Uncharted Territory

May 25, 2016

Marketing Live Chess Broadcast Rights

Background: Agog at Agon’s Candidates Broadcast Monopoly

The moves of chess games have always been in the public domain.  Anyone can quote them in any medium including whilst games are in progress.  Indeed, in recent years live internet broadcasts of commentary on games at chess tournaments and in matches have become very popular with the chess community.

It was in this context that several chess websites geared up to broadcast commentaries on the most significant chess tournament of 2016, the Candidates tournament in Moscow which opened on March 10th.  The winner of the Candidates gets to play the current World Champion in a match for the title of World Chess Champion, so we’re all looking forward to watching Sergey Karjakin challenge Magnus Carlsen in November. But two days before the Candidates started, the organisers, a company called Agon, working with the worldwide chess federation, FIDE, forbade anyone else from broadcasting the moves until 2 hours after each game.  They did this by requiring anyone accessing the official website to sign a “Clickwrap Agreement” agreeing not to retransmit the moves.  Presumably onsite spectators and journalists were subject to similar restrictions.

Malcolm Pein, the editor of Chess magazine, noted in the May 2016 issue (p.4-5) that Agon’s attempt “to impose a new order on the chess world” were “cack-handed” and it is indeed very unfortunate that FIDE has been involved in preventing a number of websites from supporting what I would have thought is its core objective, promoting the game.  The sites are likely to have incurred costs as a result, perhaps having committed to pay commentary teams.

Furthermore, as Pein notes in his Chess editorial, aspects of the Agon Candidates commentary left something to be desired.  He highlights an unfortunate incident when the moves were inadvertently shown swapped between games at the start of the last round.  I noticed that too, and was also confused for a moment by the disconnect between the commentary and what actually appeared to be happening, but much more serious was the quality of the commentary itself.  I felt it was interrupted much too often for breaks, usually to show the same couple of ads, plus what I’ll describe as “pen-portraits” of the players (cartoon-style drawing accompanied by commentary).  These were quite entertaining the first time you saw them.  Not quite so much the tenth time.  And, although the commentary team obviously worked hard to help the audience understand what was going on, I’ve enjoyed other commentators somewhat more.  The commentary is much more important in chess than say football, since (as non-players will appreciate!) there are periods of a game when there’s nothing much to see happening on the board.  I would have liked the choice to watch another broadcast.

Steve Giddings writes, also in the April edition of Chess (p.8-9), that preventing unauthorised broadcast of chess games is in “the commercial interests of the game”.  That may be so, but it seems to me that monopoly broadcasting is not the best way forward.

Given the goals of promoting chess by maximising the number of viewers of chess matches and tournaments and maximising revenue from the broadcast of elite events, simply in order to pay for them, a better option would be to license multiple broadcasters, if they’ll pay collectively more than would a single exclusive media outlet.  I outline in this article how the revenue-maximising number of broadcasters could be established by a simple process of bidding for a share of the rights.

First, though, let’s consider how other sports rights are sold and then whether times have changed – perhaps other sports might want to reconsider granting exclusivity – and how chess is different. I focus particularly on the case of domestic rights to broadcast the English Premier League.

The Football Precedent: English Premier League Live Broadcast Rights

When I was a kid, the FA Cup Final was always shown live simultaneously on both BBC1 and ITV.  So much for consumer choice – at the time there were only 3 channels (the other one being BBC2).  Nevertheless, there was competition, of a sort.  Sometimes we’d switch over to see what they were saying on the other side, though when the ads came on we’d switch back.

One might wonder why ITV would bother broadcasting the Cup Final when it was also on BBC (without ad breaks) and, indeed, why the FA would sell it to two broadcasters rather than just one.  I can think of two considerations:

  1. There was some product differentiation between the broadcasts on BBC1 and ITV.  The channels employed different commentators and pundits.  This produces what I would argue is healthy competition for viewers between broadcasters.
  2. Strange though it may seem to many younger readers, back in the day many – perhaps most – households watched either ITV or BBC almost exclusively, even though they both were (and still are) free-to-air.  It could be argued that the choice between watching BBC and ITV used to be very much driven by social class or at least the social class households identified themselves as belonging to, but that is actually irrelevant to the argument.  The point is that broadcasting the FA Cup Final on both ITV and BBC ensured that the product reached more people – ITV viewers and BBC viewers – than it would have done had it gone out only on BBC or ITV.

Presumably ITV could attract enough viewers and sell enough advertising to make it worthwhile to broadcast the FA Cup Final even though BBC1 was showing it too.

Sports Broadcast Monopolies

Why, then, you might ask, is almost all football shown in the UK now, in 2016, indeed, almost all sport (and much other content besides), broadcast on just one channel?  That is:

  • why have sports broadcast monopolies developed?;
  • why do sports administrators tolerate and even encourage broadcast monopolies?;
  • and whose interests do sports broadcast monopolies actually serve?

Some years ago I had the dubious pleasure of a job interview with BT; actually they wasted an entire day of my time at their recruitment centre (and even more with some further interviews later on).  The question arose in discussion – I guess after we’d noted the ongoing convergence of internet and broadcast media – as to how BT could best grow their broadband market.  I suggested offering some exclusive movies.  Perhaps my interlocutor was playing Devil’s advocate, but I don’t think so; regardless, he seemed to be arguing that they should market on the basis of their whizzy new network.  No, no, no!  The vast majority of consumers care only about what appears on their TV; they don’t care at all about the underlying technology.  And if there is some exclusive content – I mentioned movies at my BT interview because Sky had already “done” sport – that is likely to be decisive in winning customers.

It seems clear from their enthusiasm to enter into them that exclusive deals for live sport transmission rights are in the interests of subscription broadcasters, particularly when  trying to build a customer base.  We have the example of the English Premier League (EPL) and much other sport (as well as films and other content) on Sky, now being contested by BT.  Netflix and Amazon are exclusively hosting supposedly must-see drama series.

As a consumer, I’m always wary when I’m told something is “exclusive”.  The very word suggests to me that someone is being ripped off.  Probably muggins.

But let’s not jump to conclusions.  Besides, what we’re really interested in is the health of the sport – that is, chess, when I get to the end of this preamble.

So, could exclusive sports rights sales be in the interests of the sports themselves?

Well, when broadcasters are trying to grow their business – think of Sky and the EPL – they may be prepared to pay what appears to be a substantial premium for a monopoly.  I say “appears to be a substantial premium” because at some point the broadcaster has to demonstrate income (advertising and/or subscriptions) commensurate with the expense.  Otherwise they go bust.

It’s not immediately apparent, and, indeed, somewhat counter-intuitive, that a single broadcaster of live events or TV series can unlock more advertising and/or subscription income than can multiple broadcasters of the same material.  Nevertheless, many sports administrators appear to believe monopoly broadcast deals are in the interest of their sport.   At least in the short term.

An example of what can happen in the longer term is provided by EPL broadcast rights in the UK.  Sky held the exclusive rights from the start of the Premier League in 1992 until 2007.  After the European Commission ruled that Sky should not have exclusive rights to all matches, they had competition, first from Setanta, who ran into financial difficulties, then ESPN, who took over Setanta’s rights and most recently BT who came into the market in 2012 prepared to bid aggressively against Sky for a whole range of football and other sports rights and apparently with equally deep pockets.  Guess what happened once there was competition?  The total paid for EPL live transmission rights went up.  Considerably.

Note, though, that what Sky and BT bid for is how much of the monopoly each enjoys.  They are not in direct competition, in the sense of broadcasting the same matches, as BBC1 and ITV used to be in the case of the FA Cup Final.

The only logical conclusion is that – given that live broadcast rights to the EPL have a definite value represented by the income they can generate – they were previously being sold too cheaply!  Who’d have thunk it?

Players on £50K a week 5 years ago should be a bit miffed.  They could have been on £60K!

Why are BT and Sky paying more than Sky alone did?

Is it a conspiracy against the consumer, as I once read a commentator claiming?  Apparently, he wrote (I think it was a “he”) EPL fans would now have to buy two subscriptions.  As someone who only buys one, it might be worth pointing out that, unless it’s your team playing, or a key fixture (in which case there’s always the option of going to the pub – a form of pay-per-view) it doesn’t make that much difference which match you watch.  You don’t know in advance whether a particular match is going to be exciting.  In other words, if you’re only going to watch 20 matches a season, there’s not much point paying for 200.

Are BT and Sky trying to buy or defend market share and therefore overpaying?  Well, there may be an element of this, but, first, from the point of view of the sport this is a good thing.  Second, companies can’t do this for ever.  BT is now established in the market.  I doubt they’d be paying so much for 3 years of broadcast rights if they didn’t think they’d make money on the deal.

Has BT unlocked market segments Sky wasn’t reaching?  Yes, I believe so.  I pay a small add-on to my broadband internet deal to receive BT’s sports channels, which I watch online, on a PC.  For the number of matches I actually manage to watch I can justify this cost, but not a Sky subscription (plus charges for set-top boxes and so on).

But it may also have been that Sky was paying less than the EPL transmission rights were worth and making excess profits as a result.  These have not necessarily all appeared as profits in its accounts, but may have also been reinvested, for example, in establishing a dominant position in the UK in the broadcast markets for other sports, such as cricket.

A market needs to be competitive to establish the real value of a product.  It’s in the long-term interests of sports themselves, I suggest, to maintain a competitive market for broadcast rights and not allow monopolies to develop.  Such monopolies might end up underpaying until a competitor eventually challenges them, as, I argue, appears to have happened for EPL live broadcast rights in the UK.

In addition,  it’s in the long-term interests of sports for as many people as possible to be able to watch them.  This is best achieved by a number of broadcasters with different business models reaching different segments of the market.  It’s worth pointing out that sports administrators sometimes ensure that at least some events are “free-to-air” in order to show-case their product, for example the World Cup and, this summer, the UEFA Euro 2016 tournament (at least in most European countries).  This month’s FA Cup Final was broadcast on the BBC as well as BT Sport.

Differences Between Chess and Football

After that somewhat longer discussion of football than I had intended, let’s get back to chess.  As I’ve argued, even football could consider selling live transmission rights to multiple broadcasters, but are there differences between chess and football) that make monopoly broadcasting a less attractive option in the case of chess?

I believe there are several relevant (though interrelated) differences:

First, live chess is typically broadcast globally, over the internet.  This means that the peculiarities of local markets are much less relevant.  For example, in the UK the playing field for broadcasting football was uneven when Sky entered the market.  Sky had to have content that was not available to the free-to-air channels ITV and the BBC or no-one would have subscribed; and it needed subscriptions to fund the cost of its satellites.  OK, there is at least one place where chess appears live on TV: Norway, home of the World Champion, Magnus Carlsen.  But given the general reliance on the internet for broadcasting chess, it makes sense to simply leave distribution to the broadcaster and not sell rights separately for different platforms (TV, internet, mobile devices etc).

Second, and related to the first point, the world has moved on in the quarter-century since the EPL broadcast model was established.  To some extent sports channel subscription revenues funded a dramatic increase in the number of channels available by enabling satellite and cable TV.  But with the growth of TV over the internet, the potential number of channels is vast, and the entry-cost considerably lower than in the past.  Broadcasters don’t need huge guaranteed revenues to justify their business models.  Furthermore, given the flexibility of advertising charging that is possible on the internet – essentially payment depends on the actual number of viewers – advertisers do not need historic broadcast data.  They’ll just pay for what they actually get.

Third, the commentary and presentation is a more significant part of the overall package in the case of chess than it is for football.  Personally, for normal tournament commentaries I’m as much interested in who’s commentating than who’s playing.  I’d be much more likely to tune in if Maurice Ashley, Danny King or Peter Svidler are explaining a game.

Fourth, chess is still at the experimental stage, still trying to explore what works best in live transmission.  It doesn’t make a lot of sense to stifle this process by restricting the number of broadcasters to one.

Fifth, interest in chess is global.  Viewers might appreciate broadcasts in their own language as well as English.

Sixth, there are a limited number of marketable chess events.  To promote the game, as well as maximise revenues, it makes sense for these to be available to as many viewers as possible.

Seventh, I don’t believe there is a pot of gold waiting for someone able to sell advertising round chess events.  Compared to football, it’s always going to be a niche market.  Indeed, for many of the chess sites – Chess.com. Chess24.com, the Internet Chess Club (ICC), Playchess.com and so on – that broadcast (or might broadcast) elite chess events, covering live events is, unlike in the case of football, only part of their offering to visitors to their site (who may pay a subscription).  These sites also allow you to play online, host articles and instructional videos and so on.  Unlike the sports channels of Sky or BT, losing live transmission rights is not an existential threat.  They are therefore unlikely to pay huge sums for monopoly rights.  Collectively, though, they may pay a decent amount for something that is “nice to have”.  The resulting choice for viewers would also be beneficial to the game and raise broadcast standards.

For all these reasons it seems to me that it makes sense for chess events to be hosted by multiple broadcasters.

Price Discovery for Chess Broadcast Rights

Before considering the mechanics of an auction for chess broadcast rights, let’s first establish a principle: all broadcasters will pay the same price.

Live sports transmission rights are generally sold territorially.  That’s messy already – people cheat by importing satellite dishes from neighbouring countries and so on- but in the age of internet broadcasting its unworkable.

One might also consider language restrictions.  Why should a broadcaster be able to reach the whole Chinese population or the English, Russian, French or Spanish-speaking world for the same price as an Estonian native-language broadcaster?  Well, don’t worry about it.  The market will take care of things.  Broadcast auctions will be a repeat exercise and, if the price is low compared to the size of the market in a specific language, that will simply encourage more broadcasters.

What if some broadcasters are mainstream TV channels, in Norway, for example?  Again, don’t worry about it.  Just leave distribution up to the broadcasters.  TV channels are competing with internet broadcasters.  The only restriction should be that a one licence – one broadcast rule.  If a broadcaster wants to transmit to multiple audiences, in different languages, say, or by producing different versions tailored to experts and the general public, then they have to buy two or more licences.

What would the broadcasters buy?  An automatic feed of the moves (top events nowadays use boards that automatically transmit the moves electronically) is obviously essential.  Since you don’t want numerous video cameras in the playing hall, the organisers (or a host broadcaster) would also provide video feeds of the players, often used as background to the commentary (generally in a separate window).  Post-game interviews or a press conference are also usual and these could be part of the package, as could clips from the recent innovation of a “confession-box”, where players can comment during their game.  Broadcasters would edit these video feeds together with their own commentary to produce their final product.

Let’s make one other thing clear about the objective of the auction process.  The goal is to maximise revenue.  This is not in conflict with the goal of maximising the online audience and thereby promoting the game.

So, how would the auction work?  How can we maximise revenue from an unknown number of broadcasters all paying the same price per transmission stream?

Here’s my suggestion.  The broadcasters would be required to submit a number of bids each dependent on the total number of broadcasters.   That is, they would bid a certain amount to be the monopoly broadcaster, another amount (lower, assuming they act rationally!) to be one of two broadcasters, another amount to be one of three, and so on, up to some arbitrary number, for example to be one of more than ten broadcasters.

The chess rights holder – FIDE, for example – would simply select the option that generates most revenue.  All bidders would of course pay what the lowest bidder offered to be one of the specific number of bidders chosen.  E.g., if 2 bidders are successful, one bidding $70,000 to be one of two broadcasters and the other $60,000, both would pay $60,000.  In this case, neither broadcaster, nor any other, would have bid more than $120,000 for exclusive rights and no 3 more than $40,000 to be one of 3 broadcasters, nor 4 more than $30,000 to be one of 4, and so on.

For example, it may be the case that one bidder bids more to be the sole broadcaster than any two bid to be dual broadcasters, any three to be the only three broadcasters and so on.  In that case, one broadcaster would secure a monopoly.  Or, at the other extreme, 12 broadcasters might, for example, bid more to be one of “more than ten” broadcasters than any sole broadcaster bid for a monopoly and so on, and more than 13/12 times what the unlucky 13th highest bidding broadcaster bid to be one of “more than ten” broadcasters, 14/12 times what the 14th highest bidder bid, 20/12 times what the 20th bid and so on up to the total number of bidders.

It’s my guess that revenue will be maximised for a World Championship match by a relatively large number of bidders.  And the crucial point is that the more broadcasters, the larger the audience and the greater the choice for viewers.

 

August 28, 2012

MonopolyWatch: Thames Water’s Counting Difficulties

Our vision: If customers had a choice, they would choose Thames Water.
– signoff on email from Do.Not.Reply@thameswater.co.uk.

I don’t know why that quote creases me up, since it expresses a very sensible aspiration. Maybe it’s because it could be so easily adapted: “Our vision: If voters had a choice, they would vote National Socialist/Communist/United Russia [delete as applicable]”. Or maybe it’s just my sense of humour.

I’ve recently had to move home, so am experiencing no end of hassle, in large part in dealing with various utilities and suppliers. This has led me to formulate a hypothesis: the level of incompetence of an organisation is directly correlated with the extent of its monopoly.

So, as an aside within this inaugural MonopolyWatch newsletter, perhaps US car rental customers should start to worry with Reuters reporting that:

“Hertz Global Holdings [has] agreed to buy rival Dollar Thrifty Automotive Group for about $2.3 billion in a deal that puts about 95 percent of the U.S. car rental market in the hands of three companies.”

Why do we allow takeovers, such as of Dollar Thrifty by Hertz? Do we really believe that 3 choices is enough to ensure healthy competition throughout the entire US? It seems to me that in most markets the presence of at least 10 suppliers is necessary to provide sufficient consumer choice and drive continual quality and feature improvements and cost reductions. Surely “consolidation” across industries such as car rental is driven almost entirely by large organisations seeking to achieve a greater degree of monopoly power? So why don’t we – or at least our elected representatives and public officials responsible for the health of the overall economy – resist this process more strongly?

Back to Thames Water. They’re not the worst, but not far from it. Ealing Council, for example, have no rule for deciding who pays the Council Tax on the day you move. Or perhaps they do have a rule, but don’t understand it! Let me explain: you don’t move in or out at midnight, but Council Tax applies – and there seems to be little disagreement on this point – per calendar day, i.e. from midnight to midnight. In fact, likely you formally move some time around midday, let’s say at 11am on 16th August, for the sake of argument. So who pays the Council Tax for 16th August, the person moving out or the person moving in? Simple enough, you’d have thought. (For the record, I’d expect the rule to be along the lines of hotel room bookings, i.e. the person moving in on 16th pays the Council Tax for 16th, just as if you booked a hotel room for “the night of 16th” that would be the night starting on 16th and ending on 17th!).

How could Thames Water match this? Well, they make a clear distinction on their website between customers moving within their catchment area and those moving outside it:

Clearly, if moving out of Thames’ catchment area means you “need to close your account”, the implication is that moving within the catchment area keeps it open. They even ask you for a moving-in date to the new property. This makes some sense, since there may, as in my case, be an overlap, i.e. the rental for the new place started before the one for the old place ended. I don’t think it’s just me being pedantic: asking for information about where you are moving implies Thames are going to carry the account over, as, for example, Virgin Media do (more about those scum another time).

But whoever is moving out from the new property will also have told Thames you are moving in. Does Thames’ website sort this out in some intelligent manner, e.g. by overriding or matching the names provided by the previous resident at the new property? Seemingly not.

And does Thames’ website ask if you want to carry over your Direct Debit when you move? Nope.

So, after telling Thames where I was moving, I then received a letter inviting me to pay by Direct Debit. Has this resulted from me telling them I’ve moved or from the the landlord telling them I’ve moved in? No idea.

Do Thames reassure customers in any way that they will not be billed twice for the property they are moving to. No.

Is it actually possible I could even end up paying twice? Who knows?

Since I now have a new account number and have had to set up a new payment arrangement, is there any sense in which the account at my previous address has not been closed as if I’d moved out of Thames’ catchment area? Seemingly not.

Nevertheless, I dutifully went on line and set up a Direct Debit to Thames. This is where the tale really takes off. What day of the month did I want to pay on? I selected 15th. But when I went to the next screen the form showed 14th. So I pressed “Back”. Big mistake.

This screen-grab shows what I saw next:

Yeap, no “14”. So “15” is interpreted as 14th in the list, I guess.

Thinking maybe I’d inadvertently selected 14 instead of 15 the first time and that Thames’ had implemented a new form of drop-down list omitting the current selection, I selected 15 again. No dice: the next page still showed 14.

I decided to settle for paying on 14th. And guess what? That wasn’t the only problem with this one simple web page. No sirree. Even though all the data I’d entered – name, address, bank account etc – was showing on the screen, the software didn’t think it was there. I had to enter it all again.

On one level it is a bit odd having alternative gas and electricity suppliers all selling an identical product, coming along the same pipes or wires. Given no differences in what is supplied, one should expect little difference in prices. But at least you can choose energy suppliers that are competent in handling the billing process. Why not allow the same for water?

July 19, 2012

We Need Rules, not Rulers: Culture, Bankers and the Mervyn King Question

Filed under: Barclays, Business practices, Concepts, Credit crisis, Economics, LIBOR, Politics, Regulation, UK — Tim Joslin @ 4:18 pm

The aim of any self-respecting blogger is to make original points. I’m no exception, so it is time to start to wind down this thread on the Libor “scandal” (previous instalments: Saint Mervyn: King by Name, King by Nature; Bashing Barclays Badly and Battling for Mount LIBOR, the Moral High Ground), for the world has in many respects come round to my way of thinking.

Yesterday’s City a.m. egged on the politicians with the momentarily confusing headline:

MPs CALL FOR CAP ON KING’S POWER

and opening salvo:

“REGULATORS grossly overreached themselves by forcing Bob Diamond out of the top job at Barclays, top backbench MP Andrew Tyrie declared yesterday…”

And the refrain “Who will guard the guards?” echoes through the land (and I noticed has even seeped, with the rapid mutation typical of memes, into the consciousness of the brigade of the commentariat more concerned with the easy target of the G4S Olympic security fiasco).

One of our heroes, already mentioned in despatches from the front-line, Hugo Dixon, has another piece on his Reuters blog, discussing how the Governor might be reined in:

“Holding the next governor accountable will be as important as choosing one. The Bank of England was rightly given considerable independence in 1997 to prevent politicians meddling in monetary policy in order to advance their electoral interests. But the institution and its leader have slipped up on enough occasions that leaving them entirely to their own devices isn’t a good option either.

For example, King didn’t sound the alarm loudly enough during the credit bubble and was slow to act when there was a run on Northern Rock, the mortgage bank, in 2007. He then long resisted any investigations into the Bank of England’s own failings in managing the crisis. Now its hands-off approach to the Libor scandal is being revealed.

Based purely on its record, the central bank wouldn’t be receiving extra powers. However, the Conservative-led government has tried to pin the blame for the credit crunch on the previous Labour government’s policies – in particular, its decision to take away the central bank’s responsibility for banking supervision. Hence, it has become politically convenient to reverse that move.

Given this, the priority should be to enhance the Bank of England’s accountability. Under the current system, the government sets inflation targets and picks the governor. It also chooses the deputy governors and members of two committees: the monetary policy committee which sets interest rates; and the financial policy committee which will soon be responsible for financial stability. Their independent members help prevent the governor becoming too dominant.

The Bank of England also has a board, called the Court. But this has been largely ineffective. Though it has recently stepped up its scrutiny of the central bank’s executives, it is hamstrung because it rightly has no say over policy or who is the governor.

Meanwhile, parliament can call the governor and other senior officials in to give evidence. Although this is a potentially important check to the central bank’s power, MPs haven’t yet used this tool effectively.

One way of improving democratic control would be to give MPs the right to hold nomination hearings and, in extremis, reject the government’s choice for governor and other top positions. Indeed, that’s what parliamentarians want. But the government is resisting. If MPs are to change its mind, they must first show they are up to the job.”

Let’s come back to this when we’ve diagnosed the problem.

Because I still feel I haven’t made my point fully.

What the Libor affair shows us is that regulation must be mechanical, not moral.

This is a lesson we failed to learn from King’s behaviour during the financial crisis, despite his starving the UK banks of liquidity in a misguided attempt at preventing “moral hazard”; his expressed desire to stitch up Lloyds shareholders with a backroom deal to take over Northern Rock; and the actual outrageous stitch-up of Lloyds shareholders with a backroom deal to take over HBoS without adequate due diligence, to which he must at least have given a nod.

My first post on the Libor-fiddling topic touched on the subject of culture:

“The excuse for laying into Diamond seems to be some problem with the ‘culture’ at Barclays. Is it any different to that at any other investment bank? Doesn’t the ‘culture’ in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.”

The aim of yesterday’s post was to develop the idea that the “scandal” is being treated as a moral issue. There’s something “bad” about Barclays, we’re told, and the Bank of England Governor, with ex officio moral authority, judges it comes from the top and fires the Chief Executive.

But what is “culture”?

This is what an editorial, “Culture shock”, in yesterday’s FT (I’m getting my full £2.50 worth!) suggested:

“Culture is not a fluffy chimera of business how-to books or self-congratulatory corporate reports. Culture, real and unnoticed as the air we breathe, is the web of unspoken mutual understandings that frame what people expect from others and think is expected of them. This web shapes the fortunes of any organisation or social group. Bob Diamond, Barclays’ disgraced ex-chief executive, knew this; he once declared ‘the evidence of culture is how people behave when no one is watching’. He was right…

… [non sequiturs omitted]

A culture cannot be heavy-handedly ‘managed’ by legislation or compliance rules alone. It must be more subtly cultivated and tended.”

OK, we can all agree that behaviour within an organisation is determined by executive example and communications; organisational stories; dress code; building architecture, location and decoration; the presence or absence of game rooms; and so on and so forth – as well as the nature and demands of the work, as I previously stressed. But within all that complexity, all we’re really concerned about here is that rules are followed. There may be indirect ways of achieving this goal by means of some kind of arcane cultural alchemy – would Fairtrade coffee, beanbags and dress-down days work? who knows? – but most people would consider it sensible to simply focus on the outcome.

Obviously the “rules alone” are not enough. There also needs to be an expectation of enforcement. A rooting out of dishonesty. And maybe by spending £100m on investigating Libor-fixing rather than, say, carrying out some “routine email housekeeping” (didn’t something like that come up with News International?), Barclays have shown a willingness to steer their internal culture in the direction of obeying the rules.

With this unsatisfactory view of “culture” in mind, let’s consider the crucial question for the future, the “Mervyn King Question”: Is it possible for the Governor to both exercise moral authority AND for there to be effective oversight of the role?

No, of course not. The Governor can’t both exercise his judgement AND explain the detailed reasons for a decision. If he can explain the precise reasons to whoever he, the Governor is accountable, for example those for firing Bob Diamond (“he broke rule 44b clause 3, which is a sacking offence”), then by definition he isn’t exercising judgement.

The Mervyn King Question suggests then that we have to decide which way we jump. Do we want, in the modern world, to trust the personal judgement of an unelected official, or do we want a team expert in banking regulation to ensure that the rules and sanctions for breaking them are clear to banks and that bank behaviour is monitored and the rules enforced?

Do we want a ruler or do we want rules?

The traditional role of the Governor of the Bank of England was one of arbitrary power. This is where Mervyn King believes we should return. No wonder the job of Governor is so coveted.

But there’s a different path. Surely we’d be better off rejecting the moral approach and focusing on the technical aspects of the role of Governor of the Bank of England?

Let’s take as an example the critical case, where it all started to go wrong, when I first became concerned about the outlook of Mervyn King. Instead of arbitrarily allowing banks (such as Northern Rock) to fail to try to prevent “moral hazard” shouldn’t the Bank have made the rules absolutely clear in advance? NR would not, I’m sure, have relied on interbank funding had it’s executives known that funding may be allowed to dry up and they would have to retire in disgrace.

I would suggest that the Bank start by announcing that it will not allow any Bank to fail due to systemic problems (as opposed to Baring-style sudden catastrophic losses), but will provide liquidity as lender of last resort. What constitutes “systemic” would need clear definition, as would the cost of such support which would include a requirement for banks to raise capital. We have to recognise that we can never allow banks to fail under stress – such failures simply cascade through the economy – and dismiss the nonsense that such a backstop is some kind of subsidy for institutions that are “too big to fail”. This is like saying that Tesco is subsidised because the State provides resources for the prosecution and punishment of shop-lifters.

The Libor-fiddling that mattered – that before the financial crisis – was arguably criminality, pure and simple. It was orchestrated by a small group of traders who knew they were breaking the rules, as their emails make clear: “I would prefer this not be in any book!”, “if you breathe a word of this I’m not telling you anything else” and so on. It became a “scandal” because politicians – principally Ed Miliband – immediately made hay. But business isn’t politics. It’s not primarily about character (neither should politics be, of course, but the UK political process is becoming ever more Presidential and less policy-driven). The danger of allowing the political process to drive banking or other business regulation is that there is no satisfactory answer to the Mervyn King question. Even were we to confer moral authority on the Governor as we do the Prime Minister (who is not only elected, but easier to get rid of than the Governor – men in grey suits and all that), business is not hierarchical like government. It is fundamentally about choice and competition. Differences in outlook are necessary.

Dismissing company bosses in an attempt to change the corporate “culture” would seem to necessarily worsen group-think. If all our banks had been the same perhaps they’d all be part owned by the State now. Perhaps they’d all been like HBoS. As it is, Barclays managed to recapitalise without calling on government funds, Santander expanded and the “elephant” HSBC simply marched on barely affected. Diversity matters.

At worst, of course, there is no difference between condemning a bank’s culture and firing the boss simply because you don’t like the cut of his jib.

I promised I’d return to the points Hugo Dixon made. We may well need some or all of the means Dixon suggests for holding the Governor to account. But before we can do that, Parliament needs to step back and look at how the Governor’s role is defined. They need to review his Terms of Reference. Make sure he’s clear what the rules are.

July 18, 2012

Battling for Mount LIBOR, the Moral High Ground

Filed under: Barclays, Business practices, Credit crisis, Economics, FT, LIBOR, Media, Politics, Regulation, UK — Tim Joslin @ 4:17 pm

If you’re going to watch one film about the Vietnam War then I recommend Hamburger Hill. The point of the film for me at least (other discussions of the movie fail to stress this point) was that the battle was not about the strategic value of the eponymous high ground. Rather, both sides were trying to demonstrate their determination.

Catching up with an episode of Mock the Week last evening, I chanced on a rant by the one I would refer to as the tall, skinny panelist with dark curly hair, had the internet not been invented purely to allow me to remind myself that his name is, in fact, Chris Addison. The comic – who I always feel differs from his generally less hirsute colleagues in looking less like a funny-man, and more like a particularly tedious sociology lecturer – observed at some length that everyone is furious about the Libor “scandal”, even though most of them they don’t have a clue what it’s about. Well observed, in my opinion.

My first post on the Libor topic attempted to convey this moral dimension – and the battle for authority – with its title, Saint Mervyn: King by Name, King by Nature, but perhaps I wandered slightly off the theme, in favour of providing a narrative.

It seems clear after Mervyn King’s appearance before the Treasury Select Committee yesterday, though, that the Governor chose the Libor issue as the ground on which to continue a war with the City, and in particular with Bob Diamond. We’re told that Diamond’s sacking was not just about the Libor issue, but about Barclays’ “culture”, and a “pattern of behaviour”, as discussed in correspondence between Lord Turner, head of the FSA and Marcus Agius, Barclays’ Chairman. It seems clear that nothing new had emerged to implicate Bob Diamond personally and that King therefore simply seized the opportunity to get rid of him. Here’s how the Guardian puts it in an editorial:

“And why exactly was Mr Diamond pushed out? Not for any direct involvement in the Libor scandal but, in the words of Mr King yesterday: ‘They [the bank] have been sailing too close to the wind across a wide number of areas.’ No actual infraction; just a general sense of having gone too far for too long. … The impression left is of rather rough justice.”

Indeed, I’m reminded, the Libor scandal itself is nothing new. Although I now seem to have run out of free views of FT.com pages (so pushed the boat out and bought a copy this morning – £2.50, they’re having a laugh!), I did manage to access an old story that I’d bookmarked:

Banks served subpoenas in Libor case

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators probing alleged manipulation of a key interbank lending rate have focused their demands for information and interviews on five global banks, according to people familiar with the investigation.

UBS, Bank of America, Citigroup and Barclays have received subpoenas from US regulators probing the setting of the London interbank offered rate, or Libor, for US dollars between 2006 and 2008. …”

Who says bookmarking thousands of interesting news stories is a waste of time, eh?

And this one FT story contained links to pieces in the FT’s Lex and Lombard columns, as well as another story the previous day:

“Big banks investigated over Libor

By Brooke Masters and Patrick Jenkins in London and Justin Baer in New York

Regulators in the US, Japan and UK are investigating whether some of the biggest banks conspired to ‘manipulate’ the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The investigation centres on the panel of 16 banks that help the British Bankers’ Association set the London interbank offered rate, or Libor – the estimated cost of borrowing for banks between each other.

In particular, the investigation was looking at how Libor was set for US dollars during 2006 to 2008, immediately before and during the financial crisis, people familiar with the probes said.

The probe came to light on Tuesday when the Swiss bank UBS disclosed in its annual report that it had received subpoenas from three US agencies and an information demand from the Japanese Financial Supervisory Agency. …”

When were these stories published? 15th and 16th March, 2011.

Now, I may not be willing to fork out for an FT subscription, but I’m sure Bob Diamond and Mervyn King are. In fact, they probably receive the “Pink’un” as a perk of their jobs.

Regular readers will know that I’m very guarded in anything resembling an accusation that I may occasionally make on here, but it does indeed beggar belief that everyone involved is claiming to have been unaware of the brewing Libor scandal – a matter relevant to banks’ annual company reports – until the last few weeks, since even I knew about it, and the Libor-setting process was, until this month, of course, of somewhat peripheral interest to me, and even that overstates my curiosity. My £2.50 copy of the FT quotes Mervyn King on the front page as saying:

“The first I knew of any alleged wrongdoing was when the reports came out two weeks ago.”

Doesn’t the Governor read the FT? If not, why not?

To the extent I worried about it, I assumed the likelihood of fines over Libor-rigging was “in the price” of bank shares (we must be at the point where banks start assuming a few hundred mill in fines each year as part of their business plans, and therefore product-pricing). Active investors must have also thought bank share prices took account of the Libor investigation, as otherwise they would have sold the banks, short if necessary.

As I mentioned yesterday, Libor manipulation – much of which occurred during the financial crisis when the numbers were guesses anyway – would seem to be less serious than HSBC’s desultory attitude towards controls to prevent money-laundering. (Rather predictably, HSBC have seemingly gone overnight from one extreme to the other: I have recently had an HSBC account, to which I log in online 2 or 3 times a month, locked down – “suspended” so I can’t even pay into it – for no apparent reason).

No, Libor has been chosen as a battleground.

Sacking Bob Diamond makes no sense otherwise. Barclays report that they spent £100m “to ensure no stone has been left unturned” in their internal investigation and have settled early with the regulators. Since this has not been enough to keep the top guys in their jobs, perhaps their successors will adopt a different strategy next time!

And, like a misjudged military intervention, the battle threatens to turn into a war, consuming its instigators.

Mervyn King has clearly over-stepped his authority and threatened his legacy: “It is the BoE that finds itself most directly in the line of fire”, writes the FT’s Chris Giles. Not only are more and more awkward questions being asked in the UK, the regulators across the Pond are now playing holier than thou. That FT front-page lead (taking precedence over a report of the HSBC compliance chief quitting during a US Senate hearing!) is titled: “Bernanke calls Libor a ‘flawed’ benchmark”, and observes that “Mr Bernanke’s description of how the US reacted [earlier, in 2007] to claims that banks were understating the rates at which they could borrow contrasted with testimony yesterday from Sir Mervyn King.”

Mervyn King’s “pattern of behaviour” suggests to me that he may have been bullied at school. If not, I rather suspect he’s now going to find out what it’s like at his regular central-banker get-togethers.

July 17, 2012

Bashing Barclays Badly

Filed under: Barclays, BBC, Business practices, Credit crisis, Economics, LIBOR, Media, Politics, Regulation — Tim Joslin @ 6:10 pm

I noted yesterday that I’d set the recorder to catch Jerry del Messier’s appearance before the Treasury Select Committee. Sadly, when I got home I found I had filled my hard disc with several hours of BBC News 24, which contained no more than 7 minutes of coverage, including “analysis” of the session. Clearly the BBC is not so bothered to get to the heart of the matter.

Never mind, I watched a bit on Parliament TV this morning, after warming up with some live coverage (thanks BBC) of Mervyn King’s appearance, flanked by his deputies and Adair Turner, like a bunch of schoolboys caught reading top-shelf magazines behind the bike-sheds.

Unlike the BBC, the MPs are trying gamely, but you really have to wonder if the process works properly. Maybe just two or three of them should ask all the questions, to avoid lines of questioning being dropped just as it gets interesting, as keeps happening when it’s another Member’s turn for a few minutes in the limelight.

Still, I wasn’t disappointed by del Messier’s grilling (you missed broadcasting some great live TV, BBC), but a couple of points seemed to pass the MPs by.

First, it finally became clear that Bob Diamond’s infamous memo was sent the day after the phone call it records, as suggested by the timestamp. Here’s the full memo:

“From: Diamond, Bob: Barclays Capital

Sent: 10/30/2008 14:19:54

To: Varley, John: Barclays PLC

Cc: del Missier, Jerry: Barclays Capital (NYK)

Subject: File note: Bank of England call

Fyi

File Note: Call to RED [Diamond] from Paul Tucker, Bank of England

Date: 29th October 2008

Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the Libor pricing. His response was ‘you have to pay what you have to pay’. I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response ‘oh, that would be worse’.

I explained again our market rate driven policy and that it had recently meant that we appeared in the top quartile and on occasion the top decile of the pricing. Equally I noted that we continued to see others in the market posting rates at levels that were not representative of where they would actually undertake business. This latter point has on occasion pushed us higher than would otherwise appear to be the case. In fact, we are not having to ‘pay up’ for money at all.

Mr Tucker stated the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.

RED [Diamond]”

I was surprised, to say the least, that none of the Select Committee noticed this delay the first time round when they might have asked Diamond what he did in the intervening time (he phoned del Messier, it turns out, though I recollect Diamond didn’t recollect this). Diamond, I remember, testified at some length that he was concerned that Barclays might appear weak whilst trying to finalise its life-saving Middle East share sale. Surely he would not have waited a day before relaying the message from Tucker.

Second, the MPs are completely failing to distinguish between different periods of Libor fiddling. From 2005-7 traders in Barclays and elsewhere were persuading the rate-setters to submit a Barclays Libor rate in order to try to make money. This is appalling – see the FSA’s report (pdf) for the salacious details. But after 2007 Libor wasn’t working. Interbank lending wasn’t happening. The FSA write:

“In the latter half of 2007 and throughout 2008, lending in London for maturities longer than overnight came to a virtual standstill and there was extreme dislocation in global money markets.”

So the banks were just making a judgement as to what they might be able to borrow at. Since it was just a guess, it stands to reason that if they were guessing higher than every other bank they may as well guess lower. “Low-balling” Libor was done for an entirely different reason from mid 2007 on – top-down from management, rather than bottom-up by traders – so as not to appear weak.

What strikes me is that by releasing Diamond’s file note, Barclays have successfully steered the MPs away from the criminality and into the increasingly murky area of Libor-setting during the financial crisis. Damage-limitation PR, basically, though that’s fairly moot from Diamond’s point of view right now, but the MPs really should have tried to distinguish between the two periods. The symptoms may be similar – dodgy Libor submissions – but the causes are different. Both hayfever and a cold might cause you to sneeze, but you’d treat the two conditions quite differently.

The Committee session with Mervyn King this morning was quite different. The Governor didn’t seem to realise he was in the dock. He was shirty with his inquisitors, and even tried to talk over one. And Andrew Tyrie seemed genuinely cross. He shared the concerns I expressed yesterday. Trouble is, dealing with King is like having a 6 foot shark on a line intended for mackerel. He seems to be pulling in several different directions at once. One minute he’s the regulator (on the grounds that the function is being handed back to the BoE), the next he’s not. One minute Diamond is being fired because of the outcry over Libor, the next it’s to do with a letter from the FSA (the Guardian has posted it here).

I hope and expect Tyrie’s report to be critical of the Governor, and the governance of the Bank of England.

Here are a couple of questions to think about:
– why doesn’t the Bank of England have separate Chairman (and Board) and Chief Executive roles? The Governor would then be – as the Chief Exec – at least accountable to someone.
– if this is what happens when they don’t like the “culture” (or just the CEO) at a bank/a few corners are cut on a poorly defined technical procedures during a once in a lifetime crisis (which all the other banks might have been doing as well)/a few traders find a new way to cheat a poorly-defined system (which might have been happening at all the banks) – delete as applicable, depending why you think Diamond was sacked – then what are they going to do when a bank does something really bad? Like, for example, allowing widespread money-laundering, as HSBC seems to have done.

July 16, 2012

Saint Mervyn: King by Name, King by Nature

I’ve been following the Libor scandal with considerable interest. The former Chief Operating Officer of Barclays Jerry del Messier should be settling into his chair before the UK House of Commons Treasury Select Committee as I write these words – don’t worry, I’ve set the recorder for the BBC News Channel.

Perhaps we’ll find out the answer to why Jerry del Messier was cleared of rigging Libor on the grounds that, according to Barclays’ briefing note (pdf) issued ahead of Bob Diamond’s appearance before the Select Committee he:

“…concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high. He passed down an instruction to that effect to the submitters.”

on the basis of Diamond’s infamous note to file which suggested that Paul Tucker, Deputy Governer of the Bank of England had advised that:

“…while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

The mysteriousness of it all arises because Barclays was already lowering its Libor submissions. They admit that during the period Sept 2007 – April 2008:

“Less senior managers gave instructions to Barclays submitters to lower their LIBOR submissions. The origin of these instructions is not clear.”

You’d think that when Jerry del Messier told his rate-setters to “lowball”, someone might have mentioned that they were already doing it!

I really like the point in Barclays memo that:

“[del Messier’s] instruction became redundant after a few days as liquidity flowed back into the market.”

“Became” redundant? His instruction was already redundant!

It’s not del Messier’s behaviour that really bothers me about the whole affair. It seems all the banks were at it, and Barclays may not have been the worst culprit. Barclays is just the first to settle. And the only logical explanation I can think of for George Osborne’s strange claim that Libor lowballing was sanctioned by Balls, Brown and Vadera is that it was an open secret in the City.

After all, no-one would borrow at a rate inflated by concerns that the banks might fail, as opposed to one simply reflecting risk, the base rate and the balance between supply and demand for money. Libor simply doesn’t work in those circumstances. The authorities would be obliged to address the problem any way they could in order to save the economy.

I hate to see public bullying. It seems our politicians – and many in the media and, notably, Mervyn King – just don’t like Bob Diamond. What will they do when they run out of obvious scapegoats? The excuse for laying into Diamond seems to be some problem with the “culture” at Barclays. Is it any different to that at any other investment bank? Doesn’t the “culture” in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.

Or perhaps Mervyn King could tell us. After all, he’s the one who fired Bob Diamond – never mind that the regulatory investigation is far from complete. Is he going to fire the heads of a dozen other banks?

Never mind that the real reason seems to be some problem with Barclays “culture”, it’s not actually Mervyn King’s job to sack the Chief Executives of banks. Or anyone else employed by a bank for that reason. And even if it was King’s job, he would be obliged to follow due process.

Diamond could be forced to step down if the Financial Services Authority found he was not a “fit and proper” person. Which didn’t happen.

Or if he lost the confidence of Barclays’ shareholders. He might have done, I suppose, but that’s not why he went.

No, Marcus Agius (Barclays Chairman and ex-Chairman) explained what happened:

“Agius told MPs that the chief executive had quit ‘because it became clear that he lost the support of his regulators’ just 48 hours before the American-born Diamond was scheduled to appear before the committee.

Agius described how he had been summoned, along with Sir Michael Rake, the most senior non-executive director on the Barclays board, to see King shortly after Agius’s resignation had been announced a week ago on Monday.

‘We had a conversation in which he said that Bob Diamond no longer enjoyed the support of his regulators,’ said Agius, who then had to hold an emergency board meeting by telephone of non-executive directors to decide how to proceed. He admitted to being shocked as concerns had not been raised when the £290m fine for attempting to manipulate Libor rigging emerged five days earlier.

Agius said he and Rake went to Diamond’s home on the Monday evening. Diamond – who had insisted to MPs last week that he did not know about any regulatory pressures – ‘was not in a good place’, said Agius. He said that the conversation was ‘not long’ and that Diamond had asked for time to talk to his family.

‘I left his [Diamond’s] house confident he would resign, if he hadn’t done so already,’ Agius said.”

Staggering.

I’m surprised there’s not been more outcry at such authoritarian behaviour by the Governor of the Bank of England, who is, after all, just a public official.

One exception is Philip Inman who provides some background in a Guardian piece titled “How Mervyn King Finally Got Bob Diamond.”

“…from the moment the credit crunch began to wreck Northern Rock’s finances in the summer of 2007, the grammar-school boy from Wolverhampton, whose father was a railway worker and then a geography teacher, was ready with his analysis. King said most of the huge debts accumulated by banks could be tied to the huge bonuses executives received as reward for their lending.

In meetings with regulators and then chancellor Alistair Darling, Diamond, then head of Barclays Capital, and his investment banking peers were seen as a bunch of amoral, greedy traders. Darling relates in his diaries how King would counsel against providing rescue funds that perpetuated a risk-taking culture.

But it was Diamond, one of nine children and also the son of a teacher, who made it public and personal. At a time when most bankers were busy trying to prevent their institutions going bust, he broke cover to give an interview in a Sunday newspaper. In an analysis of central banks’ actions in combating the credit squeeze, Diamond notably excluded the Bank of England from praise.

He said providing short-term cash was the job of a central bank. ‘For the recovery to continue we need to find more ways to get liquidity into the short end of the curve,’ he said. ‘That’s down to confidence, and that’s down to the central banks. We’ve seen thoughtful moves by the [US Federal Reserve] and the [European Central Bank].’

The Bank of England saw the interview as a direct attack on its handling of the crisis. King’s response was to embark on a series of speeches and interviews in which he openly decried the emergence of a ‘small elite’ that agreed to pay itself bonuses in good times and bad.”

So petty. Maybe Mervyn is touchy – I think Diamond was right. Perhaps, if King had behaved more like other central bankers, we’d have a healthier banking industry today, and Ed Miliband wouldn’t be threatening to break up the survivors to create more competition. Don’t forget that Alliance & Leicester, Bradford & Bingley and Northern Rock have all disappeared from our high streets.

What’s more, blaming the financial crisis on bank bonuses is simplistic to say the least.

And perhaps central bankers should have seen the housing bubble warning signs a bit earlier.

Another commentator who hasn’t let the matter pass is Hugo Dixon who suggests at Reuter’s that the “BoE governor’s arm-twisting raises tricky issues”:

“…on whose behalf exactly was King speaking? The BoE, after all, is not responsible for supervising banks – and won’t be until next year. That’s still the job of the Financial Services Authority. If King wasn’t speaking for the FSA too, he was arguably stepping beyond his authority.

On the other hand, if the BoE governor was speaking on the FSA’s behalf, why didn’t the regulator itself deliver the message that Diamond should go? And why too did the FSA apparently change its position? After all, the regulator had only just agreed a settlement with Barclays over the Libor rate-fixing scandal. If it had wanted Diamond to go, that would have been the moment to say so.

A further question is how exactly the regulators managed to twist Barclays’ arm. If the FSA doesn’t support a bank director in his role, the current mechanism for removing the executive is to deem him no longer ‘fit and proper’. But it seems hard to argue that Diamond didn’t meet that test. After all, the lengthy investigation into the Libor scandal did not criticise him personally.

Some people will no doubt say it is good that Diamond has gone and it doesn’t really matter how that was engineered. But methods used in difficult situations can easily become precedents.

The BoE is about to become even more powerful next year when it takes over banking supervision. It is important that it operates in a transparent and accountable fashion.”

Quite.

April 6, 2010

Scraping Greece off the Floor

Filed under: Business practices, Concepts, Economics, Risk — Tim Joslin @ 5:33 pm

Wolfgang Munchau writes very pessimistically today at the FT that “Greece will default, but not this year”.

The core of the problem is a self-fulfilling prediction. Because of the risk of Greece defaulting, the yield on its bonds, and consequently the cost of new borrowing, is 3% over Germany’s. As Munchau points out, the market implies that there is a 17% chance of losing 17% of the value of Greek bonds (1.7 is approximately the square root of 3 so 17% of 17% is approx. 3% – you could also say a 30% chance of losing 10% of value or vice versa, etc – just thought I’d point out the basis of Wolfie’s calculation). The Greek national debt would obviously become even more unmanageable after a few years of borrowing at such a premium, with debt repayments becoming an ever-increasing proportion of government expenditure. The cost of borrowing would rise even higher… Hence Munchau’s gloom.

A sacrilegious thought has occurred to me. To avoid the interest-rate death-spiral self-fulfilling prediction, why doesn’t Greece simply say that existing bonds will bear the first loss? They could then issue “New Bonds” (TM) at something close to the rate for German bunds (as they call them in the trade). Hopefully, the Greek public finances would be in better shape by the time the stock of New Bonds is large compared to the Old Bonds. Maybe it would be best practice for countries to issue long-dated junior debt when times are good, to prepare for the next financial crisis…

My cunning plan might even reduce the yield on existing bonds, free as they would be of interest-rate death-spiral risk. Everybody would be happy. Except Wolfgang Munchau, of course – he’s never happy.

Come on Greece, you’re a sovereign state. Almost. You can do what you like! Why borrow at +3% (that was yesterday, it’s +4% today, apparently) when you don’t have to?

And did I say the idea is sacrilegious? For starters, corporates can and do reorganise their capital by buying back their own debt below its nominal value and issuing more under different terms. And in fact many governments have reduced the cost of paying down the national debt by increasing the risk of existing borrowing. They do it simply by selling assets, up to and including the right to raise taxes. Buyers purchasing an income stream – for example, in the UK, the right to collect tolls on the Dartford Crossing is apparently for sale – are logically the same as bond investors. The difference is that asset purchasers don’t have to worry about the rest of the national debt – which, of course, becomes more difficult to fund without the income stream. Essentially, asset sales or privatisations are a conspiracy between governments and the asset purchasers against existing bond holders. In stark contrast to asset purchasers, new bond purchasers only rank pari passu with existing lenders. At least, until Papandreou reads this…

If the interest-rate death-spiral trap can be avoided by selling off income streams anyway, why bother with the pretence? Simply issue “New Bonds”.

October 5, 2009

Screwed by Virgin

Filed under: Business practices, Consumer gripes, Economics, Inefficiencies, Regulation — Tim Joslin @ 5:15 pm

They say moving house is one of life’s more stressful experiences. It’d be a helluva lot less stressful if it was not for the numerous bureaucracies you have to deal with. Telecomms providers must be among the worst.

A final straw has been added and I have to let off steam.

My fun and games with Virgin Media started before I even moved in. I had the affrontery to attempt to close the account I’d had for 5 years at my previous address. I thought I’d take up an introductory offer when I moved. Maybe I’d remain faithful to Virgin, maybe not. I’d dared to think I might have a choice as to who delivered my bits and bytes. Well, as someone famously said, in a democracy you may be free once every 5 years when you cast your vote, but as a Virgin Media customer I discovered I was even less free than that.

My mistake was that I had changed the package I received 10 months before I moved. I’d been using phone, TV and internet, but wanted to restore the 24 hour news channels I’d given up some time before. I’d understood it was part of the Virgin offering that you could change your TV channels from time to time. Virgin’s twist is that they’ve invented various discounts. Even though the only change to the service was to add some channels and the bill increased by a few pounds each month, it seems I moved from “Ultimate Double 2”, to “Ultimate Triple”. Apparently, just because I’d moved from one bundle “offer” to another, this required a “new” 12 month contract. I have to take Virgin’s word that such a thing exists because I don’t have it on file. I found I was locked in to Virgin and had no real choice but to arrange to use Virgin at my new address. And guess what? I’m now locked-in for another 12 months.

It’s not something most consumers spend a lot of time thinking about but I’d be very surprised if the management of service-providers don’t employ a few MBAs to devise subtle ways to lock in their customers. A high degree of lock-in – that is, high switching costs for consumers – is actually in the interest of ALL incumbents in an industry. At the expense of consumers and new entrant providers. Think about it. Or just trust me, I’m an MBA!

Don’t get me wrong. It’s logical for a provider to require a period of commitment by the customer to cover up-front costs – think mobile phone contracts, or in this case the cost of sending an engineer to carry out the cable installation. But I hardly think a call to change the TV package constitutes a major up-front cost.

Theory would suggest that service will in general be poorer, the higher customers’ switching costs. I’ll leave the reader to judge whether such a conclusion is supported by my experience with Virgin. Here are a few of the straws that have been heaped on my back since I moved:

  • Letters about my new contract were sent to the new address where an installation had been arranged in 2 or 3 weeks time, not the old one where I was actually living. One was returned to sender since other tenants didn’t recognise the name!
  • Even more irritating was that the cardboard box Virgin sent for the return of my old set-top box – which lived at my old address, of course – was also sent to my new address. Duh. So, rather than post it back, I had to pack and transport Virgin’s set-top box. And take time as soon as I’d moved in to find where the Post Office keeps undelivered packages around here… – Still, on the plus side, Virgin’s engineer did turn up for the installation…
  • …but left before the internet was working. He’d rung up, found there was a 20 minute delay before some gobbledegooky thing would happen (even though this appointment was made several weeks before) and gone to his next job. He did leave a mobile phone number, though. So when Virgin’s software asked me to ring up to “register the modem” (what does that mean?) yet their help-line couldn’t, um, help me, I rang him. He’d done his job, he said. Surreal. I went out for the rest of the day, rather unhappy, of course. When I came in, the modem had clearly managed to “register” itself and soon I was happily surfing away…
  • …until last Thursday. No internet from around 5pm until sometime between 12 and 1pm on Friday. Call me a ninny, but I consider that a significant outage. My direct costs were £30.18 and my indirect costs £29.99. £30 because I’d received an email including a half-price offer for something I wanted to buy anyway. By the time I tried to buy, it was sold out. 18p because I’d been in the middle of registering a temporary Tesco club-card, which was still next to my PC when I was next in Tescos. £29.99 because I went out and bought a 3 mobile broadband USB device and £10 credit for next time this happens.

… …
I’ve tried getting compensation from Virgin before, and it’s not worth the effort. As I recollect, they will only pay from when you ring to report the problem – which you don’t bother to do when you hear the recorded message about the problems in your area – and only pro rata, i.e. they refund one day’s broadband charge per day of loss of service. This is pathetic. You’re paying for continuous, not patchy service. Consumers on their own are isolated and not in a position to change supplier behaviour. Government should represent the mass of consumers and impose sensible terms. In the case of broadband supply, outages of more than 12 hours should trigger automatic refund of an entire month’s charge; more than an hour or an hour cumulatively over a month would cost the supplier at least a couple of day’s charges. Of course, such outages would become very rare – this is called setting the right incentive. (Did Virgin work through the night last Thursday to resolve the problem affecting my service as quickly as possible? I somehow doubt it). If broadband internet is so important that we need a tax on landlines to subsidise its supply, then it’s important enough for companies to be compelled to provide a reliable service. And for customers to be compensated for something approaching the costs of non-performance by suppliers.
… …

  • And we haven’t even reached the final straw yet. I’d opted (at my old address) for Virgin’s “eBill” service. This might be convenient if the bill was actually attached to an email. It’s rather irritating that you just receive an email telling you to log on to Virgin’s site to find your bill. Still, you pay £1.25 less (surely rather more than the bill costs to produce – we allow Virgin to create an incentive for us to do the right thing and save paper, whilst failing to give them sufficient incentive to provide a reliable service). OK, £1.25 won’t even buy a skinny latte these days, but it’s still an unnecessary expense. You’ve probably guessed by now that a few days ago I received a paper bill, complete with £1.25 “Paper Bill Charge” at my new address…
  • Nope, there are more straws. Clearly I’d need to re-register for “eBilling”. But first, I thought I’d check my old bills. Doh! Of course, Virgin have given me a new account and deleted the old one (or at least made it inaccessible via my email address and the PIN provided). So the closing bill for my old account – only recently paid by Direct Debit – is inaccessible. How do I know I’ve paid the right amount? E-billing is all very well. It’s the future. It’s potentially efficient. But companies need to be compelled to keep data available. Again, government needs to step in and set some rules. I hate to say it but maybe it’s not really in suppliers interests to have consumers checking their old bills. Maybe when they’re not thinking about how to keep you locked in, some of those MBAs are working out how to keep you in the dark about charges…

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