Lloyds Rights Issue: A Reason to Buy?

I’m rather surprised by the number of hits I’m still getting on a previous post, which noted the unnecessary complexity of the upcoming Lloyds rights issue and the way it’s been presented. I rather thought the weekend papers would clear the matter up, so was unsurprised to read the Guardian Money front page headline “Buddy, can you spare me £13.5bn?”. I immediately followed the injunction “>>Pages 4-5″ and fast-forwarded to read Jill Treanor’s examination of the “implications for small shareholders” and Patrick Collinson’s suggested “plan of action”.

I have to say I was rather disappointed.

Collinson suggests that:

“You got some Halifax shares when it floated. Now we at Lloyds want you to cough up a couple of hundred quid (we won’t tell you the exact sum till later)…”

[my stress]

Treanor also sheds considerable darkness on the point.

Now it simply isn’t true that Lloyds haven’t advised the exact sum investors will have to “cough up” (though they could have been clearer). As I pointed out last time, it’s quite simple: Lloyds wants £13.5bn, which will be divided equally amongst the ~27bn shares in circulation. That’s ~50p a share. If you own 1000 shares you’re going to be asked to put in £500. How many new shares you’ll get and at what price each is yet to be determined.

This is actually a step forward in the organisation of rights issues. The problem is that when a company announces it is going to sell a lot of shares, the price tends to fall – supply and demand – since not every share owner will be able to and want to put more cash into Lloyds equity. By delaying the announcement of the price of the new shares until the last minute, Lloyds has somewhat reduced the risk of the share price falling below the rights issue price, which would be a disaster, since, if you could just buy shares in the market for a lower price, there would be no point taking up the rights issue. The under-writers would end up with all the new shares.

What worries me most about Collinson’s comment piece and Treanor’s Q&A is that they omit part of the case for participating in the rights issue. What I’m about to say should not be construed as financial advice, but there are obvious reasons why a company’s share price might be depressed ahead of a rights issue and that in general a rights issue may be a good opportunity to invest.

The key point is supply and demand for the shares, that is, precisely what Lloyds is worrying about and the reason for the confusion about the offer price for the new shares. Many investors – funds or individuals – may simply be unable to put more money into Lloyds shares. They may just not have the cash. Or, especially if they’re a fund, they may not want Lloyds shares to rise as a proportion of their portfolio. This could even be against the rules of the fund.

Of course, some investors, such as index tracker funds, may be compelled to increase their holding in Lloyds in line with the increase in volume of its equity. But it’s difficult to think of a fund that would be compelled to take up more than its share of rights.

Therefore, it’s often argued, a rights issue is a good time to buy, because there is a surplus of sellers of the stock.

As Jill Treanor points out, you can sell some or all of your rights in the market, for example, to raise enough cash to take up the rest of your rights, a practice known as “tail-swallowing”. Such selling activity will tend to make the rights cheaper. But it’s important to understand that if the price of the rights falls, then so does the price of the existing shares. The reason is the (arbitrage) opportunity to simply sell shares and buy the rights.

Example: To simplify a little, say Lloyds shares fall to 60p when rights have been given to all the shareholders. The rights might entitle you to buy new Lloyds shares for 40p each (so you’d get 5 for every 4 shares you held at the qualifying date for the rights issue) so should sell for about 20p each (since once you’d put in the 40p you’d receive a new share exactly equivalent to the existing shares). If so many people sell their rights that the price is not 20p but drops to (say) 18p, then someone could sell shares for 60p, buy rights for 18p, subscribe to the issue for 40p and make (60 – 18 – 40)p = 2p a share. Do this for a few million shares and you’re building up a tasty bonus pot! What happens when people sell the shares to buy the rights, of course, is that the share price tends to fall until the price of the shares and the price of the rights are aligned again.

So, according to this argument, it may be a good time to buy Lloyds shares, e.g. by subscribing to the rights issue.

It might also be worth noting that Lloyds stated that it will not pay a dividend for 2 years. This may be another reason why some investors (income funds) will not want to hold the shares, though they may already have sold their holdings in the stock.

Of course, there are many reasons why it could turn out to be a bad time to buy Lloyds. They might screw up. Or we might experience the dreaded double-dip recession. And if so many people decide it’s a good time to buy Lloyds, this will push up the price and make it a bad time to buy! Though it is the largest rights issue in the UK to date…

At the end of the day, investors must make up their own minds, and, as I say, I’m not providing financial advice. Patrick Collinson (or his editors) are bold enough to allow themselves a headline “Lloyds looking unattractive” (or “Lloyds rights issue looks distinctly unattractive” in the online version). I just feel investors might also want to take into account the argument that rights issues can be a good time to invest.

Disclaimer: I worked for Lloyds in the early 1990s and own some Lloyds shares.

The Grandmother Of All Stealth Taxes

As the nights were drawing in this time last year I detailed how the UK’s “bailout” of the banks is in fact the Mother Of All Stealth Taxes. Well, I underestimated the greed of our politicians.

In March this year the government had obviously not yet done a good enough job of convincing the world’s speculators that the UK financial system was safe. They therefore proposed an insurance scheme in case Lloyds’ losses on specific assets (some £260bn worth, mostly commercial property and mostly acquired when Lloyds took over HBoS) amounted to more than £25bn. For this insurance scheme Lloyds would be required to pay a notional amount of £15.6bn in shares as I described at the time.

I say the amount is notional, because no-one knows what the shares would have been worth in the future. Presumably existing shareholders think the shares are worth more than their current price or they would sell them. Furthermore, the price of the shares granted for the insurance scheme was set when the bank was in difficulty. Since pre-emption rights of existing shareholders (i.e. their right to buy shares on the same terms as the new investment in the bank) were not respected we have no way of knowing how many would have bought shares on the same terms as the UK’s Treasury was offering.

Since Lloyds would have to incur losses of £(25+15.6) = £40bn or so before it even broke even on the deal, their executives started looking into ways to make themselves strong enough to insure themselves against these potential losses. The situation is not straightforward, but Lloyds’ management must have considered that they could manage the assets to incur less than £40bn in losses.

Lloyds now believes it can raise enough money by selling new shares to existing shareholders and issuing some bonds (mandatorily convertible to shares in certain circumstances, I gather) to insure itself, which is, after all, a large part of what banks do.

But as is being widely reported, the Government is demanding a £2.5bn break fee. This has no logical justification whatsoever.

The febrile media reaction to the banks is typified by Dan Roberts in the Guardian. His commentary begins:

“Another day, another few billion pounds of our money is on its way to cheer up Britain’s banks. Today it was the turn of Lloyds to stick its hand out – indicating it wants an estimated £5bn to support its latest restructuring wheeze.”

and which descends into complete incoherence by the end:

“All in all, it’s like taking out house insurance during a fire, refusing to pay for it once the fire is out and sending the insurance company a bill for a new sprinkler system. The real irony is that behind all the complexity, the APS and this associated exit strategy boil down to something very recognisable to bankers by now: a credit derivative, the most toxic yet invented.”

In actual fact a capital raising by Lloyds is a welcome simplification of what looked like becoming a labyrinthinely complex relationship with the UK government. It’s not the role of the taxpayer to guarantee the dodgy property loans Lloyds inherited when it took over HBoS – when, we shouldn’t forget, the bank’s executives were denied the right to conduct thorough due diligence on behalf of Lloyds’ shareholders – so Lloyds raising capital itself so that it is strong enough to bear the potential losses of the assets now on its books represents a return to normality which pundits like Roberts should be welcoming.

What Roberts seems to object to is the government’s participation in the rights issue. But this is what happens when you’re a shareholder. The government will be better off compared to underwriting the losses on a £250bn dodgy loan portfolio. The cost to the Treasury of keeping its/our shareholding to 43% will be around £5bn whereas they could otherwise have had to pay out, we have to assume, perhaps somewhere around £25bn in insurance in return for increasing their holding in Lloyds from 43% to 62% according to calculations done back in March. Let’s be generous and assume ~20% of Lloyds raises £15bn when the taxpayers’ stake is eventually sold (valuing the whole bank at £75bn). Even then the taxpayer is at least £25bn – £5bn – £15bn = £5bn better off under the rights issue plan than writing the APS insurance, assuming £25bn losses, after excess.

The reader may ask why a deal being done at all. The answer is that obviously Lloyds’ management think they can keep losses somewhat lower, but the Treasury surely has to take a more cautious view – note that because of moral hazard, the level of losses could depend on whether or not they’re insured by the Treasury! Since the sensational news has just come through this morning that RBS is to exit the scheme as well, I suspect that all involved – particularly in government – have realised that the scheme is in fact unworkable. It distorts the two banks’ incentives so much that it is impossible for them to do their job of managing the bad debts.

But what of this £2.5bn fee? There are two sorts of justification. One is that the government “saved” Lloyds by proposing the APS. But if the government had done nothing either the whole banking system would have collapsed in March or the banks would have faced down the short-selling speculators and recovered (as Barclays did, its shares having risen 6-fold since then). I would have thought it was part of the normal responsibility of government paid for by all our taxes, not an optional extra, to ensure the existence of an orderly banking system.

Then there is the financial justification. Roberts suggests in his fire insurance analogy that:

“The catch here is that we haven’t been paid yet for providing this insurance when it was needed most (ie, during the crisis) and are having to haggle to get the premium paid retrospectively.”

For what the government deserves another £2.5bn (making them at least £7.5bn better off than before this latest deal) is not exactly clear. The point is the insurance scheme had a £25bn excess and was to run for 5 years, so Roberts’ fire insurance analogy is inappropriate – the insurance policy would have had to pay out nothing for at least the first couple of years. Logically, if there’s going to be a fee of this kind it should be offset against losses and writedowns to date against a scaled-back excess of ~£5bn, i.e. a fifth of £25bn, since about one of the 5 years will have passed since what I understand to be the baseline for the insurance policy of last December by the time the Lloyds fund-raising is complete. Furthermore, the FT this morning provides details of RBS’s losses to date on assets that would have entered the APS. I don’t know where such data for Lloyds could be found, but they are likely to be comparable. RBS has already absorbed losses of £23bn! Even if we take a figure of £15bn for Lloyds, then the loss after the excess is £10bn. The government pays 90%, so owe Lloyds £9bn. Fine. We’ll offset the £2.5bn against that amount!

The £2.5bn break fee is just an opportunistic tax, ultimately falling largely on UK pension funds. There’s no financial justification for this amount.

Lloyds shareholders are likely to be understandably aggrieved that the fee is much higher than the figure of £1-1.5bn that has been touted in the media for some time now. There has to be the suspicion that the government’s negotiators have ramped the price at the last minute. If so, this reeks – I would have thought government had a duty of fairness.

With another £13bn from a rights issue, Lloyds shares are in total worth around £40bn, tops, right now, so £2.5bn represents an arbitrary tax of at least (2.5/40)*100 = 6.25%. There is still an upside, but it’s not looking stellar. I gave a guesstimate earlier that, with a fair wind, Lloyds may eventually be worth £75bn or about double the value shares are currently trading at. But this might not be for 5-10 years. A lot of investors are going to consider that they can much more easily double their money in a “global return to growth” scenario by investing it in emerging markets – where the political risks these days seem no worse – instead of in the UK. Does the government want that to happen? Especially as they may want to sell a lot of bank shares in a few years!

I have owned Lloyds shares since I worked for the bank in the early 1990s. When I was given a few shares as part of my remuneration, I certainly wasn’t warned that the government would levy arbitrary taxes whenever the country’s finances hit a patch of turbulence.

FFS, BBC!

I ordered a number 36 from the local Indian takeaway the other night. When I went to collect the meal it was a king prawn vindaloo. “But I ordered a chicken korma”, I complained. “Sorry sir, we decided to change the menu”. Never mind. I made it to the cinema anyway. I’d booked a ticket for the controversial alien prawn apartheid Nigerian gangster gore-fest District 9. But instead I found myself watching the beautifully filmed, but spoilt by saccharine narration and intrusive over-dramatic score Disney flamingo gore-fest The Crimson Wing instead. The cinema said they’d got a good deal and decided to go with the big birds at the last minute.

OK, there was no curry surprise, nor one at the cinema. But these examples are no different to what the BBC did on Saturday. They announced at the end of the Radio 5 commentary on Ukraine v. England – controversially to be shown only live only over the internet, from £4.99, or at selected cinemas, from, I heard, £12 – that the highlights WOULD after all be shown on regular TV later that evening.

Call me old-fashioned, but if I’m going to watch highlights I prefer not to know the score. If I’m not going to watch highlights, and I can’t watch live, then the next best option is to listen to a live commentary. So I decided to find an excuse to be near a radio for 2 hours on Saturday. I volunteered to do some cooking. Had I known in advance that I’d be able to watch highlights, then I would not have cooked my goulash just so that I could listen to the football commentary. Most likely I would not have cooked my goulash at all. In fact, it’s fair to say I planned a large part of the day around the football.

For decades we have become accustomed to a television medium where transmissions – by and large – follow a “schedule”. Exceptions are rare. I’m still annoyed, for example, that the BBC suspended coverage of the enthralling 1980 world snooker final to show coverage of the SAS operation to end the Iranian embassy siege on both channels. Pointless. After 10 seconds, I’d got the point and decided to read all about it in the next morning’s paper.

I’m therefore astonished at the insipid media response to the BBC’s decision not to inform us a little earlier about the Ukraine-England highlights programme. There was some kind of media programme on the radio this afternoon (OK, I can be arsed to check the schedule in this morning’s paper which is 2 feet away – it was The Media Show, 1:30pm, Radio 4 – see how this scheduling lark works Mr BBC? Convenient, isn’t it?). At the start they mentioned the footie scheduling decision as if that was to be the main topic on the programme. But “But first…” turned into around 28 minutes of waiting (BTW, audiences hate this sort of trickery to keep you listening or watching), before some lame muttering to the effect that if the Beeb hadn’t accepted an embargo on announcing the highlights programme then we wouldn’t have seen it at all. Personally (as a license-payer) the highlights were worth not very much at all – £x, say – having listened to the entire game on the radio, and would have been worth quite a bit – say £10x – had I known about them in advance. If, as I read somewhere, the BBC paid £900k (+ broadcasting costs + annoyance to viewers who wanted to watch the News or the Football League programme which were displaced at short notice), then maybe the highlights weren’t such good value after all. Reportedly some 4 million of us tuned into the highlights. Maybe a lot of these switched on, as I did, just to see if the England game really was on. Maybe a lot simply put the telly on and watch whatever the BBC chooses to show, since this episode indicates that is obviously how Auntie believes we will consume moving pictures in the future.

I wasn’t a fly on the wall during the negotiations between the BBC and the company that bought the rights to the qualifier, but I would imagine there was a price the internet-streaming rights owner would accept to allow highlights without pre-announcement, and a (higher) price with an announcement. I bet the higher price wasn’t £9 million. Why didn’t the BBC simply say “Actually [I imagine that's the sort of word they would use], we can’t jerk our viewers around like that”?

There exists in the UK a list of sports events that must be made available “free to air” – the so-called “crown jewels”. This list is currently up for review. The problem is – a point taught in class 1, Economics 101: profit maximisation principles – you can make more profit by not satisfying demand, assuming all purchasers have to pay the same price and you can’t “segment” the market. E.g. 10m people paying £1 to watch a football game earns you £10m, but if you can get 2m to pay £10 you’ll rake in £20m. Maybe you’d be best off finding 50 billionnaires willing to pay £1m each…

The point is, we live in a very unequal society. Government (as usual) is trying to address the effects rather than the causes by mandating that some events must be free to air. The trouble is, it leaves the sports affected financially worse off. Kind of a poor reward for creating a popular product – and often helping promote a sense of national identity.

Maybe there’s a better solution.

Let’s bear in mind that “free to air” is an incoherent concept and really a synonym for “in the good old days”. BBC channels, strictly speaking, are not free to air, since you need a licence. OK, the BBC is in the ludicrously privileged position that if you have a TV the law assumes you watch the BBC and need a licence. In other words, the BBC licence fee is an unfair, regressive tax.

Maybe the BBC licence fee could be reduced. Maybe people should only pay for TV content they actually want. And whilst I like to watch sport, I am aware that many people watch none. In a few years we’ll all be digital with many more channels – BBC Sports 1 and 2, for example. Why not charge a basic BBC licence-fee and a supplement for sport? (The same may apply to other content, of course, e.g. access to the BBC’s archive via iPlayer).

So if free to air is a woolly concept, why doesn’t the Government simply relax the rule so that instead of “free to air” it simply stipulates that sports events must be available to multiple broadcasters?

Remember the mobile-phone spectrum auction that raised £22m? I’m not advocating such grasping behaviour, but we could use a little bit of the smarts that were behind that operation to devise a way for multiple broadcasters to show sports events, whilst maintaining the total income to the sports.

Here’s one way you could do it. You’d have an auction as now for the rights. Let’s say the winner – Sky, perhaps – bids £10m for a particular sports event. This has established the value of the event to a monopoly broadcaster, since Sky would have to assume they’ll be paying the full £10m. But now we’ll allow another broadcaster – the BBC, say – to share the rights for 50% of the price offered by Sky, which both would then pay. If ITV also wants to show the game, then all would pay 33.33%. If ESPN wants it as well, then 25% each. If someone wants to stream it over the internet for Brits abroad (if global rights are on offer), or to fans watching on mobile phones, then 20% each.

It might be even better for 2 bidders to pay 110% of the original price – 55% each or £5.5m in this example – 3 to pay 120%, 40% each or £4m – and so on.

Now, I reckon this would create a win-win-win situation:
- sports would maximise their income , whilst also reaching the maximum number of viewers (in fact, the market is being segmented, since the cost per viewer varies);
- viewers would have more access to sporting events and could choose the commentary and form of coverage they wanted – broadcasters would have an incentive to improve or at least differentiate their products;
- broadcasters could follow their various business models. E.g. Sky and ESPN could show a lot of sport to people who pay a premium, the BBC and ITV could show a selection of popular events, and so on;
- the Government gets out of making tricky decisions about the “crown jewels” every few years.

Certain events – the World Cup Final, for example – are already shown simultaneously on multiple channels. Viewers are able to choose their commentary and punditry teams. I remember how, when I was a boy, we used to argue over which channel to watch the FA Cup Final on – on our neighbours’ colour TV! Let’s bring those days back. Jumpers for goalposts…

OK, there are a few problems to sort out. E.g. side-deals may be needed to avoid too many cameras at sports events. But surely it must be possible to improve on the current situation where either sports lose out financially or many viewers have no access to key sporting events, like the Ashes – not good for the long-term future of the sport.

Whatever the rules, perhaps the BBC could spend our money a little more wisely in future than it did by agreeing to keep secret its purchase of Ukraine v. England highlights. FFS, BBC, For Footie’s Sake!

Bring Back BBC Bias!

With so much sport to choose from, it takes something special to grab my attention – genuine rivalry, perhaps, like the Ashes. Or a special individual. I happen to think Lewis Hamilton is a driver of exceptional talent. My interest in F1, like that of millions of others, was rekindled when he burst on the scene.

I was therefore fuming when Hamilton’s McLaren suffered a puncture on the first corner of yesterday’s German GP, leaving him in last place for the rest of the race. Like millions of others I was interested to know exactly what had happened.

I was rather puzzled that Hamilton appeared to lose it at the first corner and not only ran wide but, at first sight, must have collided with another car (Raikonnen’s Ferrari was the candidate) on rejoining the race. OK, there’s a bit of “My boy can do no wrong”, about it, but such errors would be very uncharacteristic for Hamilton, who, as I said, is pure raw talent.

Sure enough, the plot soon began to thicken. It was announced that the Australian Red Bull driver Mark Webber, who ended up winning the race, was under investigation for an incident at the start. The BBC’s “expert pundit”, former under-achieving Scottish driver David Coulthard (if you’ve followed that Wikipedia link, then, like me, you’ll have been reminded that Coulthard’s last racing team was – you’ve guessed it – Red Bull) immediately announced that Webber had done nothing wrong. His comments suggested that his basis for this was that he “hadn’t seen a collision”.

At this stage we hadn’t seen any clear replays, so Coulthard clearly believes that he has the ability to monitor exactly what is happening over a few seconds to 20 cars speeding away from the start of a GP. No-one else can do this, especially whilst simultaneously commentating, so Coulthard is clearly superhuman and deserves every penny of the millions he earnt not winning many races.

Replays soon confirmed that Webber had in fact side-swiped Barrichello’s Brawn going into the first corner. Webber admitted in the post-race interview that he thought Barrichello was on the other side of him! Lucky he wasn’t on a public road, or he’d be facing a dangerous driving charge. Miraculously, the collision had little effect on Barrichello or Webber’s cars. On another day, though, Webber’s mistake would have taken out half the field.

David “Superman” Coulthard’s opinion was, of course, unchanged by the visual facts of what had happened.

Webber received a drive-through penalty, which was insufficiently severe to prevent him winning the race. What sort of sport is this becoming? When I used to watch, the penalty was a 10 second stop, as well as a drive-through.

What the stewards didn’t investigate, though, was what happened next. Webber bounced off Barrichello, and – no doubt shocked to have found a car already there as he headed to the apex of the first corner – also steered left where Hamilton happened to be going round his outside. It turns out Webber clipped the McLaren forcing him off the track and giving him the puncture that cost him the race.

But the Beeb’s narrative was what a “brilliant performance” by Webber. Sorry, I expect sports coverage to reflect at least some of what I feel about the event, not construct some dumbed-down narrative. Webber was lucky his car wasn’t wrecked after playing dodgems at the start; lucky F1’s punishment regime is a joke; lucky not to find himself behind Hamilton and Barrichello at the start (and vulnerable for a lap or two to Kers-powered overtaking moves by the Ferraris and Kovalainen’s McLaren); and lucky too, as it happened, that Brawn screwed up a Barrichello pit-stop, relegating the closest rival to the Red Bulls to 6th. Maybe there’s a reason the “brilliant” Webber had not won any of his previous 129 GPs.

Not only is the Beeb happy to give Webber more credit that he deserves, they are also apparently happy to do down the British talent:

“Hamilton had fancied his chances of scoring a podium finish after qualifying fifth – and a fuel-corrected third fastest.

But after benefiting from his Kers power-boost system to contest the lead with Webber and Barrichello going into the first corner, Hamilton missed his braking point and ran wide.

He got a puncture and rejoined last where for some reason the McLaren, which has a major aerodynamic upgrade this weekend, did not show the pace it had on Saturday.”

What’s this “fancied his chances”? Subtext: “but got egg on his face”, eh? And “benefiting from Kers”? – with the implication that he doesn’t deserve it. But he should benefit. The car has to carry the Kers gear around the track! And McLaren have made design compromises to put it in the car. And probably budget compromises too – working on Kers rather than other aspects of the car (only McLaren and Ferrari have effective Kers systems). I expect they thought F1 was serious about including this “green” technology, and that it wouldn’t be quietly dropped as is being done next season. And Hamilton was so far behind (he had to limp to the pits with his puncture) that there was no point flogging it. There may also have been other damage to his car.

Yes, much of posterity will believe this latest poor result was purely Hamilton’s fault. Anyone using the Guardian’s archive will get the same impression as at the BBC:

“Lewis Hamilton had a bad day after being forced into the pits shortly after the start with a puncture. He made a strong start from fifth but ran wide after turn one. He returned to the track but was bumped from behind almost immediately.”

Independent readers will see Kimi Raikonnen slurred by name:

“As for Lewis Hamilton, on a day when he and McLaren felt their year of woe would potentially end with a podium, he could not have anticipated it would end so disastrously and in such swift fashion.

From fifth on the grid, and aided by a push of the KERS button, the world champion made a storming start.

As Webber and Barrichello played dodgems, Hamilton appeared poised to take full advantage, only to overcook it and run wide into the sharp first-corner hairpin.

Returning to the track in fifth place, Hamilton’s right-rear tyre was punctured by the front wing of Kimi Raikkonen’s Ferrari, which was not to be the only incident of the day involving the Finn.”

Raikonnen has been wrecking a lot of other drivers’ races lately, but not Hamilton’s on this occasion.

Whilst the Independent is happy to report what a BBC commentator guessed had happened, the Times actually bothers to get it right:

“Defending world champion Lewis Hamilton finished 18th and last after an attack on the opening lap saw him involved in a collision with Webber that cost him a puncture.

Webber bashed into Barrichello’s car on the run from the start to the first corner, a collision for which he was punished with his drive-through penalty, but he overcame that with a dazzling drive to victory.”

After this, I woke up this morning expecting to hear the BBC revelling on England’s remarkable escape in the First Ashes Test – listening to the last overs of this had rather raised my spirits. But no, Auntie had decided “the angle” was supposed England delaying tactics. It did seem England had overstepped the mark (though part of Strauss’s explanation – trying to ensure the players out there knew how long they had to last – is very plausible), but this had no effect on the match – the Aussies lost no overs. The rule was 15 overs or an hour’s play whichever is the longer. Can anyone imagine the Aussies (or any other Test side) allowing the bowlers to achieve more than 15 overs in the last hour in similar circumstances?

Look, BBC, I pay my licence fee because – oh, sorry, you’re a monopoly – anyway, I expect what British viewers and readers would consider balance. Winning a GP after playing dodgems at the start is not “brilliant”, and to deserve to win a Test you actually have to look like being able to take the last wicket. If I want the Aussie angle, I’ll find out how to get their coverage over the internet!

Fewer Says Who

Maybe my ears deceived me, but I could have sworn that yesterday morning on BBC Radio 4’s Today programme I heard a statement of the form:

“They are conspiring against Gordon Brown, whom is in a precarious position.”

It’s not just media hyperventilation at continuing personality politics (anyone out there seen a policy? Hello? Hello?), there appears to have been a recent surge of enthusiasm for the word “whom”.

Only a year or two ago the BBC – as if this institution is not otherwise suffocating public debate enough in this country they seem to be unofficial custodians of our language as well – suggested “who” could safely be used most of the time. In 2006, University Challenge even claimed “whom” was virtually obsolete”. Now, in what could be a clip from a 1960s class comedy (wherein the cheeky chappy looks lovably foolish in his mistaken attempts to speak proper), Alan Johnson seemed on the same BBC Radio 4 a few weeks ago to take a deep breath before producing the word “whom” as proudly as a baby pooing.

I suspect the “whom” epidemic is caused by an oversimplification of grammatical rules. The majority school claims that “who” should be used as the subject and “whom” otherwise. This rather ignores the subtleties of direct and indirect objects of verbs, let alone the accusatives, genitives and so on so important in Latin. My initial position was that “whom” correctly replaces indirect but not direct objects. E.g. “That’s the player who was kicked by Fabregas”. “That’s the referee of whom Drogba spoke”. The trouble is, it’s not quite so simple, if we’re to clarify whether we should refer to “the player who Fabregas spat on” (allegedly) or “the player whom Fabregas spat on” (allegedly) – the former seems correct to me. Maybe we do need to go back to those Latin cases, but a more practical minority position is occasionally referred to in online forums. This is that “whom” is the form to be used after prepositions.  So use the word in constructs such as “of whom”, “to whom” etc, but not elsewhere.  This is what appeared to be the consensus until the recent outbreak of grammatical correctness.

The affectation of “whom” is nothing compared to the change in pronunciation of “says” and “said” over the last couple of years.  for decades we’ve all been content to rhyme “say” with “hay”, but “said” with “Fred”.  “Says” is pronounced “sez”, alright?

While the English police direct their resources at supposedly mistaken “who”s and supposedly mispronounced “said”s, “fewer” falls ever more into disuse.  The Guardian’s otherwise brilliant columnist Lucy Mangan even wrote recently that she couldn’t:

“think of an example where abolition of the distinction [between "less" and "fewer"] would cause confusion, but my heart mourns its loss.”

What?

Consider the ambiguities arising from the lack of a moreish equivalent to “fewer”.  Here’s one: “There are more dangerous snakes over there”.  Are there more snakes thither or are the ones there more dangerous?  If we were there rather than here we could be clear: “There are fewer dangerous snakes over there” or “There are less dangerous snakes over there.”  Trouble is, now that the language has eroded, to make yourself understood you’d have to say something like: “The snakes over there are less dangerous.”

So we’re making people concentrate on supposed, but dubious, correctness when it makes no difference to understanding, but paying no attention to language rules that are necessary to avoid confusion.  As usual we’d rather play little social games than actually solve any problems.

Flogging the Black Horse: How Bad is it for Lloyds Shareholders?

CORRECTION (01:00 11/3): I made an assumption in this post (mentioned in section 5) that the Government would not have an entitlement to new ordinary shares at 38.43p each. In fact, they have stated that they DO have such an entitlement and intend to take it up. This point has been discussed on FT Alphaville, which notes that the minimum holding the Government will end up with in Lloyds is 62%, not the 51% I (and some others) arrived at. They will retain at least 43% of the ordinary shares, not the 26% I (and some others) arrived at, before the B shares are converted. I haven’t yet corrected this error in the text of this post. The discussion remains valid.

(10:00 11/3): Made corrections to some calculations in the text (in italics).

—–

It’s been incredibly frustrating over the last couple of days trying to determine exactly what the effect of the latest dodgy UK Government wheeze (its Asset Protection Scheme, APS) has been on the value of my modest Lloyds Group shareholding. On Sunday I complained, inter alia, about how the bank is being forced to lend not for business reasons, but because the UK Government seems to think this is a good idea. I have no idea whether or not such enforced lending will benefit the economy – it seems like just the latest fashionable economic thinking to me – but I presume that, if it turns out to be a big mistake, Brown, Darling and King will be disgraced and stripped of their pensions.

Nevertheless, I’m not too worried about the lending stipulation on Lloyds. After all, we’re a bank – that’s what we do!

I become a little more concerned (meaning my blood boils) when I read articles suggesting that the latest intervention – a “toxic asset” insurance scheme – may not in itself be entirely necessary (after all, we were told the UK banks were stress-tested last October – they are now just realising anticipated losses), but is being implemented in order to gain control of the banks in order to force them to implement ad hoc lending policies devised by politicians seeking re-election within 15 months.

I become very concerned (my blood curdles) when I subsequently discover that the UK Government appears to be making up the rules as it goes along, for example on capital adequacy, in order, it seems, to force the banks to participate in the APS, in order to force them to implement ad hoc government policies that may not be in their shareholders’ interests.

I am extremely concerned (blood clots block my veins) to read this morning that one of the few remaining independent UK banks – Barclays – may also be forced to become a tool of UK Government policy.

But none of the articles I’ve read clearly explain the precise impact on Lloyds shareholders. I’ve had to download a PDF from Lloyds own website. Sack the journos. And take away their pensions!

Let me try to explain the deal:

1. Cost for participation in the APS
I wrote on Sunday that this would be £10bn (plus a £25bn excess). I’m not sure where I got this figure – TV or radio speculation, probably – because news sources were quoting £15.6bn.

But neither figure is really correct. The £15.6bn is an entirely notional amount. It is intrinsic to the deal that this is paid in new Lloyds B shares:

“…carrying a dividend of the greater of 7 per cent per annum and 125 per cent of the dividend on ordinary shares.”

The B shares will cost 42p each, the approximate closing price last Friday, the last trading day before the announcement.

Now, call me naive, but even if we say that Lloyds shares are “worth” 42p, the B shares are worth somewhat more than my ordinary shares. They have first call on dividends (so in the worst case for ordinary shareholders could receive 2.94p each – 7% of the notional £15.6bn, i.e. £1.092bn! – in a year when ordinary shareholders receive nothing!).

But even if the ordinary dividend exceeds 2.94p * 1.25, i.e. 3.675p per share, the B shares will receive 1.25 times the ordinary share dividend.

It seems to me the B shares are worth north of 1.25 times the ordinary shares, that is, at least 52.5p each or £19.5bn in total.

But there’s a twist in the tail.

2. Conversion of B shares
The B shares can be converted into ordinary shares, but only at a cost of 115p, i.e. about 2.74 B shares would be converted into one ordinary.

Furthermore, the government must convert the B shares if the ordinary share price rises above 150p.

This would result in the government increasing its holding by at least an additional 12% of the bank (the figure depends on how many shares the Government already holds, since it dilutes its own existing holding by taking new shares) of Lloyds (see below for explanation), in terms of both economic and voting interest (but see below).

This is very curious, since, before conversion (strictly, if never converted), the B shares increase the economic interest of the Government in Lloyds by (at least) 3.42 (1.25 times 115 pence/42 pence) times as much, that is 41.07%!!! [Actually, the calculation is not quite so simple - perhaps its easier to say that before conversion the B shares number more than the ordinaries, and get a higher dividend per share, so on their own represent an economic interest of well over half the bank!! And the Government owns 43% of the ordinaries already, and could own as much as 65%. It's total economic interest, i.e. share in dividends, before conversion of the B shares - which could be calculated exactly, maybe I will later - could be as much as around 90%].

Astonishing! As an ordinary shareholder, the Board of Lloyds will only be acting in my interests if it refuses to pay any dividends until the B shares have been converted into ordinaries. They will then have “merely” exchanged (approx.) 12% of the bank for the APS insurance. If the B shares are never converted, the insurance will have cost (approx.) 41% of the bank!!

3. APS insurance excess
I mentioned that the excess charge for the protected assets is £25bn. But this is on the assets after “historic impairments and writedowns”. So the cover is for £250bn of £260bn of loans. Maybe the excess should really be stated at £35bn, since it’s not clear that Lloyds would benefit were any individual loans that have been written down already to recover. This matters, as Lloyds has just declared a huge loss on the HBoS book. I understood at the time that this was done in order to get the bad news, or at least the worst of the bad news, out of the way.

If the £260bn of loans don’t make a further £25bn of losses, then Lloyds will have given the UK Government another 12% (or perhaps 41%) of the bank for nothing.

In fact, if the extra lending Lloyds is to undertake is given a value – say, several £bn – then, worst case, Lloyds will have given the Government 12% of the bank and several £bn, for nothing!!

4. Conversion of preference shares
I’m trying to be objective, here, so perhaps should cut out the exclamation marks and italic emphasis.

Even if Lloyds doesn’t lose another £25bn on the loan book, there is something in the deal for Lloyds shareholders. The Government is offering to underwrite a conversion of the 12% preference shares – albeit that these were outrageously expensive in the first place.

The £4bn of prefs are going to be converted at 38.43p per share, creating an additional 10.41bn shares.

There are currently about 16.34bn in circulation (calculated from Yahoo! data), so the new shares are 10.41/(16.34+10.41) or 38.92% of the increased pool of shares, or 63.71% of the shares already in circulation.

Now, if the shareholders end up with all these 10.41bn new shares, the Government’s existing 43% in the bank will be diluted down to only about 43/1.6371 or 26.27%.
[An alternative way of carrying out the same calculation is to note that, in this scenario, the Government would end up owning 7.03bn of a total 26.75bn shares, that is 7.03/26.75 or 26.28% of the shares - obviously small rounding errors are creeping in].
CORRECTION (10:00 11/3): This won’t happen, as the Treasury will take up its 43% or 4.48bn of these shares, maintaining its minimum holding at 43% or a total of 11.50bn shares (actually the Treasury has 43.5%, but forgive me if I don’t go back and correct this everywhere).

It’s quite possible that the shareholders will take up their entitlement to new shares at 38.43p, since the Lloyds share price at this very moment is somewhat higher at 48.8p (i.e. I could subscribe for my shares and sell them immediately at a 10.37p profit per share, but, of course, this will tend to lower the share price, so not everyone can do it).

On the other hand, if the Government as underwriter ends up with the new shares instead of its prefs, it will own (43% of 16.34 bn) + 10.41bn of the total 26.75bn shares in Lloyds, that is (7.03 + 10.41)/26.75 = 17.44/26.75 = 65.20% of the shares, as quoted in the Press.

5. Conversion of B shares revisited
As I mentioned above, if and when the Government converts its B shares to ordinary shares, it will increase its holding by at least an additional 12% of the share base.

As detailed in section 4, above, when it converts the B shares, the Government may have as many as 17.44bn shares out of the total share base of 26.75bn ordinary shares.

The £15.6bn of B shares will convert at 115p per share, that is, into 15.56/1.15 = 13.53bn new shares.

Treating the B shares separately after conversion, they give an economic interest of 13.53/(26.75 + 13.53), that is 33.59% of the bank.

Before conversion, the B shares receive dividends equivalent to at least 1.25*13.53*115/42 = 46.31bn shares, that is 46.31/(26.75 + 46.31) or 63.21% of the dividends.

But the B shares dilute the Government’s own ordinary share holding, so it’s also interesting to see their effect on the Government’s total holding after conversion.

If the shareholders subscribe to no new shares at 38.43p, the Government would end up owning (17.44 +13.53)bn of (26.75 + 13.53)bn ordinary shares, i.e. 30.97/40.28 or 76.89% of the bank as quoted in the Press.

Note that the Government’s voting rights are capped at 75%, which may explain why this number has sometimes been reported for the Government’s Lloyds’ share.

On the other hand, if the shareholders take up all their rights to the new ordinary shares being exchanged for the preference shares, then, after converting the B shares, the Government would only hold (7.03 + 13.53)bn of 40.28bn shares, that is, 51.04%.
CORRECTION (10:00 11/3): Since the Treasury will take up its 43% or 4.48bn of the preference replacement ordinary shares, as noted in section 4, its minimum eventual holding is in fact (11.50 +13.53)bn of 40.28bn shares, that is 62.14%.

Since this is a bare majority, I am ashamed to say that I am inclined to wonder whether the numbers have been stacked to ensure that the Government will always be capable of becoming a majority shareholder in Lloyds (since it can convert its B shares at will).
CORRECTION (10:00 11/3): OK, it’s not a “bare majority”, but I still wonder whether the whole process has been, in part, designed to ensure the Treasury gains a controlling stake in Lloyds.

I note, also, that that there appears to be no provision for Lloyds to pay for the APS by raising more than the £4bn needed to redeem the preference shares when it offers existing shareholders (and new investors) new shares at 38.43p. [On the other hand, I've assumed the Government will not participate in this share offer, even pro rata to its existing 43%, given that it is under-writing it anyway, and that the full £4bn worth of shares will be available to outside investors].
CORRECTION (10:00 11/3): I was in fact mistaken to make assumption indicated in the square brackets.

But, of course, if the numbers have been stacked, this would be tantamount to expropriating Lloyds’ shareholders assets – seizing them without adequate compensation – and of course that would be against the European Convention on Human Rights. And, of course, the Government is always careful to respect the rights of its citizens!

And, after all, according to Lloyds:

“HM Treasury has confirmed to the Board that its objective in increasing its potential holding of ordinary shares in the Group is to provide financial support. In the event that HM Treasury increases its ownership of the ordinary shares, it does not envisage any change to the constructive relationship it currently enjoys with the Board.”

So that’s all right, then.

After all, now that they’re in the position of having to sell the deal to shareholders, the Lloyds Board are not exactly free to speak their minds. I’m sure there’s nothing in the various stories that have appeared claiming they are unhappy.

Note: 22:23 10/3 Corrected an embarrassing slip in this post – the minimum B share dividend is 7% (2.94p), not 7p which appeared in a couple of places!

Who Watches the Watchmen?: A Letter from a Lloyds Shareholder

Dear David Howarth MP,

I am writing to you not only as a stunned longstanding Lloyds Group shareholder and former employee in Lloyds Bank, but also as a potential Lib Dem voter in the next General Election, in which I presume you will be hoping to win a second term as the MP for Cambridge.

Over the last fortnight it has gradually become apparent that shareholders in Lloyds are, for the second time, about to lose a large part of their stake in the future earnings of the Group. Details had still not emerged by Friday evening, when I realised I needed a little film therapy. I found myself in a packed cinema watching the tremendous Watchmen. Maybe you won’t have a chance to see it, so I’ll explain where the title comes from – though you may be able to guess. It’s the ancient philosophical problem, of course, dating back to Plato, Socrates and Juvenal: “Who watches the watchmen? Who guards the guards?”

I’ve grown up with the understanding that the UK government is accountable to the House of Commons. Furthermore, in our system, the role of the Opposition in the House is to hold the Government to account. The question I therefore want to ask you, as the British state assumes more control of its banking system than any other country, in the process expropriating shareholders’ assets, is simply: “Why is the Government not being held to account?”

I see the Labour Government exercising blanket powers – foolishly granted to it by Parliament at the time of the Northern Rock fiasco – to progressively seize control of the banking system, it seems as a specific goal in pursuit of a strategy to pull the UK out of recession. One hardly needs to be even a mild cynic to conclude that the electoral timetable motivates many of the drastic measures being taken – a recovery by early next year could yet keep Gordon Brown in Downing Street. Of course, it would only be right that he does now secure a mandate, albeit somewhat belatedly, since the context in which Labour won the 2005 General Election was that Tony Blair had given an explicit undertaking to “serve a full term”. You’d think the Opposition parties would be pointing this fact out on a daily basis. But no, they no longer care to oppose. A new consensus has arisen – partly, perhaps as a result of the UK’s ridiculous first past the post system – it is, I suggest, now seen as reckless for parties to go around opposing policies, or even presenting their own solutions to the issues of the day. Instead they minimise risks by manoeuvring and attempting to outflank the others. It’s far safer to blame the Government for “not going far enough” than to question the direction they are leading us all in. So we see the Conservatives unable to present a clear plan, and the Lib Dems outdoing Labour in calls for nationalisation of the banks.

Let me make a few suggestions as to what the Opposition parties should be saying. I’ll start by quoting the Lib Dems lead spokesman on business issues, Vince Cable, who, like John McFall, the Chair of the Treasury Select Committee, is presented in the media as an expert only because fellow MPs are even more ignorant. As they used to say: in the land of the blind, the one-eyed man is king. Here’s what the Lib Dems one-eyed man had to say to the BBC this weekend:

“The government can’t now just sit back as it has with the other banks that it’s taken over and just watch them – it has to make sure that they are run in the national interest.”

The article in which Cable’s quote appeared had begun:

“The deal giving taxpayers a 65% controlling share of Lloyds Banking Group is a ‘vital step’ to get banks lending more, the chancellor [Alistair Darling] has said.”

Here are some questions Cable might have asked instead:

1. Why should the banks “lend more”? The problem we have is a result of an unsustainable asset boom, principally in residential property. Surely, if prices fall, less lending will be required in that sector, yet the Government is demanding that the banks increase lending. This does not compute. Surely, too, the commercial property sector needs to retrench, and, in many other business sectors, businesses need to reduce their borrowings to a level where they can be profitable over the entire business cycle. Some businesses may need to fail. What are the precise objectives of the renewed lending the banks are being ordered to make? Is it wise to insist they throw good money after bad?

2. Is the state really best placed to make lending decisions? Surely the system that has developed over the centuries is that those lending money must judge how much to lend in total and to whom, on the basis that such lending is likely to be profitable. Why would we want the state to control the banks? How does this support the principle of lending only to those likely to pay it back?

3. The implication of Alistair Darling’s celebration of having achieved control of Lloyds Group (as well as RBS and Northern Rock), in particular, is that the process of insuring potentially bad loans on the books of Lloyds Group has been manipulated to produce just this outcome. If so, this would be an abuse of power of the highest order: not only is it against British tradition to seize property, in this case shares, without adequate compensation, it is also contrary to international undertakings the UK has given, for example, in ratifying the European Convention on Human Rights. There appears to be a motive, as well as a wealth of prima facie evidence. Has there been a crime?

4. The nightmare for Lloyds shareholders has arisen in large part from the decision to take-over HBoS last October. After this, and Bank of America’s rescue of Merrill Lynch, I can tell you now that no bank will ever again support a government in the sort of cosy backroom deal that the insufferably smug Mervyn King bemoaned was not organised at the time of the Northern Rock fiasco. “Why”, Vince Cable should perhaps be asking, “was Lloyds not given adequate time to perform due diligence?”

5. And, given that Lloyds did step up to the plate, why have draconian terms been imposed on them for participation in the Asset Protection Scheme? As a shareholder, I understood that the banks had been stress-tested in October 2008, and capitalised to withstand the worst of downturns. I simply do not understand why further action is necessary to save Lloyds. If it is the economy (or Government) that is being saved this time (which is what Gordon Brown keeps saying), why should Lloyds’ shareholders pay for it?

6. There are many agendas at play in the Government’s handing of the banks. Two of these are to:
(a) Ensure the banks “resume lending”;
(b) Minimise the risk to and maximise the profit for the taxpayer.
Why is (a) the concern of individual banks? Where does the obligation to behave in a way that may be expedient to the Government come from? Especially as much of the “problem” is a result of foreign banks exiting the UK. And if a bank such as Lloyds is required to lend more than its management might otherwise judge is in the best interests of its shareholders, then surely they should be compensated, not pay for the privilege.
As regards (b), how do I know that paying something around £10bn for insuring £260bn of loans is a good deal? Especially as the excess on the insurance is no less than £25bn! I understand that the loans would have to be worth on average less than 86p in the pound for this deal to be of any value to the bank – that is, before the excess and the fee are covered.

7. But the bank is being forced to pay for the insurance in shares issued at around 40p each (compared to more than 10x that much before the credit crunch). The bank is legally obliged to act in the general shareholder interest, a principle which the Government appears to be riding roughshod over, and any company would only dilute its shareholders in such a way as a last resort. This is on top of the simultaneous dilution caused by the conversion of the extortionate prefs the shareholders were forced to take in October. The purpose of the insurance is to ensure the bank survives and that the shares are worth more in future. But the majority of this benefit will accrue, not to the existing shareholders, but to the Government. “Why”, perhaps Vince should be asking, “is the Government penalising shareholders because it is having to support the financial system?” Surely the Government should be ensuring the smooth operation of the banking system anyway, not charging for the privilege?

After Tony Blair’s honeymoon period, there was a huge reaction against New Labour spin. Now the self-serving scape-goating of the banks by the political classes has gone unchallenged, not just by the Opposition parties, but also by the media. It is the government and regulators who are responsible for the oversight of the UK’s financial system. They are not being held to account.

Who’s watching the watchmen?

I await your response. Please confirm that you agree that I may make it public, in part or in its entirety,

Yours sincerely,

Tim Joslin

Logan’s Run, Peston & Goodwin, James Baker’s loony ramblings and Compact Fluorescent Lightbulbs

I was treated last week to a screening of the 1976 dystopian saga, Logan’s Run. The event was organised by CRASSH, so we discussed the themes of the movie afterwards (and the 1970s haircuts!). There’s the idea of what the world would be like if we disappeared – a longstanding human preoccupation recently discussed, for example, in Alan Weisman’s The World Without Us. The film treats us to an the sight of an overgrown Washington. Perhaps the familiar trope – remember Survivors, Twelve Monkeys? – arises from a collective experience of living among the ruins of past great civilisations – Egypt, Rome, Greece, Inca, those of the builders of Stonehenge and the giant Easter Island statues, the fascination with mysterious, powerful Ancients reinforced in a thousand Hollywood movies and supplanted to imagined worlds in numerous SF works (check out Iain M Banks’ Against a Dark Background, Feersum Endjinn and Matter) and a dozen Star Trek episodes – coupled with the perceived Cold War threat of the rapid destruction of our own civilisation (as most memorably explored in the classic novel, A Canticle for Liebowitz). The scientific question of “what would happen without us” is an interesting one, though, so perhaps more on that another time.

Logan’s Run also presents a future of overwhelming state power. This was a common theme in portrayals of future (or historically contingent “parallel world” alternative) societies in the media of the middle part of the 20th century – think of 1984, It Happened Here, and, less high-brow, Blake’s Seven and Star Wars. The examples are endless, but less common today, when the narrative is more likely to revolve around external (or internal) threats to society – think 24 or even Battlestar Galactica.

We forget how the state became so dominant in people’s lives during the mid 20th century, and the battles to throw off the yoke – remember 1968 and 1989. It wasn’t just the Nazi and Soviet phenomena. The World Wars were among the factors leading to powerful states everywhere determining the course of their citizen’s lives. But even after 1945, conscription sent the youth of many countries to fight in pointless wars, food was rationed in the UK until the 1950s, and it was only after the Thatcher Revolution that the state’s role in housing provision started to decline. Globally, the post-war Affluent Society rippled out from the US, where it asserted itself in the 1960s, reaching the Soviet Empire in the 1980s, and China – where Tiananmen has postponed political change – only in the 1990s.

Perhaps it is my interpretation of recent history as a battle for individual freedom that causes me to react so viscerally against the scape-goating of Fred Goodwin, led by the dangerously influential, over-excitable Robert Peston. I consider it nothing short of scandalous that the BBC – the only UK website in the world’s top 10, they seemed to be saying on the radio today (though I don’t recollect what metric this was based on and Mr Google can’t verify this factoid) – presents a single dominant opinion on financial issues to the world, in the form of Peston’s blog. It is, in fact, the only blog in the hundreds of links on my customised version of the BBC homepage, appearing prominently at the top of the Business & Money section. I checked all the boxes and, looking at the selection menu again, “Robert Peston” appears on the same level as category headings, such as “Economy”, “Companies” and “Top stories”! It reminds me of how, in 2007, many UK newspapers contained News, Sport and Madeleine McCann sections.

It’s not just me who sees the hounding of Robert Peston as the thin end of the totalitarian wedge. There’s Daniel Finkelstein in The Times, for example, and – flaming hockey-sticks! – I even find myself agreeing with Boris in the Torygraph. Unfortunately, it’s not just Peston. Vince Cable is another who is profiting immensely by talking down the financial system. Here’s what he has to say on the Lib Dem website:

“In the case of Sir Fred Goodwin, it seems to me the Government would be on strong ground to tell him he is entitled to pension payments available to employees of bankrupt companies under the Pension Protection Fund, which have a maximum of £27,000 a year. If he feels that’s inadequate he can sue.”

Unbelievable. Let’s make it up as we go along, shall we?

But it’s not just executives such as Goodwin who must be punished, apparently. Look at this paragraph from a prescription by James Baker writing in the FT:

“To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.”

Everyone must be protected from their actions, it seems, except shareholders! Forget the law. Forget fairness. Forget even the economists’ cherished but flawed principle of moral hazard. Apparently there are consequences if depositors lose confidence in the system, consequences if bondholders lose confidence. But… hang about. What about those crashing stockmarkets? Aren’t they one of the feedbacks in the system, ratcheting down business confidence and people’s willingness and ability to spend? Don’t massively devalued share prices make it more difficult for companies to raise money? If there’s a danger of bank-runs by depositors and bond-holder panic, then maybe, just maybe, there’s a danger of stock-market crashes if shareholders are wiped out, or if confiscation of their assets is threatened.

Value judgements and confiscations by government don’t help us solve this crisis – they make it harder – but they sure reinforce the power of the political classes and their media rabble-rousers.

I was minded of this on Sunday evening when I was trying to make a complex point in a discussion. Someone had earlier pointed out to general amusement that the UK’s Middle England tabloid, the Daily Mail, had, in the same week, railed against the ban on traditional incandescent lightbulbs and pointed out the money that could be saved by installing them! I rhetorically suggested that maybe the ban on incandescent bulbs had been counter-productive. Meaning, a better way to phase out the old type of bulbs would be to convince everyone that the new ones are a better product. Anyone stocking up on incandescents now in advance of the ban could use them for decades, whereas someone switching to compact fluorescents (CFLs) to save on their electricity bill would do so immediately. And are we going to abandon CFLs in favour of advanced LEDs in a few years’ time? Probably not, but those conscious of the electricity cost may well make another switch voluntarily. But apparently my comment about banning bulbs was beyond the pale and I was interrupted mid-flow.

Do we really want to solve our problems by state diktat? Or should we respect fairness, reason and individual freedoms? The latter is the only possible path that can succeed. If we imagine that we can only achieve our goals by capture of the state apparatus the result will be endless conflict. And we might not like the end result.

The Great Depression of the 1930s was a factor in greatly increasing the power of the state over the individual. Let’s not repeat the experiment.

Clawing back a response to Peston

Rob Peston has revisited the topic of Goodwin’s pension yet again.  Yet for some reason my response on his blog at 09:30 (it’s now 10:30, WordPress shows it to be an hour later for reasons I haven’t got round to investigating) has been “referred to the moderators” – twice.  I suspect what’s happened is that someone disagreeing with me has simply complained about my comment [oops, maybe not - see PS].  By the time it is reinstated it will no longer be one of the most recent posts so will be much less likely to be read.  Here’s what I wanted to say:

Rob, A little bit more measured than your previous posts on Goodwin’s pension, though you get entirely carried away at the end. It seems RBS has always been run competently, but, in a sense, management have been too much in control – hubris was the problem. Losses on loans depend on what happens in the future, so I hardly think RBS shareholders could successfully argue that they were misled by the bank because it failed to predict events resulting in massive losses, such as the insanity of allowing Lehman’s to fail in a disorderly fashion – termed the “second-worst decision of the Bush years” by a City insider I happened to be talking to on Saturday evening.

You presuppose that it is desirable to “claw-back” Fred’s pension. This whole issue is a distraction not only from the debate about the real causes of the financial crisis (regulatory and government somnambulism) – as numerous contributors here have pointed out – but also from the issue of the disgraceful levels of income and other inequality currently prevailing in the UK and elsewhere. We need to solve our systemic problems, not scapegoat individuals.

I’d also like to see a little humility from yourself, since you haven’t retracted your misleading claim that RBS was “not obliged” to top-up Goodwin’s pension. This is not the case and was sloppy journalism, as discussed here.

The whole point is that Myners et al could only have stopped Fred receiving his pension if they’d fired rather than early retired him. But clearly everyone involved knows that Fred was only the most prominent member of a group of people who steered RBS onto the rocks (or something rhyming with “Northerns”, if we want to go all Cockney!) – in fact the main reason Fred had to go was to draw a line under the past so that RBS could move on and start to rebuild.

RBS isn’t the first company to destroy itself with a takeover at the top of the market and it won’t be the last. It seems to me that those who should take a large part of the blame, though, are the pension fund managers who would have seen it all before and should have had the detachment and historical perspective to recognise the mistake, yet nevertheless voted in favour of the disastrous ABN deal.

PS (14:00): I discovered the link to Peston’s previous post was broken (my mistake), so have fixed it above and resubmitted the comment on the BBC site (twice, since nothing happened the first time). Of course, none of this would have happened if they’d simply accepted my original comment as was, or actually done something with it rather than leave it “referred to moderator” until the rest of the world has moved on to other pressing matters (nearly 5 hours and counting).

Mainstream media organisations using their pre-existing dominant market position to capture traffic that would otherwise go to other parts of the blogosphere is legitimate, I suppose, but they shouldn’t be surprised if restrictions on participation induce resentment. Organisations like the BBC which have a state-sponsored monopoly like some 17th century slave-running trading company have, in my view, a strong obligation to operate their blogs democratically, and, if they insist on moderating comments, to resource this activity properly – or get out of the way and leave the job to those prepared to do it properly.

(14:30): No comments even “awaiting moderation” have appeared on Peston’s blog post since 14:00. This is starting to piss me off. Off to do something more productive…

(16:20): At last! My original posts on Peston’s blog have appeared with “[Unsuitable/Broken URL removed by Moderator]” inserted. Thanks BBC, and sorry to cause hassle, though I still think the moderation system could be improved. No trace of my corrected posts around 14:00, though.

Goodwin and getting away with it

Kids, remember what you learn in the school playground, because the grown-up world is… just the same.

Last week, I mentioned the absurdity of the attempts to bully Fred Goodwin, sorry, prevent him from receiving his entirely undeserved pension.

Never mind that we have numerous laws to protect minorities from arbitrary discrimination.  Clearly none of these apply to overpaid, failed bank chief executives.

But before break, the kids in the playground may have learnt that in 1215 the Magna Carta limited the powers of the state. Nevertheless, according to Harriet Harman, Fred Goodwin is so evil that the law should be suspended in his case.

I find it almost beyond belief that an issue as peripheral as Fred’s payoff is still in the news. The House of Commons Treasury Select Committee is to grill the Chairman and Chief Executive of the UKFI (charged with no less a role than managing the UK’s now vast state-owned banking assets) later this morning – I may try to get away with watching a bit of the meeting, as they have their own little TV channel on the internet.  (09:45 – the actual broadcast is here, but it is either not working or late – BBC Parliament, for reasons that are unclear, prefers to run repeats than broadcast Select Committee meetings; 09:52 – finally starting late – pathetically – though it’s also on BBC News 24).

I listen to the BBC, which is to a large degree setting the agenda.  Once again I am stunned that the organisation has scaled new heights of arrogance.  Remember, we’re talking about an institution that can’t even run a quiz in a sensible fashion.  As Bamber Gascoigne (I gather Paul was available but would have gone too far in taking the piss, and Bamber had the edge as a former University Challenge compere) pointed out on Radio 4’s Today programme this morning, it’s completely nuts for a university quiz programme to be filmed over two academic years!

Today also admitted this morning that Goodwin’s pension may not have been discretionary in the first place.  Now, as I pointed out last week, I have an inkling that the misunderstanding was all the fault of the school sneak, Robert Peston.  Everyone’s covering for him, and he’s not admitting on his blog that he’s misled everyone.

Then there’s Lord Myners, who’s incompetence in being unsure whether Goodwin’s top-up was discretionary or not is truly breath-taking.  Has he simply trusted Peston?  I fear so, because that’s the sort of thing that happens in the real world.  Nobody’s going to snitch on the Pest because doing so would also expose their own idiocy.

This entire storm in a teacup is of course part of the Government’s smokescreen, which the credulous media are simply lapping up.

Now we have revolting sight of the odious Alistair Darling trying to seize the moral high-ground.  His idea of humility is to say, in effect: “it was someone else’s fault and we should have done more to stop them”.  No Alistair, you created an environment – principally by allowing a property asset bubble to continue unchecked – in which financial disasters were bound to occur.

The real world, kids, is like this: very few are distinguished by being more or less incompetent than anyone else.  Those who “succeed” are simply those who manage to escape the blame for their mistakes.  Those who “fail” were, by and large, in the wrong place at the wrong time.

PS (09:56): The Treasury Select Committee is hilarious.  The UKFI doesn’t have specific information on bank pay-offs.  Headmaster John McFall is giving them a good ticking off.  Bring back the cane, that’s what I say!

(09:57): Now we’re onto the Fred Goodwin issue: it’s quite clear – Goodwin could have been fired (12 months notice/gardening leave – which would itself have likely led to a scandal, of course) rather than early retired.  But the media coverage is a fudge – the pension top-up simply wasn’t discretionary as Peston claimed – the situation would have had to have been handled entirely differently.

(10:08): Still discussing it!  The screw-up, if there was one, was that Goodwin was allowed to retire early, not fired.  These guys are completely mad: the mood was entirely different on October 11th – Fred’s compensation was not a big issue, the important thing was to get him to go quietly.  Myners is not looking very good…  But I’m getting bored.  I expect everyone else is too, so likely Myners will survive.

(11:23): It seems they’ve returned to the Goodwin pension issue many times as each Treasury Select Committee member has to have his ha’porth.  Unbelievable.