Dubai Wobbles - What Does It Mean?

Two authoritative bloggers, Robert Peston and Stephanie Flanders on the BBC site have given the conventional view that the Dubai debt repayment blip is merely that.

They also argue that if push comes to shove then the European banks which are estimated to be exposed to around 50% of the total $80bn that Dubai owes, then they can absorb those losses well within their stride. In reality, they say a big Sugar Daddy in Abu Dhabi is on hand to pick up the tab anyway and they are just toying with Dubai.

It sort of shows just how punch drunk we have become to big numbers. This is a sovereign state - and a rich one at that - delaying loans because of excessive debt.

Hello!

Substitute any rich nation having trouble repaying their loans - and there may be a fair few soon - and you have the real picture. Countries all across the globe, with few exceptions, have vastly increased their borrowing to support the bank meltdown. In doing so, they have burdened their taxpayers with extraordinary new debts and, for the most part, they have underwritten the future debts of the entire global banking system. And we are in the final throws of a recession so there is no growth to offset these debts.

To my mind, Dubai is a stark reminder of how precarious the global economy has become and how interdependent we all are on one another. The butterfly wings beating in Dubai could have a dramatic effect on the world economy and particularly if we remain unimpressed by the magnitude of the numbers involved.

A sovereign state has found repaying its debt hard. It's a wake up call for us all - you don't need many more countries announcing the same for the world to become a pretty shaky place.

It's a real reminder to our Government - plan to repay those debts and take action now. Delay, and we could be in the same boat with no Sugar Daddy oil state locally to bail us out. It should make us think hard.

Very Sharp Reminder

Just when we were believing we were free of recession and the financial crisis was all but over, Dubai has shocked the world.

We were busy worrying how to curb bankers' bonuses and when the economy would show growth again - then we had a day of turmoil as stock markets reacted badly to the news that Dubai World, the state owned investment company, delayed payment on its quarterly debt repayments. Almost unnoticed, book store group Borders slipped into administration following the Thresher off licence chain, making a further 1,000+ people unemployed in the UK.

Dubai has enjoyed a six year period of unprecedented growth as it has invested enormously in property, both commercial and private and the market for it has been buoyant. As an Emirate state it is not blessed with a rich supply of oil but its strategic location makes it compete with Hong Kong as one of the great ports in the world for international freight transport. Dubai has been Western-friendly and inward investment has been enormous but Dubai World itself has clocked up astronomic debts of $59bn.

It's another tragic example of a total belief that asset values can only go up and that all debts can be repaid. The mind boggles to try and work out how many times that vast debt has been chopped up, repackaged and sold multiple times around the globe as part of derivative trades and credit default swaps upon which banks and their trading employees have pocketed enormous profits and bonuses.

This is a stark and sharp reminder of the folly of the global banking system. The total belief that any debt is good and that asset values will always rise has been the bedrock of the financial system that has turned into the sands of the Arabian desert. The creation of structured products to trade around these debts is like a terrible cancer ravaging the financial system and this shows how very easily the whole system can get a critical blow. This kind of catastrophic failure in debt servicing threatens to have a domino effect and I am sure there are many bank executives who are nervously watching and hoping that the oil rich Government of Abu Dhabi steps in to bailout Dubai World - Dubai has total debts of over $80bn.

There is a good reason why everyone is nervous. Dubai World is not the only entity in Dubai which owes incredible amounts of money. If the Dubai economy fails, the fallout could be felt all over the world and snag us all just when we believe we are recovering. As an eminent economist, Nouriel Roubini, has asserted, there is more bad news about debts to come and banks have not yet revealed the full picture on this yet.

Dubai is reminder of how bad things can get very quickly.

Banking Governance

Kudos to Sir David Walker who has at least understood some of the big issues in the banking sector and has proposed some major changes which he believes the UK should lead on.

However, I still do not think anyone has nailed the crux of the problem. It's all very well proposing that banks should disclose how many people earn of £1m or more and that Non Execs (NXDs)and shareholders should take more responsibility in the governance of banks but I really do believe it is naive to believe this will actually solve anything, even if it is a step in the right direction.

Firstly, disclosing millionaire earners is neither here nor there - meaningless in the great scheme of things and it reveals nothing of how a banks works, the basis of reward schemes or whether it is acting properly or not. It is a mere barometer and if anything, it advertises to peer companies which bank is prepared to pay more of its employees more money. As for NXDs and shareholders having more say, I believe there are several issues here.

Firstly, we have seen how NXDs have acted in the lead up and during the crisis. As the proverbial hit the fan and one of its biggest perpetrators was being thrown to the dogs, they still acted as if nothing was wrong in conjuring up a massive pension pay off for Fred Goodwin or re-engaging Andy Hornby on a £60k per month consultancy contract at HBOS. Because the rewards of the NXDs are inextricably linked to the profits, they are hardly likely to kill the golden goose - they are by definition already wealthy people who are there to make a great deal more money. Then there are the shareholders. Of course, their rewards are dependent on the banks' fortunes as well but there is a bigger issue at play.

The vast majority of bank shares are owned by the public but indirectly - either via the Government and its vehicle, UKFI, or via pension funds and the like. The general public owns very few shares individually. Therefore any involvement by shareholders comes as 'block votes' from these 'aggregators'. Again, both fund managers and directors of UKFI are charged with obtaining maximum value from the shareholdings so they are hardly likely to vote against making profits. Again, they are all wealthy individuals and are motivated by making a great deal which their own bonus schemes generously allow.

Finally, as the whole of the banking industry now has a safety net of unlimited lack of liability to their losses should there be wide scale failure, there is zero incentive for any of the 'aggregators' to act in any way different to the banks themselves. Indeed, even the staff at the FSA all received bonuses for last year despite presiding over catastrophic losses.

There are far more fundamental issues to be resolved here and it isn't rocket science. At the heart of the banking system lies a serious flaw and a massive liability. Upon this flaw, the global financial system has built an estimated $550 trillion of open derivative positions and a further $400 trillion of associated insurance positions - all of which are so convoluted as to be virtually unauditable. As long as banks are allowed to continue trading in such products and financial instruments, then the rewards will be massive and yet largely unreal.

Until we get to grips with these 'Financial Weapons of Mass Destruction' as Warren Buffett called them, we will always have a basic issue of governance in banks for which the taxpayer will be liable - yet we are the biggest shareholders.

More Good News For Banks

Bank executives are probably having a few drinks tonight - not just because they are earning fat profits and bonuses again, but because they have found they can continue to profiteer at the expense of those who go overdrawn.

The Supreme Court has ruled in favour of the banks in the feud with customers over being able to charge excessive fees when customers go overdrawn without pre-agreed authorisation. We have all been victim of this at some point when a cheque is late or something, we get some arbitrary sum charged with no real reference to the cost incurred or to our banking history. There seems to be no real standard charging system and then suddenly, in the same month or more, all letters and administration charges can be lumped on you too.

Many bank customers had rightly complained and taken the action to court - I can only hope they had not gone overdrawn to pay for the legal fees as it has taken years to get to this point. But the Supreme Court was swift and damning in its judgement, allowing the banks to effectively charge what they liked so that they could offset the cost of those who do not incur charges.

Banking is one of the few services that you have little or no control over the charging structure and the costs can be as arbitrary as they like. It is now case law that you cannot complain and get compensation - they are allowed to do it.

Given the fact that banks are extracting front and back office staff at an alarming rate, the £2.3bn they earn annually on such fees are pretty essential to their well being. It seems a little churlish that banks would behave this way after all our incredible generosity in bailing them out - some of the bailout we did not even know about as £61bn was secretly stumped up to 'save' Lloyds and RBS last year and the public were not informed until this week. What else we don't know about may well have been swept under a very lumpy carpet.

It seems taxpaying bank customers are being shafted at both ends. We pay excessive fees for going overdrawn and if the banks go 'overdrawn' we totally underwrite their losses. I am sure that in isolation, the Supreme Court had no real choice but to exclude the fact that taxpayers rescued the banking system but in the cold hard business world once again it just goes to show what a dreadfully poor deal taxpayers got for its largess in saving the banking system.

Politicians may think it is petty to negotiate on such trivia but this is really at the heart of the matter - it is everyday people who simply cannot afford to prop up banks when they fail who have been preyed upon by banks with excessive charges. If the individual or collective taxpayer had had the authority to negotiate the bailout deals rather than ministers, civil servants and investment bank advisers, then the shape of the deals, if any would have been agreed at all, would have been very different. If we were to put that much 'skin in the game' we would have expected something in return. Instead we see high risk plans, excessive wages, written down debt being traded again and a new bonus extravaganza.

Lord Myners and the rest of the crew who negotiated all this rubbish were probably far too wealthy to be worried by such details but that was the essence of the whole lackadaisical approach that led to Fred Goodwin walking away with millions when his strategy had actually wrecked a great company.

At a time when the whole country seems to have gone mad enough to want more of this Government, this ruling was a timely reminder of how badly the whole bank bailout affair was handled.

Customer Billing Service?

It was comforting to hear the patronising tones of British Gas CEO, Bob Bentley, on the radio this morning sounding as if he has had an epiphany when it comes to billing customers. Bless him, he finds the bills his company issues complicated to read and therefore has some empathy with his customers.

Rather nicely of him, he has now decided that 'Estimated Bills' should be done away with. Instead, customers can call in or text their latest readings with only the odd spot check to keep them on the straight and narrow. How very thoughtful of him.

It sounds like this is an enormous innovation in customer service but it hardly moves the needle in reality. Sure, we can now get more accurate monthly or quarterly bills and so smooth the payments better and not have those shocking bills periodically when the utility company gets around to read the meters they own and run, but are these companies providing a real service?

True, they provide gas and electricity to homes - thanks. But in most cases, like the phone company or milkman, they do not provide accurate billing regularly and without customer intervention. The onus, in most usual instances, is on the company providing the service to provide an accurate record and bill of the customer usage and to make payments easy. The meter is provided by them and for them to read, so life could not be much easier for the utility companies really. In fact, these meters have not changed in tens of years despite all these utilities posting nice profits; the billing technology and base mechanisms have not been updated for ages and the onus is right back on the customers to intervene and question bills, estimated or otherwise. And when you do so, boy, are you are in for problems as they do not believe a word you say - the subject of an earlier blog.

It is remarkable in these modern times that at least an upgrade cannot be fitted or new meters put in which negate the need for them to be read by humans at all. It may cost money but I am sure the long term return would be there if they charged just a tiny amount per quarter for the new meter. It isn't rocket science - it's actually, in my opinion, their responsibility to do so and the racketeering we have seen on utility bills over the years has, I am sure, caused customers to pay significantly over the odds for their utility bills. I know that is likely to be the case as it happened to me.

And here's the best of the new billing companies - Transport for London (TFL). Yes, they introduced the Congestion Charge for Central London with a state of the art billing system that required the customer to pay and it was strictly cash on the day or now up to 24 hours later - you miss, your responsibility even though you never asked for the whole thing. It is important also to draw a distinction here - the Congestion Charge is not a service, it's a straight local tax which is entirely incumbent on the individual to pay. If you were a sporadic user of the roads in London or, heaven forbid, a visitor then you were basically stuffed. The onus was on you to know exactly where the limits of the zones were and how to pay - and it isn't that simple. Until recently, the website had an issue with the latest version of Windows - which they denied - that stopped you paying online. But if you made a simple mistake or forgot for 24 hours, the penalties are unforgiving and more than those for assaulting people.

It's draconian and stupid. The technology was put in there from day one to capture images and number plate recognition. They have always had the capability to set up automated billing and it is an absolute crime that they did not implement this from the start.

It is the basic premise - you want to bill people for using roads, then you set up the system for them to pay without even having to think about it. It's a tax in all but name and, boy, do we know the taxman likes to make sure he or she gets her money without the hindrance of human intervention. For TFL, it was always the case to be able to get as many penalty charges in as possible and Capita, the system designers and operators, are superb at making money for old rope.

The day will come when all companies who want to charge for their services set up billing systems which make it simple, easy and automated for customers to pay. I think it's a basic responsibility for being in business.

Debt - The Business Viewpoint

As the Government hit an unpleasant new record on borrowing in October taking borrowing to £175bn for the year, it seems that the mantra is that debt is good.

Meanwhile, out in the world of business, we seem to think the opposite. In the building sector, companies like Persimmon who were particularly debt laden at the start of the recession have slashed their debt by 58% or £960m. Other builders like Barratt and Taylor Wimpey have followed suit but on not such a grand scale.

But across business generally, borrowing is down - £4.6bn down in September, sending the 12 month growth rate to its lowest level since 1999. RBS has over £27bn of approved credit not being used while other banks have a similar situation.

The situation runs at loggerheads to the Government viewpoint as Alistair Darling marched smartly into the banks in July and told them that he was very angry about them denying businesses credit. The simple fact is that businesses are reining in their borrowings in and not asking for more credit.

Here lies the gap between Government and business thinking. In a recession, businesses look to conserve investment as there are fewer opportunities. It's all very well famous entrepreneurs like Lord Sugar telling us the recession is non-existent and opportunities are high, the reality is that few companies thrive in a recession - and it isn't for the lack of trying. The markets are down - that's a simple reality and businesses have to cut their cloth accordingly. They have conserved their cash and credit lines for the upturn and that is good business sense.

While Friedman may be the mantra at the Government level, just wishing companies to grab credit and spend it for the sake of it is not just wishful thinking but it shows a complete lack of business acumen on behalf of ministers. Businessmen understand that profitable sales drive their business and without them they have to make sure they can survive until they increase. Sure, some companies may miss the odd opportunity for growth in a recession but it is the wise businessman who survives.

I may not agree with David Cameron's total argument on the economy but I do believe that you cannot solely wish for growth to solve this country's debt problem. You have to make cuts - that is a reality. And the longer we leave it, the worse it will get.

What I would like to see is an emergency budget that identifies immediate savings through slashing inessential costs, wastage and inefficiencies and then puts more spend directly into areas that will help boost business such as cutting tax in the short term and offering subsidies to firms on wages to keep people employed.

The two different mindsets are dangerously polar and too much money has been sunk into banks in preference to general business for zero return. Businesses understand the need to get sales before they invest - the Government is going down completely the wrong direction by wishing only for growth when they should also be driving down costs.

It's a recipe for disaster in the long term.

Bring on The Flexiforce

Today is the start of the CBI Annual Conference and there is a lot of emphasis on change - the idea that the recession has taught us some big lessons about how to adapt to a more volatile future.

Discussion points include how businesses (and remember the CBI represents 240,000 of them in the UK) should partner with their competitors in order to prevent a 'Domino Effect' of the recession bringing down multiple companies rather than just a few weak ones. This will be a bitter pill for many business leaders to swallow and could we have prevented crashes in the UK if Woolworth and Poundstretchers had teamed up? I don't know but it's an innovative and lateral concept.

One area I have blogged on before and is close to my heart is the concept of the 'Flexiforce'. The idea that companies should have a core set of permanent employees and then bring in resources to do specific tasks as and when they need them. The concept that I have referred to as 'Putting the power where it is needed, when it is needed'.

Often we think of this as temporary staff filling administrative holes but I am thinking more about getting in specialist staff to attack new or short term opportunities when the company lacks experience in the specific area. For example, it may be staff to help drive web presence or advertising, telesales people to try and get leads or sales in a specific market, experienced field sales people for a target market or even project managers for tasks. The point is that such resource may be expensive to hold as permanent employees but can be viable if they can be switched on and off when needed - without onerous long term contracts and employee issues. Pay as you go resource, if you like.

To some extent this is what I do but the reality is that there is now a big pool of experienced resource out in the market who are flexible, capable and ready to fill the gaps where needed.

As we emerge from recession, there will be great opportunities to pick off and there has never been a better time to consider the advantages of the new style of 'Flexiforce'.