Archive for the ‘Finance and Economics’ Category

Makers and Takers, review

There I am in the bookshop and the owner offers me Rana Foroohar’s lastest book, Don’t be Evil..., about the inherently evil Big Tech. He detects my interest, but not quite in this book at this moment. Then he reaches for Foroohar’s earlier work from 2016, Makers and Takers. In true Douglas Adams style I bought it because it was slightly cheaper, but unlike the Hitch Hiker’s Guide to the Galaxy, it did not have a reassuring title (Don’t Panic). Indeed, this book’s subtitle, How Wall Street Destroyed Main Street, could actually be re-titled, Panic. It is that troubling.

How does this book fit into my current reading? Regular readers know that climate change is occupying my thoughts at the moment, indeed my current reading (right) is shockingly pertinent (also used by my bookseller to cause an exchange of money from me to him). The finance industry is both a cause and solution to the climate crisis. To understand how it might solve the crisis, it is worth knowing – or at least reminding oneself – about the dark side of finance. How, despite the financial crisis of 2008, in Jarvis Cocker’s words, The cunts are still running the world. And indeed, ruining it.

This is a gripping book. I know most of the story, but here it is nicely sewn together. Essentially as a Financial Times journalist – unusually so – Foroohar has been a chronicler of the story in bite-sized chunks, in real time. She reminds us about the banking industry’s original functional purpose for capitalism, to provide the funds for investment in the productive economy. She takes us through the deregulation of the industry in both the USA and the UK that crucially broke the separation of boring, low-return retail and business banking and lending and the riskier investment, speculative and hedging activities. Moreover, the central banks in those countries are both lenders of last resort (always reassuring when engaged in risky trading), regulators and, in tandem with the state, secure a compliant civil society and the system of law that favours capital over labour.

Wall Street is also complicit in the financialisation of business. Faroohar reminds us how large firms avoid tax by offshoring their earnings abroad; how they increase the value of their firms by share buy-backs financed by lending (for example, Apple) at the expense of innovation in product and services; and how the executives of these firms remunerate themselves not on the basis of salary like their employees, but rather by shares attracting capital gains tax rather than income tax. This provides the incentive to inflate the value of the firm independent of its products. Here Faroohar cites the case of Pfizer, so desperately short of innovative products, but rich nonetheless.

We see how the finance industry thrives on private and public debt, itself fuelled by low interest rates. The lower the interest rates, the more lending (and hence money generation) becomes feasible. The lower the interest rates, the more money there is to buy property which squeezes out of property ownership a good percentage of private citizens – or at least gets them to overstretch themselves in pursuit of loans. And when whole neighbourhoods become bankrupt, the finance sector provides the money for equity funds to buy up swathes of cheap properties, rent them out, often supported by the state and tax payers, and take rather than make.

The finance sector steals our pensions, ensures the high price of commodities, including essential foodstuffs. And, particularly in the USA, personnel enjoy the revolving door between Government and Banking and vice versa, over and over again. We see how the banks, private equity, and their customers monetise public goods like research and development executed in publicly-funded universities and research centres but privatise the benefits. By offshoring their profits, they return only a fraction of the value generated to source.

Where does the environment come into this? The climate crisis that is ramping up can be still solved by investing in zero carbon technologies, infrastructures, public procurement, education and lifestyle changes. It does not. The finance sector has become an end in itself rather than the means by which an economy can be radically changed in a relatively short space of time. Not only do they not lead in investment in green technology, but they actively lobby against it. And because of the revolving door, a bubble is generated whereby business-as-usual – that is, making money – remains the priority. Challenging this is the struggle of the century. And if we do not win it, the climate will change. Badly.

Unease over corporate scandal: Olympus

Olympus_head_office_hatagaya_shibuyaLast night we watched documentary screened by the BBC called 1.7 billion dollar fraud: full exposure broadcast under the Storyville series banner. It is the story of an accounting fraud perpetrated over a 10 or so year period by the Board of the company to hide losses. It is an intriguing story told in an engaging way. Or so it seemed on first viewing.

The plot is simple. Successive presidents of the company have hidden losses by a variety of means – offshoring debt, buying shell companies, etc. – in order to keep up the share price and, ultimately, avoid bankruptcy. The knight in shining armour, as it were, was Michael Woodford, a humble Brit from Liverpool who started work for a subsidiary of Olympus 30 years ago and rose to be its president, at least in name. Without him, the scandal would have been ignored in Japan even though the story had been articulated in a small Japanese language financial magazine, FACTA. The story is even more complicated than the film presents.

Now there is no doubt that Olympus perpetrated significant accountancy fraud. And in order to do it, some rather dubious players – Yakuza and various Cayman Island firms – were employed. But it is also clear that the causes were not all they might seem. At first sight, the successive Presidents “instructed” their Finance directors, in particular Hisashi Mori, to move, hide and do whatever else to get rid of the debt for personal gain. Surely, should such losses be reported, they, as the person sat at the top would have to go? But what if the motive was not personal gain but rather the social welfare of employees? The capitalist west – or certainly the USA and the UK – has no real problem with this. Firms fail, employees find new jobs. Or not.

Tsuyoshi Kikukawa and Michael Woodford shake hands over appointment as President in 2011

Tsuyoshi Kikukawa and Michael Woodford shake hands over appointment as President in 2011

But even a cursory knowledge about Japanese firms and Japanese business methods alerts us to the non-universality of this approach. The firm may be bigger than the President (despite what Michael Woodford says about – Tsuyoshi Kikukawa – in the film) with the livelihoods of employees, families and pensions all locked into the success of the firm.

Moreover, the losses have their origins in global capitalist systems. First, the Plaza Accord of 1985 where a group of countries including Japan, the USA, UK, France and West Germany, decreased the value of the Dollar relative to the Yen. The purpose of this was to make the US more competitive and its goods and services cheaper. The downside was that Japanese products became more expensive, including Olympus products. Whilst this was not threatening, Olympus’ profits were affected. In order to keep them up – and this was not unique to Olympus – firms invested in stocks, bonds and other financial “instruments”. When the crash of 2008 came, these companies found their balance sheets compromised. Olympus acted to protect itself from those losses.

In the film, Michael Woodford is portrayed as being a victim. He was badly treated by Kikukawa particularly. For example, he tells the story of how he was invited to a lunch meeting where he saw that he had been served a Tuna sandwich and the other Japanese participants, Sushi, as a way of demonstrating his inferiority vis-a-vis his Japanese counterparts. He also tells of how he feared for his life when on the day he was sacked. But what was also telling is that Michael Woodford did not speak any Japanese. Now I am far from qualified to comment on this, but it seems to me that language is the most important aspect of culture. It is clear that some of the Japanese (writing) signs are made up of concepts of honour, loyalty, etc. To understand the language is to understand the culture. One cannot hope to understand Japanese capitalism in English. Maybe that is the biggest scandal, that Michael Woodford thought that he could. Or that capitalism speaks a universal language?

Picture: Olympus HQ ja:利用者:Kamemaru2000

Kikukawa and Woodford: screengrab from film

Syriza and the Greek response to austerity

Increasingly, it is clear that globalisation has globalised wealth in the hands of a number of elites – from Flag_of_Greece_svgoligarchs in Russia, bankers in the UK and land speculators in Bombay. When the crash came in 2008, the perpetrators – the financial services elites – ‘hoovered’ up the public money pumped into the system to obviate a capitalist meltdown. No one went to jail; but Europe’s people were handed down a dose of austerity in return for their support. What is perplexing is how any sane policy-maker can sustain an argument that austerity helps declining economies. In Greece, for example, something in the order of 70 per cent of the country’s under 25s are unemployed. They are neither economically active nor productive. In the UK, unemployment goes down not because the economy is growing and the demand for labour is increasing; rather because people are taking zero-hour jobs or, indeed, taking jobs for an hour through ‘freelancer’ websites. Or, most disturbingly, if unskilled – at the unconnected end of the labour market – ads in supermarkets and shop windows. Alexis_Tsipras3

Syriza’s victory in the Greek general election last week represents something positive. It is populist, but from the left rather than the right. The rhetoric is one of alternative, fairness and equality. It is a David and Goliath story in the making. The new Greek Prime minister, Alexis Tsipras (left), takes his secular oath, appoints radicals to his government (such as Yanis Varoufakis as Finance Minister), halts privatisations, reappoints the cleaners who were sacked from their jobs in the finance ministry, initiates tax reform and targets corruption. They have even put up all of the ministerial BMWs up for sale.

We learn that the first port of call is not the IMF, the European Commission or even the German government in Berlin, rather opposition parties in Italy and Spain – next up on Europe’s election merry-go-round. I wait and see what happens, but there is optimism about Europe’s prospects and the rightness of Syriza’s approach to the crippling debt that they have inherited. I trust the elites do not share my optimism.

Flag: Fry1989, Wikipedia

Photo: Lorenzo Gaudenzi

The oil price is a problem

Oil_wellWhilst I am delighted to see that I can fill the tank of my ever-so reliable van for a fraction of what it cost this time last year and fly until my heart is discontent in the knowledge that the value of the airlines (share price) is increasing, they having done nothing more than survive three months since the oil price started to plummet, it is bad news. Why?

First, burning hydrocarbon fuels is bad for the environment and price is a key regulator of consumption. Second, many oil producing countries – some of them not the richest – have set their budgets at anticipated levels; for example, $100. The shortfall of $35 (reflecting today’s price-per-barrel) can make the difference between life-and-death. High oil prices, then, can be good transfer payments between rich and poorer countries.

Third, oil company shares are down sharply. With these stocks being some of the key investments made by pension funds, meeting obligations becomes more difficult. Fourth, investment in renewables will be hit. Suddenly it is only cost-effective to burn oil. Fifth, geopolitics. When demand goes down, price is often regulated by cutting supply. This is not happening for reasons which are currently unclear. However, there are some suggestions that it is a power battle between oil producing countries particularly in the middle-east rendering the region even more unstable than it already is. That is also not to mention the situation in Russia. Very much an oil economy that is suffering also from ludicrous EU sanctions. There is unrest ahead.

What about the positives? Well, I can think of one key positive. The glut in demand is, in part, caused by shale oil production in the USA and tar sands in Canada. These two practices are very damaging to the environment. $65 a barrel is not sufficient to warrant such production. Whether the firms will cease their activities remains to be seen, but what is clear is that where fracking has not yet started, it is unlikely to do so.

Picture: Flcelloguy/Wikipedia

The case for lawyers to head up the banking inquiry

‘Bob’ – we are all on first name terms now – Diamond wrapped the MPs on the Treasury Select Committee around his little finger yesterday. Despite it taking 3 hours, it was an incoherent tame affair largely because there was no strategy to the questioning by the MPs. To be fair, they are not trained interrogators, but there were some rudimentary errors made. For example, Robert Peston on yesterday’s World Tonight programme asked, when did Diamond actually learn about LIBOR fixing – when he first read the report last week as he claims or earlier when he in 2008 claimed that all banks were busy fixing the LIBOR? If he knew in 2008, why did he not intervene? And why did he say to the Committee that he learned only last week? And why did the MPs not pick him up on that contradiction? The now infamous Tucker exchange was also unsatisfactorily investigated.

Click on Peston above to hear the interview.

If ever there was a case for a lawyer led investigation, yesterday’s hearing made it.

Diamond resigns, Cameron announces limited inquiry

Bob Diamond has this morning resigned as CEO of Barclays. Clearly, the reputation of Barclays is under some pressure over this LIBOR-fixing scandal. That said, one is still incredulous to hear shareholders this morning defending him – or at least his aggressive banking style that they think suits their dividend requirements.

Yesterday, David Cameron announced a parliamentary review of banking – or rather professional and cultural standards in the banking industry to be chaired by Andrew Tyrie. Tyrie is now doing some back peddling in light of Labour’s call for a more substantive review of banking presided over by a lawyer similar to Leveson currently investigating phone hacking.

Barclays and the LIBOR

On 6 November 2011 (see below), I reported on Bob Diamond’s Today lecture and his subsequent appearance on the programme the following day (that interview was uploaded to this blog). Well, now we find that Barclays made a lot of money from manipulating the inter-bank lending rate at the expense customers and citizens. The corporate price to pay is roughly £290m with £60m as a straight fine. Job done!

Well, not quite. Was this illegal? The suggestion is that this practice was systematic; i.e. orchestrated by the senior managment of the bank in which CEO Bob Diamond, at the time, was certainly a player. If so, surely it is time for a criminal prosecution? Giving up a bonus will not do.

Some of the reporting from this morning’s Today Programme, including a clip from Bob Diamond’s lecture on corporate culture, an interview with a former Barclays CEO, Martin Taylor, and the inevitable Robert Peston comment can be heard here.

Bank bonuses

So, Stephen Hester has declined his £1m bonus. Well done.

This morning’s radio comments on the issue have been revealing and need a more robust response. Though I give credit to Evan Davis again for challenging one interviewee who suggested that firms need to be able to pay on the basis of desert. Davis came back very quickly and said that the logic of capitalism was that firms try to get labour as cheaply as possible. Only senior managers seem to think that they deserve high salaries.

Stephen Hestor, noted Robert Peston on the Today programme, is a ‘determined man’ who may find himself with job offers to go to other banks where he could claim his bonus without political interference. Here are the things to say to all of those senior bankers – and anyone else who thinks that they deserve more.

Go. If you can find a better place to live than London, go. Second, having got us into this mess, you might feel that you have some responsibility to help clean up the mess. The banking sector owes the taxpayer a lot of money and gratitude. There wouldn’t be a banking sector without us. Go to Beijing, Singapore, Dubai. We really need a reformed banking sector – one that serves the citizens rather than exploits them. We want small businesses to be able to function and develop. Banks, as they are currently manifested, are a hindrance.

Finally, I have heard the argument that we need Stephen Hestor so that we can return the bank to the private sector and retrieve the £45bn or so that we have invested. At the moment it is ‘worth’ half of that. The experience from Northern Rock is that we will not get our money back with or without Stephen Hestor with or without his bonus.

Giving Northern Rock away

The sale of Northern Rock  to Virgin at a loss to the taxpayer of £450m demonstrates something. First, nothing has been learned from recent experience. All this nonsense about bringing competition to the high street is meaningless in the world of financial services. One would have thought that if the government had wanted to develop competition then a second option might have been better.

That second option might have been remutualisation. Was it not the demutualisation of Northern Rock that got it into bother in the first place? And what happened to the government’s proclaimed love affair with co-operative ownership? I would have thought that mutual ownership was a viable and desirable option. The high street would have benefitted, businesses short of capital might have benefitted? But oh no. The taxpayer subsidises the transfer of a valuable asset – tens of thousands of viable mortgages – to an already very wealthy man. However, Jill Treanor writing in the Guardian on 2 December sees that large sums of money will also be transferred to existing senior managers:

The annual report for 2010 states that:

“The company will operate a long-term incentive plan for senior employees that will deliver financial rewards if the company achieves certain targets over a three year performance period. As the company did not make Ltip [long-term incentive plan] awards in 2010 it is the company’s intention to make awards in 2011 covering 2010 and 2011. The 2010 award will vest in March 2013 and the 2011 in March 2014 or upon successful exit from temporary public ownership if earlier” (emphasis added).

How convenient that the transfer occurs before the close of the year saving all of that unnecessary waiting around until 2014.

Now I understand.

Bob Diamond on Today

Bob Diamond, the CEO of Barclays Bank, was on The Today Programme on Radio 4 on Friday 4 November. He’d given the inaugural BBC Economics lecture the night before and came on to face John Humphrys in a kind of defence of banking. Listening to him, one might have thought that all was rosy in the the world of banking. These valued institutions have regrettably moved away from the Captan Mainwaring approach – sitting down with the local bank manager to agree a loan – but the branches are friendly and well decorated. A bit of miss-selling of financial products – in particular pension protection insurance – was nothing too serious. And paying lots of money for the best financial talent is justfiable. Himself included. It’s a global business. His own salary was a bit of a contention – he didn’t like being asked about it. As always in these situations, they generally argue that it is up to the remuneration committee to decide salaries. The fact that the global economy is on its knees because of these people seems not to have registered. Listen here

Nice tie.