The workers at the Grangemouth oil refinery are striking mainly because they want to protect their non-contributory final salary pension plan. These deals are rarer than hen's teeth in the private sector these days, but it's hard to blame the workers for trying to hold on to what they've got.
The Grangemouth owner, Ineos, says that the company simply can't afford to maintain the existing scheme. One reason for that may be that they know they face a growing tax bill to pay for public sector pensions. It's been reported in the last few days that public sector workers will retire with pensions as much as four times larger than the average private sector worker, who is now reliant on a defined contribution plan. What's more, the public sector pension is inflation indexed, no small consideration as the inflation genie seems to be out of the bottle again.
The UK Industry Minister, John Hutton, has criticised the strike as unnecessary and urged the unions to compromise. Hutton is, of course, in line for a non-contributory indexed pension of his own, and there's no sign that he plans to set the Grangemouth workers a good example by giving it up.
Monday, 28 April 2008
Nice try, hedgie
This weekend the Sunday Times biz section gave space to Jon Wood, head of one of the hedge funds that bought into Northern Rock after the crisis hit, to air his views on how unnecessary the whole mess was.
Wood argues that Northern Rock was and is solvent, with assets in excess of its liabilities; that its much-criticised wholesale funding model complied with FSA guidelines; and that the whole mess could have been avoided if the Government and the Bank of England had made their liquidity injection available last August, rather than just this month. He starts and ends with expressions of regret over the imminent loss of jobs at the company, and over the losses sustained by 200,000 small shareholders, manfully refraining from bemoaning the likely loss of his own company's opportunistic investment in the ailing company.
On first reading I found this fairly convincing, but as I started to pick it apart a bit, I was less sure. In the first place, if the company was as sound as Mr Snow claims it was last August, it's surprising that no real private sector solution to the problem was found at that stage. Sure, Lloyds TSB was sniffing around, but its interest in buying the company depended on massive amounts of state aid. Second, the Rock's stock price had been falling throughout the first half of last year, a period during which it was the largest single mortgage lender in the UK. If the company had no problems with either its asset quality or its funding model, why had the market taken fright? Third, even if the Government had put its liquidity deal in place last August, the Rock would probably have had to scoop the whole pot itself, given the scale of its problems. It's hard to see how this would have helped the rest of the financial system.
The main reason to be sceptical about Mr Snow's views, of course, is that his company never really wanted to be a shareholder in the Rock for the long term. Although he asserts that SRM was willing to inject more money into the Rock to provide "comfort" to the Government, it only built up its shareholding in the hope of profiting from a bailout, either by another bank or by the Government. Its only chance of seeing much of its money back is probably going to come in the courts, so this weekend's piece in the Times probably gives us a pretty good insight into what SRM's opening arguments are going to look like.
Wood argues that Northern Rock was and is solvent, with assets in excess of its liabilities; that its much-criticised wholesale funding model complied with FSA guidelines; and that the whole mess could have been avoided if the Government and the Bank of England had made their liquidity injection available last August, rather than just this month. He starts and ends with expressions of regret over the imminent loss of jobs at the company, and over the losses sustained by 200,000 small shareholders, manfully refraining from bemoaning the likely loss of his own company's opportunistic investment in the ailing company.
On first reading I found this fairly convincing, but as I started to pick it apart a bit, I was less sure. In the first place, if the company was as sound as Mr Snow claims it was last August, it's surprising that no real private sector solution to the problem was found at that stage. Sure, Lloyds TSB was sniffing around, but its interest in buying the company depended on massive amounts of state aid. Second, the Rock's stock price had been falling throughout the first half of last year, a period during which it was the largest single mortgage lender in the UK. If the company had no problems with either its asset quality or its funding model, why had the market taken fright? Third, even if the Government had put its liquidity deal in place last August, the Rock would probably have had to scoop the whole pot itself, given the scale of its problems. It's hard to see how this would have helped the rest of the financial system.
The main reason to be sceptical about Mr Snow's views, of course, is that his company never really wanted to be a shareholder in the Rock for the long term. Although he asserts that SRM was willing to inject more money into the Rock to provide "comfort" to the Government, it only built up its shareholding in the hope of profiting from a bailout, either by another bank or by the Government. Its only chance of seeing much of its money back is probably going to come in the courts, so this weekend's piece in the Times probably gives us a pretty good insight into what SRM's opening arguments are going to look like.
Monday, 21 April 2008
The Old Lady put
Remember the "Greenspan put"? That's how Wall Street described the situation in the early part of this decade, when it seemed as though the Greenspan Fed was willing to cut rates whenever there was a wobble in the stock market. No need to worry about getting overextended in the equity market -- if things went pear-shaped, Greenspan would come to the rescue with a rate cut.
Does the Bank of England's plan to "unfreeze" UK credit markets by allowing banks to swap some of their asset-backed debt for gilts amount to a UK version of the Greenspan put? Early in the credit crisis, Bank of England Governor Mervyn King was steadfast in his opposition to doing anything that might create a moral hazard in the financial system, by appearing to bail out imprudent lenders. Arguably, this stance delayed the search for a solution to the plight of Northern Rock, at great expense to all concerned.
King has been less vocal about moral hazard lately, but it seems unlikely that he would have come up with this swap scheme of his own volition. It must be the Government that has initiated it, prompted by fears that a prolonged slump in the housing market would put paid to its reputation for prudent economic management and scupper its chances of re-election in one fell swoop. Yet almost everyone agrees that the credit excesses of the last half-decade have raised housing prices to unsustainable levels, while making first-time home ownership near-impossible. A period of falling house prices would start to address both of these problems, yet the launch of the swap scheme seems designed to prevent that from happening.
Of course, all bets would be off if the credit crisis caused more institutions to go the way of Northern Rock; in that case the Bank and the Government would be forced to act. So the swap scheme is likely to be presented as a preventive measure. It certainly seems to have been set up to avoid giving the appearance of a bailout. Banks will have to overcollateralise the gilts they receive (i.e. put up a larger face value of asset-backed paper in exchange -- possibly 10 to 30% more). This will limit the risk of the scheme winding up costing the taxpayer money, though that could still happen if the fall in underlying asset vales (house prices) becomes sufficiently severe.
Still, I'm not sure that the apparent goal of getting banks back to business as usual in the mortgage market is the right one -- that's how we got into this mess. Far better for banks to take their lumps and rein in a bit while they rebuild their balance sheets. That's what RBS seems to be intent on doing, with its proposed rights issue and asset sales. Interestingly, though, that has the firm's shareholders up in arms. Presumably they think that the taxpayer should be on the hook for past management mistakes, so they at least must be happy with today's announcement from the Old Lady.
Does the Bank of England's plan to "unfreeze" UK credit markets by allowing banks to swap some of their asset-backed debt for gilts amount to a UK version of the Greenspan put? Early in the credit crisis, Bank of England Governor Mervyn King was steadfast in his opposition to doing anything that might create a moral hazard in the financial system, by appearing to bail out imprudent lenders. Arguably, this stance delayed the search for a solution to the plight of Northern Rock, at great expense to all concerned.
King has been less vocal about moral hazard lately, but it seems unlikely that he would have come up with this swap scheme of his own volition. It must be the Government that has initiated it, prompted by fears that a prolonged slump in the housing market would put paid to its reputation for prudent economic management and scupper its chances of re-election in one fell swoop. Yet almost everyone agrees that the credit excesses of the last half-decade have raised housing prices to unsustainable levels, while making first-time home ownership near-impossible. A period of falling house prices would start to address both of these problems, yet the launch of the swap scheme seems designed to prevent that from happening.
Of course, all bets would be off if the credit crisis caused more institutions to go the way of Northern Rock; in that case the Bank and the Government would be forced to act. So the swap scheme is likely to be presented as a preventive measure. It certainly seems to have been set up to avoid giving the appearance of a bailout. Banks will have to overcollateralise the gilts they receive (i.e. put up a larger face value of asset-backed paper in exchange -- possibly 10 to 30% more). This will limit the risk of the scheme winding up costing the taxpayer money, though that could still happen if the fall in underlying asset vales (house prices) becomes sufficiently severe.
Still, I'm not sure that the apparent goal of getting banks back to business as usual in the mortgage market is the right one -- that's how we got into this mess. Far better for banks to take their lumps and rein in a bit while they rebuild their balance sheets. That's what RBS seems to be intent on doing, with its proposed rights issue and asset sales. Interestingly, though, that has the firm's shareholders up in arms. Presumably they think that the taxpayer should be on the hook for past management mistakes, so they at least must be happy with today's announcement from the Old Lady.
Head Balls
Question: how many private sector workers in the UK do you suppose earn £200,000 a year, paid entirely in cash, with virtually iron-clad job security (backed by a trade union) and an index-linked pension. My best guess: none. Yet in an attempt to improve the education system by bringing in "private style" incentives, that seems to be the deal that Education Minister Ed Balls wants to offer to some head teachers.
This follows the perceived success of big boosts in salaries for heads of large NHS hospitals. One of these folk, the chief executive of Whipps Cross hospital in east London, made not far short of £400,000 last year, according to data disclosed to Parliament a few months back.
Now, I know Whipps Cross hospital very well, having grown up in the area. A few years ago it was a Victorian nightmare -- and I apologize to any Victorians out there who may be offended by that comparison. Whipps was actually much worse than that. Nowadays it's much improved, so the Chief Exec and his (her? -- I can't remember) staff have done a good job.
But that's not the point. One of the key elements of success for any private business is not paying more than you have to for anything, but Ed Balls and his Cabinet colleagues seem quite unaware of this. Who is competing against the NHS for the services of hospital administrators? Right. So why do you have to pay them so much? The person at Whipps would still turn up to do the job at a salary of £100,000 a year, and would no doubt be very glad of it. (I would make the same sort of argument about how much the BBC pays Jonathan Ross, but that's for another time).
The same goes for head teachers -- maybe even moreso, in fact. It's at least conceivable that a private sector manager from an unrelated field could make a go of hospital administration, but there's no chance of a non-teacher getting a headship. So you're going to pay a budget-busting amount to people who have already chosen to be in the profession, and entered it in full knowledge of the rewards and risks.
This Government simply does not understand the private sector practices that it seeks to emulate. City fat cats get paid big money, but large chunks of it are deferred and very possibly paid in the form of company stock, which may or may not be worth as much when it's finally handed over; they are subject to firing either because of their own failings or because problems elsewhere in the business have led to general cost-cutting; they have no trade union to fight their corner; and they have to provide their own pensions. If Ed Balls wants to replicate those conditions for head teachers, fair enough, but I don't think that's the plan, and if it were, I'd expect a lot of members of the profession to quit, because that's not what they signed up for.
We're hearing that class sizes in primary schools could reach 70 because of funding constraints. For the same reason, teaching assistants are replacing fully qualified teachers all over the place. If Ed Balls has wodges of cash to throw around, he should invest in solving those problems rather than make a few head teachers rich beyond their wildest dreams.
This follows the perceived success of big boosts in salaries for heads of large NHS hospitals. One of these folk, the chief executive of Whipps Cross hospital in east London, made not far short of £400,000 last year, according to data disclosed to Parliament a few months back.
Now, I know Whipps Cross hospital very well, having grown up in the area. A few years ago it was a Victorian nightmare -- and I apologize to any Victorians out there who may be offended by that comparison. Whipps was actually much worse than that. Nowadays it's much improved, so the Chief Exec and his (her? -- I can't remember) staff have done a good job.
But that's not the point. One of the key elements of success for any private business is not paying more than you have to for anything, but Ed Balls and his Cabinet colleagues seem quite unaware of this. Who is competing against the NHS for the services of hospital administrators? Right. So why do you have to pay them so much? The person at Whipps would still turn up to do the job at a salary of £100,000 a year, and would no doubt be very glad of it. (I would make the same sort of argument about how much the BBC pays Jonathan Ross, but that's for another time).
The same goes for head teachers -- maybe even moreso, in fact. It's at least conceivable that a private sector manager from an unrelated field could make a go of hospital administration, but there's no chance of a non-teacher getting a headship. So you're going to pay a budget-busting amount to people who have already chosen to be in the profession, and entered it in full knowledge of the rewards and risks.
This Government simply does not understand the private sector practices that it seeks to emulate. City fat cats get paid big money, but large chunks of it are deferred and very possibly paid in the form of company stock, which may or may not be worth as much when it's finally handed over; they are subject to firing either because of their own failings or because problems elsewhere in the business have led to general cost-cutting; they have no trade union to fight their corner; and they have to provide their own pensions. If Ed Balls wants to replicate those conditions for head teachers, fair enough, but I don't think that's the plan, and if it were, I'd expect a lot of members of the profession to quit, because that's not what they signed up for.
We're hearing that class sizes in primary schools could reach 70 because of funding constraints. For the same reason, teaching assistants are replacing fully qualified teachers all over the place. If Ed Balls has wodges of cash to throw around, he should invest in solving those problems rather than make a few head teachers rich beyond their wildest dreams.
Thursday, 17 April 2008
PFI-ddle
The private sector has done a pretty good job of trashing its own reputation since the UK Government started privatising the provision of all kinds of public services (the so-called Private Finance Initiative, or PFI). The mega-disasters are well known: the collapse of the Metronet consortium that was selected to run half of the London Underground (it ran out of money and credit only a couple of years into a thirty-year contract); the soaring cost of the privately-run railways, which absorb far more in subsidy than poor old British Rail ever did; the out-of-control BAA monopoly that has made London's airports musts to avoid; and so on.
It's pretty clear that public sector negotiators have been outsmarted by their private sector counterparts at every turn. Contracts have been let for the wrong term, risks and rewards are hopelessly skewed against the government, and there is an absence of real accountability.
Now it transpires that things may be even worse than this. Metronet or BAA are clear examples of failures of public-private finance to deliver what was promised at the agreed price. However, even in many cases where the partnership has "worked" in terms of delivering the project without any headline-grabbing screw-ups, it seems as if the public may still have got the short end of the stick. The Office of Fair Trading (OFT) has just accused 112 construction companies of irregularities relating to the bidding process for publicly-funded construction projects. The offences include "cover pricing" i.e. forming cartels with competitors to inflate prices in order to ensure they don't win contracts (no, I don't know why they would do this either -- if you don't want the job, don't bid), and faking invoices in order to compensate losing bidders.
Outrageously, the industry's main trade body, the Construction Confederation, is already pleading with the OFT for a "sensible and proportionate response" in dealing with companies found guilty of anti-competitive practices. It has even demanded that companies found guilty of these offences should not be prevented from bidding on future public sector contracts. Umm, I don't think so, though with this Government seemingly willing to press on with public-private ventures in the face of all evidence of failure, you can't be too sure.
By the way, by far the best coverage of the excesses that have taken place in the name of the Private Finance Initiative has been in Private Eye. Their latest issue just hit the newsstands, but the next one should have some juicy coverage of the OFT's report.
It's pretty clear that public sector negotiators have been outsmarted by their private sector counterparts at every turn. Contracts have been let for the wrong term, risks and rewards are hopelessly skewed against the government, and there is an absence of real accountability.
Now it transpires that things may be even worse than this. Metronet or BAA are clear examples of failures of public-private finance to deliver what was promised at the agreed price. However, even in many cases where the partnership has "worked" in terms of delivering the project without any headline-grabbing screw-ups, it seems as if the public may still have got the short end of the stick. The Office of Fair Trading (OFT) has just accused 112 construction companies of irregularities relating to the bidding process for publicly-funded construction projects. The offences include "cover pricing" i.e. forming cartels with competitors to inflate prices in order to ensure they don't win contracts (no, I don't know why they would do this either -- if you don't want the job, don't bid), and faking invoices in order to compensate losing bidders.
Outrageously, the industry's main trade body, the Construction Confederation, is already pleading with the OFT for a "sensible and proportionate response" in dealing with companies found guilty of anti-competitive practices. It has even demanded that companies found guilty of these offences should not be prevented from bidding on future public sector contracts. Umm, I don't think so, though with this Government seemingly willing to press on with public-private ventures in the face of all evidence of failure, you can't be too sure.
By the way, by far the best coverage of the excesses that have taken place in the name of the Private Finance Initiative has been in Private Eye. Their latest issue just hit the newsstands, but the next one should have some juicy coverage of the OFT's report.
Sunday, 13 April 2008
Jacqui Smith boobs
UK Home Secretary Jacqui Smith has issued a stark new warning about the "growing" terror threat in the UK, with 30 plots and 2000 individuals under police surveillance. Quite by chance, this warning comes as Parliament prepares to consider the Government's plan to increase the period for which terror suspects can be held without charge to 42 days from the current 28 days. There is absolutely no logical connection between the number of plots and the holding period, but I suppose it all helps to create the atmosphere of fear that the Government is relying on to push this measure through.
Am I the only one, though, that thinks this stark warning might have been more convincing if it hadn't been placed in the News of the World, behind the wall-to-wall Madeleine McCann, Shannon Matthews and Heather Mills coverage? Then again, Ms Smith was briefly famous for supposedly showing off too much cleavage in the House of Commons, so maybe this is where she belongs.
Am I the only one, though, that thinks this stark warning might have been more convincing if it hadn't been placed in the News of the World, behind the wall-to-wall Madeleine McCann, Shannon Matthews and Heather Mills coverage? Then again, Ms Smith was briefly famous for supposedly showing off too much cleavage in the House of Commons, so maybe this is where she belongs.
Tuesday, 8 April 2008
Tom Baker versus the IMF
Lent's over, so it's time to look at the latest pronouncements from dear old Anatole Kaletsky.
Do you remember an episode of Blackadder where Edmund hires an old sea dog to take him around the world? When he turns up for the voyage, he finds that the captain, played by Tom Baker, is planning to do the trip without a crew. "Isn't it normal to have a crew?", asks Edmund. The captain replies, "Opinion is split on the matter. All the other captains say it is, and I say it isn't".
I was reminded of this by a comment from Kaletsky in the Times on April 7, to the effect that he is now just about the only economist in the world not expecting a recession in the US. He's probably right about that, but I'm not sure it's a good thing. Over the years I have encountered quite a lot of economists who take contrary positions just to attract attention, saying that clients benefit from hearing contrary opinions. This is fine as long as your contrary opinion turns out right once in a while, but it's not much good if the consensus that you're bucking is correct.
And the fact is that the consensus, even if it's just a simple average of individual economists' forecasts, usually proves quite accurate. That's one reason why the private sector consensus published each month by the UK Treasury is worth watching. In fact, given Kaletsky's appalling track record since the credit crisis began, I'd value his opinions rather less than those of Tom Baker.
Anyway, the latest body to warn that the credit crisis will get worse before it gets batter is the IMF, in its semi-annual Global Financial Stability Report. It warns that “The critical challenge now facing policy makers is to take immediate steps to mitigate the risks of an even more wrenching adjustment, including by preparing contingency and other remediation plans, while also addressing the seeds of the present turmoil.” Evidently it doesn't agree with Kaletsky, who thinks that George Bush has laid the foundations for resolution of the problem through the fiscal stimulus that takes effect at mid-year. The way this crisis is going, that seems a long way away, and it's hard to be as confident as Kaletsky that cutting taxes for low earners will give much of a boost to anything, apart from the US trade deficit.
In the meantime, the impact on the UK economy continues to grow. Abbey has become the last bank to stop offering 100% mortgages (which should, of course, never have been available in the first place, but that's another issue). The Bank of England will further increase the size of its monthly liquidity injection into the banking system this month, as the spread between official and interbank rates (what used to be called the TED spread) continues to show a fundamental lack of confidence in the financial sector. Maybe Kaletsky will turn out to be right for once, but as Damon Runyon once said, "that's not the way to bet".
Do you remember an episode of Blackadder where Edmund hires an old sea dog to take him around the world? When he turns up for the voyage, he finds that the captain, played by Tom Baker, is planning to do the trip without a crew. "Isn't it normal to have a crew?", asks Edmund. The captain replies, "Opinion is split on the matter. All the other captains say it is, and I say it isn't".
I was reminded of this by a comment from Kaletsky in the Times on April 7, to the effect that he is now just about the only economist in the world not expecting a recession in the US. He's probably right about that, but I'm not sure it's a good thing. Over the years I have encountered quite a lot of economists who take contrary positions just to attract attention, saying that clients benefit from hearing contrary opinions. This is fine as long as your contrary opinion turns out right once in a while, but it's not much good if the consensus that you're bucking is correct.
And the fact is that the consensus, even if it's just a simple average of individual economists' forecasts, usually proves quite accurate. That's one reason why the private sector consensus published each month by the UK Treasury is worth watching. In fact, given Kaletsky's appalling track record since the credit crisis began, I'd value his opinions rather less than those of Tom Baker.
Anyway, the latest body to warn that the credit crisis will get worse before it gets batter is the IMF, in its semi-annual Global Financial Stability Report. It warns that “The critical challenge now facing policy makers is to take immediate steps to mitigate the risks of an even more wrenching adjustment, including by preparing contingency and other remediation plans, while also addressing the seeds of the present turmoil.” Evidently it doesn't agree with Kaletsky, who thinks that George Bush has laid the foundations for resolution of the problem through the fiscal stimulus that takes effect at mid-year. The way this crisis is going, that seems a long way away, and it's hard to be as confident as Kaletsky that cutting taxes for low earners will give much of a boost to anything, apart from the US trade deficit.
In the meantime, the impact on the UK economy continues to grow. Abbey has become the last bank to stop offering 100% mortgages (which should, of course, never have been available in the first place, but that's another issue). The Bank of England will further increase the size of its monthly liquidity injection into the banking system this month, as the spread between official and interbank rates (what used to be called the TED spread) continues to show a fundamental lack of confidence in the financial sector. Maybe Kaletsky will turn out to be right for once, but as Damon Runyon once said, "that's not the way to bet".
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