monetary stimulus in the face of
inflationary risks. Even so and as with China, once the ball is
rolling, it will continue so to do as citizen expectations gather
momentum. This is why demand for commodities globally will continue
to grow. Not least amongst such demand will be for oil. Never mind
the sluggish West, watch the price of oil continue to climb.
19 February 2010
– Floats sunk.
As a sign of improving times, I wrote recently about the
impending private equity floats. That was impetuous and premature.
Amid widespread fear that the post credit crisis recovery is
faltering, warning signs that credit markets are tightening again
are glowing red and especially on the European scene. Default risk
in Greece and Dubai (and to a lesser extent the attempted tightening
in China) is causing the hitherto credit rally to slow rapidly.
Moody’s, the rating agency, have referred to a “material” rise in
borrowing costs during January 010 and noted that sixteen companies
worldwide have pulled debt issues worth £4.66bn. These include
Bombardier of Canada, New World Resources (Dutch), Snai (Italy). For
the UK, the private equity floats now sunk include:-
• New Look (£2bn)
• Merlin Entertainments (£2bn)
• Travelport (1.2bn)
One must not call a double-dip recession. It might be premature.
18 February 2010
– Maverick strikes again
I coined the phrase maverick in relation to Barclays bank quite
early in the Credit Crunch Diary (Oct 08 – Oct 09). They went to
Middle Eastern investors for finance, eschewed the UK Treasury
shilling and generally speaking did it their way.
Did it pay off? Given the approach of Barclays and a bit of luck,
the answer is yes. For the year ended 31st December 09, the bank
declared a profit before tax of £11.6bn, up 92% on the comparative
although this included a gain of £6.3bn on the sale of the Global
Investors business. Taking this massive gain away still left a
remarkable profit story.
What did non-Barclays people gain? Quite a lot. The ordinary shares
are up nearly 13% on the news, £225m has been paid in the new bonus
tax and £1.35bn in business taxes. More importantly, Barclays
provided credit to the UK market of £35bn gross split evenly between
households and business. Finally, the banking group is paying circa
£750m to the UK Treasury for participating in the special liquidity
scheme and the credit guarantee scheme. It ended 2009 with a tier 1
capital ratio of 10% (against a regulatory minimum of just 4%).
What we want are more mavericks.
06 February 2010 –
The verdict on QE
All the portents are that the quantitative easing programme is
finished, though that is not certain. So significant an event was
this monetary move by the Bank of England that it is worth a recap
and a conclusion.
In March 09, the UK economy was experiencing its worst three-month
of growth in modern history. The B of E took an initiative that was
unique in 315 years of activity. It started to create money out of
thin air. The quantum of this experiment is relevant to how serious
the authorities viewed a looming economic depression especially
given that it had already reduced interest rates to an effective
zero. Relative to the size of the economy, the programme was
destined to be greater than that of Japan in the 1990’s or the US or
Euroland this time around. Indeed, the total value of QE at just
over £200bn, represented the equivalent of 15% of the UK’s annual
income.
With hindsight, QE needed to be effective not least since it can be
argued that the UK government’s fiscal contribution to the slump was
hardly mega (fiddling with VAT and pinching the continent’s car
scrapping idea.) So what balanced judgement can be formed?
The downside things are probably these:-
• The gap between what retail banks are themselves charged to borrow
money and what they recoup from customers remains much higher than
prior to the crisis
• The UK economy is only marginally out of recession – if it is at
all
• Bank lending as a whole is still very weak
• The flow of cash around the UK economy has actually fallen, not
risen (M4).
On the upside:-
• What is the counterpoint? What would have happened without the
injection of new money? A full-scale depression?
• Banks have been assisted in building their balance sheets
• Some of the bigger credit markets have loosened allowing companies
to start raising finance again
• The equity market has flourished
• Investment banking financiers have made fortunes by buying gilts
from the Government and selling them straight back to the B of E at
a good mark-up.
Conclusion: Looked at quite dispassionately, there was no effective
way the B of E could prevent the individual banks from hanging on to
the money obtained from selling their gilts. The B of E might just
as well have bought directly from the Government. After all, it has
been the only net buyer (99%) of Government debt over the past year.
Corporate bonds and semi-toxic assets could have been bought as an
alternative. QE has actually created two problems. The private
section has to get back into the habit of buying Government debt and
secondly the Government has to issue much more debt. I think history
will judge it a mistake.
28 January 2010 - Private equity is back
Here is an interesting question: What has the UK debt market and
the UK weather in the second half of January 10 got in common?
Answer: a thaw set in.
Four private equity firms battled to acquire a group that sells,
inter alia, cat litter, bird food and dog coats. Not exactly your
blue chip client but profit is profit and prospects are prospects.
That KKR paid what was considered a very full price for Pets at Home
is less important in monitoring events post the credit crisis than
what the deal signifies. Debt markets must have thawed if, as
reported, a £955m price tag is funded by £335m of senior debt and
£120m of mezzanine.
This deal is not an isolated case of hungry wolves chasing a
particularly tasty snack. Other business that could fall to private
equity currently are:-
Merlin Entertainment (Madame Tussauds and Alton Towers)
General Healthcare Group
Matalan
New Look
Ocado.
Some of these suggested names may come back to market as new floats
but given the precept of Pets at Home, it looks like a step-change
to life as before has occurred.
20th January 2010
– Inflation rears its ugly head
In time it was inevitable but not many thought the time would
come as early as December 09. The official Consumer Price Index
(CPI) reached 2.9% in December 09 and although that may not seem
unduly alarming, it is in fact an increase of 52.6% on the November
figure of 1.9%. The key thing about inflation is relativity. If
inflation and wage increases and savings rates are roughly in tune,
then the impact of weakened purchasing power is cushioned.
The real problem post the credit crisis is that inflation is now
rising at twice the rate of average earnings and real savings rates
in terms of bank deposits are negative. Another aspect bearing on
living standards in the UK is that (and this is unique for this
recession) whilst maybe 200,000 people did not lose their jobs as
predicted, this was at the expense of reduced wages and salaries.
Consequently, many employees are receiving less in take-home pay
than in the pre-2007 era.
What of the trend line? Almost certainly upwards. VAT has gone back
to 17.5%, fuel costs especially petrol and diesel are way up (28%
year on year) and at some stage post the May 10 election, indirect
taxes have to go up to eat into the huge sovereign debt. Even those
with lower mortgage expense due to variable rates will see their
advantage eroded as interest rates rise during this year.
All in all, the aftermath pain will be felt widely by UK citizens.
13 January 2010 –
Every little helps
This is a quote from Hetal Mehta, senior economic adviser to the
Ernst & Young ITEM Club, “The small rise in exports, paired with a
decline in imports in November (2009), reflects improved trading
conditions for the UK and should help to push GDP into quite robust
positive territory.”
This statement arose from figures that show that the deficit in the
trade in goods for November month narrowed slightly to £6.8bn from
£7bn in October 09. Exports edged up in the same comparative by
0.1%. It seems on the cards that the UK economy moved out of
recession in the final quarter of 2009. Just.
According to the Office for National Statistics the reason for the
“improvement” was a narrowing of the deficit with non-EU countries
by £400m. Sadly the deficit with the EU widened to £3.8bn but that
was only £200m worse. One really quirky statistic was that the
increase in imports had much to do with bringing cars in to meet the
demand emanating from the scrappage scheme.
BDO’s business trends output index rose to 99.7 from 96.3 and the
optimism index rose to 100.5. The pound strengthened a little
against both the dollar and the euro.
There is still a long way to go bu,t as they say, every little
helps.
31
December 2009 - The John Smith 2009 top-ten awards
1. Most understated quote
“The Treasury may not have secured the best price for the
advice.”
(National Audit Office referring to £107.1m paid to accountants,
lawyers and bankers between September 07 and March 09).
2. Most inappropriately named executive
Sir Fred Good-win
3. Most appropriately named executive
Bernard Mad(e)-off
4. Best monetarist trick
Quantitative easing
5. Best UK prime minister by default
Sir Mervyn King
6. Worst UK prime minister by default
Gordon Brown
7. Greatest global blood-sucker
Goldman Sachs
8. Best UK sucker
Alistair Darling
9. Best white-knuckle ride
FTSE 100
10. Most hated activity
Investment banking or UK Government borrowing (equal 10th)
Wishing You All
A Happy And Prosperous 2010
27 December 2009
– Back to square one
September 2008 was a memorable month. First because it was when
Lehman Brothers collapsed and secondly when I decided to write the
Credit Crunch Diary to start what turned out to be the year of
crucial events.
On Christmas Eve 2009, the FTSE 100 index rose 30.3 to take it above
5,400 for the first time since September 08. Back to square one you
might say. And what a journey in between it has been. For a close
FTSE watcher such as myself, the transformation beggars belief. To
put it bluntly, a lot of money was lost for the top 100 companies’
shareholders in the first six months of the crisis. But then, as was
catalogued in the daily diary, things started to turn. Slowly and
hesitatingly at first and with many bearish setbacks en-route but
turn nevertheless.
Since March 09, the FTSE 100 has risen 53.8% and this is truly
astonishing. The dead will not lie down. History will show that the
two-pronged approach of low interest rates (fiscal) and the spending
by the Bank of England of £200bn of new money on buying government
bonds (monetary) have been the key moves. We should take special
note that both acts were civil servant inspired – not political
moves. That politicians decided to bail out investment and other
banks was their call. It was the Bank of England that played to
shareholders. If interest rates are low, buy high-yielding shares
and if you are a pension fund or an insurance group, put your spare
cash in equities. It was this logic that saved the shareholder from
their demise in the nasty banks.
The cynic might say, quite rightly, that the FTSE 100 is a global
not a UK measure and so the confidence in the business world is
outwith the UK. Maybe, but the FTSE 250 also hit a new peak for
2009. When? On Christmas Eve of course.
19 December 2009
– A mountain of debt
If, like me, you have a passion for walking up mountains then
you will know the exhilaration of reaching the summit and looking
down on what you have achieved. It would take superman to climb the
UK’s mountain of debt and even if he did, what would he be looking
down on?
Britain’s total net debt rose to £845bn at the end of November 09
being the equivalent of 60.2% of GDP. It seems way back in the low
cloud encompassing this mountain that the fiscal rule was to keep
net debt below 40%. I have not yet heard the authorities mentioning
an overshoot of 50%, have you?
The UK Treasury borrowed £20.3bn in November which was the biggest
monthly amount since records began. The fact is that revenues have
dropped whilst social benefits have soured. The Institute for Fiscal
Studies has said that the burden of future pension payments imply
that the burden of debt will stay above 60% of GDP for generations
to come.
It is one thing having a merry Christmas 2009 but fancy the children
thinking that a national burden of debt is normal. If it is, why
will it be wrong for them to be personally in debt all their lives?
11 December 2009
– Dubai dichotomy
Dear Dubai,
You really are a puzzle old boy. You are a world class city, have
the world’s fourth busiest port and can boast the world’s seventh
largest airline. Like Marilyn Monroe, your infrastructure is superb
(or perhaps that analogy is a mistake) and you have attracted home
owners from the world’s richest echelons.
At the same time, you have attracted to your edifices investors from
sovereign states in foreign currencies that quite honestly were not
in a position to take big losses. This is because they were all
tottering from loan swaps and the like in, for example, Swiss
francs. These were all ambitious but economically thin states such
as our near and dear friend Ireland and our beloved holiday idylls
of Greece and Spain. They also included places we are not so keen on
such as Bulgaria, the Ukraine and Hungary.
And the dichotomy is this. You have attracted to your hot and sandy
shores a new breed of adventurer. I understand that Mr Roy Maurer,
managing director of Qatar’s QNB Capital has said that panic sales
of the emirates’ quasi-sovereign bonds has a major consequence,
“Those who were spooked by Dubai are giving a nice profit to anybody
who knows the region and understands that Qatar, Abu Dhabi, Saudi
Arabia and Kuwait are much stronger credits. Funds are building up
positions significantly.”
No wonder your neighbours are not exactly rushing to your aid. The
Yanks are back to make a buck. In some respects it’s all your fault,
for aping them.
Yours sincerely,
U.K. Observer.
08 December 2009 –
Up with the fees
Two of the puzzles that I wrote about during the credit crunch
crisis have been solved. The detective was the National Audit Office
(NAO). The first was my early evening ramblings betwixt London
Bridge and Tower Bridge and where, if we are in such a mess, all the
money has come from for the drinking and eating throngs that mass
the South Bank and secondly the admiration for the brains behind the
work of the Treasury in planning and implementing, inter alia, the
Asset Protection Scheme not least given that the brilliance has been
well hidden prior to the crisis.
The answer, of course, is that the city eggheads did it all and got
well paid. In fact, to quote directly from a piece by Edmund Conway
in the Daily Telegraph, “In a scathing report, the NAO indicated
that the Treasury may not have secured the best price for the
advice, and could have wasted money with overly generous contracts.”
Sounds like the mollification of the millennium.
It seems that two of the advising investment banks, namely Credit
Suisse and Deutsche Bank, were put on retainers worth £200,000 a
month each for a year and agreed to receive success bonuses worth a
total of £5.8m whilst failing to clarify what these bonuses would be
dependent on. Wow! The expected cost of advisers to the Treasury
between September 07 and 21st March 09 are quoted as:-
Slaughter & May
£32.9m
Credit Suisse
£15.4m
PricewaterhouseCoopers £11.3m
Ernst & Young
£8.7m
KPMG
£7.7m
Blackrock
£7.4m
Deutsche Bank
£5.3m
Citi Bank
£5.0m
BDO Stoy Hayward
£4.9m
Others
£8.5m
In total this adds up to £107.1m which pays for a bottle or two of
plonk.
29th November 09
- Lloyds Banking Group escape route
The mechanism and price of the escape route for Lloyds Banking
Group out of the APS programme is now agreed. Due to the success of
the first element which was to issue £8.8bn worth of contingent
convertible bonds, the rights issue is somewhat stronger than
initially thought and as set out in this diary dated 9th November.
The rights issue is valued at £13.5bn and means it is the highest
ever attempted beating the HSBC issue by some £.3bn. Of equal
significance is that Lloyds has the largest private shareholder base
of any company listed on the London Stock Exchange at 2.8 million
people and amounting to about 7.5% of the equity. The event is
therefore of major public interest. Furthermore, since the taxpayer
owns 43.4% of the business and intends to keep it that way, the
Government (that is the taxpayer) is going to stump up a further
£5.8bn just to stay still.
The issue, (as approved by a vote of shareholders on the 26th
November) is of 1.34 shares for each existing share (previously 2
for 1 was mooted) at a price of 37p per share. The market overall
seems pleased since the share price ahead of the issue had passed
the 93p price. Post the approval, it fell as expected to around 58p.
The taxpayer does have some compensation in that £2.5bn has already
been paid for insurance of the assets up to this point and £144m
will be the underwriting fee. The investment banks will also have a
fee bonanza – as usual.
Was it all worth it to escape the insurance scheme? The market seems
to think so. As a fairly large private shareholder, I hope so.
23rd November 09
– Neelie the elephant
She’s not really an elephant but merely a behemoth beast. Neelie
Kroes has done it again. The European Competition Commissioner has
done it again ; eaten Angela Merkel for breakfast. Just as well for
the German Chancellor that she rode to victory in the elections on
the back of saving thousands of German Opel jobs by backing the
Canadian car parts firm Magna to buy GM Europe assisted by the
Russian bank Sberbank.
Kroes broke up the Dutch bank ING, played a starring role in the
reduction of Lloyds Banking Group and RBS and now has helped
persuade GM that they might as well do their own thing with their
European business since by the time Neelie has felled another tree,
the answer will be about the same. Of course, the Russian bear is
sore.
Few items of news have occupied more column inches in the credit
crunch aftermath than what the bankrupt GM Motors would do with its
European wing. With 25,000 jobs at stake in mainland Europe and
5,000 in the UK plus probably as many again in the ranks of
distributors and ancillary trades, it was and still is one of the
major fall-outs.
Well, the Americans have stood their ground and the sovereign
governments will have to put up if they want to keep the business in
tact. All this talk of the new European Constitution and whether
there will be a European President seems a bit pointless. We already
have the most powerful person in Europe firmly in place. Not nearly
but Neelie.
16th November 09
– “Probably the worst managed bank this country has ever seen.”
The quote from Lord Myners, the City minister, relates to
none other than the Royal Bank of Scotland (RBS) as it was announced
that it would use the Government’s Asset Protection Scheme (APS) for
£282b of toxic assets. It will stand the first £60b of losses
itself.
A further £25.5b is to be pumped into the bank (in “B” shares with a
coupon of 7%) to add to the £20b of existing support and giving the
taxpayer an 84.4% holding in the beleaguered outfit. A further £8b
could be injected in the future should the tier 1 ratio fall below
5%.
Like Lloyds Banking Group (see entry dated 9th November 09)
concessions have been dragged out of the bank as one cost of the
saviour efforts. Cash bonuses are to cease for those on salaries
above £39,000 pa in favour of shares and even new recruits who were
appointed on multi-million “guarantees” will be caught. Directors
are to defer bonuses until 2012 and clawback clauses will apply. RBS
will have a lending target of £25b for this year and next.
Facing up to Europe’s competition authorities, RBS will sell its
insurance arm Sempra, its global payments business and 312 branches.
Lloyds and RBS taken together, it is estimated that 10% of all
personal banking and small business arrangements will pass to new
owners over the term of the deal.
All that “goodwill” on past acquisitions wiped out at a stroke.
9th November 09
– The APS that wasn’t
Back on the 13th August, I was writing a piece that assumed
that the new Lloyds Banking Group (LBG) would sign the government
inspired Asset Protection Scheme (APS) agreement. Well, it never was
signed and now will not be. Rather the bank has crawled out from
under the insurance cover preferring big funding actions and bowing
to competitive pressure issues from Europe.
The future shape of LBG can be summarised as follows:-
• There will be a massive (the largest ever in the UK) rights issue
to raise £13.5b. The shares will be issued on the basis of 2 for
each existing share and priced at the higher of 15p or a 38% to 42%
discount to the ex-rights price and calculated as 29p or 34p based
on the closing price on Monday 2nd November 09.
• £7.5b of debt will be swapped for capital that can convert to
shares.
• The Government will pump a further £5.7b into the bank to augment
the £15b of taxpayer support previously applied.
• Cash bonuses are banned to staff on salaries above £39,000.
Bonuses will have to be in shares.
• Board directors will defer all their bonuses until 2012.
• All bonuses will be subject to clawbacks.
• Lending targets have been set at £14b for both this year and next.
• 600 branches of Lloyds/TSB must be sold, together with the
Cheltenham & Gloucester branded accounts and mortgages and the
Intelligent Finance business, all by the end of 2013. Halifax is to
be retained.
• Acquisitions are banned for the next four years.
• Dividends are banned until the end of January 2012.
• There is an expected hit of about £34b in loan losses for the next
two years.
Quite a turn up. And to think that I used to bank with Bank of
Scotland, a lovely friendly bank that had pushed quietly Southwards
and started off the bidding round for Natwest. How times change.
2nd November 09
- Of confidence
In the early days of the credit crunch diary, I referred to
the esoteric factor of confidence as the most important ingredient
in getting things going again and likened it to “culture” overlaying
the performance of a corporate body.
Market research company Nielsen has published its latest survey on
consumer confidence showing the highest level for eighteen months.
Specifically, sentiment about personal finances has improved a
little and attitudes to spending on discretionary items are more
positive. Overall the consumer confidence index rose to 75 in
October being a 10 point gain on the all-time low registered in
April 09.
Significantly, 20% of people now believe job prospects in the UK
will be “good” or “excellent” over the next twelve months compared
with 14% in June 09. Adding some mollification, the British Retail
Consortium’s (BRC) director general, Stephen Robertson said “There’s
no question the general mood of customers is better than a year ago
when conditions were dire, but improvements have been slow so far.
Half of consumers believe we’ll still be in recession in a year’s
time. More than half are worried about jobs and their own finances
and that will hold back full scale recovery well into next year.”
One other aspect of aftermath is worth noting since it is definitely
a factor in my family. People still in employment are working harder
and there has been an increase in people feeling their work-life
balance is their biggest concern (9% compared with 4% a year ago.)
24 October
2009 – Great expectations
Dashed. I know of no leading economist or respected economic
institution that did not think that the UK economy would pull out of
recession in the third quarter of 2009, that is, as ended on 30th
September. But it was not to be unless later revisions change the
figures. The economy shrank by 0.4% in that quarter to bring total
output down nearly 6%.
According to The Office for National Statistics, every sector
contracted except for a “flat” public sector. The big surprise was a
further decline in the most important services sector not least due
to the rampant time investment banks are known to have been
experiencing. Management consultancy has been doing well too. One
assumes it is the professional services associated with the
construction and related areas that still pull down the overall
services sector average.
What are the consequences of the surprise failure to move back into
the black?
• Sterling weakened closing down 2.4 cents against the dollar at
$1.6338 wiping out earlier gains. This should continue to help
exporters but also led to Britain slipping down to seventh place in
the economic nation league table
• The yield on gilts fell sharply on expectations that the QE
programme will be increased beyond the £175bn current threshold
• The equity market continued to shrug its shoulders with the FTSE
100 closing up 35.2 points at 5,242.
The political take on the economic news is interesting. There would
seem to be a difference of opinion. Our laid back, one hesitates to
use the word moribund, Chancellor Alistair Darling ( a Darling was a
deer hunter by the way) said “I’ve always been clear that growth
will return at the turn of the year” whilst his shadow George
Osborne replied “Britain urgently needs new economic leadership.”
I have a new team in mind. Mervyn King for PM and our Vince for
chancellor. The revolution starts right here.
16 October
2009 – Turn again Whittington
The famous Christmas pantomime is supposedly based upon the
story or Richard Whittington, a medieval man from Gloucester, who
found fortune (with his cat) when he turned to London to find the
streets paved in gold. So did the aptly named Goldman Sachs. The
biggest investment bank is the leading lady in a pantomime only too
familiar to chief executives needing to raise capital (due largely
to the consequences of the credit crisis), re-finance generally,
re-structure or do a spot of merger or acquisition work.
The fact is that in this recovery period, competition for the big
financial services has reduced significantly. So what? Well, one can
widen the spreads, up the margins and push service charges through
the roof. Risk has not gone away and if you want those shoes
mending, the monopoly cobbler can charge more. Simple as that. The
fact is that markets cannot be regulated away and the regulators and
controllers cannot do what has to be done themselves.
The likes of Goldmans are actually needed. If that golden goose is
maimed, another egg will surely be laid someplace else. In the third
quarter of 09, Goldman’s revenues increased by 105% on the
comparative period to reach $12.3bn. From a UK economic viewpoint
that is excellent news since about 43% of revenue is paid to its
staff and the treasury takes a top-slice 52% of that. It also takes
a whopping chunk of profit in corporation tax. For a full current
year, it is thought that the UK taxpayer will pull back about £2.5bn
just from this one business. That will pay for a few dolers.
What is more, the ultimate risk-takers, the shareholders, got a
21.4% return in that third quarter. Admit it, you are just jealous.
14 October
2009 - Catching ones
breath
The credit crunch diary poem dated 9th October was intended
to summarise the key events of a very special year. A year in which
the economic world was caught on the hop. A world of events that
started in some remote distant place, like an earthquake in San
Francisco, that sounds bad and must be horrible for those left
homeless over there but will not, let’s face it, affect us.
Except this time the homeless will affect us because unlike an act
of God, this event is an act of man. Man at his most avarice.
After a full year of commentary and blogging, it was time to retreat
to a secret place where only sea and wind crash in as a harmless
spectacle. Time to catch ones breath so as to climb a mountain and
take in a spectacular view of what nature intended and man can not
mess with.
So, the credit crunch diary, etched into my life between successive
Octobers, has ended. I hope readers enjoyed it and appreciated the
research and the asides. It will live again as a whole and be
re-launched as a book. A historical record of the year. Watch the
website for the birth.
Meantime, is it not incredible that the Magna saga lives on? Lord
Mandelson has concluded (well, actually he didn’t, my old firm
PricewaterhouseCoopers did) that the business plan has
“shortcomings”. No kidding! It worked before with 25% of the UK
Vauxhall workforce gone and now with no compulsory redundancies, how
can it still work? You will recall form my diary that Germany was to
disproportionately benefit from job cuts amounting to about 16% of
their, admittedly much larger, manning level for Opel. But this is
the new Europe and Neelie (not Nearly) Kroes, the European
Competition Commissioner, thought that the four-and-a-half billion
euros offered by the Federal German government looked a bit like a
bribe. Like Britain, Spain, Poland and Belgium where none too
chuffed either. Nevertheless, GM is going to do the deal with Magna
(and Russia) and sod the European governments.
The spreadsheets in that business plan must look a bit wobbly,
especially as a bolt-on to a Canadian car parts outfit. My wife
would like a new Astra. Whether it will come from Ellesmere Port is
still in doubt but we will keep tabs on events.
Previous Week
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Diary Home
- The Aftermath & Recovery
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