Dates In My Diary

I am always interested when offered an invitation to a free webinar - they are great because you can dip out easily if it is not interesting but best of all you never have to leave your desk, so if the subject matter is good I try to attend. But when I received an invitation today I had to check the date and make sure it was not an April Fool's prank.

The invitation came via ExecuNet and it sounded good as it is part of the Power Break series and was entitled 'Weathering The Storm: Executive Talent Management In An Economic Downturn'. The sort of subject matter I'm interested in, I was about the accept the invitation when I noticed who the speaker was - a Dr. Anna Tavis who happens to be Global Head of Talent Management and Organizational Development at AIG Investments.

It was at that point that I reached for the calendar and checked the date.

AIG is not exactly the most shining example of best practices in terms of talent management or organizational development for that matter. On around its third or fourth round of Fed bail outs, it has consumed well over $200bn of cash pumped into it and is in state hands. Clearly the 'talent' they have is for building a house of cards in terms of investment and organizationally the company looks virtually defunct.

Still, I expect I will be getting invites to an RBS seminar on 'How to maximise your pension when your company is bust' and an invite from Jaqui Smith on 'How to maximise your expense allowances' in conjunction with Brown, McNulty, Conway and Darling. I am also waiting for tips on 'Knowing when to set up a blind trust when you are not meant to get paid enough to have one' by Lord Mandelson who follows on from his insightful series on 'How to get sacked twice, consort with rich Russians, get a peerage and a handsome pay off', 'How to get a passport pronto', and 'Mortgage loans made simple.'

I am also expecting a seminar invite from Tony Blair simply entitled, 'Timing', while 'The Janet and John guide to quantitative easing' by Yvette Cooper should be good too. The best should be the jointly presented seminar by Gordon Brown and Barack Obama called 'Big Number Theory - how to destroy an awful lot of money and someone else pay for it.'

Cool Facts of The Week For Pub Conversations

Did you know that monkeys show organisational skills? Perhaps AIG should consider using a few but it was found that monkeys at Stockholm Zoo pelted stones at visitors. Studies showed that before the Zoo opened each day, the monkeys would look around for stones, make piles of them behind a bush and then when the visitors came by, they would pelt the stones at them.

In another revelation, it seems that chimpanzees exchange meat for sex, thus proving that prostitution is indeed the oldest profession after all. I wonder many pieces of rump Max Mosely paid for his sessions over the years?

A recent study at John Hopkins University has shown a link between oral sex and some throat cancers. It seems to be all to do with the HPV virus which can cause cancer and it has been suggested that those who have oral sex with more than 6 partners have 9 times greater chance of getting throat cancer - which is a greater risk than from smoking or drinking alcohol. I'm sure there is some witty line to be added here but I shall refrain.

It is good to know that Reality TV is getting to the nub of topical issues. Fox TV in the US is putting together a series called 'Someone's Gotta Go' where employees of small companies decide which one of their colleagues gets laid off.

And finally, a woman in Berlin is to divorce her husband because he cleans too much. There, it's a message to all men not to try too hard - it could ruin your marriage.

Does Anybody Actually Know What They Are Doing?

The PM is in the US to talk to the President to compare the size of their economic phallus' (phalli?) and see who has spent the most money in the bail outs on things that they shouldn't have - like bonuses, fat pensions, consultants, investment banking advice and daft conferences to whitter on as if they know what they are talking about.

In a single day, even an hour, it seems fiscal policy was turned on its head and there are worrying signs that not only does no one know what they are doing, but worse still, they are all promoting doing the opposite thing.

Knee Jerk Reactions

In the series of bank bail out knee jerk reactions like large nervous twitches, we have seen several hundred billion spent by the government and the Bank of England to try and remedy the financial mess we are in. I am deliberately vague on the figures as there seems to be no popular consensus on how much actually has been pledged, spent, put up as guarantees and loans or slung down a large drainpipe leading to nowhere. In the remarkable series of events that allowed Fred Goodwin to walk away with a fabulous pension at our expense, no minister seemed to be able to know his address or phone number to contact and tell him he was not going to be rewarded for failure. How surprising that a bunch of vandals found Goodwin's house with remarkable ease and made the same feelings known with a series of well directed bricks.

Barack Obama seems to have lost his coolness and has developed a nasty habit of tittering when answering questions on the crisis which he refers to as essential 'gallows humour', and his usual unflappable speech style has been replaced by a Gordon Brown stutter.

The two should get on famously this week as the one thing they are both getting good at is spending large amounts of money their countries haven't got.

The latest in the series of knee jerk reactions came yesterday as inflation shot upwards and not one single economist had predicted it, which does not inspire much confidence. Having already embarked on his course of Quantitative Easing in earnest, Mervyn King, wobbled visibly and there now seems to be a volte face likely on that particular bright idea. In response gilt yields shot up record amounts as investors started to speculate that the era of low interest rates may be short lived.

The rise from 3% to 3.2% in the Consumer Price Index was very unexpected - in fact falling high street prices had been seen as potentially pushing us toward deflation if anything. But it is clear that economists don't spend much time in the real world as from my tired eyes shop prices have stabilised and gone back up with few exceptions. The fire sales seemed to be over a while back. In response, Mervyn King penned a fifth letter of explanation to the Chancellor.

I hope he put pictures in it as I think Alistair Darling is having real trouble reading things at the moment.

Further, King then told the Treasury that he may hold back on spending his £75bn of Quantitative Easing that he agreed to do not a month ago. The fear that inflation takes off is one of the side effects in the theory book on this one and Merv is playing very much by the book it seems.

The combined effect of these two things then sent gilts down in price and yields up as investors speculated that the Bank would buy far fewer Government bonds than first thought which had sent prices up previously. Another unexpected result of all this tumult was that sterling rallied against a whole basket case of currencies and gained 2.25 cents against the dollar.

Opposite Views

As Gordon Brown starts his visit to Washington to basically agree with the US that buckets more spending is the only solution to this economic crisis, Mervyn King was warning the Treasury Committee that the Government should not embark on a policy of further spending to stimulate the economy and was specific that the country should not run up more debt. Instead there could be targeted measures to get us out of the mess.

The Government was quick to point out that there was no rift with King on the stimulus package. We can only assume that either no one knows what the other is saying or Brown will simply tell King what to do - no discussion.

Rumours are that Alistair Darling is sitting muttering in a corner not knowing which way to turn. It will be an interesting match when Darling meets his US counterpart, Tim Geithner, who far from retreating into his shell with a face like a slapped backside as Darling has, he has boldly stepped forward and said that he wants wider powers to deal with financial firms. He claimed that the £173bn spent on bailing out AIG could have been avoided if his predecessor had the powers to have put AIG into receivership. Darling will be shocked at such a notion with the Government having to step in to save 5 major banks falling in the UK, the first of which, Northern Rock, had a strong case for just withering.

Bungling, Incompetence and Negligence

It may come as cruel twist to the saga of Goodwin-gate that in fact the US taxpayers and not the UK's may end up paying the cost of Fred's pension. The RBS Board insured themselves against their own incompetence (what foresight they had) and the main underwriter is none other than AIG. So if the UK Government do sue Fred and by some miracle they win, AIG amongst others will have to cough up. Pigs will be flying snow to Eskimos before the Government will get a penny back from Fred.

But it has been a depressing week for our super hero leader. As he flies like a speeding bullet to several countries to bore them with his monotonous message on spending and non-protectionism, the revelations by the National Audit that after the Northern Rock bail out was done, the highly paid consultants, under the watchful eye of ministers, allowed a further £800m in 125% stupid mortgages to be handed out up to 6 months after. Even a an imbecile would ahve thought to have told Rock management the very first thing they should do was to stop such nonsense - but no the object was to 'save' the bank not to rectify its brilliant lending policies. We then had Lord Myners whinging that he was not to blame for the Goodwin pension fiasco when it was his responsibility to get it right, we had Northern Rock paying its staff bonuses and changing the terms of its loan repayments to us, a sharp rise in unemployment was announced, tax revenues dropped by 10%, deficits rose sharper than anticipated and now we have the Czech Republic becoming the third and most significant country to oust its Government in the wake of the crisis.

As each country reports dramatic bad news after bad news, it is now absolutely clear that the financial crisis and recession has gone far deeper than expected and into the general commercial markets. It is becoming fast apparent that the drop in consumption in the wider sense will not be replaced by the vast spending by central governments. The spiral is beginning to lose control.

What is most worrying is the divided opinion amongst the people charged with getting us out of the mess having allowed us to get into. It is no good turning to the Conservatives as they are struggling to keep up with the niggling soundbites and witty one liners of criticism to have enough time to have ideas on how they would go about it.

Niall Ferguson had a long and technical article in the Telegraph yesterday with his ideas on how to stimulate the economy which I did not understand but what he does agree upon, as many are realising for themselves, is that the anticipated results of pouring a vast pile of money down a drain have been over estimated while the long term borrowing requirement has been vastly underestimated.

The Tories picked up on one of my analogies from some months ago, saying that Gordon Brown was like an obsessed, broke gambler believing it just requires one big bet to wipe out all his losses. The trouble is, he is gambling with borrowed stake money, and the IOUs are underwritten by us. I think we should take a lead after Latvia, Hungary and the Czech Republic and turf Brown and all his incompetent ministers and advisers out.

The sad fact is that we don't have anyone competent to replace them, except for the guy by the fruit machine in the Robin Hood pub last night who advocated bringing back Nigel Lawson, Ken Clarke and John Major led by Margaret Thatcher - his A Team. Er, no thanks.

Go on then, Gordon, have another throw of the dice on all of us. Here's hoping.

Symptoms Of A Wider Problem

President Obama is angry. Gordon Brown was angry and probably still is. Why all this angst? Because Financial Institutions are paying out bonuses despite clocking up losses which in the case of AIG are more than the Gross Domestic Product of many a developing nation.

In the great scheme of things the amount is trivial, just $165m although that is part of a total of over $400m of bonus being paid by AIG - it's just that this bit went to derivative traders, the people at the very heart of the cause of the financial mess the world is in. When measured against just the latest tranche of bail out money at $40bn from the Fed, this is no more than chicken feed, but it is the symbol and message it sends to a nation in a deep recession where nearly half a million people per month are losing their jobs, that President Obama is so enraged about.

Attaining The Status Quo

Any banking executive will tell you that if you want the financial system to work as before and get lending going again at similar levels, there has to be the incentives for earnings in place. The fact that the financial system had devised a way to keep trading a basic commodity such as debt so many times and take a commission each time was pretty hilarious as scams go, but that's the nature of finance - you don't get seemingly unlimited amounts of money to lend without a way of it paying incredible amounts of money back, far beyond the value of the assets it was being used to finance.

There has to be more to be had than that.

The status quo in the banking world is getting the show back on the road again and these executives would tell you that if you don't pay the bonuses then you will not get staff good enough to do the job. There is a perverse logic here. These are the very staff who actually caused the mess and these executives are proposing that rather than sack or even possibly jail them, we should in fact pay them bonuses even though their companies have lost billions using their gambles.

It is this loop of illogical ideas that fuel the finance system. At the heart of it though, it has to be understood by people like Obama and Brown, that if they really want to get the system back to the amazing cash making engine of before and give the consumers the cash they need to kick start the economies again to get people back to work, then there is an awesome price to pay and the bitterest of pills to swallow. You would have to agree to do what the banks say - which is precisely what these Politicians are doing as they are surrounded by advisers from the world of Investment banking and these fellows know a great deal about making more money per year than the rest of us will make in a single lifetime.

It goes with the territory.

Changing The System Will Mean Tackling The Underlying Problem

There are few banks who did not play the game. Everyone looks at Goldman Sachs as some kind of paragon of virtue but the reality was they often bet the right way but they are one of the largest beneficiaries of the AIG payouts made via the Fed. If Goldmans had not received the bail out on their derivative positions, they would have been in just as bigger mess as they rest of the sector.

So you have to agree there is a fundamental flaw in the system. The ability to pass on debt and insure it is fair enough but the derivatives, 'exotics' and other forms of clustering debt and assets and passing them onto a financial conveyor belt around the system like a never ending, lucrative game of 'pass the parcel' has to stop.

Warren Buffett always predicted that such financial instruments would be the downfall of the financial system and how right he was.

To stop this happening again, financial institutions have to fundamentally change their way of working, the money that can be made by themselves and their staff. It is as simple as that. In order to do that, Governments are going to have to step in and use legal powers to change what banks can do to make money. It will mean they will have to change the regulatory system and they it will mean that staff will have to change.

The days of the City Rocket Scientists should be over and finally, the safety net of Government bail outs should be removed.

The biggest mistake so far has been to bail out the current system - it is the problem. However angry Obama and Brown get, if you push more money in to save it you have to accept the consequences as it how the present system works. They should have changed the system and restructured it before they bailed it out and made sure they had not just the symptoms of the problem treated but the problem itself.

Out Of Work Bankers

This would mean, I suppose, that many of the current clever bankers would stamp their feet, shout out about how clever they are, how much money they 'created' and then threaten to leave their jobs. And yes, that would be the preferred outcome. Rather than cut bank tellers and back room staff or deny such people their bonuses for their hard work in producing the only real profits banks make, the whizz kids should be turned out on the streets to see if they can find jobs to create such fabulous wealth in the real world.

We should curb the way Hedge Funds work - we should stop the sale of any share that the seller does not legally own at the time of the bargain - we should change the staff at regulatory bodies to be accountants and non-industry professionals who have the financial forensic skills and no connections to the institutions past or present so that they are objective and have the integrity and skills to do the job properly.

We should fundamentally change the laws on Non Executive Directors and how they can easily evade such financial collapses. They say that NXDs have more onerous liabilities now - that's complete rubbish and it is still the most lucrative club in the world. There should be curbs on how money can be spent to influence others like doling out multi-million 'adviser' roles to former Prime Ministers for doing absolutely nothing - NXDs should be the mechanism that stops such idiot largess and actually be guardians of the remuneration policy with the public conscience in mind rather than their own deep pockets.

It would mean a very different banking system than today which would mean that economies are going to have to shrink back before they can move forward into growth in a more orderly and conservative fashion. And that's what Politicians do not like - as that does not win votes.

So they will pay out vast sums like $100bn plus to bail out AIG and then get really angry about a bonus payment of just 0.004% of the amount. The bankers would tell you it's trivial in order to keep their best people.

Obama and Brown have to have the fortitude and moral fibre to tell these banks, the bonanza days are over - if those staff want to leave, the door is open as they should never, ever get that kind of opportunity to earn such money again under a new system.

Seconds Out - Round 4

AIG, the prominent sponsors of arguably the most successful football club of the decade, have not mirrored their protege's success themselves. Having had 3 serious injections of cash to try and shore up their rotting balance sheets, they have gone back begging for a fourth hand out. This time their argument is not so strong - it's plain and simple; help us out or the whole money market could get crippled causing major effects in Europe and amongst other insurance companies - doom is the alternative.

It's the equivalent of a financial gun to the head and it is also an invite to pile in good money after bad. In the UK we have had a similar problem with RBS and Lloyds - to the tune that more money has been ploughed into RBS than its entire worth in terms of shares meaning it will be a long, long time before the taxpayers' shareholding sees any return on the investment - if any.

So what is the mentality behind so much money going into these companies? What is the predicted outcome? And when does it all stop?

Finance For Dummies

The financial crisis has sobered us all up - and at least we know some more about the mechanics than before. Over the past 10 years or so, we have believed in the competency and skills of the slither of elite population occupying the banking world and given them credit for creating a period of prosperity which has seemed greater and more sustainable than at any other time in history. I was among the few people who did not believe in the Brown-Blair mantra on the economy and it was obvious to many that the prosperity was not coming from fantastic Corporate performance and the corresponding general increase in disposable household income from salary and benefits. It was clear that an awful lot of money was 'created' by leveraging assets which flowed to a comparatively small number of people and made them incredibly wealthy.

In the world of zero sum economics, there is a belief that not money is never created or destroyed, it just flows somewhere. That is true to a point. The fact is that those who have leveraged the increase in the value of their homes have effectively just increased their debt - money was created and lost as asset values plummeted.

It is very hard to see how people of fabulous intelligence could get this so horribly wrong. The whole financial system had been grown in size and complexity well beyond the fundamental value that underpinned it and it was easy for outsiders to see - so why was it so hard for insiders to understand this?

And why did Politicians ignore repeated warnings from places like the IMF about Britain's National Debt but, more importantly, the unprecedented growth in personal, unsecured debt? These numbers are not hidden nor are they hard to understand. Whilst many would point to the judgement of bankers being clouded by their own greed, this could hardly be aimed at Politicians who, apart from consuming ever larger amounts in unwarranted expenses, were not on some superb bonus scheme should they keep the economy growing.

What Caused The Errors Of Judgement?

The one thing I never thought about Gordon Brown in the run up to the financial meltdown was that he was unintelligent. His academic credentials are fairly awesome and his textbook language of the economy certainly seemed to demonstrate he knew the terminology if not the mechanics of the economy. I definitely disagreed with his assessment that Britain's fundamental economic position was good - it was clear to me that our economy was underpinned by over valued assets and that had to give at some point. I did believe, though, that he must have an infinitely better grasp of the situation than I so there was probably a great deal more to the situation than I knew about.

It appeared that was not the case. What has certainly been proven in the last year is that Gordon Brown has little more grasp on the mechanics of the economy than the average guy in the street. Even now, as he surrounds himself with very highly paid and some very dodgy bankers, he still seems to have little clue as to how to solve the problems.

The Catalogue Of Errors

I could go on but here are just a few.

Firstly, I think character judgement has been poor. Already we have seen people like Glen Moreno and Sir James Crosby at the heads of watchdogs and members of the inner-circle of advisers be from businesses with dubious backgrounds. In Crosby's case, HBOS were using over zealous selling tactics and later got into suicidal corporate lending, mostly via Crosby's protege Andy Hornby - but HBOS was on a path to go bust, be rescued, clock up massive losses and have over £200bn in toxic debt. How on earth did Crosby get a place at the advisory table is beyond comprehension. Moreno sat at the head of several dodgy tax avoiding companies in Liechtenstein and yet was part of the inner-circle too. Then there was the man that Gordon Brown held up as the pinnacle of banking genius so much so he befriended him personally had him knighted - I am talking about Sir Fred Goodwin of RBS.

Secondly, the long term belief that the economy was working fine despite the severely over-heated house prices was bad enough, but the belief that the financial system was not using a flawed model was unforgivable. Down-toning the methods of the watchdog, the FSA, was symptomatic of foolhardy judgement that the business model would somehow keep fuelling itself when all logic pointed to it imploding if some small spanner got in to the works. The spanner was small - it was just a realisation that any one part of the financial system could have a mismatch between actual worth and estimated brought the whole thing to a shuddering halt. And not just an 'adjustment' as George W Bush famously called it, but a massive implosion as everyone realised they had been trading in debt until they were far beyond knowing who held what and how much it was worth, and that this alone, not deposits, was making the whole banking system work. The funding gaps together with the concern over asset values, blew the whole system apart.

Yet it was visible all the time - a system built on such a house of cards that any one corner could give way and cause the total to collapse.

Thirdly, the reaction to the collapse has been extraordinary. Far from trying to assess how much toxic debt was at the heart of the problem - for some reason it was believed that pumping a significantly large amount into the system would restore the Utopian view of the economy once again. Yet the total amount of outstanding derivative positions was over $500 trillion, over $900 trillion if you included the associated insurance positions. This was the total extent of traded debt in the market - somewhere between zero and that total figure was the answer to the question - how much? Yet the accumulated wisdom of the banking fraternity at the heart of all this and the Politicians who believed them, started to pump what now appears to be huge yet inconsequential sums of money into the system. The recession has only exacerbated the problem - global demand has dropped significantly and even the budget positive Chinese is now plummeting into debt. As Politicians try to apportion blame to some amorphous body of energy called 'globalisation', they also try to make us believe that without this globalisation the world will be far worse off - yet we were not that bad off beforehand and without it.

Fighting Fire With Fire

The end result sees plenty of talk, some big action and then some total inaction with the associated ineptitude. While Ministers tell us that the car industry needs to £2.3bn to survive in January, we are now in March and nothing has been done as Vauxhall teeters on the edge of oblivion. The failed New Labour experiment in commerce has brought us at the brink of the abyss of nationalisation and how sad that we have red-carpeted their path to it by giving them two terms in office and such powerful mandates that makes it impossible for us to get them out within two years. By that time, the detrimental effect on our economy will be something that future generations will have to pay.

In reality, all the upside of the last 10 years will be paid in the form of a 30 year mortgage on the people, which will be paid off, if we can afford it, in future rises in tax.

At some point, commerce has to kick in. In the world of business, there is little room for sentimentality and idealism. If you run your business badly, you pay the price - seeking bail outs to survive is a fantasy world in which people who are most affected by the mess actually foot the bill for the mistakes made by people who became amazingly wealthy on their stupid business ideas.

If you had written it as a novel - no one would have read it for its lack of reality.

Yet this is what is going on. In the US, AIG and Citicorp, have collapsed to mere shrivelled shells of once great companies, but that is the law of business. You play with fire, you get burnt. Giving you more fire to play with only means you get more burnt.

What If We Did Not Bail Out?

It is hard to say or know what would have happened had we let many of the banks fail - certainly the likes of Northern Rock. There would have been mass defaulting on debt, but in the long run it may have been quicker and less expensive in exposing the actual value of the problem, to then deal with it and then move on. Instead, we have attempted to maintain the status quo and it has been a horrible and expensive series of mistakes which may yet prove to be far more costly than could ever have been imagined. To some extent, it could even be argued that we may still yet have a system which completely fails and we may yet have to go back to some starting point and suffer the wide-scale collapse of the banking system. By that time, all the money we have put in so far will have been lost and Britain would stand on the edge of the cliff of bankruptcy with only the IMF left to turn to as our bonds will be junk.

As we try to pick our path out of the mess, there are more than financial systems which need to change - I would argue that the Political system needs an overhaul too. One of the most disempowering aspects of this whole crisis is that no one has been in a position to effectively challenge and stop the Government from making more mistakes or for them to only listen to the advice of the idiots who caused the mes in the first place - that should teach us a grim lesson as this second Labour Government had a 100+ seat majority based on only 34% of the popular vote.

It is at times like these that you understand that our democracy, as we know it and try to impose on other nations, is very flawed indeed as is our knowledge of finance.