4th July 2012
Here's Mindful Money's top five stories requiring attention from those investors who can bear to tear themselves away from the minute-by-minute fallen celebrity news from Barclays HQ.
The Greek euro in or out conundrum continues
Believe it or not, Greece has not called time on its financial crisis just because Diamond has quit. But as Athens stares into economic hell despite the billions poured into it, both a conventional economist and the leader of left-leaning political party Syriza, Alexis Tsipras, warn austerity is going nowhere.
Replying to a clarion call for more of the same misery, economist Megan Greene, based in London, is director of economic research on the eurozone at Roubini Global Economics, the consultancy run by Nouriel Roubini who is credited for having predicted the financial crisis of 2008, reckoned it would fail. She forecast "a 85 percent probability to have Greece and Portugal to exit the eurozone, starting early next year."
Tsipras, said: "An economy in freefall cannot balance its budget, and have growth, and pay 110 billion euros in interest by 2020. It is an equation without a solution," he said. "The troika programme is leading to humanitarian disaster", he warned.
Regulator admits it's all gone pear-shaped
Over in Regulation Street, a speech by Lord Turner, FSA Chairman at the FSA Annual Public Meeting has revealed what everyone already knew – the FSA lacked teeth to control the industry. It's the last such meeting ahead of the splitting of the watchdog into two, so honesty was in order.
Firstly. Turner owned up to failings. He said: "The pre-crisis system of prudential regulation had been severely deficient in three important respects:
· Woefully deficient rules on bank capital and liquidity.
· A deficient and under-resourced approach to prudential supervision.
· And, a dangerous vacuum, an ‘underlap' between the Bank of England and the FSA, an absence of systemic analysis and macro-prudential policy tools."
And then he made it very clear that the "rogue trader" or "we were acting under Bank of England orders" excuses at Barclays or elsewhere lacked reality.
This is worth reading in full. He said:
"The LIBOR scandal has caused a huge blow to the reputation of the banking industry. The cynical greed of traders asking their colleagues to falsify their LIBOR submissions so that they could make bigger profits has justifiably shocked and angered people, in particular when we are facing hard economic times provoked by the financial crisis. But sadly it is clear that the behaviours evidenced in the LIBOR case were not, in the years before the crisis, confined to this specific area of financial activity. Documents such as the US government's Financial Crisis Inquiry Report
and the Senate report on Wall Street and the Financial Crisis, or indeed, Michael Lewis's insightful account of The Big Short have revealed, for instance, a cynical willingness of many traders to sell securities whose value they doubted to customers whose judgments they disparaged. And too much of what is described in the investment banking world as ‘creative' or ‘innovative', is not creative or innovative on behalf of the real economy, but devoted to tax structures which simply shift money from the generality of taxpayers to the financial sector, to regulatory arbitrage which seeks to gain an improved regulatory treatment of unchanged economic substance, or to accounting devices which attempt to put a favourable gloss on the underlying situation of firms or their clients, for instance, understating a country's true level of debt."
Playing around with the electricity meter
The Financial Times reports that it's not just Libor that banks are accused of fiddling. In the United States. JP Morgan Chase is under regulatory review after allegations that its commodities business manipulated electricity prices in California and the Midwest, according to documents filed by the Federal Energy Regulatory Commission(FERC). The bank owns or has rights to output from several electricity generating facilities. FERC, the regulator, said it is investigating whether JPMorgan bidding strategies extracted "inflated" or "excessive" payments from two wholesale power markets serving California and several Midwest states.
"Any such improper payments to generators are ultimately borne by the households, businesses, and government entities that are the end consumers of electricity," FERC attorney Thomas Olson wrote in papers filed on Monday in a US federal court.
One blogger said: "The belief that these commodity markets are "free" is a triumph of ideology over experience. Of course they are manipulated. The markets operate largely in secret, with a very limited set of very powerful players, who can increase their income enormously if they cooperate. I'm shocked, shocked."
Britain's own Barclays was in hot water with the same regulator in April when the FT reported that "Barclays and four former traders are being investigated for allegedly manipulating Californian electricity markets, according to US regulators.
The bank is alleged to have bought and sold electricity in enough volume to move exchange prices up or down to benefit parallel swap positions, the Federal Energy Regulatory Commission said.
Poundland makes lots more pounds
Now for some news which may be good or bad according to your tastes. The Guardian reports that profits are 27 per cent higher at Poundland, the 400-strong stores group whose pricing policy is contained in its name – does that make Harrods Thousandquidland?
The profits gain is due apparently to a influx of squeezed middle-class shoppers who find that items to suit their value parameters. So its success depends on others feeling poorer. The chain has also opened 13 stores in Ireland under the Dealz label, and plans to double that within the year. It will then begin plotting its first foray into continental Europe.
But on a like for like basis (removing the 62 stores opened over the past year) sales at the private equity owned group are only up 2.3 per cent.
Jim McCarthy, the chief executive, said he suspected the proportion of AB shoppers, who made up 12% of Poundland's customers more than a year ago, was now higher. Recession-induced penny-pinching has taken hold in the national psyche and will carry on even when the economy recovers from its four-year downturn, he believes.
Passing the private equity parcel – again and again
Older investors will remember Wood Mackenzie as a blue-blooded stockbroking partnership in the days before Big Bang. The old Trustee Savings Bank then bought it briefly before selling it on to then Natwest offshoot County NatWest. It subsequently specialised in natural resources research and analysis including oil, gas and mining.
Now, according to the Daily Telegraph, it has been sold by private equity owners to other private equity owners in deal that will net big profits for all concerned.
Vendors Charterhouse, due to retain a 13pc stake, will receive £1.1bn from Hellman & Friedman, leaving H&F with 63pc overall, will net the private equity group a good profit just three years after buying the company.
In yet another case of private equity pass the parcel, Charterhouse paid £553m for Wood Mackenzie in 2009 when it bought it from buyout specialists Candover.
The latest deal will further enrich the firm's management.
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