Friday, 31 October 2008

Storm In a Tea Cup

‘There’s us and there’s them,’ commented Noel Gallagher chillingly about the resignation of his friend Russell Brand in the wake of the lewd answerphone messages Brand and fellow presenter, Jonathan Ross, made to Andrew Sachs about the latter’s granddaughter.

Gallagher was assessing the intervention in the affair of people like Conservative Leader David Cameron and I assume the Prime Minister but also on the fact that it took several days for around 10,000 people to lodge complaints about the broadcast. Since, the figure has risen to 30,000 complaints but anecdotal analysis seems to put the complainers in the camp of ‘old fuddy-duddies’ while those who support Brand and Ross as young people who considered it at worst a prank by silly boys but still quite funny.

Us and Them

I find it hard to take sides. I guess as I grow older I am more aware of the thin line between good taste and bad in comedy. Recently I watched the irreverent Little Britain USA where Matt Lucas and David Walliams took their successful formula of unique British humour to an American setting. I cringed. The humour was forced and erred on the side of shocking in an attempt to take the familiar characters and situations into small and large town America. I visibly shrank as I saw the stereotypical suggestion that the new President (I assume it was meant to be Obama ) had a ‘Weapon of Mass Destruction’ in his trousers and baulked at the scene where the ‘Laydee’ who gave her dog a voice made it tell her to defecate behind a bush. Not exactly their best material.

Maybe I would have laughed a few years ago but I got the distinct uncomfortable feeling that this was the best of British humour being aired in the US and it was awful and painful. Curiously much of it was directed by ex-Friends actor, David Schwimmer, who had done a great job on the very British humour in the immensely enjoyable film, ‘Run, Fat Boy, Run’. Maybe Americans like it that way?

Ruining a Successful Formula

And so to Brand and Ross. Both have enjoyed great success in taking things to the limit. Ross’ ‘cheeky’ style as described by Tom Hanks in a great interview has both shocked and been hilarious. And it’s a combination that has worked even though you are constantly feeling at any moment he could offend people terribly. I have not endured much of Russell Brand, but generally he is funny too.

So it came as a great surprise that they had pushed the envelope just that little too far as perhaps the real skill in their humour was to know the boundary and flirt with it just enough to cause a gasp but never to go far enough to ruin the formula and really offend. Whether this was humour, a prank gone wrong or whatever wasn’t really the issue. The fact was they called a granddad and made lewd insinuations about his granddaughter. It had to be offensive no matter who they were calling.

Perhaps the real sin was that as a recorded program it was allowed to be aired. The judgement by the BBC editorial staff was pretty grim and accordingly, Lesley Douglas accepted responsibility and resigned, as has Russell Brand.

Accountability vs. Responsibility

In an age where responsibility and accountability has been disconnected particularly in Government and business, I think that both Brand and Douglas should be commended for taking it on the chin and stepping down.

Whatever side we all take and whatever we may think of Russell Brand, his humour, his apparent lack of contrition, his sense of taste, I think we should actually applaud his being accountable for his actions – and for that he gets my respect.

Contrast it to the bank executives, regulators, politicians, police chiefs and more of this world and how they avoid blame and accountability, at least one guy who overstepped the mark had the decency to accept the criticism, draw a line and resign.

Has City Rocket Science Ended?

A lot has happened in a year. The collapse of Lehmans Bros in particular sent a major shock wave through the financial system. The innovative securitisation and distribution models in the Financial Institutions was magnified by repeated leverage, but it was making simply ridiculous ' amounts of 'profit' much of which flowed into bonus pools. In the top 5 or so US banks alone $28bn was paid out in bonus in the last bank fiscal years prior to the system collapse.

While Bear Stearns was rescued, everyone thought it was a momentary blip, but Lehmans changed that. When it was left to implode, a wave went through the financial markets that indicated these leveraged models were over and a new period of new unleveraged products would emerge.

Can We Trust Them?

That really looks good on paper. Back to basics as Warren Buffett would advocate having long ago sagely predicted derivatives and their like would ruin the financial system. Now it seems, as Gordon Brown re-reads Keynes, everyone is having the epiphany that all that excess and daft borrowing was actually silly. 'Let's wipe the slate and start again, only keep it simple this time lads' is the new credo.

£4.5 trillion of slate wiping has occurred globally but in terms of regulation, governance and law little has changed. While everyone smarted that 'shorting' shares was foul play and to be avoided, across the pond in Germany in a single working day €30bn was lost on a single share by shorting. It seems some old party-goers just can't kick the habit. Morgan Stanley and Goldman Sachs were in the kitchen having a few sly swigs with their $10bn bail out money hoping no one would notice they shorted VW shares also. Sadly someone ratted on them as their share price dived 10 and 6% respectively. But was anyone taken to task? No.

Hot Air Rises

The problem is that the whole concept of self-regulation is like leaving the cats in charge of the cream. They simply would find it hard not to be tempted to dip their paw in every now and then when no one was watching. The fact of the matter is - the old boys club that is International Finance is rotten to the core. As I overhear conversations in the lunch spots in the City of young hopefuls, there is still talk of this crisis 'blowing over' and 'getting decent bonuses next year'.

There is a sense that someone dropped a floater into the punch at the party and when someone has worked out how to remove it, everyone can get back to having fun.

The talk is that the markets will recover and that the whole defunct engine, given enough fuel, will miraculously spring back to life and start racing like a Superbike. Back to normal in no time - mine's a champagne.

A Lot of Old Ballacks

Even Premier League Football has felt the pinch as people talk of the vast funding required to run clubs drying up - heaven forbid Middle Eastern money should dry up. At oil's peak price not so long ago around $500m per day was flowing into Dubai alone.

Many other bold schemes have fallen into disrepair. Some while ago it was believed that clean techs would emerge in our booming economy as we all got a conscience about our planet's future. It is clear now, just as many pundits claimed, that growth and clean tech are interconnected. The iShares Global Clean Energy ETF has fallen 48% in a quarter along with all other markets. Clean is off the agenda when bonuses are threatened. And that's the issue - unless we re-evaluate our quest for continued growth, clean technologies will never get a foothold and we will always be net consumers of resources and contributors of carbon. All this carbon offset and carbon neutral rubbish firms come up with is just make-believe. Until they stop contributing carbon gases to the atmosphere nothing has changed except another 'commodities scam' arising.

Regulation and Change

It would be heartening to believe that financial institutions have changed but it is more likely a momentary pause until someone applies a bandage like the bail out to the system, a little tweaking of product mixes and then off they go again to the next trough which if we leave it all unchecked could be far more disastrous than this one.

Would it not be the time to make long term, radical changes to the whole financial market to demystify its complexities and make products far more transparent with proper adherence to underlying values of assets for the future? And would it not be better to have proper governance and regulation to ensure banks do not pay vast bonuses but hold reserves in order to cover future losses or, heaven forbid, give back some of the benefit to the customers whose money they have so freely risked and leveraged to gain the profit?

It's a nice thought - but it won't happen.

Thursday, 30 October 2008

And The Greed Goes On

It's estimated that around €30bn was lost by Hedge Fund Managers on a single stock recently as the frenzy to fuel greed continues. It seems despite the financial condition of the world, some people are hell-bent to keep the good times rolling while banks and even countries fail.

Beetle Crushes Man

You couldn't make it up.

Several Hedge Funds greedily shorted VW shares recently only to be left reeling when over the weekend Porsche announced it owned 74% of VW shares not the previously assumed 46%. The extent of the calamity was revealed on Monday as Fund Managers scrambled desperately to cover their positions, after VW had become the most shorted share in DAX history. To their added agony only 6% of VW shares were available to buy and in the process VW shares went as high as €1,005.

To put that into perspective, on Friday the shares had closed at €210 and by Monday they resettled at €945. At one point VW was worth €296bn and had become the largest company in the world ahead of the oil giant ExxonMobil.

And You Never Guess What

As the whole saga unravelled shares in German banks and good old boys like Morgan Stanley and Goldman Sachs dived as much as 12%.

There were inevitable claims that Porsche had profiteered and that German regulations were a joke as Hedge Fund Managers desperately tried to justify their losses to which Porsche merely blamed those who had chosen to invest billions in shorting the VW share price.

Crisis? What Crisis?

As we slither inevitably toward recession and the world squirms in the grip of a financial crisis that various sages have compared to a global banking collapse, bankers and Hedge Fund Managers behave as if nothing has happened. Losing €30bn is a single weekend is just senseless and beyond the comprehension of most.

On the same front page of The Telegraph Business Section yesterday we were told that business failures rose 28% in the last quarter and so far this year 16,591 businesses have failed in the UK. Just to make sure we all understand how a recession works, we see that the cost of freight shipping has collapsed from $234,000 daily rentals to $7,340 - world production and trade is grinding to a halt.

So, after all the much slathering and rhetoric by angry politicians and citizens, why are we allowing such obscene amounts of money to be lost and gained in a financial activity which most abhor?

A single share. A single weekend. €30bn lost.

If We Don't Understand, What About.........

As we sip our tea and read the business sections and get worked up that such scales of money can be lost and gained in such a short time on such a simple matter, what on earth chance or do people in The Third World ever have? We struggle to provide aid or free drugs to treat diseases because we don't have the budget mainly as its unpopular with voters. Besides, globally, around £4.5 trillion (read it again carefully, that's 4,500 billion pounds) has been spent in propping up the failed banking system due to the kind of systematic greed I refer to above, so we sure don't have the money spare to save the Third World, bankers come first. The kind of money that makes the Afghan and Iraq war budgets seem like pocket change, although I may argue the lives lost are worth far, far more.

A World Gone Crazy

We have lost all sense of perspective. How can anybody allow this to happen after what we have learnt in the last year?

And why do we provide such vast sums of money to bail out banks just to allow them to continue behaving in the way that brought them to their knees? This is OUR tax money being collateralised to save their rich executive skins and this is what they do?

For Gordon Brown Alastair Darling, Hank Paulson and George Bush - the main people who stood up and said we should bail out these greedy people - this is what you get, and frankly most lay people would have told you so had you bothered to ask. All we wanted was depositor monies, our pensions, life assurances and banking products we had bought saved - we did not want the greedy world of banking to continue the way it did. Without a single vote cast, you used our tax money to borrow to fund the bail out telling us a pack of lies in the process.

Clearly we are too thick to understand the complex world in which we live that provides us with so much in the 'civilised world'. Try taking your pretty graphs and complex glossaries to the destitute and starving of Africa. Life is far less complicated there.

Tuesday, 28 October 2008

Well, it's a rainy day. Now What?

A Lot Can Happen In A Week.

The 'Deripsaka Affair' momentarily took our eyes off the bad news. Today's Times tells us UK borrowing will rise to £60bn as Tax Revenues are predicted to collapse. Why do the laymen fraternising bars know more about the economy than Chancellors, reporters and City financiers? Pick a random pub in Britain 2 years ago and the sage sipping his pint would have told you a) house prices had risen way beyond all means to pay as had credit card credit which would end in tears and b) a recession will hit soon enough which will mean high unemployment, a higher burden on the state, less corporate profits and therefore less tax collected - so a hole in tax revenues would occur. And mine's a lager.

Doom and gloom is suddenly upon us now that 'Mr. Prudent Brown' has finally succumbed and uttered the 'R' word - Recession. In the last quarter UK GDP shrank by 0.5% and worse is predicted to come, indicating a technical recession. I almost sighed a relief that at least we can now prepare for it having admitted it, like a drunk facing their addiction at last.

But just a week ago, most people I met suggested their business was still doing well, and no downturn had been seen.

This week, one of my own clients failed to secure their next tranche of VC Funding mainly as the pot was empty as the VC was Hedge Fund-fuelled. Almost like an avalanche, bad news kept coming in.

The Bad News Keeps Coming

Mervyn King, Governor of the Bank of England, delivered his annual Financial Stability Report, you know that stability Mr. Brown talks of for the last 10 years. Well it went a bit wobbly. Last week, King announced the banking system came the closest to collapse since World War I and that it was due to 'Systemic Failure' - advice he could have got in any of the last 5 years in my household but he's only paid to do his job. He estimated the total loss in the Banking System is around £1.8 trillion and so far globally Governments have consumed £750 bn in bail outs (I think his sums are wrong personally). The litany of failed banks is long - RBoS, HBoS, Lloyds TSB, Northern Rock, Bradford & Bingley, and Barnsley Building Society in the UK have old gone into partial or total public ownership exposing the tax payer to hundreds of billions of potential liability. In Iceland, there was a total failure of the country's banks as credit was denied them - pushing them to meltdown while they held over £1bn of UK public money plus private savings - the country itself almost went bankrupt. In the US we saw mortgage giants Fannie Mae and Freddie Mac go public while Lehmans popped its clogs, Merrills got bought, AIG was rescued twice.........oh I am depressing myself.

The UK housing market according to Nationwide will lose more than 25% of its value and reading different reports it will mean between 1.2 and 2.5 million mortgage holders going into negative equity. The market, it's predicted, will not recover until 2013. A little factoid for you, as the UK house builders quite literally hit a wall, less bricks were made for the UK market this year than at any time since 1945.

Unemployment is fast approaching 2 million and estimates say that it will reach 3 million before it gets better putting another huge burden on the State - it is now higher than when 'Prudence' Brown took over, as indeed is inflation which at its highest for 16 years, so much for puny targets.

As we contemplate the interest payments on the £400bn bank bailouts and cheer Mr. Brown for ensuring that not a UK deposit of savings was lost, he tells us that borrowing more to pay for all this and increasing public spending is actually the right way, as his well-worn Keynes book tells him. The borrowing that independent bodies like Ernst & Young, the IMF and OECD have told him was way too high 5 years ago, that is. This year's Government target, which will be 'robustly' broken like all their fiscal make-believe, was £38bn. If the predictions are right, very shortly it will not far off be double that and it goes way beyond 50% of our GDP.

Britain is being mortgaged in a major way. If our debts were called in, each taxpayer would approximately owe the Government around £50,000 whether you were able to pay or not - around the same for the US.

And the Banking issue is not yet resolved as the Stock Markets indicate. The FTSE 100 is now down at around 3800 and still shows signs of frailty while the pound is at a 5 year low against the dollar - a sharp fall in less than a year of around 42 cents. It is estimated around $535 trillion of open derivative positions, those nasty money-making vehicles at the root of our problems, exist and to put that into perspective that's a mere 35 times the US GDP. Oh and there's a further associated $400 trillion of insurance positions to account for.

China, that bastion of emerging economies, is also slowing as demand for their cheap goods which account for over 70% of their GDP, slows dramatically. Retail sales, which have held up remarkably well, dropped by 0.4% in September and shops predict the worst Christmas buying period for years. The pound drop means a hop to New York for Xmas shopping in the Thanksgiving Sales simply is no longer worth it, while cheap French booze is no longer that.

The good times really are over.

It poses all sorts of questions about how we should have avoided this and that all this 'Global Crisis' affecting the UK as if we were not part of the problem being hokum - but that really doesn't help the small businessperson, trying a) grow or b) survive recession now that we have it.

Any Good News?

Today BP announced $10bn PBT for the last quarter and oil prices have shot down from a peak of $147 to $62 per barrel which at least makes fuel cheaper at last.

And that's about it.

How To Survive

Enough with the gloom - we have all seen the Sequoia Presentation on the web which it presented at its All Hands CEO Meeting for its protege companies, well there was some sound advice for us all, if most of it was simply presenting the financial predicaments graphically for those who couldn't read.

Last week I made a presentation to a group of Entrepreneurs and while I focused on some common business weaknesses for small or emerging businesses, gave some tips on how to expand their networking (which I have blogged on before), I also gave my tips on how to survive a recession. So here goes - it isn't exhaustive and it's deliberately simple:

  • Common Areas of Business Weakness
  1. Wishful thinking - most businesses see their future they way they would like it and a lot is rose-tinted. Recession hits most businesses in some way or another and its best to acknowledge it will hit and have some impact. Plan for it and don't deny it.
  2. Understanding the Sales Cycle - most emerging businesses think that sales will occur naturally and that once the light bulb goes on, companies buy. The fact is, the bigger the company you sell to, the more lights need to go on and usually that means more people resort to process to buy. If you think your sales cycle is likely to be 3 months, double it for larger companies and then don't be surprised if it's longer. Further, if your product or service is synonymous with the 'Good Times' so is a nice to have not essential, it is highly likely that in recessionary times companies will simply not buy. Think about how your product impacts the bottom line and reassess your 'Value Proposition' to customers - I will address this separately. Remember, sales is a game of numbers - the more people you meet, the more likley you are to increase sales. Similarly, don't rely on a few large customers, spread the risk. If one customer suffers a downturn then you are more likley to survive unless you wholly dependent on them.
  3. Spending Money in The Wrong Areas - many small businesses don't think through the impact of cost or capital spend on their bottom line. In recessionary times Sequoia tell us 'To spend every dollar as if it was your last' which is pretty scary but the maxim works. Think about every detail of spend and then test it against the benefit it directly produces. If it does not stack up, don't spend. Reassess all current spend and look to see where savings can be gained as cash is absolute king - the last thing you should be doing in a recession is increasing borrowing for working capital, and banks will not support it.
  4. Assumptions - 'are the mother of all evil' - well that was my invention. At any time, we all make assumptions, particularly in forecasts. Recessions are horrible beasts, they actually ruin forecasts because one minute all the numbers and graphs look great and the next they all go red and point down. Gordon Brown made a whole lot of assumptions and his continual denial to himself that the growth in the country was unsustainable cost us all an enormous amount of money and liability to pay for his damage. We are his lifeline, his collateral or assets to save his neck and the country. It doesn't work like that for small businesses - you get your assumptions wrong and there is no-one to bail you out. So acknowledge recession, think about its consequences in your market and start thinking about whether your assumptions and forecasts actually reflect what could happen. Remember should you 'hit the wall', no one is going to believe you if you predict for a few pounds more, the graphs will again go up and figures go black - reality is really a swine.

It's all about balancing Optimism with Objectivity

The Value Proposition

Picking up on my theme above, companies in recession will buy only against certain criteria. Like you they will not buy products or services which do not impact the bottom line and they will be rigorous on this.

All sorts of reality bites. As a for instance, if you are in recruitment, as unemployment goes up and open headcount goes down, the competition for every open position increases dramatically and once again we will see what on earth value is there is charging 30%+ of salary as fees for searching keywords on CV database? Differentiation is critical and track record is worth not a jot in a desperate market. Cost is king.

The Value Proposition in a situation like this is critical. How can you deliver more value versus your competition and so justify your cost? Remember it has to have a direct effect on the bottom line. For those who want an answer to that question, I have a free download on my website which gives some ideas entitled 'The Cost of Bad Recruitment' - the Value Proposition for customers and recruiters alike is highlighted in there.

And so for all other businesses, think about what extra you are directly delivering to someones bottom line and why - quantify it. At this point, my thought is do not get hung up on the competition, but focus on each customer and tailor the Value to them specifically. Give examples of those successes and ask existing customers to talk on your behalf or give testimonials. Think about what impact does the customer have if they do not buy from you? Quantify that and think about a specific timescale when that benefit is either lost or gained - a 'Compelling Event' if you like, the D-Day of increased cost for not using you.

In a recession, your biggest competitor is 'No Change' - make sure you tailor your Value Proposition to answer that specific situation and remember customers will buy but only demonstrable value.

Keep Flexible - Put The Workforce Where It Is Needed

  • It's usual to contract out payroll, cleaning, accounting, even manual labour but what about sales and marketing?
  • There is a huge, experienced labour market already out there - guns for hire.
  • They can be used at short and long notice to augment your efforts.
  • These people are not employees and they live by their results and reputation, so they always go that extra yard to succeed and deliver.
  • They can be paid more inventively, highly geared to results and even made part-time. It's a 'Pay as you go' culture.
  • More importantly your needs change constantly, one week you may need telesales, the next face to face experience - pay for what you need, when you need it. Similarly in marketing, one month you need copywriters, the next web maintainers or designers - pick and choose the expertise and apply it when and where you need it.
  • Negate onerous employee obligations and costs. While daily rates may seem higher, you only pay for what you need, when you need it.
  • Be adaptable - pay for the skills you need as you go.
  • Pay for experience as you need it.
  • Pay for geographic reach as and when.

Pay for what you need, when you need it - be flexible, lean and mean.

Recession Beating Thoughts

The Sequoia Presentation highlights some key thoughts for small and emerging businesses and here's my take:

  • Focus on costs - evaluate 'return on every cost'. Don't keep spending just because it's in the budget. Review, reforecast and adjust spends in all areas. And do it now.
  • Be Realistic - Make the tough calls now. Recession is ugly and forecasting and adjusting is vital. That will inevitably mean review of major investments, projects and even people. Make the tough calls now. When the recession as at its hardest or even beginning to ease, it is not the time to be making tough decisions on cost because it is very unlikely that your finances will be strong enough to take advantage of the upswing. Of the last 6 major downturns, the markets have recovered - so make sure you are thinking about weathering the storm and the upswing and that means make tough decisions beforehand rather than after.
  • Budget to Survive - There is no point thinking the position you are in now is going to last. Everyone will get affected in some way, there will be even some who benefit. Sit back, reforecast and budget to make sure you survive rather than being hopelessly optimistic in the face of the obvious. Now is not the time to be embarking on major programs of investments or new projects which do not have immediate returns.
  • Pay for Results Not Failure - Make sure all staff are joined into the position. Recently Caterpillar saved 300 jobs by the workforce going onto flexible working. People will be reasonable and help if you are communicative and sensible - and lead by example. Banks who fly executives to Spa resorts at the time of crisis don't win favours so think about your own largess in front of employees. They will respect your decisions if you also live by the same credo. Link any new payments to results - make sure all new costs are covered only by the profit created rather than paying in advance.
  • Choose Your Customers Very Carefully - remember, it costs around 5 times as much to find new customers than keep existing ones. Throw a blanket of value around your existing customers and go that extra yard to make sure service never degrades. Pick new customer acquisition very carefully. Keep away from competition and price sensitivity - some business can really be bad business. Assess their worth, the cost it might take to acquire them and your capability given your existing resources in servicing the business.
  • Keep Reviewing Your Pipeline - In a recession customer buying moods change like the wind. Make sure you constantly review the pipeline of deals to ensure they are realistic and reforecast and adjust accordingly.
  • Conserve Cash - above all make sure you collect cash voraciously and hang onto it as long as possible. Remember nobody will lend you cash for Working Capital like salaries or possibly even to buy stock. Banks are more risk averse than ever and if there is one major consequence of all that avarice at the top end it is that the small customer and consumer pays the price, because we simply have no choice but to do so.
  • Funding - getting new funding specifically from VCs in 2009 in particular is going to be tough as their own sources of funds are drying up but they will certainly be calling the shots on any deals. Don't put yourself in that situation if you can avoid it. If you are starting up, pick a market where your products and services will be bought no matter what the economy is doing, build a proof of concept in terms of getting early sales and then ask for money to grow rather than really start up.

All this may seem a little excessive before the real party begins. Well things can change very quickly. As mortgages dried up, Estate Agents saw their average house sales drop to 1 sale per week in no time, Savills reported an 80% drop in high house sales in a single quarter. The recession will cause a sharp and very hard fall in confidence and it will affect you. Plan now to avoid its consequences.

If you need further advice on any or all this, please call me on +44(2) 207 193 2356 or mail to

Saturday, 25 October 2008

Another Day Another Scandal

So you are invited by a Russian oligarch worth billions onto his beautiful £80m yacht moored in an idyllic setting off the cost of Corfu within sight of the holiday home of a well known wealthy banker with whom you went to University and as you arrive to take drinks you notice that Peter Mandelson lurks aboard also. At this point, should you have not made some polite excuses about a chicken in the oven and left sharply, knowing the track record of the man known amongst political circles as 'The Prince of Darkness'? Or, as with many politicians, do you stay and chat - after all there was no need to leave before the 'free lunch'?


The old Mario Puzo books first alerted me to the Sicilian concept of 'omerta' - effectively silence amongst family, friends or associates, bought or not, no matter what heinous things you may know. Aboard that yacht, Nat Rothschild, a former University chum of George Osbourne clearly felt 'What goes on on Tour, stays on Tour' and was dashed upset when his old chum started ratting on 'The Prince' and suggesting his meeting aboard the Russian billionaire's, Oleg Deripaska, yacht had some hint of skulduggery. So upset indeed that Nat wrote a letter to The Times to point out that not only was Osbourne around but so too was the Tory fundraiser, Andrew Feldman, and whats more there was a blatant attempt to solicit a Tory Party donation from the Russian albeit via one his UK business concerns.

Ouch. The denials were 'robust' - that lovely political term that means anything but robust - and Osbourne answered the specific allegation. He was on dodgy grounds in denying everything but after all there is nothing wrong with a free lunch.

That was tantamount to calling Rothschild a liar and since we have had a cacophony of statements from Deripska, Rothschild, more drivel from Osbourne, suggestions that David Cameron was flown free of charge to Murdoch family parties, and EU statements that Peter Mandelson had met Deripaska only as far back as 2006 and of course after the EU's decision to ease import duties of Russian aluminium, for which Mandelson was cleared of any wrong doing as he had first met Deripsaka after the vote.

The Clanger

Ah, that is where there might have been a slight but 'understandable' misunderstanding as that EU statement came out when the now Lord Mandelson, formerly an EU Commissioner for Trade, was actually moving from Brussels to London (no don't mention the fact he will continue to draw his £200k+ salary as if he was still in Brussels hob-nobbing with billionaires and 'doing a good job' for 3 more years - and we pay for that) and was rushed in for an emergency medical procedure. So he could not have corrected the 'understandable' misunderstanding that he had first met Deripaska in 2006. You see, Lord Mandelson, as EU Trade Commissioner had indeed met Deripaska as far back as 2004.

Of course, that was before the crucial decision by the EU to ease those pesky aluminium duties on Russia. And Lord Mandelson was the EU Trade Commissioner at the time of that decision.

What? Are you suggesting that the EU thought that Lord Mandelson had not known Deripaska before that decision and therefore had somehow read his diary wrong or misinterpreted the dates he told them leading them to believe he could not have been 'influenced' by any 'free lunches' aboard yachts or otherwise and affect his powers of judgement in the matter of EU import duties regarding aluminium and Russia? Heavens above, no. Lord Mandelson has an exemplary record in such matters and 'always acts in the public interest'.

So what

I have no time for Osbourne and his puerile jibes - he got what you get if you also cavort with rich Russians who want to influence you. There are no such things as free lunches. The fact he was trying to open a sleazy theme about Mandelson is irrelevant - he was tarred with the same brush and rightly so by Nat Rothschild. He should fall on his sword and get lost - he would make a useless Chancellor anyway.

However, Lord Mandelson has been brought back from the EU with fat pay offs and salaries at the taxpayers' generosity to take a seat in Government the only way that was possible for a non-elected MP, and that was as a sitting peer in the House of Lords. A desperate move by a desperate man, Gordon Brown, has once again opened up the weeping wound of New Labour sleaze.

Denial - The Power Behind Politics

The Power of Denial, about which I have written before, is a huge force in politicians and business people. Lord Mandelson clearly sees it as no public matter that he met Oleg Deripaska in 2004 and in 2005 he was EU Trade Commissioner at the time of the decision to ease import tariffs on Russian aluminium - the very commodity with which Deripaska had made his considerable fortune. No doubt Lord Mandelson will squirm his way out of this mess as he always does, but the stink of corruption follows him whether justified or not. When it comes to bad judgement, George Osbourne is guilty. But take a look at the King of Bad Judgement, Gordon Brown. It was a huge gamble rehabilitating 'Lord' Mandelson to heal the Blairites - it has blown up in his face as it surely would.

Then again, like the financial mess we are in, there are many who would have told him that bringing back 'Lord' Mandelson and getting more dubious scandals was inevitable.

There is no such thing as a free lunch, particularly on the private yacht of a billionaire.

Tuesday, 14 October 2008

Two Things I Never Thought I would See

As Peter Mandelson was sworn in ermines, entering back into Government with a salary of over £100k per annum and a 3 year pay off from the EC of over £200k per year, I blinked as I watched three bastions of the capitalist era, Lloyds TSB, RBS and HBOS go into majority State ownership joining Bradford & Bingley and Northern Rock.

Well I would never have thought either could happen.

The cost? Apart from Mandelson's comparatively minor burden on the taxpayer, a cool £37 billion yesterday. Thank God we saved Fred Goodwin's pay off.

So What Do We Get?

The city and academics both say we, the taxpayer. are party to a potential windfall. After all we now own around 60% of RBS and 40% of Lloyds TSB, we are not sure at what the share price paid was but those are minor details. As the world recovers, the theory is the Government and hence the taxpayer will reap the benefit of the wise investment.

Dream On

When was the last time the UK taxpayer got direct benefit from a public owned company going back into private ownership?

Further £37 bn is borrowed money at a rate of interest which we the taxpayer pay - a mortgage in so many words collateralised on future tax to be collected. In the meantime, the plan is that conditions are reset to mid 2007 and all the banks start lending again, there is cheap credit available and we all start spending again.

Was that not what got us into this mess or perhaps I dreamt the last year and all those clear diagrams and explanations the bankers told us about?


The reality is that the 'Credit Crunch' was a symptom of a much deeper problem. The house market had grown out of kilter to average wage rise, rentable values and the average household savings had slipped into negative. At the peak, 49% of all new mortgages were re-mortgages as people leveraged the equity in their homes. In the last year we are told that average house prices have dropped by 10% with a further 18% to go by some estimates. In the last quarter Estate Agents averaged less than one house sale per week. Savills alone have seen an 80% drop off of high end sales.

The engine is broken - it is irrelevant how much fuel you put in, it just won't work.

Economic Slowdown

Brown's huge gamble is that the economy, i.e. consumer spending, gets back to pre-August 2007 levels. In order to do that he needs a return to cheap, freely available credit and above all, leverage of our growing assets to raise more money to spend - after all wages are actually falling in real terms and tax is rising.

But inflation is rising at the highest level for 10 years, unemployment is up to the highest level in 11 years and we have allowed at least 1m extra foreigners in to do low level, unskilled work. The sort of jobs that will disappear fastest when the recession (and we had better believe it will) bites. No more meals out, morning exotic coffees, hand car washes - the little things will go first and that's where the majority of those workers currently are.

As they fall out of employment, the burden on the state rises.

The slowdown will affect corporate earnings, there is a real chance China will lurch into recession and job prospects are already lowering as the number of open positions have already dropped dramatically.

The Price We Will Pay

So if you think £37 bn will yield us a profit, think again. Britain faces a dramatic slowdown in its economy and kick starting credit will not rescue us. Our borrowing as a nation is now 50% of GDP and rising - we can only cover further tax shortfalls as the recession bites by borrowing more.

There was little Brown could have done in the face of the crisis other than rescue the banks and pay lip service to the greed that caused the crisis. But it was his hubris, arrogant self confidence that he knew what he was doing as Chancellor that steamed us right up this blind alley in which few have gotten rich quickly, the general populous thought all these second properties and hi tech electronics were here to stay and always affordable and the polarisation of rich and poor, have and have nots around the globe got ever more evident.

Just don't forget, the man who put us in this mess is the man trying to get us out. He wants a return to 2007 spending to save his neck - I hope we do not fall for it because it will surely mean a future crisis far worse than we are experiencing now.

A Tale of Two Cities

Beijing – capital of the most populous country in the world, host of perhaps the most sensational Olympics to be witnessed and a country with a prodigious manufacturing output. London – capital of Great Britain, the next host of the Olympics and home to the most prestigious Financial Market outside of New York.

They have more than the Olympics in common. As the global financial crisis and economic slowdown takes its fearsome toll, both countries have been profoundly affected and the fall out has yet to really take its toll.


As the UK financial positions unravel, in a single quarter the current account deficit has doubled to £11bn, adding further woes to its crumbling national finances. Meanwhile in China, with over 70% of its manufacturing output consumed by eager foreigners, the threat of a global financial slowdown means that its exports will simply dry up. The danger is that internal consumption will not compensate and manufacturing will simply have to slowdown and workers will get laid off.
Through the last 10 years, the UK has enjoyed an unprecedented boom fuelled by a 160% growth in average house prices, which has been underpinned by cheap, plentiful and inevitably wreckless lending. China, meanwhile has been the willing recipient of the increase in consumer spending as UK households took advantage of the credit boom and leveraged their rising assets to buy ever more affordable electronics to fill their first and second homes.

Toxic Mixture

The mixture has become as toxic as derivative debts used to raise the money. The UK is over dependent on the finance markets in London, and manufacturing contributes less than 20% to the country’s GDP while in China is it almost exactly the reverse. The threat to each country is equally hideous.

As the UK Government gave ludicrous tax status to Big City Private Equity and Hedge Fund Hitters, the UK markets rose uncontrollably and when the inevitable meltdown occurred, the UK has found that as the money makers pull out, we simply have nothing in terms of exports to fill the vacuum. As more of our money flows out to fund jobs in offshore businesses and our own unemployment figures rise, the country will have to come to terms that the ‘super-boom’ in the last 10 years will have come with an awful time of reckoning.

And so too China. As the Chinese Government opened its mind and capacity to service world demand it has become almost totally dependent on the global financial markets as only ready credit would continue the phenomenal growth it has perceived over the last 10 years.
The Olympics may well also have come with a massive financial burden. China spent over £23bn on their wonderful Games while the UK has budgeted £9.5bn and rising. Ultimately, the Games may well have become vast White Elephants to two economies who thought the good times could not possibly end while a few of us sat around and were aghast that allegedly educated people thought that free lunches were a reality.

Rise in Public Spending

Gordon Brown’s mistake has always been that he took on good finances from the Tories and then began a spending spree that meant over 1 in 4 UK jobs are now in the Public Sector. At the same time, laissez faire immigration policy allowed over 1 million new unskilled people to arrive and do low end jobs. As the UK economy grinds to a halt, teetering on recession, inflation rises to 4.7%, the pound continues to fall and the Government liabilities to fund the financial meltdown rise and let’s not forget two unwanted wars, the pressure on the Welfare State will begin to rise.
Like China, the UK cannot take much more unemployment and it will almost certainly exacerbate an already gloomy economic position. Expect a rough ride in the UK and meanwhile watch over your Far East investments with a very wary eye.