Thursday, 19 February 2009

How to fund the bail outs, part one

It’s expensive, all this bailing out. Which is why Obama is so keen on grabbing some of that cash back from tax evaders and avoiders (yes, there is a difference, however slight). As the new President amusingly put it:

“There's a building in the Cayman Islands that houses supposedly 12,000 US-based corporations. That's either the biggest building in the world or the biggest tax scam in the world.”

Gordon Brown wants a piece of the action too. HM Revenue & Customs estimates that the size of the tax gap (the difference between what UK companies should be paying and what they are paying) could be anything up to £13bn—a sizeable wedge with so much toxic debt on the state’s banking balance sheet.

Gordo’s crackdown on tax havens is an international effort. It has to be. Attempting to rake back some of the cash that your largest businesses are hiding offshore isn’t going to work if other nations’ aren’t playing the same game. No government, Brown’s included, can risk being seen to damage the competitiveness of its blue chip firms unless there is complete collusion.

And that goes for the targeting of individual savers too. Those citizens hoping to avoid tax in their own country often stash their money in a nearby tax haven. So Dutch savers might open a Swiss bank account, for example. If you target Switzerland, as Brown intends to, those Dutch savers simply move their money to Lichtenstein. You need multinational coordination to have any hope of affecting a proper clampdown.

Obama has already scored a minor victory. The Swiss bank UBS has been forced to reveal the names of around 19,000 wealthy US account holders whom the IRS suspects of tax evasion. According to the Huffington Post:

“Prosecutors suspect that UBS helped its American clients hide $20 billion from the government, or about $300 million a year in taxes, from late 2002 to 2007. UBS has admitted that some of its employees ‘participated in a scheme to defraud the United States.’”

So who’s on the list?

Wednesday, 11 February 2009

Toxic bonus

There was a joke doing the rounds in the City last year, which played on bankers’ annual bonus worries. The credit crunch had struck and expectations were low. In lieu of a fat wedge, it was said, City employees could this year expect the deeds to a repossessed Hicksville ranch. In retrospect, of course, not such a bad offer. But maybe if traders were, as the Americans say, forced to eat their own dog food, we wouldn’t have got ourselves into this mess in the first place. Here’s an interesting twist from credit crunch blog, The Baseline Scenario:

“Why not say that all bank [bonuses] above a baseline amount - say, $150,000 in annual salary – [have] to be paid in toxic assets off the bank’s balance sheet?

Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there - at the value that they insist they are worth.

Of course, the average employee does not get to set the balance sheet value of the assets… but think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations.

Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.”

Great idea. I’d set the basic salary bar a little higher, though. We want to see directors and unit heads carrying the can, not flunkies. How does that Pedigree Chum taste, Sir Fred?

Monday, 9 February 2009

Inside job

The government’s review of banking bonuses may be cynically timed, but it is not, as some have suggested, a cover-up. David Cameron is right to question the sense of ploughing £20bn into an industry that’s mis-firing on all cylinders, only to give five per cent straight back to the morons that got us into this mess in the first place. But Brown’s intention is not to screen the public from the truth.

The review, which will be led by former Morgan Stanley chairman Sir David Walker, was announced three weeks before RBS, now 68 per cent controlled by the government, is due to release its results. They won’t be pretty. But bonuses will be paid (according to the contractual small print) no matter how badly RBS does. Brown and Darling will use the Walker Review to deflect some of the inevitable flak.

Cynically timed, then, but not a cover-up, as Vince Cable and Robert Peston have suggested. The review will have a specific goal: to find a new way of structuring City bonuses so that they encourage the long-term health of the banking sector. Risk will still be encouraged, but it will be responsible risk, whatever that is. With the review target so clear, it’s difficult to see how it could be construed in any other way than as a very real attempt to shore up the weakest links of the City machine, without damaging its potency in the process.

Sir David is indeed an insider—and it’s his apparently cosy appointment that has enraged the conspiracists—but outsiders have thus far proved themselves incapable of penetrating the complex idiosyncrasies of high finance: both the financial journalists and the banking non-executives failed to ask the right questions at the right time.

Besides, those doubting Sir David’s capability need only refer to his last public review of 2007, which set out to bring transparency to the mysterious and much-despised private equity industry. In some ways, the two reviews are similar: open up the hood, appease the public, but don’t neuter the defendants in the process. Some of the private equity industry’s most secretive boards have already begun to release details relating to performance and strategy. But last month’s report by Ernst & Young, the first real data to emerge from a newly transparent industry, has revealed perhaps even more than even Sir David bargained for.

According to the Guardian’s spin on the report:

“More than half the profits generated by UK private equity firms in recent years have been made by piling debt on to the books of the companies they invest in… Just one fifth of the returns achieved come from strategic and operational improvements.”

Confirmation, if you ever needed it, that private equity is about short-term profits, not organisational efficiency.

What gems will Walker’s investigation into banking bonuses uncover?

Thursday, 5 February 2009

No protection

The arguments for protectionism get louder the deeper the economy sinks. At Lindsey Oil Refinery, employees have been protesting the decision to ship in 400 Italian and Portuguese workers at a time when UK unemployment is beginning to accelerate. In the US, President Obama’s stimulus package carries a crucial section of small print: all projects financed by the $800bn bailout have to source US iron and steel, rather than imported materials. And in Spain, where over one million men under 30 are now unemployed, Industry Minister Miguel Sebastian has launched a "Made in Spain" initiative, aimed at persuading citizens to spend their hard-earned euros on Spanish produce.

On a very basic level, you can see where the protectionists are coming from. Even Jamie Oliver is at it. As governments all over the world acquiesce to huge bailouts, aren’t the people entitled to choose where all this public money is going? According to the BBC, Ohio Democrat Tim Ryan has calculated that using wholly domestic input (iron and steel from US sources) for future infrastructure projects will create an extra 77,000 jobs across the country. His position isn’t exactly isolated. When help is needed, it’s human nature to treat the neighbours first. Charity doesn’t travel well when there are problems closer to home.

But that’s where the logic ends. In a global economy, companies must look after their exports as well as domestic demand. That’s why US firms General Electric, Boeing, and Caterpillar (each of whom are about as “American” as apple pie) have all spoken out against Obama’s bailout. According to the BBC, more than half of Caterpillar's sales are exports. “We’ve got to keep our markets open if we expect other countries to keep their markets open,” says Caterpillar CEO James Owens.

He’s absolutely right. The last thing the world needs right now is a tit-for-tat trade war. While it’s been inaccurately reported that the wave of protectionism that followed the Wall Street crash of 1929 was the chief cause of the Great Depression, it certainly lengthened the pain. Obama must choose between his election pledge of standing up for US workers and developing a foreign trade policy that stimulates growth on both sides of the Atlantic.

Tuesday, 3 February 2009

Knol: it kinda sucks

The battle to become the Web’s number one encyclopaedia took an interesting turn last week when the 240-year-old Encyclopaedia Britannica decided to go all Web 2.0. New contributions will still have to be verified by one of the encyclopaedia’s 4,500 experts, but this is actually pretty similar to Jimmy Wales’s new vision for Wikipedia. So concerned is Wales that troublesome graffiti artists are ruining his beloved project’s credibility, he has decided that amendments will in future be vetted by Wikipedians higher up the food chain.

Journalists have since taken every opportunity to quote a few classics from Wikipedia’s ever-expanding canon of witless contributions. “Is Wikipedia cracking up?” asks the Independent. During Sunday’s Super Bowl, Bruce Springsteen, who performed live for the half-time show, apparently had his entry subbed to read:

"Bruce Springsteen. This guy kinda sucks."

Tellingly, media interest in Google’s rival encyclopaedia, which the advertising and search company calls Knol, has been rather thin on the ground. Google says Knol is a site that provides “authoritative articles about specific topics, written by people who know about those subjects”. After six months, the number of Knol contributions on a variety of subjects has grown to over 100,000. Google recently announced a commercial deal with to try and boost the quality of the next 100,000. I can see why.

Taking one search term at random, try inputting “Silicon Valley” to see what Knol comes up with. As you might expect, there are plenty of entries that reference Silicon Valley—this is, after all, a beta for a tech gizmo. But the only entry I could find on the Knol database that attempts to actually describe Silicon Valley (What is it? Where did it come from?) is written by somebody called Grace Keng. It is 250 words long. Wikipedia’s entry on the same subject is almost 2,000 words.

Unfortunately, Keng’s entry adds very little to the story of the world’s pre-eminent tech cluster. There is a photo credit (with the picture deleted). There is also a short history of the region's early days in tech, which brings new meaning to the word “succinct”:

“The 1930 (sic), two engineering graduate students of Stanford University set out to do their work in a garage in Palo Alto.”

The identity of these mysterious students, or at least some idea of the kind of work they enjoyed, are trifling details that Knol users can presumably google for themselves. There is then a solitary reference—a link that goes straight through to Wikipedia.

Keng does at least find the time to offer us a special insight into Silicon Valley’s phenomenal success as a technology hub:

“One of the major reasons for Silicon Valley's success is the ability to attract people from all over the world to live and work in the valley. The cultural mix and the diversity of ethnic traditions have enriched all of us.”

Which sounds suspiciously like estate agent-speak. Oh wait: Keng is an estate agent. She even posts her details in the unlikely event that having read her enlightening précis, you might suddenly decide you’re in the market for some prime Silicon Valley real estate. Sign me up for some of that ethnic enrichment.

Wikipedians and other righteous defenders of Web Justice are concerned that if Google manages to acquire a dominant position in both content and search, we might as well all pack up and go home. Knol’s feeble arsenal of content suggests otherwise.