Saturday, 28 February 2009

Second thoughts

Some second thoughts on the Goodwin pension thang.

If I was of a mind to try and defend it in an FT-styley, I'd refer to Chuck Prince who left Citigroup with "vested stock holdings valued at USD$94 million and the roughly $53.1 million salary he received over the four years in the position. He also received a pension of $1.74 million and another one million stock options. He is still a consultant with Citigroup." (lifted from wikipedia) or even Stanley O'Neal, formerly of Merrill Lynch, and his "golden parachute compensation package that included Merrill stock and options valued at $161.5 million at the time".

So by the standards of these other dismal failures Fred doesn't appear to have been unduly rewarded. In fact, he's been treated quite badly all in all. See! I said I was doing it in an FT style.

Nah, the real reason I was wondering about this more was because the talking head stuff about it on the BBC gave me the willies; its a bit like after Princess Diana died and a good chunk of the British population went bonkers for a while. For me that poses the danger of errant stupidity taking over and ultimately discrediting what could otherwise be an important point - its wrong that for executives the financial difference between their performance being good, bad, indifferent or spectacularly atrocious is largely a matter of degree.

This isn't a moral argument, although it could easily be considered in terms of morality/greed, social inequality, economic justice and all that kinda stuff. Rather it's the fact it appears to have encouraged execessive risk-taking at institutions, we've learned, too vital to the economy to be allowed to fail.

There's also the broader set of assumptions the Goodwin pension reflects, as also illustrated by the following Wall Street Journal quote (Feb 28th) about the 3rd Citigroup bailout - "Wall Street also is worried about "whether the company will be run in the interest of private shareholders or for the public good," said John McDonald, a banking analyst at Sanford Bernstein & Co. "It's a valid question what the priorities will look like."

The reality is thats not a valid question, its a stupid question and it's disturbing that its actually being voiced in print by someone who, judging by his job title, potentially has the important responsibility of advising on pension funds. For one thing government i.e. the public, is a key shareholder so why distinguish between public and private interests? For another the US government has been strenuously avoiding nationalising Citigroup, which legally restricts any imposition of public goods even though the whole damn shebang should arguably have been nationalised months ago. And finally, given the Northern Rock example, the schmuck doesn't appear to be even considering what private Citigroup shareholdings would be worth without government intervention while giving the impression only the interests of private capital providers merits attention.

See theres this complete lack of awareness, ignorance even amongst people who don't in many cases it appears realise they're no longer the masters of the universe. Despite this, thanks to all thats happened and individuals like Madoff, Thain and now Goodwin, the impression being created is of greedy, grasping, preening little men scurrying about grabbing as many taxpayer fivers as they can jam in their own pockets.

For me patient, public, informed, forensic and transparent enquiries are the means of taking advantage of the opportunities this has created to achieve permanent change. Unfortunately, the potential alternative now emerging is of a soundbite screaming lynch mob riding the passing wave of public opinion. Well thats how the FT would describe it given they've already used a comparison with witch trials in an attempt at spoofing the attacks on Sir Fred to the point where they are undermined.

But, I'm not sure something meaningful would serve our political masters well right now given their priority appears to be establishing a distraction. Oh well.

Thursday, 26 February 2009

If I ruled the world(ish)

Perhaps not, but if I was a politician with some responsibility for the bank bailout and realised

a) I was about to throw vast amounts of additional taxpayer cash at RBS

b) had failed to appreciate at the time how the deal cut over the Sir Fred "the Shred" Goodwin pension deal might be perceived

Then here is what I'd do. First, I'd focus, fixate even on the pension issue. Second, in doing so I'd personalise it as much as and wherever possible. And three, I'd try to be seen to be doing the right thing by having a word with the lucky recipient so him keeping it can be readily explained away as a sign of his greediness rather than point (b) above.

I mean just think about it for a mo'. Government today announced an additional £13bn of support for RBS plus £6bn in reserve just in case (howdya like them apples LDV and Mini car plant workers, eh? eh?). Alongside this is a dirty great contingent obligation taken on by government i.e. us, in respect to possible losses on £325bn of RBS assets.

But see thats scary biscuits and quite complicated. Much better to personalise it down into something yer average Heat/Daily Mail reader can understand and make a £16m pension pot and £650k a year for life the issue rather than tens of billions of additional government aid.

This isn't a defence of the Goodwin pension BTW, heck no, but I am naive enough to think its a minor issue that's been flared up by political self-interest and should have been/should be sorted out realtively painlessly. Rather for me its the aid to the institution itself that needs the real scrutiny.

There again given my understanding is that there wasn't a wet eye in the house when Sir Fred left the building, it's good sport seeing him become public enemy no. 1

Wednesday, 25 February 2009

Dr Sentance goes to the IEA

Economists employed by PLCs aren't much cop on the whole. If they aren’t getting wheeled out at corporate shindigs to warm up for the CEO or regional sales team, they’re doing their damndest to get their employer’s name in the press by vomiting screeds of guff surveys typically bought off the shelf from someone else who actually has a degree of methodological competence. So it was with some interest that I read “Monetary Policy and the Current Recession”, a speech given by Andrew Sentance at the Institute of Economic Affairs (IEA) on Feb the 24th.

Dr Sentance is a member of the Bank of England’s monetary policy committee and as such a big cheese. He’s also been an economist at the CBI and British Airways so is as big a PLC economist as it’s possible to get in Britain. The IEA by the way was Thatcherism’s think-tank, a body founded (and voluntarily funded) to promote free-markets as the solution to all the world’s socio-economic ills, give or take the credit crunch free markets caused. So when Dr Sentance went to the IEA you might think it was a match made in heaven (1). Alternatively, after reading the speech you might think “aye right”.

Dr Sentance you see is the self-appointed voice of economic reason - “The fact that we have to look back nearly two decades to find the last recession and three decades or more for its two predecessors inevitably makes it harder to put the experience of the current recession in perspective. That, in turn, may account for some of the more apocalyptic and hyperbolic views of the current conjuncture.”

He goes on – “I have argued that while the downturn is being driven by a financial crisis of a type we have not seen in post-war economic history, our experience of the current recession in the UK is not – so far – out of kilter with earlier post-war recessions” i.e. if what I’m saying turns out to be bollocks saying “so far” makes for a sweet get out clause.

Anyway, that’s the guff, what about the meat? Well there isn’t much really. There’s a big-up for himself as a forecaster when he was at the CBI and for its business surveys to an extent thats cringeworthy compared to the measured tones usually associated with the Bank of England. Then, there’s a dire account of the British economy in the 1970s just in case we’d forgotten his former employer’s raison d’etre is representing the interests of employers first and foremost. For Dr Sentance, in the 70s “British industry was then being held back by a set of problems which became known as the “British disease” – low productivity, bad industrial relations and lack of non-price competitiveness”.

Err right. Lets not bother comparing the history of industrial relations here with continental Europe and the uniquely positive contribution oil revenues have made to the British economy since the end of the 70s. We’d also best ignore the repeated exchange rate crises and fiscal policy induced booms followed by busts also seen in the past and just don’t talk to me about supply-side shocks of a kind we simply aren't seeing right now!

Or is that unfair? He does make one interesting point about GDP, which is that the magnitude of recent trends looks more like the recessions of the early 70s and early 80s than the early 90s and while that’s as maybe we got through those in due course. Plus there are some nifty runs of data that provide some benchmarks and guidance as to how long things might take to sort themselves out (remember this is at the IEA so no government intervention, no government intervention!).

The problem with using historical experience like this though is straightforward; things change or as Mark Twain put it “History doesn't repeat itself - at best it sometimes rhymes”. Picking through the resultant differences in turn provides a straightforward challenge to Dr Sentance’s perspective.

He says “growth in the UK economy should receive additional support over the course of this year from a competitive pound”, which is a fair point given devaluation and cheaper credit was fundamental to recovery in the 1990s. But, growth of what exactly?

In this regard Dr Sentance is clear “a competitive pound puts British manufacturing in a much better position to win new markets at home and abroad - mitigating the negative impact of the recent sharp downturn in global demand”.

Bollocks. Maybe it does maybe it doesn’t, the fact is the manufacturing industries he describes trade on the basis of technological advantages and high value add, which conveys a high degree of insulation from exchange rate movements.

Ahh, says Dr Sentance, but manufacturing today is less affected by the British disease of the 70s so is better placed to respond. Err, right. First off, lets humour the guy by ignoring the accuracy of his historical analysis and the point already made about British manufacturing exports not being especially sensitive to exchange rates. Lets also ignore how despite the “British disease” being presumably cured we’ve still moved into recession. Then lets pretend manufacturing hasn’t been in long-term, relative decline for decades and finally lets also ignore Dr Sentance’s own point about the “highly synchronised contraction in demand and output across the global economy” i.e. cheap pound or no no-one will be buying British anytime soon.

Instead, lets just point out that with manufacturing now accounting for under 15% of GVA (a lot like GDP) judging by the weightings in the official statistics, it’s a far smaller part of the economy than it ever was to the extent that a meaningful, manufacturing led recovery predicated on a competitive exchange rate is a stupid idea. Ooops, almost forgot, a cheap pound can also push up inflation by making imports more expensive, unless Dr Sentance is pretending deindustrialisation didn’t happen and that we’re all about to start buying our flat screen TVs from British TV factories that don't exist? And anyway even if manufacturing does recover, it’ll have to go some to counter-balance the restructuring (i.e. hacking back) of the much larger business services and finance sector that drove British economic growth from 2000 until the credit crunch.

So if Dr Sentance sounds like he’s talking pants (though beautifully presented I’m sure), is the apocalyptic hyperbolic alternative justified given his own criteria of things being “not yet clearly worse than the mid-1970s and early 1980s downturns in output”?

Well lets have a broader perspective than just GDP for a start, I mean theres house prices for instance where judging by the (I’m guessing nominal) Nationwide quarterly house price index, the current downturn is only the second time since 1955 i.e. before the 70s and early 80s recessions quoted by Dr Sentance, that annual house price growth has turned negative. Not only that, the rate of the decline seen in Q4 last year was the worst on record, something that also applies to commercial property values. So by two measures things are already worse now than in the 70s and 80s.

Then there are official interest rates, which are now at their lowest level in 300 years. Here let me repeat that 300 YEARS i.e. before the 70s and 80s. Alongside this the Bank of England is about to take the UNPRECEDENTED step of implementing a quantitative easing policy due to what Dr Sentance rightly describes as a “financial crisis of a type we have not seen in post-war economic history” i.e. even if we include the 70s and 80s.

The reason for pulling rates down to crisis levels and introducing quantititative easing is because banks are in schtuck and the supply of credit to the economy has fallen significantly or to quote the Bank of England's own Feb 09 Inflation "major UK banks have, on average, also been reducing lending". This isn’t something Dr Sentance is keen to talk about, which is a shame because it’s what caused the mess in the first place and has so far seen government take the UNPRECEDENTED step of nationalising and part-nationalising high street banks.

Moreover, if rapid lending growth contributed to pre 2008 economic growth, then the constraints now being permanently placed on the banks' use of wholesale funding and securitisation to finance their retail and coporate lending makes for a permanent, step-change in the availability of credit likely to constrain i.e. drag out, any recovery.

On the other hand while business insolvencies jumped a frightening 52% in Q4 2008 compared with Q4 2007, enough to push the 2008 total up 24%. Looking at the official data going back to 1961 we’ve seen worse than this, but, with far more insolvencies on the way may I suggest the jury is still out on this one?

Or is this is too reasonable given Dr Sentance also said “there is now much more evidence that firms and households are seeing lower borrowing costs”. Really? Right lets bring some reality into play here cos things really are getting a bit silly. With the hack back in high street LTVs from well over 85% to under 60% in some instances, to get the best mortgage deals buyers – going by December 08’s average house purchase price data – are having to find something like an extra £30 grand or so for their deposit (the shift from an 85% LTV to 60%). So sure, mortgage rates have fallen, but at these LTVs who has got the savings to buy regardless of what the rate is? Or to put it another way with credit being aggresively rationed by policy as well as price (i.e. interest rates), to focus on one and ignore the other is to miss the point.

In my view then some of the more apocalyptic commentary does appear warranted. Sure the GDP downturn and increase in insolvencies are only as bad as say the 70s and 80s, but we're only 2 quarters into the recession. Plus, key asset values are already falling at unprecedented rates. Speaking of unprecedented we're also now seeing a range of unprecedented measures being taken in response to arguably the worst financial crisis since the Great Depression. And of course this is just the British experience; the IMF is already bailing out economies across the world.

All in all then Dr Sentance hasn’t provided A particularly convincing response and that’s despite having had two, I’m guessing, very bright young things helping him with his research. In fact, the quality of the analysis compared to what MPC members usually produce does leave you wondering what he's doing on the committee; a sop to his former employers perhaps? As for a more meaningful response to what's currently being labelled a recession for me its deficit financed social housing and public works, not that that would win me any friends at the IEA right enough.

(1)Alternatively you could ask what was an impartial MPC member doing at an institution that has helped provide/promote many of the theoretical underpinnings of right-wing politics. In the interests of balance will Mervyn King be speaking at the next Association of Radical Economists annual conference I wonder?

Thursday, 19 February 2009

The commanding heights (part 4)

Personally, I thought Gordon Brown was going to make a good prime minister. The only concern I had was working tax credits, a Gordon Brown thang that's an over-engineered, overly complicated, confusing and horrendously inefficient means of using financial stimuli to change attitudes and behaviour. Here hang on did I say working tax credits? I meant to say the Asset Protection Scheme (APS) now being rolled out across British banking.

Lets start with the basics and the fact government really, really, really, really, really doesn’t want to nationalise another bank. I mean it really doesn’t. Politically, given the Northern Rock share value experience, doing so would alienate a lot of voters as in how much are your shares in “Was Private-Now-Public-Bank” PLC worth? Diddlysquat!

Politically 2Xs it opens up whole cans of worms, I mean if banks can be nationalised why not any other business as the unions in the car and engineering firms currently queuing up for more aid might say.

It’s also morally complicated, I mean big UK banks lend to all sorts of people across the globe, so should their lending decisions be subject to additional political and/or foreign policy criteria? To use a practical example when RBS acquired Natwest it inherited Huntingdon Life Sciences (HLS) as a customer. Following anti-animal testing protests, to quote HLS, RBS “pulled the plug” (1). Now that government has a majority stakeholding in RBS will it start lending to HLS again given it’s a perfectly legal business or consider pulling the plug on other legal businesses that also pose a reputational risk? On a smaller scale if a nationalised bank repossesses a house is that Gordon Brown’s fault?

Government also wants to hold the banks at arms length because of what another nationalisation might mean for the national debt given the EU has just issued a warning to other European governments about their debt levels even if the French example signals we’ve another year or two before anyone might give a monkey’s. There again with some rating agencies (aye rating agencies, you know, the experts that said sub-prime RMBS was the bees knees) already discussing the potential for downgrading Britain’s credit rating this could have more immediate, financial consequences given government borrowing is set to reach new heights.

So that’s just some of the reasons why government really (5x) doesn’t want to nationalise another bank, it’s just I’m not convinced current policy towards banks takes this into account due to “moral hazard”.

Bank bailouts of the kind seen in the US create a moral hazard because they see profits privatised (as in mega bonuses and dividends) and losses socialised (e.g. a government bailout on the cheap if things go wrong). This is a bad thing because it removes any incentive not to behave badly in future, in fact it leaves intact the mentality of sure we’ll lend to anyone, its not as if government won’t bail us out if it all goes wrong because we’re too big to fail.

Don’t confuse this aspect of moral hazard with the kind of matronly chastisement Mervyn King’s speech to the BBA a while back dished out when he talked about taking away the punchbowl at a party. Nah, feck that, moral hazard isn't about punishing bankers for bad morals, it’s about discouraging stupid behaviour that could damage us all.

How has this concept been translated into actual policy? Via the APS of course where in exchange for a one off fee paid to government banks can place a cap on the potential losses attached to whatever bits of their portfolio they throw at it. The idea is this removes the uncertainty over how much a bank might eventually lose and by removing this uncertainty other financial institutions regain their confidence in British banks and start providing them with the liquidity they need to finance their existing and future lending books.

That’s the theory as I understand it, and dear god uncertainty matters right now what with it being a major cause of the credit crunch as when everyone realised the rating agency assessment of sub-prime asset losses was garbage, but had no idea what the eventual losses might be (and without which had no idea of assessing the solvency of the banks that invested in it).

When you put it like this the APS sounds perfectly reasonable, quite smart even except subprime was primarily a US phenomenon European banks invested in via sexy treasury departments. Over here UK and European banks never generated the same type of debt via their branches (give or take self-cert liar loans) and have already been writing down their exposure to the US mortgage market.

Besides if the provisioning and/or write down policies of the UK banks are worth a damn (or are all the accountants who do the annual accounts fibbing?) they already allow for future losses. Ahh, says the realist, but we’re in such an uncertain environment who can possibly estimate future losses? Fair point said the pragmatist, but following that same logic we pretty much need to underwrite entire portfolios rather than bits of them, I mean why just 10, 20 or even 50% of a bank’s lending book, why not 90 or 100%? In the meantime the APS looks an awful lot like a belt added to an existing set of braces. And man oh man what an expensive belt given current estimates see RBS paying £8bn to participate in the scheme, which is almost as much profit as it declared before tax, amortisation and what not for the full, BOOM year of 2007.

And see that’s the problem. Given we’re just entering what I think will eventually be regarded as a depression, charging banks so much to participate in the APS will potentially wipe out their profits for years. On an individual basis this clearly avoids any moral hazard, which is a very, very good thing, but at an industry level it could prove deeply counterproductive because banks will be so busy paying APS fees they won’t have any cash to lend let alone pay the dividends that would restore their (our pension fund) share values.

So the APS involves some dirty great inconsistencies, possibly enough to undermine the entire process. In fact the way it currently stands (will RBS trade further equity in lieu of paying APS fees?) it places nationalisation very much back on the agenda by itself along with the post-nationalisation good bank/bad bank split advocated by Willem Buiter.

My personal contribution to this debate is more straightforward; punish the guilty to avoid moral hazard in future. Sack all the chief executives, divisional CEOs and their direct reports who helped formulate and implement the strategies of the banks currently being bailed out by government. This could easily be done via existing company HR policies what with the losses currently being declared providing clear evidence of gross incompetence and for another no executive can claim to be irreplaceable due to the emphasis placed by the FSA for years now on succession planning i.e. an irreplaceable executive is by definition an incompetent executive.

This approach offers loads of benefits. First, it's easy to implement, second, it feels good in a morally-right-morale-restoring kinda way, third, it saves loads of cash what with executives being expensive creatures, and finally, it sends a clear message about the old way of doing things being no longer acceptable.

Oh dear I've just realised this would involve government stepping beyond the current arms length bollocks and intervening in the banks it has major shareholdings in. Even worse it would see government back-tracking on the existing arrangemnts that see it proclaiming no one is getting a pay off at the same time as senior boys are already becoming consultants on fixed term contracts that approximate their pay offs. Hang on a mo 2 Xs, given the RBS bonus fiasco isn't government intervening already? And shouldn’t the non-execs being doing this kinda house clearing stuff anyway without any government prodding? What would Gordon say I wonder?

Postscript to the above - (as of 20th Feb) my understanding based on various financial journals is that RBS can defer payments. This kinda suggests policy is being made on the hoof i.e when the consequences of what was being proposed became obvious, shit done changed.

On a different note the Times today reported that RBS's deputy head of its corporate division is taking early retirement. Yeah, that'll teach him a lesson that will.

Tuesday, 17 February 2009

Politics and George Orwell’s invention of modern management

Well no Orwell didn’t if honest, but the notion of double-think he set out in 1984 still provides a fantastic insight into the modern manager’s mind. As to what it means double-think is being able to simultaneously hold two contradictory beliefs and accept both of them. It’s also being able to deliberately tell lies while genuinely believing them to be true and to forget any fact when it becomes inconvenient.

If you want some examples of double-think just scratch the surface of the banks being bailed out, taken over, acquired a new CEO etc. and ask how many of the senior managers and executives in each one are currently forgetting inconvenient facts? How many are desperately disassociating themselves from old business strategies (and departed executives) while scratching about for a new patron to latch onto? And finally how many are desperately crow-barring into every conversation examples of how they personally warned such and such about the possible consequences of such and such a decision as if their buying wholeheartedly into the previous culture hadn't secured them their current position? From what I’ve been hearing and reading pretty much all of them.

Don’t kid yourself that double-think is just about these sea-change moments, not a chance. Double-think is key to the everyday mindset and integral to the very fabric of a business. Take the example of competency and when being wholly incompetent is a good thing. For instance, in any major PLC a group function that’s a waste of space means it's divisional equivalents get an easy life, result! Even better the divisional equivalents look good by comparison, so result 2 times!

Double-think figures here because these are exactly the kind of underlying truths only ever discussed in the pub after work on a Friday. Otherwise, from 9 to 5 the incompetency, lack of credibility and ignorance of entire departments and/or senior individuals transmogrifies into successful networking opportunities, meaningful strategic interventions and real scope for facilitating the enhancement of long-term capabilities aligned with key core competencies i.e. vague mince that only ever subtracts more than it adds to the bottom line.

And that’s how it is, which leaves me wondering how different bankers are from politicians given the strenuous efforts the former are making right now to limit government's role in banking.

Lets take some practical examples - whereas bank CEOs have to manage institutional investors, politicians have their own equivalent which is the major party donor. Similarly, while politicians love constantly tinkering with say education policy to prove to the electorate they are doing things every new executive operates under a seemingly moral obligation to change things, thus proving to his or her stakeholders that he or she (who am I kidding, it’s a he) really has made a best-in-class difference. CEOs and politicians also share a love of rhetoric, so sure the precise clichés, buzzwords and modes of delivery might differ, but the double-think principles underlying both are the same.

Yet despite all these obvious similarities and shared interests (you like mission statements? Me too, hey lets meet up sometime to discuss our 5 core values over coffee), no bank CEO is currently waiting in the reception of his head office on the off chance a treasury official or minister walks by. I wonder why?

For me the difference stems from democracy. Executives like politicians use patronage to secure their own position and reward friends, but thanks to the magical power of HR departments armed with compromise agreement, a CEO can also punish opponents and people he simply doesn’t like, gestures that send out a clear sign as to what is/isn't acceptable. A politician on the other hand needs to make alliances and respect rival power bases, in other words politicians need to compromise and actually develop realistic assessments of the different ways his or her actions are perceived.

Politicians you see are subject to scrutiny and criticism of a spectacularly wide-ranging and incessant variety. The CEO by contrast runs a personal empire wherein he decides what is and isn’t acceptable, establishing a culture that allows him tp wear whatever new clothes he likes knowing full well everyone is going to ignore his danglies and proclaim that the emperor’s new clothes are indeed da bomb.

It’s this range of criticism, pressure, vested interests, compromise and public scrutiny that political intervention introduces and a private sector CEO wants to avoid. I mean his whole applecart gets turned upside when he finds himself having to justify his actions rather than simply assert and – dear god – answer follow up questions.

I wonder though, I mean essentially my argument is that CEOs want to remain the kings of all they survey due to ego rather than any intrinsic private sector good/public sector bad kinda thang. Are things that simple? Probably not, but dear god when I remember the kerfuffle I once got caught up in over which executive could and couldn't lease himself a private jet I know from first hand experience how important a factor it is. As for 1984, well ignore the film(s) whatever you do and read the book instead, especially the end where Winston Smith finally succumbs to double-think.

Wednesday, 11 February 2009

Allez les bleus and disingenuous leadership

The French government has just announced a bailout for the French car industry. This involves LENDING Renault and Peugeot-Citroën a grand total of £5.2bn (at 6% for up to 5 years). In exchange the carmakers will be obliged to maintain existing French production facilities and not make any existing French employees redundant.

Ignoring the various special lending schemes and what not running into hundreds and hundreds of billions, the British government has already INVESTED £37bn in 3 banks (i.e. no fixed interest payments and the value may go down as well as up). These investments will be managed at arms length from the government. Aside from the huffy restrictions being placed on bonus payments the staff recruitment and retention strategies of all 3 (now 2) banks are not in anyway formally connected to the taxpayer bailout. Indeed, recent headlines make clear the bailed out banks are already in the process of making a significant proportion of their existing workforces redundant.

So there’s a wee cheeky bit of a difference between France and Britain with the logic of the British approach as I understand it being as follows – we are investing billions of our taxpayer pounds in these companies to limit the extent of the current recession in which people wil loose their jobs. The companies we're investing billions off taxpayers’ pounds in are already making thousands of people redundant and will continue to do so for the foreseeable future because this is a very , very good way of them sorting themselves out.

So letting people be made redundant is going to stop people being made redundant. Or am I missing something? I know, first off it shows government isn’t intervening in the management of banking, which is a good thing obviously because . . . . . . . . . . Aye anyway, we’ll have a bash with something else . . . . . . . Here, got one. Letting these businesses sort themselves out will ultimately benefit us all. The taxpayer will make a healthy return on their investment as the banks once more return to the job of creating wealth and in due course employ more people. Ignoring the reality of what bank profits will look like in the far more heavily regulated future (here’s a clue – SMALLER!!!!!!!!!!!!!!), this combines 2 glaring fallacies.

First, it’s a long-term view and in the long run we are all dead. Cute quotes aside with the number of vacancies per worker currently plummeting and unemployment rising at a horrendous rate thats set to continue into 2010, the “right-sizing” of banking will contribute to the creation of a new generation of long-term unemployed. This is a bad thing even from a purely economic perspective given the permanent loss of service sector human capital it entails in what after all is a service led economy.

Second, as JK Galbraith elegantly put it, this is trickle down theory writ large - “if you feed enough oats to the horse, some will pass through to feed the sparrows”. We’ve plenty of horses in Britain what with all the hedge fund managers, private equity directors, non-domiciled (or tax paying) billionaires, corporate executives and so on, so there should be plenty of manure for the rest of us to eat. Even better, thanks to the joys of tax efficient solutions the Joseph Rowntree Foundation found in 2007 that economic inequality in Britain had reached a 40 year high, so we really have been stuffing those horses. Yet according to the IMF in January Britain will experience the worst recession of any advanced nation signalling the Anglo Saxon model of capitalism has put the horse squarely before the cart (ouch).

Despite the existence of a French alternative all we have is the ghastly prospect of government mebbe establishing an emergency-working-group-task-force, preferably chaired by a recently resigned non-exec bank director, charged with coming up with a re-employment strategy for redundant bankers.

Or not as the case may be. Lets be honest bankers don’t vote Labour, aren't that popular right now and are reasonably well placed to find other jobs (Christ there’s going to be a lot of applications to teacher training college). Bankers, like me fer instance, are also geographically scattered, reducing the likelihood of the kind of concentrated outburst Rover workers did so well.

What gives all this particular personal meaning, give or take my own expectation of losing my job in due course, was a txt from a friend yesterday working in RBS. He told me the first he heard of the planned 2,300 RBS redundancies (on top of the existing Ulster Bank cut backs which is RBS/taxpayer owned) was reading about it on the BBC website. Today he txted me to say he was in the staff grade being lined up for redundancy.

I’m clearly old fashioned because I think finding out stuff like that via the news is repugnant. There again with the former bank execs on display yesterday in front of the Treasury Select Committee it was certainly a good day for a bank to bury bad news. So from a PR perspective go go RBS, they finally got something right.

Clearly, it’s a challenge reconciling such behaviour with the open and honest communication so integral to the laws of leadership executives espouse, but then what is leadership if it isn’t about making difficult decisions?

Pish like that aside my personal favourite is still Barclays recent decision to announce 2,100 redundancies in one area one day and another 2,100 elsewhere shortly afterwards. Presumably this was in the hope that people would confuse the two headlines and think the total cut was 2,100 not 4,200. Here hang on the Barclays logo is blue so allez les bleus it is then, British style.

Sunday, 8 February 2009

Our dear leader

Look in any airport book shop in the business section right beside the 2 for 1 offer on Jordan’s latest autobiography, and a quick scan of the titles will make clear leadership is now a fundamental tenet of management thought.

According to the thousands of books on offer leadership amongst other things has “21 irrefutable laws” (why not 22?), is both a challenge and an art, has theories and is a practice, a habit and something every organiz(s!)ation MUST grow to survive.

My arse. For one thing the people with the biggest hard-on for leadership have typically been fascists, Hitler being one and Mussolini another. So there is clear scope for guilt by association here, I mean no one ever claimed business was a democracy.

You could cite Churchill as an alternative, except that would miss the point. What fascism illustrates is that with the right leadership rational processes and people can be driven towards irrational and immoral ends - leadership by itself is never enough. Instead, what Churchill’s career actually illustrates is that there are no irrefutable laws of leadership because Churchill was both a great wartime leader and an awful peace time prime minister. Rather than laws what made Churchill great was the interaction between his character and a specific set of events. Full stop.

That’s as maybe, said the HR person on the phone to the head hunter, but the job description for our great leader states he or she must have flexibility and adaptability as core competencies. ”Bollocks” said the head hunter. Well no she didn’t because she was on a doozy of a commission if she could attach herself to the right candidate, but she should have. In fact she should have reiterated the point made above about the attributes of leadership being context specific, including the need for flexibility and adaptability. To go back to the Churchill example one last time it was precisely his lack of flexibility that mattered during the Second World War (1).

So with circumstances unavoidably changing across and between organisations, and over time, it's blindingly obvious there is no such thing as one universally applicable set of great leadership behaviours, laws, habits etc.

If that’s the case then why is leadership so popular despite logic, history and commonsense all suggesting otherwise? I think the killer combination of laziness and self-interest provides a meaningful starting point.

You see much of leadership's appeal rests on it providing easy, palatable and at times plausible answers to difficult questions. Like why are we successful? Because we have a great leader of course! And if you're minded to accept that kind of mince then you can fool yourself that success is easy to achieve, all it takes is the recruitment of a great leader. Even better it justifies paying the existing executive shed loads of money, which makes executives very happy. And if they’re happy everyone whose organisational fortunes depend on keeping them happy is happy. That’s not all, when great leaders turn out to be not so great leadership provides a readymade and acceptable excuse for failure i.e. it’s the leader’s fault not mine.

In these circumstances replacing one great leader with another is an easy way of convincing everyone you’re deadly serious about sorting things out. Your business makes technologically obsolete products, is selling into a shrinking market or has an outmoded IT infrastructure? Feck that, we're on the phone to an executive head hunter who will find us a new great leader with enough bullet points, power points and strategies to sort everything out.

And finally, leadership is vague enough to justify anything. This is more important than you’d think because organisations after all are hierarchical structures predicated on the unequal division of resources and authority. So when someone asks why is that halfwit in charge of a department he doesn’t have a clue about it, you can reply “stop sweating the small stuff geek boy and check out his leadership credentials”. Which is a pity because an attachment to leadership is one of the clearest signs of hubris in business and a fundamental risk. For one thing it means an organisation is buying into a stupid concept, for another it means by definition all the stuff that actually gets done to generate profits is being taken for granted. And finally (the risk bit),it shifts attention away from maintaining technical/professional standards towards negotiating acceptable outcomes; every major decision gets assessed on the basis of does the leader like it not is it legal, practical, stupid, etc.

So a fixation with leadership makes sense more as a political than a business imperative, which is fair enough given the extent to which organisational politics define business life. But, if a key strand in management thought is geared to legitimising the existing executive status quo, avoiding any realistic analysis of corporate strengths/weaknesses or developing meaningful strategies for delivering success, where does that leave shareholders (and employees)?

(1) No way Churchill would have passed a competency based interview. So Mr Churchill can you please tell us about a time when you altered your plans in response to key stakeholder concerns? Describe the situation, what you did and what the outcome was - “I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering, etc., etc.". Yes, thank you Mr Churchill, we'll be in touch.

Tuesday, 3 February 2009

Mr Whippy

Call me Mr Whippy if you want, but current government policy appears to contain a glaring contradiction. You see on the one side there’s its intervention in the financial system, the was going to be £50bn but is actually £185bn SLS, then there will be asset g’tees on top of the bank recapitalisations plus a £50bn for starters kitty handed over to the Bank of England to buy up corporate debt, etc., etc., That plus a few nationalisations and semi-nationalisations and crikey have you got major support for banks and all done in a very flexible and creative manner as well (honest!).

So that’s the banks then and hopefully, if they don’t fall over, they’ll start lending again in due course. It’s just in the meantime we’ve now in a recession, hence on the other side government is wanting to get all counter-cyclical in its spending.

So what connections have been made between the support for banks and government capex plans given these are heavily dependent on borrowing from the private sector? I mean the learning and skills council has just appointed a troubleshooter to investigate why the renovation programme for all the English FE colleges has stalled (cos it’s a struggle to borrow money), the European Investment Bank has stepped in to bail out 5 building schools for the future projects I think it is (cos they couldn’t borrow money) and the M25 extension now looks like its going to be bailed out by government (cos its been a struggle to borrow money – see the pattern here?).

Err …. aren’t the banks currently umming and awwing about lending to governmental and quasi-governmental agencies the same ones getting recapitalised and/or loans from the Bank of England as well as having a floor put beneath their losses (for a fee)? Does this mean there’s no joined up thinking in government economic policy? I mean why aren’t the same banks being propped up by government happily lending to job-saving projects initiated by housing associations, FE colleges, local education authorities, strategic health care trusts, the highways agency etc.?

Perhaps government thinks lending to build a school is worse than or less important than encouraging banks to throw money at over-priced houses at the fag-end of a property bubble? I’d be very interested to hear what the Governor of the Bank of England has to say about this given he rightly criticised banks for lending too cheaply in the run up to the credit crunch. There again PFI, housing associations etc. capex was built on this same cheap credit. Oops!

Sunday, 1 February 2009


Defining a recession is easy. 2 successive quarters of negative growth and bobs your uncle you're in a recession and if you want to argue the point there’s even a National Bureau of Economic Research in the US to tell you where you are in the economic cycle.

A depression is different because there is no agreed, formal definition. There’s the “Great Depression” of course and as few would disagree with the notion that it was anything other than a depression we could be all empirical and say that when economic growth is as bad as the 1930s then we’re in a depression. Except, calling the depression “great” implies there have also been average ones and mebbe even quite good ones i.e. lesser events still bigger than a recession.

Rather than debating some arbitrary cut off point based on national accounting statistics I would define a depression as a sustained economic recession accompanied by a broader shift in the common sense of how an economy works (1). So a depression differs from a recession in that it is both an economic AND cultural phenomenon.

The great depression had this combination in spades. Besides negative growth the US New Deal redefined the role of the state in the economy while in Britain the depression provided the cultural context for Keynes General Theory and the subsequent creation of the welfare state after WWII.

So far we’ve seen nothing remotely comparable despite the fundamental redrawing of the lines between the public and private sectors that’s currently going on. Whereas in the past the debate was on striking a new balance between the public and private sectors, now the focus is on what precise shade of pragmatism to adopt; banks have been nationalised not to take control of the commanding heights of industry, but as a last resort to be reversed when they are eventually sold back to the private sector as lean, mean, lending machines.

Similarly, my guess is that the credit crunch’s planned legacy is a muted technocratic response of more (and more and more) financial regulation informed by primarily technical rather than social, political or moral concerns. Hence we are set to see detailed regulation that will establish more conservative bank liquidity reserves, the global adoption of counter-cyclical capital provisioning, greater cross-border collaboration between financial regulators and closer scrutiny of asset backed securities, matters so complex, esoteric and frankly dull as to be happily ignored by the vast majority.

I think this is a bad thing. I think that as the current crisis reflects deep failings in the common sense of how a financial system works, then that common sense needs to change. I also think that we are only at the beginning of what will be a sustained recession. Alongside this events like the revulsion prompted by the John Thain debacle, the public outbursts already seen in Russia, Latvia and France and the British wildcat strikes all signal a broader if diffuse challenge to the status quo, enough perhaps to see the common sense of the economy being at least called into question.

So by my criteria we could well be entering a depression.

(1) Common sense here essentially rips off Gramsci, the dead Italian Marxist “Common sense' is the folklore of philosophy and always stands midway between folklore proper (folklore as it is normally understood) and the philosophy, science, and economics of the scientists. Common sense creates the folklore of the future, a relatively rigidified phase of popular knowledge in a given time and place.” And “a general form of thought common to a particular period and a particular popular environment"