Please don't judge me but a small confession to begin: I actually feel a little sorry for Goldman Sachs. I know, I know, how much sympathy can you really have for a bunch of people who are richer than God? But remember, the bank is doing God's work, so presumably they should be reimbursed accordingly.
The giant vampire squid has been flogged by media commentators and political opportunists, the PM included, with such wilful abandon that it almost seems sadistic to watch. Many critics see the bank as guilty of the worst excesses of the bull market bubble and have certainly not been backward in coming forward. This seems to have reached a crescendo following the SEC's allegation that the bank is guilty of securities fraud related to the structuring and marketing of synthetic collateralised debt obligations (CDOs) linked to subprime residential mortgage-backed securities.
The degree of Schadenfreude on show following the SEC and FSA probes highlights the animosity against Goldman. However, in this case it seems potentially misplaced and perhaps a little premature. Bloomberg reported that the SEC vote was split 3-2 to approve the enforcement case against the bank. The fact that the committee was divided denotes some degree of uncertainty and when combined with seemingly "nakedly political" posturing and timing from the SEC and the Obama administration in turn, the case seems unduly vindictive to boot. Not a great start.
The specifics of the case have not been unveiled and as The Times' David Wighton writes: "It is too early to draw any but the most tentative conclusions about the Abacus affair." Much of what has been written in the press seems to focus on the fact that the trader at the centre of the affair referred to himself as "fabulous Fab" in his gloriously hubristic email to a colleague: "More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!"
This email proves nothing other than the fact that Fabrice is a bit of a prat who refers to himself in the third person. It is certainly not an indication of some elaborate and Madoff-esque subterfuge to defraud investors. The whole affair seems far more prosaic than that. The conflict of interest that follows the Bermuda triangle of CDOs created and checked by Paulson & Co, Goldman Sachs and ACA is one thing, but proving deliberate and calculated fraud is quite another.
The case is interesting because it involves four things that have captivated the market throughout the financial crisis – Goldman Sachs, exotic structured products, hedge funds and the regulators. Investors in the CDOs have protested against the way they were misled but, regardless of whether that is true or not, their refusal to take accountability is a microcosm of the whole credit crisis. Highly sophisticated investors use these products, not your average punter. They have due diligence teams that pore over documentation, and if they didn't – what the hell happened to caveat emptor? Breakingviews neatly summed up the debate: "As politicians and regulators pick over the SEC's allegations, they might keep in mind the synthetic CDO tango took two."
In terms of Schadenfreude, Goldman's competitors and critics should perhaps be wary to cast the first stone. Goldman was a major player in the CDO market but certainly not the biggest – Merrill Lynch, Citigroup and UBS all underwrote more securities according to Nomura. The regulators are clearly taking a hard look at the CDO market and given the sheer volumes traded, you would expect a similar case of "disreputable activity" to have taken place. Critics should also note that Goldman is run like a military operation. They are tough and will come out swinging – yesterday's bumper first quarter profit announcement and accompanying "aggressive defence against US fraud charges" highlights that they are a force to be reckoned with. They will not disappear gently into the night.
Goldman is an extremely difficult firm to like, but provided they can ride out the reputational storm, I doubt that their shareholders and heavily remunerated employees will be too troubled by this specific case (wider regulation is another matter). If Goldman was to suddenly adopt a football terrace style chant (chance would be a fine thing) they might well take their inspiration from Millwall FC: "No One Likes Us – We Don't Care."
JS
Wednesday, April 21, 2010
Monday, March 29, 2010
Tinker, failure, closure, grief
There can't be many people who genuinely believe any government has set out to systematically undermine UK workplace pension provision. But you could be forgiven for thinking politicians are genetically programmed to indulge in well intentioned tinkering, with irredeemably baleful consequences.
Today's survey from Punter Southall provides a fairly stark picture of the malaise into which the once vaunted UK pension system has descended. One in four employers report staff cutting or suspending pension contributions, only one in twenty still offer defined benefit schemes to new employees, and there is a rising tide of resentment against the pernicious impact of government actions. While nearly nine out of ten respondents anticipate a change of government in the forthcoming general election, only 13% think this would be a good thing, and a whacking 57% think it would make little or no difference.
A popular idea which emerges from the Punter Southall study, as well as from a broad range of other pensions commentators, is to take politics out of pensions. If the pensions industry craves one thing, it is a stable long term regulatory environment in which to get its act together. Politicians who win power have a range of priorities, but by far the most important is to get re-elected within the next five years. As we all know, even a week is a long time in politics, but five years is barely a blink of the eye in the glacial world of pensions.
Given this asymmetry between the time horizons of the pensions industry and the ministers whose decisions shape it, or mis-shape it, perhaps the Pensions Commission might serve as a useful template for the way forward. Chaired by Lord Turner, the Commission's 2005 analysis and recommendations achieved the unusual feat of attracting support from across the pensions community and, broadly speaking, across the political spectrum. Maybe a similar body, made up of representatives from the various stakeholder groups, and freed from the straightjacket of political short termism, could come up with sensible, practical and effective ideas for reform of the pensions system. Maybe along these lines, in fact?
AF
Today's survey from Punter Southall provides a fairly stark picture of the malaise into which the once vaunted UK pension system has descended. One in four employers report staff cutting or suspending pension contributions, only one in twenty still offer defined benefit schemes to new employees, and there is a rising tide of resentment against the pernicious impact of government actions. While nearly nine out of ten respondents anticipate a change of government in the forthcoming general election, only 13% think this would be a good thing, and a whacking 57% think it would make little or no difference.
A popular idea which emerges from the Punter Southall study, as well as from a broad range of other pensions commentators, is to take politics out of pensions. If the pensions industry craves one thing, it is a stable long term regulatory environment in which to get its act together. Politicians who win power have a range of priorities, but by far the most important is to get re-elected within the next five years. As we all know, even a week is a long time in politics, but five years is barely a blink of the eye in the glacial world of pensions.
Given this asymmetry between the time horizons of the pensions industry and the ministers whose decisions shape it, or mis-shape it, perhaps the Pensions Commission might serve as a useful template for the way forward. Chaired by Lord Turner, the Commission's 2005 analysis and recommendations achieved the unusual feat of attracting support from across the pensions community and, broadly speaking, across the political spectrum. Maybe a similar body, made up of representatives from the various stakeholder groups, and freed from the straightjacket of political short termism, could come up with sensible, practical and effective ideas for reform of the pensions system. Maybe along these lines, in fact?
AF
Monday, March 8, 2010
Some knights, a vampire squid, one acronym and a chunk of debt
Hostile takeovers, excessive leverage, boom and bust, board room wrangling and exorbitant pay packets...might sound like just another day in the financial markets but it's also the perilous state of English football at the moment. The business of the 'beautiful game' is now played out right across the front, middle and back pages. Just a few years ago, when things were ostensibly all swell in the market, there used to be a rough order to things – politics and social affairs on the front, business in the middle and sport on the back. Now, things are a little more blurry.
The fate of Portsmouth FC is a cautionary tale in just the same way as Bear Stearns, Lehman Brothers, RBS or the other financial institutions which imploded. They were debt laden, engaged in aggressive M&A activity (read transfer policy), remunerated their stars heavily and crested the wave of cheap credit. They did rather well on that strategy for a time – much like RBS (remember when Sir Fred was the toast of the town) – winning the FA Cup less than two years ago. However, if something seems too good to be true; it often is exactly that. So, sure enough, Portsmouth duly became the first Premiership club to fall into administration on 26 February.
Now, in the red corner, we have Manchester United – the most successful English club of recent years and a footballing powerhouse with a fan base that straddles the globe. Their debt levels have attracted attention ever since the Glazers took over the club in a highly leveraged deal in 2005. However, the various restructurings of late and the effective 'Green-and-Gold' protest movement has galvanised supporter animosity and the Glazers have really been feeling the heat. This has arguably come to a head with the surge of interest which the Red Knights consortium has generated.
In keeping with the front-page theme, The Observer led with a story proclaiming how Alex Ferguson was "backing bid to buy United", according to unnamed City financiers. Whether the Red Knights can really wrest control away from the Glazers is unsure but, like all good takeover struggles, the clash of personalities and ideologies is what we all love to see. The embattled Glazers are certainly the pantomime villains in this production of Twelfth Night...perhaps that should read as Twelfth Knight? On that note, enter stage left those intrepid Knights, led by Goldman Sachs' Jim O'Neill, as he rides proudly across on a giant vampire squid. [As an aside, has anyone's financial career and industry standing been so elevated by the simple use of a four lettered acronym – Bric, really?]
As The Sunday Times highlighted, Mr O'Neill is an unlikely hero – a Goldman Sachs banker and the Old Trafford faithful make unlikely bed fellows. However, the Glazers are public enemy number one and the Red Knights' ideology appears infinitely more palatable to the fans. Indeed, the notion of the supporter-owned club (a la Barcelona, Real Madrid and several German clubs) is gaining credence all around. "In an ideal world all clubs would be controlled and run by their supporters according to democratic principles," Uefa said in Vision Europe, a document setting out the direction and development of football over the next decade. In fact, a Uefa report last month revealed that 18 of the Premier League’s 20 clubs owe more combined than the rest of Europe’s top divisions put together. The debt for the 2008 season stood at £3.4 billion, 56% of the European club total.
All this makes for a compelling financial story. Who knows, perhaps one day football and business will become so closely aligned that the likes of Manchester United are 'too big to fail' and the Ronaldo's and Kaka's of the world are packaged into complex structured products, securitised and traded in tranches with inferior players, eventually leading to the dislocation of the global economy. Perhaps a government bail-out of a club will take place, leading to the creation of a 'good' club and 'bad' club – thereby classifying John Terry and Ashley Cole as 'toxic assets.' Actually, maybe not.
JS
The fate of Portsmouth FC is a cautionary tale in just the same way as Bear Stearns, Lehman Brothers, RBS or the other financial institutions which imploded. They were debt laden, engaged in aggressive M&A activity (read transfer policy), remunerated their stars heavily and crested the wave of cheap credit. They did rather well on that strategy for a time – much like RBS (remember when Sir Fred was the toast of the town) – winning the FA Cup less than two years ago. However, if something seems too good to be true; it often is exactly that. So, sure enough, Portsmouth duly became the first Premiership club to fall into administration on 26 February.
Now, in the red corner, we have Manchester United – the most successful English club of recent years and a footballing powerhouse with a fan base that straddles the globe. Their debt levels have attracted attention ever since the Glazers took over the club in a highly leveraged deal in 2005. However, the various restructurings of late and the effective 'Green-and-Gold' protest movement has galvanised supporter animosity and the Glazers have really been feeling the heat. This has arguably come to a head with the surge of interest which the Red Knights consortium has generated.
In keeping with the front-page theme, The Observer led with a story proclaiming how Alex Ferguson was "backing bid to buy United", according to unnamed City financiers. Whether the Red Knights can really wrest control away from the Glazers is unsure but, like all good takeover struggles, the clash of personalities and ideologies is what we all love to see. The embattled Glazers are certainly the pantomime villains in this production of Twelfth Night...perhaps that should read as Twelfth Knight? On that note, enter stage left those intrepid Knights, led by Goldman Sachs' Jim O'Neill, as he rides proudly across on a giant vampire squid. [As an aside, has anyone's financial career and industry standing been so elevated by the simple use of a four lettered acronym – Bric, really?]
As The Sunday Times highlighted, Mr O'Neill is an unlikely hero – a Goldman Sachs banker and the Old Trafford faithful make unlikely bed fellows. However, the Glazers are public enemy number one and the Red Knights' ideology appears infinitely more palatable to the fans. Indeed, the notion of the supporter-owned club (a la Barcelona, Real Madrid and several German clubs) is gaining credence all around. "In an ideal world all clubs would be controlled and run by their supporters according to democratic principles," Uefa said in Vision Europe, a document setting out the direction and development of football over the next decade. In fact, a Uefa report last month revealed that 18 of the Premier League’s 20 clubs owe more combined than the rest of Europe’s top divisions put together. The debt for the 2008 season stood at £3.4 billion, 56% of the European club total.
All this makes for a compelling financial story. Who knows, perhaps one day football and business will become so closely aligned that the likes of Manchester United are 'too big to fail' and the Ronaldo's and Kaka's of the world are packaged into complex structured products, securitised and traded in tranches with inferior players, eventually leading to the dislocation of the global economy. Perhaps a government bail-out of a club will take place, leading to the creation of a 'good' club and 'bad' club – thereby classifying John Terry and Ashley Cole as 'toxic assets.' Actually, maybe not.
JS
Wednesday, February 17, 2010
Ay Ay Icap!
Some market commentators have seized upon Icap's "broad ranging strategic review" of its cash equities businesses as another sign of the structural shortcomings at play within the mighty inter-dealer broker. After all, shares plunged nearly 30 per cent at one stage following a profits warning last month. However, under the stewardship of chief executive, Michael Spencer, Icap has consistently demonstrated itself to be an innovative market force and the leader (followed by Tullett Prebon) in the IDB sector. While there are certainly issues that require remedying, the fact that Spencer has placed his political ambitions on hold to focus on the business should go some way to assuage nervous investors. The Telegraph's Questor certainly believes so, tipping punters to buy shares yesterday, and adding that "it would be wrong to underestimate Spencer himself."
The ill-fated foray into cash equities has undoubtedly been faltering and progress extremely slow. Spencer bowled into the sector at the tail end of 2008 to try and fill a gap in the market left by the demise of Lehmans. Icap recruited heavily and aggressively – hiring over 200 staff to join the division. To be fair to Spencer, he saw this as a once-in-a-lifetime opportunity to profit from the glut of available talent, as many trading desks were decimated in the wake of Lehmans.
And, he was definitely not the only one to share this opinion. There was considerable activity from the ‘traditional’ brokerage firms, large and small, and from the new wave of smaller providers, to seize the market opportunity that the demise of Lehmans, plus those of Dresdner Kleinwort and Bear Stearns, created. BarCap and Nomura were certainly conspicuous in their hiring sprees as they looked to build their equity teams. However, cash equities is a fiercely competitive business, and it seemed doubtful that the size of this market opportunity was sufficient to sustain every individual business plan. Unfortunately for Spencer, Icap faltered. Breakingviews highlighted some of the inherent problems the IDB faced: "Cash equities is a difficult, low-margin and commoditised business. The costs are high, and the continued need to invest in technology, keeps them that way. The business is dominated by a handful of big banks with the scale to make it pay."
Icap will bounce back from the problems with cash equities and as some analysts have already noted – Spencer has the bottle to simply shut the unit down rather than let it limp lifelessly onward. Panmure Gordon even notes that winding up the business will be of little strategic importance to the group. Nonetheless, Icap still needs to navigate some choppy waters – notably regulatory reform, as Obama's plans to curb proprietary trading by banks will undoubtedly hit revenues. To keep with the nautical theme – Spencer certainly has the wherewithal to keep an even keel.
JS
The ill-fated foray into cash equities has undoubtedly been faltering and progress extremely slow. Spencer bowled into the sector at the tail end of 2008 to try and fill a gap in the market left by the demise of Lehmans. Icap recruited heavily and aggressively – hiring over 200 staff to join the division. To be fair to Spencer, he saw this as a once-in-a-lifetime opportunity to profit from the glut of available talent, as many trading desks were decimated in the wake of Lehmans.
And, he was definitely not the only one to share this opinion. There was considerable activity from the ‘traditional’ brokerage firms, large and small, and from the new wave of smaller providers, to seize the market opportunity that the demise of Lehmans, plus those of Dresdner Kleinwort and Bear Stearns, created. BarCap and Nomura were certainly conspicuous in their hiring sprees as they looked to build their equity teams. However, cash equities is a fiercely competitive business, and it seemed doubtful that the size of this market opportunity was sufficient to sustain every individual business plan. Unfortunately for Spencer, Icap faltered. Breakingviews highlighted some of the inherent problems the IDB faced: "Cash equities is a difficult, low-margin and commoditised business. The costs are high, and the continued need to invest in technology, keeps them that way. The business is dominated by a handful of big banks with the scale to make it pay."
Icap will bounce back from the problems with cash equities and as some analysts have already noted – Spencer has the bottle to simply shut the unit down rather than let it limp lifelessly onward. Panmure Gordon even notes that winding up the business will be of little strategic importance to the group. Nonetheless, Icap still needs to navigate some choppy waters – notably regulatory reform, as Obama's plans to curb proprietary trading by banks will undoubtedly hit revenues. To keep with the nautical theme – Spencer certainly has the wherewithal to keep an even keel.
JS
Tuesday, January 26, 2010
Freddie Starr ate my recovery
It’s official. The UK is out of recession.
According to the government's statisticians, the Office for National Statistics (ONS), the economy grew last quarter by 0.1%, ending six consecutive quarters of negative growth and bringing to a close the longest recession since before the Second World War.
So that's good news right? Surely it's time to roll out the bunting and crack open the champagne (well, Asti, given the current market) and put on some B.B.King?
Well not according to some.
Despite the hopes of services shaking the banker bonus tree, it seems one or two commentators are not quite ready to sing along just yet. But then perhaps that's to be expected as we languish in the post-festive-pre-payday gloom. So it seems Blue Monday has slipped into a Terrible Tuesday.
Indications are that any growth is likely to remain anaemic, and this has led some cabinet members to be reportedly fearful of taking any responsibility for something that in most scenarios would be classed as 'good news'. But then perhaps that is sensible given the possibility of a return to negative growth in Q1 2010, which would be reported statistically 11 days before the likely day of the general election, 6th May.
With the two major parties preparing to draw the battle lines along how best to sustain the 'recovery', any such figures would not exactly enhance the incumbents' self-proclaimed reputation for economic competence, a point not really helped by what seem now to be rather optimistic growth expectations for this year and next year. They can, however, take comfort from not being the only ones caught out.
So what now and what's in store for the 'fledging recovery'? Well, any sort of long-term plan would be useful. The Daily Telegraph points to private sector investment and overseas growth as areas to deliver the growth needed to rescue us from being stunted by the fiscal stimulus plans. That does not seem to be evident yet, however, and certainly nowhere near on the systematic scale seen in China, which clearly recognises the importance of scientific research and retention of knowledge as the key to its future.
Perhaps a change of perception? The Daily Telegraph talks about a two-speed global economy with opportunities being thrown up by the turmoil surrounding fiscal exit strategies.
But then perhaps we are justified in being wary of celebrating GDP growth if the New Economics Foundation paper yesterday is to be believed. With developed nations assuming continual growth, perhaps the view is just flawed. They illustrate this point with a short video called 'The Impossible Hamster'. If a hamster doubled in size every week for a year, it would weigh 9 billion tonnes – enough to give Freddie Starr serious indigestion. So why should we assume GDP should continue growing, particularly when we consider that environmental concerns may pin back the recovery over the long term?
Food for thought indeed.
So, let's look on the bright side (for the time being at least) – the days are getting longer, payday is nearly here and if Freddie feels peckish, he'll probably opt for a Chinese hamster instead. As Frankie Boyle has been heard to say, "Help yourself to nibbles – (he was our favourite hamster…..)"
AF
According to the government's statisticians, the Office for National Statistics (ONS), the economy grew last quarter by 0.1%, ending six consecutive quarters of negative growth and bringing to a close the longest recession since before the Second World War.
So that's good news right? Surely it's time to roll out the bunting and crack open the champagne (well, Asti, given the current market) and put on some B.B.King?
Well not according to some.
Despite the hopes of services shaking the banker bonus tree, it seems one or two commentators are not quite ready to sing along just yet. But then perhaps that's to be expected as we languish in the post-festive-pre-payday gloom. So it seems Blue Monday has slipped into a Terrible Tuesday.
Indications are that any growth is likely to remain anaemic, and this has led some cabinet members to be reportedly fearful of taking any responsibility for something that in most scenarios would be classed as 'good news'. But then perhaps that is sensible given the possibility of a return to negative growth in Q1 2010, which would be reported statistically 11 days before the likely day of the general election, 6th May.
With the two major parties preparing to draw the battle lines along how best to sustain the 'recovery', any such figures would not exactly enhance the incumbents' self-proclaimed reputation for economic competence, a point not really helped by what seem now to be rather optimistic growth expectations for this year and next year. They can, however, take comfort from not being the only ones caught out.
So what now and what's in store for the 'fledging recovery'? Well, any sort of long-term plan would be useful. The Daily Telegraph points to private sector investment and overseas growth as areas to deliver the growth needed to rescue us from being stunted by the fiscal stimulus plans. That does not seem to be evident yet, however, and certainly nowhere near on the systematic scale seen in China, which clearly recognises the importance of scientific research and retention of knowledge as the key to its future.
Perhaps a change of perception? The Daily Telegraph talks about a two-speed global economy with opportunities being thrown up by the turmoil surrounding fiscal exit strategies.
But then perhaps we are justified in being wary of celebrating GDP growth if the New Economics Foundation paper yesterday is to be believed. With developed nations assuming continual growth, perhaps the view is just flawed. They illustrate this point with a short video called 'The Impossible Hamster'. If a hamster doubled in size every week for a year, it would weigh 9 billion tonnes – enough to give Freddie Starr serious indigestion. So why should we assume GDP should continue growing, particularly when we consider that environmental concerns may pin back the recovery over the long term?
Food for thought indeed.
So, let's look on the bright side (for the time being at least) – the days are getting longer, payday is nearly here and if Freddie feels peckish, he'll probably opt for a Chinese hamster instead. As Frankie Boyle has been heard to say, "Help yourself to nibbles – (he was our favourite hamster…..)"
AF
Friday, January 22, 2010
Barack to the drawing board
I have missed Barack Obama. I devoured his campaign coverage to levels of minor obsession and had grown used to seeing his face strewn over the covers of publications the world over. Recently though, it seems Obama has been hibernating. Maybe he has been finding it difficult to make it into the office due to all the snow? Or can that excuse really only apply to Londoners? Either way he has not exactly been marking his first year in office with the media frenzy many would have expected twelve months ago. But now he's back!
Obama has, some suggest, produced the sword to deliver a final blow to the Wall Street bull. Exhausted with the media frenzy over bankers' bonuses and deaf from the screams of the American public crying "kill" "kill", could this be the death of the big bank: 2010's Glass-Steagall finale?
I doubt it. It is important to remember these "Volcker Reforms" are just proposals. We are not about to see the end of proprietary banking on Monday. As with any American legislative proposal, and especially any introduced by the current president, it will be months before anything is actually set in stone and the big banks are forced into selling off their hedge funds and private equity groups. Goldman Sachs and JPMorgan can rest easy this weekend. What will no doubt follow will be months of lobbying. The Wall Street top dogs (what can I say I'm not a cat person) are getting quite used to spending time in Washington D.C. By now, they are probably thinking of the Holiday Inn on Capitol Hill as a second home (or fourth or fifth in many caes). While the rest of are still ploughing through the details of the proposals, lobbyists will be weaving loop holes that will ultimately produce very little (if any) changes to the too-big-to-fail banks. When tired of this we can watch bank share prices yoyo in front of our eyes.
This of all proposals comes at a terrible time for Obama: after weeks of laying low, he reared his head at the end of the week only to find that he has lost Teddy Kennedy's old Democratic seat in Massachusetts and thus the crucial 60th vote in the Senate that he needs to pass this or any other bill. And to really kick dirt in his face when he's down, the Supreme Court voted yesterday to lift the ban limiting banks and other powerful companies from funding and supporting political candidates. Banks don't take too kindly to their share prices falling by around 5% across the board; so although in the past Wall Street has been a major fundraiser for the Democrats (and Obama himself), I get the feeling that the millions of dollars of Wall Street's campaign donations might be up for grabs right now. Enter the Republicans with open hands…
And what will all this mean to us in the UK? Well, the BBC reports that Shadow chancellor George Osborne has come out in support of President Obama's proposals but has covered himself by assuring that there would have to be international compliance. Chances are nothing much will happen once the election is out of the way. I suggest we all take the weekend to turn our attention back to donating to the Haitian appeal. There will be all of Summer (and Autumn and Winter...) to follow the 'Obama takes on Banks' headlines.
RK
Obama has, some suggest, produced the sword to deliver a final blow to the Wall Street bull. Exhausted with the media frenzy over bankers' bonuses and deaf from the screams of the American public crying "kill" "kill", could this be the death of the big bank: 2010's Glass-Steagall finale?
I doubt it. It is important to remember these "Volcker Reforms" are just proposals. We are not about to see the end of proprietary banking on Monday. As with any American legislative proposal, and especially any introduced by the current president, it will be months before anything is actually set in stone and the big banks are forced into selling off their hedge funds and private equity groups. Goldman Sachs and JPMorgan can rest easy this weekend. What will no doubt follow will be months of lobbying. The Wall Street top dogs (what can I say I'm not a cat person) are getting quite used to spending time in Washington D.C. By now, they are probably thinking of the Holiday Inn on Capitol Hill as a second home (or fourth or fifth in many caes). While the rest of are still ploughing through the details of the proposals, lobbyists will be weaving loop holes that will ultimately produce very little (if any) changes to the too-big-to-fail banks. When tired of this we can watch bank share prices yoyo in front of our eyes.
This of all proposals comes at a terrible time for Obama: after weeks of laying low, he reared his head at the end of the week only to find that he has lost Teddy Kennedy's old Democratic seat in Massachusetts and thus the crucial 60th vote in the Senate that he needs to pass this or any other bill. And to really kick dirt in his face when he's down, the Supreme Court voted yesterday to lift the ban limiting banks and other powerful companies from funding and supporting political candidates. Banks don't take too kindly to their share prices falling by around 5% across the board; so although in the past Wall Street has been a major fundraiser for the Democrats (and Obama himself), I get the feeling that the millions of dollars of Wall Street's campaign donations might be up for grabs right now. Enter the Republicans with open hands…
And what will all this mean to us in the UK? Well, the BBC reports that Shadow chancellor George Osborne has come out in support of President Obama's proposals but has covered himself by assuring that there would have to be international compliance. Chances are nothing much will happen once the election is out of the way. I suggest we all take the weekend to turn our attention back to donating to the Haitian appeal. There will be all of Summer (and Autumn and Winter...) to follow the 'Obama takes on Banks' headlines.
RK
Tuesday, January 12, 2010
Better the Red Devil you owe
When the Glazer family took over Manchester United in 2005 the fans were in uproar as the Floridian family loaded the club with debt. The furore from the prawn sandwich brigade subsided as the Glazer's kept their heads down and Fergie led the Red Devils to three league titles in a row. However, what goes around comes around, and the interest on United's PIK loans is accumulating faster than Tiger Wood's mistress count.
Whatever Manchester United does will always generate huge attention and confirmation yesterday of its planned £500m bond has been all over the business and sports pages. In fact, while I think about it, the football community is more au fait with financial lexicon that you might expect. I vividly remember watching the telly when Sheikh Mansour took over Manchester City and thinking that a sovereign wealth fund acquisition was being discussed with alarming lucidity. Arsenal's Andrei Ashavin also displayed his financial savvy last year as he looked to renegotiate his £80,000 a week contract after being "unpleasantly surprised" by the UK's 50p tax rate for top earners.
Anyway, back to the point in hand...despite the blanket press coverage and element of doom saying from the more hysterical football fans, let's not get ahead of ourselves. By no means are United going to fall into the hands of the administrators – after all, the club also confirmed yesterday that it had recorded a pre-tax profit of £48.2m and a turnover of £278.5m for the year ending June 30. The club's success is also highlighted in the Deloitte Football Money League 2009 report, where they were ranked second in revenues, behind only Real Madrid. In fact, the report revealed that "had it not been for depreciation of sterling against the Euro, United would have leapfrogged Real Madrid." Making a profit in this market environment – and in a business as volatile as football – should certainly not be sneered at. Nonetheless, the debt burden is a real albatross round its neck, and the bond issue should go some way to ease the situation as they swap the expensive bank and hedge fund debts with the cheaper debts owed to bondholders.
The notes will be used to refinance the existing debt secured against the club rather than the PIK notes and as the FT reports, allow the club to "use up to 50 per cent of its cashflow to pay a dividend to the Glazer family, enabling them to repay a punitive payment-in-kind loan, which carries interest of 14.25 per cent." Fans bemoaning the lack of transfer activity of late to replace expensive flops such as Dimitar Berbatov could also take some comfort, as "United will also enter into a revolving credit facility to allow it to borrow an additional £75m, to be used for working capital and, probably, to help the club to continue buying players."
The United saga brings an interesting comparison to rivals, Manchester City. City have typically been regarded as United's unfortunate cousin – the pauper to their more illustrious neighbour's prince. However, since the Abu Dhabi Investment Authority's acquisition of the club, they are now armed with more funds than some countries' GDP. They've been spending money like it's going out of fashion and the ensuing battle seems to show parallels with another economic situation: a US-owned debt-laden mammoth versus an asset-rich Emirati pretender...sound familiar?
JS
Whatever Manchester United does will always generate huge attention and confirmation yesterday of its planned £500m bond has been all over the business and sports pages. In fact, while I think about it, the football community is more au fait with financial lexicon that you might expect. I vividly remember watching the telly when Sheikh Mansour took over Manchester City and thinking that a sovereign wealth fund acquisition was being discussed with alarming lucidity. Arsenal's Andrei Ashavin also displayed his financial savvy last year as he looked to renegotiate his £80,000 a week contract after being "unpleasantly surprised" by the UK's 50p tax rate for top earners.
Anyway, back to the point in hand...despite the blanket press coverage and element of doom saying from the more hysterical football fans, let's not get ahead of ourselves. By no means are United going to fall into the hands of the administrators – after all, the club also confirmed yesterday that it had recorded a pre-tax profit of £48.2m and a turnover of £278.5m for the year ending June 30. The club's success is also highlighted in the Deloitte Football Money League 2009 report, where they were ranked second in revenues, behind only Real Madrid. In fact, the report revealed that "had it not been for depreciation of sterling against the Euro, United would have leapfrogged Real Madrid." Making a profit in this market environment – and in a business as volatile as football – should certainly not be sneered at. Nonetheless, the debt burden is a real albatross round its neck, and the bond issue should go some way to ease the situation as they swap the expensive bank and hedge fund debts with the cheaper debts owed to bondholders.
The notes will be used to refinance the existing debt secured against the club rather than the PIK notes and as the FT reports, allow the club to "use up to 50 per cent of its cashflow to pay a dividend to the Glazer family, enabling them to repay a punitive payment-in-kind loan, which carries interest of 14.25 per cent." Fans bemoaning the lack of transfer activity of late to replace expensive flops such as Dimitar Berbatov could also take some comfort, as "United will also enter into a revolving credit facility to allow it to borrow an additional £75m, to be used for working capital and, probably, to help the club to continue buying players."
The United saga brings an interesting comparison to rivals, Manchester City. City have typically been regarded as United's unfortunate cousin – the pauper to their more illustrious neighbour's prince. However, since the Abu Dhabi Investment Authority's acquisition of the club, they are now armed with more funds than some countries' GDP. They've been spending money like it's going out of fashion and the ensuing battle seems to show parallels with another economic situation: a US-owned debt-laden mammoth versus an asset-rich Emirati pretender...sound familiar?
JS
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