So what if Labour is pushed into a poor third place and the Liberal Democrats come a close second to the Tories?
How will proportional representation then look to the Liberal Democrats? If as is possible, Labour self-implodes it is the Liberal Democrats who stand to gain the most at the next general election. So much so that under a first past the post system the Liberals would then have the ability to challenge the Tories for outright power!
On the other hand proportional representation at the next election would leave the door open for the Tories to do deals with other parties, leaving the Liberals stuck on the back benches.
If there is a hung Parliament, the Liberal Democrats might like to think twice about having proportional representation for MPs at the top of their negotiating list.
Wednesday, 28 April 2010
Thursday, 15 April 2010
Hung Parliament?
If there is a hung Parliament where the Liberal Democrats hold the balance of power... which of these three options would they prefer?
Work with the Conservatives under Cameron, or
Work with Labour under Brown, or
Work with Labour under another leader?
If it were to be the latter, and with the polls pointing towards a hung parliament, it could be said that a Liberal Democrat vote was a goodbye to Brown vote. How would that go down with the voters?
It makes one think.
Work with the Conservatives under Cameron, or
Work with Labour under Brown, or
Work with Labour under another leader?
If it were to be the latter, and with the polls pointing towards a hung parliament, it could be said that a Liberal Democrat vote was a goodbye to Brown vote. How would that go down with the voters?
It makes one think.
Tuesday, 30 March 2010
Bank Tax - No - just make some things not tax deductible...
A bank tax will not stop the way banks take risks and speculate using cheap Government money.
Why not simply make losses (and the costs associated with these losses)for certain high risk banking activities not tax deductible. This will make banks think twice when they enter into high risk deals (and for those who speculate their effective tax charge will rise).
And also rebalance the distribution of earnings more fairly between shareholders and bankers' bonuses.
For my detailed proposals please click here
Why not simply make losses (and the costs associated with these losses)for certain high risk banking activities not tax deductible. This will make banks think twice when they enter into high risk deals (and for those who speculate their effective tax charge will rise).
And also rebalance the distribution of earnings more fairly between shareholders and bankers' bonuses.
For my detailed proposals please click here
Saturday, 6 March 2010
The Euro and its Poor Relations
Will the Euro hold together?
Its nominal effective exchange rate has declined 6% from a December 3rd 2009 figure of 114.74 to 107.53 as of March 5th 2010.
However, compare this with the index figure for October 25th 2000 which stood at 81.09, which is almost 25% lower than todays figure.
A further fall in the Euro would help the exports of Germany and France, but would probably do little to solve Greece's problems?
The issue is likely not to be one of finance, but one of social cohesion. At what point will the Greeks decide that the Euro straightjacket is going to cause too much damage to their society... And then want out?
Its nominal effective exchange rate has declined 6% from a December 3rd 2009 figure of 114.74 to 107.53 as of March 5th 2010.
However, compare this with the index figure for October 25th 2000 which stood at 81.09, which is almost 25% lower than todays figure.
A further fall in the Euro would help the exports of Germany and France, but would probably do little to solve Greece's problems?
The issue is likely not to be one of finance, but one of social cohesion. At what point will the Greeks decide that the Euro straightjacket is going to cause too much damage to their society... And then want out?
Tuesday, 2 March 2010
Banks' Earnings and Big Bonuses
The issue of bank bonuses is complicated and emotive. Set out below are my thoughts on a simple yet different approach.
The UK needs a healthy banking system in which bankers are appropriately incentivized and rewarded.
However, banks have a public role. The degree to which and the terms on which they provide finance has a direct influence on the health of UK businesses, our economy, and people's well-being.
Finance is the life blood of businesses. SMEs predominantly rely on capital from their owners and bank borrowings. Larger companies rely mainly on shareholders' funds, bank lending and finance from the capital markets. It is the ability for large UK companies to source keenly priced finance from the capital markets that gives them the wherewithal to operate on the world stage.
Generally speaking, retail banking operations provide the much needed debt facilities to individuals, and SMEs. And the investment banks provide large companies with access to cost efficient capital markets.
Both retail and investment banks are needed and they have a significant role to play in underpinning the economic recovery and the well-being of the UK economy. Both types of banks need to prosper, lend, provide capital to large and small businesses and should be able to reward their staff appropriately.
However, it should be remembered that banks borrow cheap money from the Bank of England and benefit from an implicit Government guarantee (being too big to fail). So where banks derive significant profits by exploiting the needs of borrowers by lending at disproportionately high rates of interest or where big profits come from risky and speculative activities then these activities are counterproductive.
Lest we lose sight of the overall picture, UK financial services, according to research undertaken by PwC, contributed £61.4bn to the Treasury's coffers in the financial year 2008 / 09, (just over 12% of all Government taxes) and of this it is estimated that £26.4bn was employment taxes. The City is not just made up of bankers. There are other high earners who rely on a prosperous banking community.
So how might the bonus conundrum be resolved without driving business offshore?
Working on the KIS, keep it simple, principle I have two proposals:
1. Excessive risk taking was at the heart of the banking crash. Higher risk for many years meant higher rewards and big bonuses. Then when the big risks went sour the problems started.
Proposal #1: Losses (including apportioned overheads) incurred on significant speculative activities would cease to be tax deductible.
This would encourage bank bosses to focus on downside risks and their risk appetite.
=> Significant speculative activities would need to be defined, but could include: the use of uncovered derivatives; short selling; lending with an excessively high loan to value ratio or a very low debt service cover ratio; and might include investing in high risk securitized products. However, market making activities should be excluded.
2. Big bonuses and risky activities went hand in hand. For many years a bank's access to cheap money enabled those whose gambles paid off to make fortunes. Banks are in a privileged position.
Proposal #2: For those companies which borrow directly from the Bank of England, the Companies Act should be amended. A second tier of dividend cover rules, should be introduced, whereby the big bonuses paid to their employees are classified as "personal dividends". A big bonus could be greater than say £20,000.
As with shareholders' dividends, these "personal dividends" could only be paid out of retained / distributable earnings and would relate to:
a. The bank as a whole and the subsidiary in which the bonus receiving employee worked.
=> (To keep a level playing field - for overseas banks operating in the UK, it would be the UK subsidiary that would fall under these rules).
=> and be for a specified period (say a 5 year rolling period)
b. The cover figure by which "personal dividends" would need to be covered by retained earnings would be set down by the financial regulator.
So, if one or more banks are seen to be acting in an anti-competitive manner, (e.g. overcharging their clients), or in a high risk manner then the authorities could have the power to revise the "personal dividend" cover ratio upwards for offenders.
c. "Personal dividends" just like shareholders' dividends would be paid out of the bank's after tax profits, but would come with a 0% tax credit. Yes, there would be National Insurance benefits for those receiving the bonus, but this would be more than offset by these big bonuses being a dividend and therefore not being tax deductible for the bank.
d. For six figure bonuses a percentage could be required to be taken in new shares of the bank. How long these shares would have to be kept would be determined by the bank's directors but this would require shareholder approval.
e. Transparency: Bonuses that are, say, greater than £20,000 would be disclosed and, like shareholders' dividends and directors' pay, they would be subject to shareholder approval.
=> Shareholders would be able to take a view on whether the balance between shareholders' dividends and "personal dividends" was appropriate.
f. To counter balance the ability of bankers to pay big bonuses out of illusory profits, there could be clawback provisions. "Personal dividends" could be subject to a full or partial clawback if the bank (or the subsidiary) breaches the "personal dividend" cover ratio within a specified number of years.
What might an appropriate minimum "personal dividend" cover ratio be? The figure relates to the bank's retained earnings and it broadly represents how much would be ploughed back into the business and how much would be paid out to those who make the profits. A "personal dividend" cover ratio of between 3 and 7 would lead to a bonus pool of between 14.3% and 33.3% of the money available for reinvesting in the bank.
Unlike a Tobin tax which does not address the underlying problems, the above suggestions would provide a framework whereby UK based bankers could be rewarded at a level appropriate to their success. Big bonuses could and would still be paid, but they would be with the support of the shareholders. And in setting the overall sum available for bonuses the financial authorities no doubt would be mindful of the benefits that a prosperous banking sector gives to the British economy.
Looking for another book to read? A thriller with a financial twist? Visit www.latenthazard.com
The UK needs a healthy banking system in which bankers are appropriately incentivized and rewarded.
However, banks have a public role. The degree to which and the terms on which they provide finance has a direct influence on the health of UK businesses, our economy, and people's well-being.
Finance is the life blood of businesses. SMEs predominantly rely on capital from their owners and bank borrowings. Larger companies rely mainly on shareholders' funds, bank lending and finance from the capital markets. It is the ability for large UK companies to source keenly priced finance from the capital markets that gives them the wherewithal to operate on the world stage.
Generally speaking, retail banking operations provide the much needed debt facilities to individuals, and SMEs. And the investment banks provide large companies with access to cost efficient capital markets.
Both retail and investment banks are needed and they have a significant role to play in underpinning the economic recovery and the well-being of the UK economy. Both types of banks need to prosper, lend, provide capital to large and small businesses and should be able to reward their staff appropriately.
However, it should be remembered that banks borrow cheap money from the Bank of England and benefit from an implicit Government guarantee (being too big to fail). So where banks derive significant profits by exploiting the needs of borrowers by lending at disproportionately high rates of interest or where big profits come from risky and speculative activities then these activities are counterproductive.
Lest we lose sight of the overall picture, UK financial services, according to research undertaken by PwC, contributed £61.4bn to the Treasury's coffers in the financial year 2008 / 09, (just over 12% of all Government taxes) and of this it is estimated that £26.4bn was employment taxes. The City is not just made up of bankers. There are other high earners who rely on a prosperous banking community.
So how might the bonus conundrum be resolved without driving business offshore?
Working on the KIS, keep it simple, principle I have two proposals:
1. Excessive risk taking was at the heart of the banking crash. Higher risk for many years meant higher rewards and big bonuses. Then when the big risks went sour the problems started.
Proposal #1: Losses (including apportioned overheads) incurred on significant speculative activities would cease to be tax deductible.
This would encourage bank bosses to focus on downside risks and their risk appetite.
=> Significant speculative activities would need to be defined, but could include: the use of uncovered derivatives; short selling; lending with an excessively high loan to value ratio or a very low debt service cover ratio; and might include investing in high risk securitized products. However, market making activities should be excluded.
2. Big bonuses and risky activities went hand in hand. For many years a bank's access to cheap money enabled those whose gambles paid off to make fortunes. Banks are in a privileged position.
Proposal #2: For those companies which borrow directly from the Bank of England, the Companies Act should be amended. A second tier of dividend cover rules, should be introduced, whereby the big bonuses paid to their employees are classified as "personal dividends". A big bonus could be greater than say £20,000.
As with shareholders' dividends, these "personal dividends" could only be paid out of retained / distributable earnings and would relate to:
a. The bank as a whole and the subsidiary in which the bonus receiving employee worked.
=> (To keep a level playing field - for overseas banks operating in the UK, it would be the UK subsidiary that would fall under these rules).
=> and be for a specified period (say a 5 year rolling period)
b. The cover figure by which "personal dividends" would need to be covered by retained earnings would be set down by the financial regulator.
So, if one or more banks are seen to be acting in an anti-competitive manner, (e.g. overcharging their clients), or in a high risk manner then the authorities could have the power to revise the "personal dividend" cover ratio upwards for offenders.
c. "Personal dividends" just like shareholders' dividends would be paid out of the bank's after tax profits, but would come with a 0% tax credit. Yes, there would be National Insurance benefits for those receiving the bonus, but this would be more than offset by these big bonuses being a dividend and therefore not being tax deductible for the bank.
d. For six figure bonuses a percentage could be required to be taken in new shares of the bank. How long these shares would have to be kept would be determined by the bank's directors but this would require shareholder approval.
e. Transparency: Bonuses that are, say, greater than £20,000 would be disclosed and, like shareholders' dividends and directors' pay, they would be subject to shareholder approval.
=> Shareholders would be able to take a view on whether the balance between shareholders' dividends and "personal dividends" was appropriate.
f. To counter balance the ability of bankers to pay big bonuses out of illusory profits, there could be clawback provisions. "Personal dividends" could be subject to a full or partial clawback if the bank (or the subsidiary) breaches the "personal dividend" cover ratio within a specified number of years.
What might an appropriate minimum "personal dividend" cover ratio be? The figure relates to the bank's retained earnings and it broadly represents how much would be ploughed back into the business and how much would be paid out to those who make the profits. A "personal dividend" cover ratio of between 3 and 7 would lead to a bonus pool of between 14.3% and 33.3% of the money available for reinvesting in the bank.
Unlike a Tobin tax which does not address the underlying problems, the above suggestions would provide a framework whereby UK based bankers could be rewarded at a level appropriate to their success. Big bonuses could and would still be paid, but they would be with the support of the shareholders. And in setting the overall sum available for bonuses the financial authorities no doubt would be mindful of the benefits that a prosperous banking sector gives to the British economy.
Looking for another book to read? A thriller with a financial twist? Visit www.latenthazard.com
Tuesday, 16 February 2010
Latent Hazards
Short-termism and over optimism is dangerous.
When our political masters deal with the big ticket risks we face and formulate new legislation or ways to deal with the risks, they would do well to look carefully at the business models of Lloyd's and our successful UK insurance industry.
There are risks which are capable of being assessed in terms of: the likelihood of a loss or bad event happening, and the size of the pay-out. These are the bread and butter of the insurance industry. Where the risks and / or the pay-outs increase the insurance industry simply jacks up their insurance premiums. The focus then moves on to how the rate of claims and pay-outs can be reduced. The motor industry is a good example. The introduction of seat belts, breathalyzers, no claims bonuses, MOTs have all helped reduce risks and insurance premiums. Prevention saves money, frequently costs not a lot, but the beneficial effects may take many years to show through, so the action is put to one side (e.g. tackling the causes of obesity).
Then there are the big ticket items, the catastrophes, where the likelihood of the disaster happening is very small, but if the event were to occur the pay-out would be massive. The long financial tail of these potentially large liabilities in practice are reinsured.
It is the management of the risks where when things go wrong; the potential pay-out is simply too big, the economic damage is too large, or the social costs are too high, which politicians seem to misjudge. And they do not have the luxury of reinsurance. Perhaps it is the 5 yearly political cycle that makes politicians focus on the short term and do little about reducing or mitigating the big risks.
Things which could go wrong big time, and cause the country massive damage, but where the likelihood is very small are seemingly put on "the to do list". Examples of "we know there is a problem, we will sort it out later" seem to be:
=> UK energy shortfall
=> Flooding of London and other key areas
=> Nuclear waste
Five years ago the country's finances were strong and the costs of large disasters / set-backs could be taken onboard. But times have changed. Now public finances are stretched to the limit and it would be difficult to find the money to meet the financial cost of a catastrophe.
To hope very bad things will not happen and therefore do little about them is short-sighted and risky, even foolhardy. Perhaps there is much activity going on behind closed doors? It is hard to tell, but I don't see signs of this happening in a serious way.
Then there is: "we will cut the budgets, but we won't undertake a review to determine what is a must have and what is a luxury".
A significant reduction in the unit of resource has occurred in many areas, for example:
=> Armed forces
=> Universities
It is much trumpeted that the overall spend has increased year on year. This is true, but the volume of activity undertaken has increased at a faster rate. So in reality there has been a significant reduction in the unit of resource.
The position is made worse due to the difference in the inflation rate for individual citizens and those receiving the funding. I have seen it reported that the cost of keeping our service men and women properly equipped and supported rises at 3% above the rate of inflation. Contrast this with a funding rise of 0.5% per annum. At the end of a 12 year period this results in an effective cut of over 30% in terms of what is being paid as against what should be paid for the armed forces to financially stand still.
In contrast the unit of resource at the NHS has increased significantly, but this we have to ring fence!?!
It is all down to the allocation of scarce resources. Ring fencing causes financial distortions. How for example is body armour to be ranked against fertility clinics, or sending out leaflets on stress? There are a large number of must haves, lots of we need this in a civilized society, but over the years there are many, many things that have crept into the public spending which are luxuries or beyond what we can afford.
One hopes that the new Government will take an informed and longer term view. And will identify the "we must have it" and the "it is essential to our long term success", and the "we don't need it and can't afford it".
Am I right in believing that politicians are increasingly driven by short-termism?
For a crime thriller with political intrigue visit: www.latenthazard.com
When our political masters deal with the big ticket risks we face and formulate new legislation or ways to deal with the risks, they would do well to look carefully at the business models of Lloyd's and our successful UK insurance industry.
There are risks which are capable of being assessed in terms of: the likelihood of a loss or bad event happening, and the size of the pay-out. These are the bread and butter of the insurance industry. Where the risks and / or the pay-outs increase the insurance industry simply jacks up their insurance premiums. The focus then moves on to how the rate of claims and pay-outs can be reduced. The motor industry is a good example. The introduction of seat belts, breathalyzers, no claims bonuses, MOTs have all helped reduce risks and insurance premiums. Prevention saves money, frequently costs not a lot, but the beneficial effects may take many years to show through, so the action is put to one side (e.g. tackling the causes of obesity).
Then there are the big ticket items, the catastrophes, where the likelihood of the disaster happening is very small, but if the event were to occur the pay-out would be massive. The long financial tail of these potentially large liabilities in practice are reinsured.
It is the management of the risks where when things go wrong; the potential pay-out is simply too big, the economic damage is too large, or the social costs are too high, which politicians seem to misjudge. And they do not have the luxury of reinsurance. Perhaps it is the 5 yearly political cycle that makes politicians focus on the short term and do little about reducing or mitigating the big risks.
Things which could go wrong big time, and cause the country massive damage, but where the likelihood is very small are seemingly put on "the to do list". Examples of "we know there is a problem, we will sort it out later" seem to be:
=> UK energy shortfall
=> Flooding of London and other key areas
=> Nuclear waste
Five years ago the country's finances were strong and the costs of large disasters / set-backs could be taken onboard. But times have changed. Now public finances are stretched to the limit and it would be difficult to find the money to meet the financial cost of a catastrophe.
To hope very bad things will not happen and therefore do little about them is short-sighted and risky, even foolhardy. Perhaps there is much activity going on behind closed doors? It is hard to tell, but I don't see signs of this happening in a serious way.
Then there is: "we will cut the budgets, but we won't undertake a review to determine what is a must have and what is a luxury".
A significant reduction in the unit of resource has occurred in many areas, for example:
=> Armed forces
=> Universities
It is much trumpeted that the overall spend has increased year on year. This is true, but the volume of activity undertaken has increased at a faster rate. So in reality there has been a significant reduction in the unit of resource.
The position is made worse due to the difference in the inflation rate for individual citizens and those receiving the funding. I have seen it reported that the cost of keeping our service men and women properly equipped and supported rises at 3% above the rate of inflation. Contrast this with a funding rise of 0.5% per annum. At the end of a 12 year period this results in an effective cut of over 30% in terms of what is being paid as against what should be paid for the armed forces to financially stand still.
In contrast the unit of resource at the NHS has increased significantly, but this we have to ring fence!?!
It is all down to the allocation of scarce resources. Ring fencing causes financial distortions. How for example is body armour to be ranked against fertility clinics, or sending out leaflets on stress? There are a large number of must haves, lots of we need this in a civilized society, but over the years there are many, many things that have crept into the public spending which are luxuries or beyond what we can afford.
One hopes that the new Government will take an informed and longer term view. And will identify the "we must have it" and the "it is essential to our long term success", and the "we don't need it and can't afford it".
Am I right in believing that politicians are increasingly driven by short-termism?
For a crime thriller with political intrigue visit: www.latenthazard.com
Saturday, 13 February 2010
PSNCR, It got me thinking...
Whilst working on the plot of my next book, I had a phone call from a friend who was writing a follow up article on the EU and the single currency. Would Greece have got into such a mess if they had stayed out of the Euro? He asked. It got me thinking (at a tangent).
The UK's Public Sector Net Cash Requirement (PSNCR) is out of control and little is being done to stop the spiraling size of this liability which will fetter our next generation. Investing for growth has merit, but how much of the massive Government spending is in reality targeted on growth? And in contradiction our universities are having their budgets cut and they are the educators of the next generation of wealth creators... The UK is sitting on a knife-edge.
The UK's Public Sector Net Cash Requirement (PSNCR) is out of control and little is being done to stop the spiraling size of this liability which will fetter our next generation. Investing for growth has merit, but how much of the massive Government spending is in reality targeted on growth? And in contradiction our universities are having their budgets cut and they are the educators of the next generation of wealth creators... The UK is sitting on a knife-edge.
In the investment markets it is important to understand what the perceived view is, and to work out what will influence it, and change it. The markets are full of analysts with great looking CVs (BScs, MBAs, PhDs, CFAs, etc) and an ability to put forward their views in well thought through terms (usually). They understand the risk / reward trade-offs and how to play the markets to their advantage.
Why then do so many politicians play catch-up?
And why is there so little debate on the sererity of the looming credit crunch which has the wherewithal to impoverish the next generation? PIMCO, whose assets under management, have just topped $1,000 billion, have recently estimated the UK's public and private debt at 466% of GDP. (as I commented on in http://www.ebooktumble.com/latenthazard.html). PIMCO has decsribed UK gilts as a must avoid... and resting on a bed of nitroglycerine.
We can't spin ourselves out of this one.
At what point will our politicians wise up and realise that the perceived view is changing and the reality is that they have to start doing something meaningful now, whilst they can. If it remains all talk, bluster and spin, they face the prospect of being overtaken by events. The risk is that a tipping point will be reached beyond which is a financial hell.
In this after world, we (the UK) will still need to borrow large amounts of money, but investors won't want to lend to us, unless it is at (very) high rates of interest. Perhaps the politicians should ask the finance director of a small or medium sized company what it is like dealing with banks in the current economic environment - will they lend? may be, and if they do, the interest rate will be exorbitant. Leaving the hard decisions to much later in the year is starting to look very self-interested. In short the ability to finance growth could become a secondary issue. The main issue could simply become - how do we stay afloat?
We need a new Government with a mandate to do what it takes to stop our borrowings and our economy from going totally off the rails.
Imagine what the Greek Prime Minister would be doing if he was currently in the middle of a General Election...
What ever the outcome, we need to get the General Election out of the way as quickly as possible, so that our politicians can then place the country at the top of their priorities. The alternative is delay, and then facing the priority of getting re-elected, while sterling and gilts get hammered.
Quantitative easing has bought the Government valuable time, it would be a shame if it was all in vain.
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