Problem Solved?

EU leaders have voted on a new bank bonus clawback deal and they are all patting themselves on the back, smiling for the camera and can look to the renewed trust of their electorates that they have solved the issue that caused the crash of our financial system that in turn has cost each and everyone one of us so much money. Hurrah!

As the champagne starts to go flat at the end of a long day's celebrating and the last of the stragglers leave the party with ties askew, lipstick on their collar, silly hats on head and worse for wear, we should just ponder for a moment.

Let us do a thought experiment. You happen to know that your company bought a barrow load of sticking, rotten manure and it is sitting in a cupboard somewhere downstairs - a barrow load of manure they bought for $12.3bn when the market for manure was very good. So you think, 'I can deal with this'. The barrow load of manure is not only smelling the place out but, of course, it is sitting as a nasty debt on the company's books as the manure is now worthless. So you offer your company exactly what they paid for it - you would then transport it to a place where they don't mind what manure you want to store just as long as you pay good money to do so. In order to pay for the manure, you take a 10 year loan out from your company for $12.6bn.

You set up a nice company in the place you want to store the manure - the sort of place where no questions will be asked and no nasty hidden taxes are paid and where prying eyes are sightless. In return for the doing this, you resign, along with several colleagues who know as well as you that where there is manure there is money, from your company and they pay you an annual fee of $40m in order to 'manage' the manure.

The loan is a nice one - it is set at 2.75% above the US interbank rate which your company hopes will attract $3.9bn in profit over the course of the loan agreement. Only the interest is paid net of interest paid to the 'investors' in the storage company you have set up - let's call it Protium Finance for argument's sake. This investor income is at 7% of the $450m they have invested in Protium and their interest ranks higher than your company's.

Your company rubs its hands - it has cleared the debt off its accounts and on paper it will receive $16.6bn in 10 years time - it has been able to prove to the world that it no longer has the filth on its books and by doing this deal it appears it has bettered its capital ratio by getting its most toxic manure off its books. Meanwhile, you and your friends at Protium will be returning a sizeable profit to your investors who might be a US bank and a hedge fund, while your company will be paid from the manure's cashflow.

You see the manure could be replaced by toxic debt in this experiment and suddenly it does not look so ridiculous, pointless and downright stupid. Toxic debt has a 'cashflow' based on the assets supposedly. The 'Your Company' involved here is Barclays and Protium has indeed been set up by 45 of their employees who have now resigned to populate Protium Finance.

It does not matter how you account for this, the toxic debt remains a toxic debt and is highly risky. Barclays' CFO, Chris Lucas, stands and tells everyone that this is a good deal as it is producing a 'stable return profile for shareholders' as they rely on cashflows on such debts, so why not restructure them to rely on them and maximise shareholder value?

Protium has a recipe for the future - this will not be the only deal of this nature they will undertake. They will be the manure storage company of the future, state of the art facilities and discretion guaranteed as they operate out of the Cayman Islands.

This deal is nothing but straight forward, rotten manure. You can put your Palin-lipstick on the pig but it is still a pig. This is a deal that is at the very heart of a rotten and deeply flawed banking system. On the one hand, Barclays have 'cheated' the Government and regulators' capital ratio requirement by no longer appearing to have this toxic debt while the new Protium company is making money out of toxic manure fumes.

Have no doubt that this pile of manure/toxic debt will be worth its weight in gold after 9.99 years and by the 10th anniversary of the loan being taken out to pay for, it will be spread over the faces of plenty of people seated close to fans. The cleaning bill for their expensive suits and fast cars splattered by the mess will be picked up by yours truly.

This deal is the template for the next financial disaster and it illustrates why my blog of yesterday is true. Bonuses, and their culture, are not the problem per se, it is the flawed banking system that allows money to be made out of worthless piles of manure we euphemistically call toxic debt. It is the apparent intelligent thinking behind such a deal that defers the bad news to a point far in the future, long after many people will have made an absolute fortune out of the obvious - the obvious being that these toxic debts are nothing more than a pile of worthless manure. And manure is nothing more than manure, yet we will pay a princely sum to underwrite deals of this nature and that is what the whole financial industry now depends on - our enduring and bottomless pockets of money to pay for their profits and losses they make with total impunity.

This is the process of making money out of thin air and it is why bankers are a more aggressive, more risk taking then ever as they can make money out of losses. Does that sound stupid? It is because it is stupid. The massive losses that companies have made, the kinds that bust Lehmans Bros, are being openly traded again in order to make money from them - big money.

We haven't yet got a handle on how much this financial disaster will cost the world going forward but the bankers can tell you exactly how much profit they will make out of it. The response to this by the Treasury Select Committee Chairman, John McFall, merely claims this is 'sleight of hand' - Maradonna would have called it the financial equivalent of the 'hand of God'. Where are Hector Sants and Adair Turner of the FSA, Pinky and the Brain, as this goes on in full public view? Probably taking it easy talking up their futures with other agencies all around the world on large expense accounts and guaranteed bonuses.

Where are the politicians? They are still at the party congratulating themselves that they have stopped the financial world in its tracks - bonuses are curbed, problem solved.

Come again, what was the problem then, chaps?

Playing The Percentage Game

Two more more soldiers died recently in Afghanistan bringing the total to 216.

It's easy to forget in our everyday humdrum lives the kind of fear that must be going through the minds of the brave young men in our Armed Forces in Afghanistan. It must be hard for them to block out the mathematics of their situation. If you are a soldier who is sent out on patrol either on foot or in an armoured vehicle, then you know that the chances are that if a bomb goes off near you there is a very high probability you could be killed or, at best, hurt or maimed.

The percentages involved are frightening. You do not need to know the fundamentals of probability theory to know that each time that you go on patrol in Afghanistan, you are risking your body and possibly your life. The more often you go on patrol, the more likely you are that you will be a victim of a roadside bomb and you may also know that being in an armoured vehicle as opposed to be being on foot protects you only a little more. While it may be comforting to know that each time you go on patrol that you are subject to the same odds of being hurt, the mental anguish tells you that if it hasn't happened yet, then the chances are getting shorter that it could happen - it's human nature to think that way; the same as you may think that by continually buying lottery tickets you stand a better chance of winning.

You can easily work out the percentages of how likely a soldier who patrols in Afghanistan is to be hurt or killed. We would not like to think about it. If the chances were similar for us getting up in the morning and being run down by a bus, we would not venture outside because we would be too scared.

Politicians are very glib in the way they talk about a fallen hero who was brave but they do not know the half of it. No amount of money, even a banker's wedge, would get me to run the same kinds of chances/risks of being hurt as those soldiers do.

The odds are stacked against them. That they venture out each day to patrol in the name of our country is extraordinary knowing how the dice is against them. Meanwhile, our valiant politicians cannot even get them the right kit, the right kind of armoured vehicles or enough air transport to decrease the odds.

It might have been more humane for them to have just diverted a fraction of the money they so willingly and unwittingly spent on bailing out rich bankers on equipping our brave armed forces to do the job they sent them to do. But saving their careers was more important than saving lives.

I couldn't do the job our brave soldiers do and I falter to find the words to express my gratitude and respect for them. I could do the politician's job easy enough - but I would make a very bad one as I have a conscience and my vote could not be bought.

Spare a thought for our boys in Afghanistan.

When Does A Bonus Drive The Right Behaviour?

The front page of the FT yesterday had an article which said that en masse 30 people from Societe Generale's Hedge Fund activities in France resigned and formed their own Hedge Fund.

The whole saga was triggered, allegedly, by the French President's stated desire to curb the bonus culture in financial institutions specifically by limiting the percentage of profits earned which can be set aside for bonuses. Defenders of current and future bonuses in the City, like Barbara Knight of the British Banker's Association (BBA), would argue this would be a growing trend if bonuses are curbed meaning that extraordinary 'talent' would migrate to other places or set up their own businesses in order to maintain their earnings.

I am not sure how much bonus was in question about these 30 individuals at Soc Gen but I think it is safe to assume that it is more money in a single year than most of us would earn in a lifetime. That sort of frames the context here. We are talking incredible amounts of money. This is only a snapshot of an industry that rewards a comparitively small number of their workers with more wealth each year than the average weekly lottery pay out in the UK. It would be easy to trivialise the work that they do - I would venture to say that their jobs are hard, require incredible levels of dedication, aggression, some skill (come on, give them some credit) and specialist knowledge and I am sure also that the work is highly pressurised. We have all seen the films and TV programs about these types of job, the peer pressure is immense, the relentess pursuit of profits is huge and the potential rewards are fabulous leading to a lifestyle few of us can comprehend.

Perhaps if we knew the kind of pressure these people worked under and the level of specialist 'skills' required to do their job, we would have some sympathy with the 'Soc Gen 30' who seem to be martyrs for the cause of freedom of the right to earn in the world of finance. Is their loss to Soc Gen going to change the balance too for the French institution? Will it affect France as an economy? These are important questions as we deal with the concept of bonus and its culture in order to understand how we deal with the issue in future.

We need also to ask ourselves, if the incredible bonuses which have been earnt, say, in the last 12 years had not been available, would the financial world have been any different than it is today? Would the Credit Crunch and the fallout which we have suffered ever have existed if such levels of bonuses be available?

It's an important and fundamental question on a very complex topic.

Many entrepreneurs' memoirs say their commercial acumen was evident at very early ages. People like Richard Branson started making money when he was a schoolboy. He is today the epitome of the successful man in Britain, perhaps only dwarfed by the bizarre pedestal on which Lord Sugar is placed as some kind of Enterprise Tsar who openly ridiculed his own Viglen products with Ratner-style comments and whose business practices have their own war stories, some of which I can attest to. Clearly, success is only measured by the money made in that context as surely Sir Philip Green could not have been knighted for paying himself, via his non-domiciled wife, a single one-off dividend of £1bn in a year when his company earned less than a fraction of that amount in profit. In fact, it is not only the fact that people are revered if they have a great deal of money, we do not care how they made their billions to be idolised by would-be entrepreneurs. Perhaps this is human nature.

There is also in innate desire within such people to keep earning more and more fabulous amounts of wealth even though they have more money already than they could ever spend in their lifetime. What makes Warren Buffett get up each day or Bill Gates? What makes Philip Green want to buy another company? It would be like me winning the lottery then going to the bank to raise a loan and then spending the loan on buying more tickets. Some of us know when to quit when we are ahead, the knack for these people is to keep on going and making much more. We all want a steady rise in our eranings but this is at a much higher level.

You do not have to look far to understand that bonuses are woven deep into our society. Hardly a job in Britain, particularly in the private sector, does not have an element of the total compensation available marked as 'bonus or commission' - the part of the annual remuneration which is termed 'at risk'. You can also look at the public sector and see a great deal of evidence of the same culture at work - only today there is an article about head teachers being paid sizeable bonuses and even 'golden handshakes' for starting jobs in a very similar vain, although the figures involved are orders of magnitude less, as the world of finance. In the world of teaching, there are zero profits to be made as in the same way as in the world of finance but there are Government targets to be hit and that's where bonuses were and are still designed to attain.

I am a sales animal at heart and a portion of my attainable earnings each year has been driven by attaining targets - in some cases it has doubled my annual salary. From the web 1.0 era I also had stock options which came to nothing but at one stage I could have speculated about possibly paying off my mortgage if not more if things had gone right. However, in all situations, if I did not reach minimum target levels or if the business collectively suffered then my bonus/commissions and stock options were completely at risk, if worth anything at all. In many schemes it was normal to have 'clawback' mechanisms that adjusted automatically my bonuses over a year-to-date performance so if one good month triggered a bonanza and then there was poor performance, over time I earned only the average amount. Such schemes are commonplace and can be very complicated, often have large caveats to reward specific behaviour and not unwanted ones and even be taken away at the discretion of the company for whatever reason they dreamt up. Some schemes in the IT business could see SAP or other big ticket software salespeople earn over £250,000 a year in total remuneration while in general people could have anywhere from 20 to 60% of their overall package geared on achieving certain targets. I am not talking about anything unusual which has not gone on in my business for a long while.

This is generally acknowledged to be a successful system - you pay for achieving but you don't pay for not achieving - some companies do get this wrong but that is in the minority. Also, in general, it has promoted the generation of profits based on product or service sales which have added value to the customers who bought them - and this is critical in our analysis. In the public sector, when profits are not at stake, then other performance measurements and targets are in place. Some of these are just silly as they are often handed out for no more than someone doing what is on their job description and that can lead to people believing that bonuses are some sort of guaranteed element of their earnings which in turn can lead to big issues when a recession arrives.

But the general principle is the same - in Britain today, bonus culture goes far, wide and deep in both the private and public sector.

So why are we so inflamed by the bonuses in the financial world? The Soc Gen 30 would argue that they are high performers in their field, they might argue that they have generated €billions in profits for their company, they might argue that they are the 'best in class' people in their field, they might even argue that they did not cause the credit crunch and associated losses and indeed, during that time, they continued to generate profits possibly. I am sure that this will be the basis of argument for the majority of traders in the financial world - it was someone else who lost the money or management's fault for not covering the risk. And we are talking $billions and billions of profit. In fact, the amount of money allocated to bonus pools is actually a small fraction of the kind of money these financial companies have earned - let us not forget that they have also distributed a great deal of wealth to their shareholders while handsomely rewarding other sorts of investors like bondholders. The base argument here is that such incredible profits cannot be generated without the vast bonuses available to be earned down at the traders' end and the management above. One does not go without the other. Before we argue otherwiese, you have to agree with the basic principle as it pervades in all business and even the public sector as I have argued above.

Bonus drives profit - that's the credo.

Well it is not always true. In the case of the financial world we have learned that it is not true. And let us be clear here - the incredible amounts of profits earned in the last 10 years by banks have all been written off with few exceptions. Most financial companies in the main stream of commerce have had to write off all, if not more, of the profits they have made over a period of around 10 years. If companies have not already done so, i.e. those who have not made such huge losses, then they probably will at some point in the future. The reality is that the financial system has regularly given back the proceeds of periods of huge growth as huge losses, and some more learned than me would argue that the only stable underlying profit banks make are from general lending, mortgages and insurance products. Almost all profits associated with investment banking or hedge funds are regularly wiped out.

But in those periods of huge profits, a comparitively small number of people make massive bonuses. It could be argued that our financial system today, our prosperity as a world even, cannot be as we observe it today without the world of finance driving such massive profit cycles to end in bust. In the last 10 to 15 years since deregulation of the financial system we have experienced an unprecedented period of 'sustained growth'. We have found, to our cost, this has been a false boom. Yet in that period, bank executives and traders have earned more in bonuses than they ever have. And as the trades got riskier, they earned more.

In fact, they are still doing so and more aggressively as now they have the safety net that if they do make huge mistakes that incur amazing losses there is an unlimited fund available to pay for their mistakes - they have the freedom to trade as hard as they like, risk more and get paid more without fear of losing. It's like playing the casino with fake money.

And these people are already fabulously wealthy. Many earn each year in bonuses the equivalent of an individual like me winning a single lottery jackpot which is a once in a life time experience and has a chance of one in 14 million of occurring. For these people, playing the lottery is a mug's game, they have a far more secure way of winning. It's called using other people's money and the financial system.

While I would expect, quite habitually, that if I did not acheive my goals that I would not get paid a bonus or, as in the case right now, I would not get paid at all, these people have no such level of accountability. The financial system has just been bailed out to the tune of $15trillion globally and the measure of accountability has been almsot zero with the odd exception and in reality the actual collapse, far from wiping out the stupid banks that caused, it has actually primed them again to believe they can make money out of the losses they incurred.

Think about that last statement as this is the essence of the argument. By wiping the slate clean for all these people and allowing them to keep their methods of working, they will make $billions on the fact that they made the losses. Lehman Bros derivative positions worth just fractions of of their original values are now potential gold mines in the eyes of financial people. Toxic debt will be worth billions in speculation that there are plenty of potential good bits in there. Bankers already speculated before the fall of the system that repackaged Government debt would be worth trillions.

Why? Because we underwrite the whole thing and these people simply do not get it. You cannot make money out of nothing - someone, somewhere pays for it. You can buy a derivative from Lehmans for 20 cents in the dollar without someone someone else paying for that loss. When Barclays bought the assets of Lehmans for less than $2bn, it has been now alleged that the structure of the deal allowed them to make $8bn immediately. We can sit here in awe that such daring and brilliance can occur or we can stand up and call a halt to this fantastic game that is being played with our money.

The point about bonuses is that it drives behaviour. In the public sector it makes people do only the the things that hit targets - if it is reducing waiting times in Accident & Emergency at hospitals then people will be registered minutes after they arrive and then wait hours to be seen by a medical person because the statistic records that they are not really waiting at all. If the target is 20 operations per day and ingrowing toenails operations take 30 minutes but heart surgery takes 5 hours, then only ingrowing toenails get done by surgeons skilled to save lives not nails.

You get what you pay for - you reap what you sew. You gear people to take incredibly high risks without fear of accountability or losing their bonuses by selling products of no real value then they will take ever more riskier options and they will dream up ever more creative ideas to create bonuses knowing full well that such profits that are earned have to be given back at some time as they are literally conjured out of nothing.

There is a price to pay. As numb taxpayers we can watch in awe as £1.5 trillion is added to the National Debt of which by 2014 the interest alone will be £60bn which is equivalent to the entire annual education budget. Do we scrap education or raise tax to cover it? You guessed it - and the whizz kids in the City will employ clever accountants so that neither the companies who incurred the debt or the traders who engineered it pay anything like their fair share of that £60bn.

It is that perverse. We sit here glibbly reading about the whole situation and we think that because we think we understand bonuses that the financial system should have them, it is just a matter of how much they are. But we don't get it as we are the only schmucks who pay for them - they are not, over the long term, paid back for the sustained losses made; these bonuses are paid for by the taxpayer to cover the losses that are really being made.

But banning or curtailing bonuses is not the answer as the Soc Gen 30 have shown. They simply will up sticks and go elsewhere. The economy does not lose out, France does not lose as they simply do the same eleswhere - maybe Soc Gen loses for a while. The point is that until we change the system at the fundamental level to properly define what these people can trade, then will we start to get to pay them for doing things which really help our economy rather than just helping themselves.

The time has passed when we could do this and so the new course has been set. The financial world is at the trough making vast profits out of the losses they made and maybe we can curb the bonuses but we cannot stop the damage they are causing.

It's like building your house with bricks of poor stone, it does not matter how much you pay for them, your house will fall over sooner or later.

Bonuses are not the problem. It's the industry that is the problem.

The Stakes Are Getting Higher

President Obama is determined to do something, Gordon Brown is ‘appalled’ but no one has seemed to have gotten the real message of what is happening in the newly invigorated financial system.

More intelligent people than me, such as Joseph Stiglitz, the Nobel Laureate in Economics, have pointed out that the bank bailout has effectively wiped the slate clean for banks and they can now resume their high risk activities with new, cheap, even free money. In fact, Stiglitz presents the argument I put forward yesterday with real credibility – that now banks have been written a blank cheque they can gamble more freely and with less conscience as they now know that the Governments will never let them fail. With the odd exception as we celebrate Lehmans Day.

Stiglitz asserts that Obama’s failure to rein in Wall Street will lead to further disasters and we hear only talk of potential curbs on bonuses and tighter regulations but not one single country is prepared to take the lead as they don’t want to be the loner that effectively rings the bell on their financial centres by spoiling the party unilaterally. All the big leaders are talking up the importance of the forthcoming Pittsburgh G20 meeting but the chances of getting any consensus for concerted action is slim. Someone, somewhere will sense an opportunity to win on this and it will only take one to not toe the line.

In a snippet in the Guardian yesterday, Bethany McLean who authored the book ‘Enron: The smartest guys in the room’, argues that far from financiers losing too much, they in fact lost too little. Meaning, on a personal and even company level, we bailed them out to an extent that it did not hurt – not one iota. In fact, like Stiglitz, she argues, with the exception of Lehmans, the lack of loss has embolden banks to be more aggressive in their ‘talent acquisition’ activities, salaries and bonus schemes as now the stakes are much higher and the potential rewards much greater as we exit the financial crisis and experience the inevitable bounce back.

Both of these observers claim that there should have been wider losses than Lehmans and in the UK there should have been at least one, if not more of the financial institutions we so gleefully bailed out that should have been left to fold. Only then, they claim, could the banks have really been convinced of the folly of their system. In the real world, bondholders, shareholders and those involved in the derivative contracts should have been left to face the consequences of their mistakes as most of the casualties in the business have done during this recession. By allowing these special cases we have given an unfair business advantage to companies who already have business by the short and curlies. The same people who would have no qualms about shutting down companies who default on their loans to them. However, that opportunity as been missed and now all we can talk of is curbing bonuses when everyone knows that banks will find a way to pay the high rewards for the high risks, somehow.

It means that banks are more than ever gearing their strategies and reward schemes to short term profits. This newly fine-tuned mindset is based on the simple maxim that if there are incredible short term rewards to be gained for taking huge risks which ultimately makes the rest of us pay for them in the long term, then unless there is an obvious barrier placed, they will take them. Banks are now working in the secure knowledge that we cannot let them fail and that they will get their free rein as Governments are so dependent on them to sustain economic growth. In short, the Governments want the rewards of the high risks too and are prepared to stake our taxes as collateral should the bets not come off. It is a highly dangerous joint strategy and, while the growth figures may look fine in the short term, in the long term it means that we are all progressively worse off. Amid burgeoning deficits and borrowing, there will be ever greater cuts in public spending and higher taxes in order to pay for all this, while the business world will be a great deal more uncertain with much higher unemployment.

Some argue that as early as 2010 could see the next financial crash, we can only hope that is too early as Britain will not have peaked in terms of unemployment by then and the effects of cuts in public spending to reduce the budget deficit will have not even kicked in. There could only be one course of action – the ‘TUC way’ which is to raise taxes, and then some as the need for cuts would be immediate and huge. While the TUC has a point about the super rich avoiding paying tax, to the tune of perhaps £1bn, it is still a drop in the ocean and it will mean higher tax for all above average earners under any such new scheme. One can only hope that we can get a few years in of decent recovery before the next crisis hits but it surely will.

The only effective way to stop these high risk bets from being placed would be to go to the source of the issue which is the free flow of money based around derivative products which are effectively a work of fiction. Only when we take away such products from the system will we get some stability in it which can be sustained. It will inevitably mean a slowdown or stagnation in growth but you cannot have it all ways – if the system has no real growth in it, you cannot just create it based on no good principles. It is better we find a way to grow our economies based on sensible risk than to get ourselves repeatedly into the same mess while just a small number of people reap incredible rewards for which we have to pay over the long term.

The wide consensus of opinion is that political leaders have learnt few lessons from this economic crisis and that their collective inaction has allowed banks to gear themselves for even more risk. On the anniversary of the Lehmans crash, we have the bizarre sight of the restructuring adviser for Lehmans, Alvarez & Marsal, putting the remaining Lehmans funds back ‘in play’ and they have hired many former Lehmans traders to do so. It is not just a high risk strategy, it is totally counter intuitive to the role of liquidators whose sole purpose is to maximise the remaining assets to make some return to creditors, shareholders and the like. It is as if people view the remaining monies as lost anyway, so they may as well buy a bunch of lottery tickets or back a horse at the 5.30 at Kempton Park. It is that stupid but it is precisely indicative of the new era we have created. Far from learning from their mistakes, the banks think they now have the secret formula to beat the casino. Only there is no formula but there is an unlimited benefactor who will supply all the money they need should they incur incredible loses – the taxpayers. They are now, in their own eyes, unbeatable.

The other obvious learning point from the Lehmans crash that has not been heeded at all is that banks build up their structure like an intertwined morass of interdependencies which makes any kind of proper accounting and scrutiny almost impossible. Lehmans had a web of over 3,000 companies which owed each other enormous sums of money and we have the idiotic situation of British subsidiaries suing American ones for hundreds of billions of dollars while liquidators try to unravel the ball of string that was Lehmans structure. It is a feature of the whole financial industry to build such impenetrable webs and makes the nirvana of banks having some kind of ‘Living Will’ a complete pipe dream. There is a strong case that the situation has got over complicated and is designed to keep prying eyes out and to shield the fact that banks are not really making any profits at all but playing some over elaborate game of ‘fantasy trading’ in order to generate virtual profits. It all looks great on the computer screens and spreadsheets but does not have the same credence in the real world.

As I sat on the plane at an unearthly hour, the music over the tannoy was ‘Road to Hell’ and there was prophetic line in there about credit being just bits of paper which I forget but it seems very apt – it goes on to say ‘This ain’t no technological freeway, this is the road to hell.’ I’m sure it wasn’t written with all this in mind but it might just apply.

It will take a bold politician to break this Mexican stand off as the G20 leaders all look at one another to get a nod of synchronisation before they all move together in perfect harmony. It will be like herding cats. Even then, I think we will barely have paper over the cracks rather concoct real remedies to the ills of the financial world but I believe that’s because they believe they cannot afford to change it and sacrifice growth.

In this foolish and unholy alliance, the bankers know they have the upper hand and a blank cheque. We have created the conditions for catastrophic failure for the future.

Consumer - Know Your Rights

There is a terrific article on the BBC online Magazine which I refer to. It highlights five consumer laws you should know when buying goods.

With it comes a few horror and good stories from punters. I am sure we can all relate a few stories about buying products and what the article shows is that you need to know your rights.


Travel


I do a lot of travel and the last few months two things have affected me.


1. Eurostar


I took a trip to Paris and that included a meeting in Lille. So I bought a ticket to Paris returning from Lille so I caught the SNCF train to Lille from Gare du Nord which incidentally is an identical train to the Eurostar in every detail. The Eurostar tickets were Business Class, fully flexible and I noted there was no difference in the price of a return ticket from Paris or the halfway point which is Lille - ah, well you pays your money. My meeting at Lille ended slightly earlier than anticipated and I was able to catch an earlier Eurostar that had coincidentally come from Brussels not Paris. The first thing is that there is no special facility at Lille for Business Class like a lounge. Then when I got to my seat on the train there were only 3 other passengers in the carriage and no one came through with a drinks or meal service. Eventually I had to buy some water and ask for some service. A person came through set out the meal table and then did not return.


I complained to Eurostar and it took weeks of wrangling as all they wanted to do was to compensate £30 for the missing meal. However, I argued that the ticket was Business Class and several services were missing which made the ticket missold. Only when I said that I was referring the matter to a solicitor under my rights as a consumer did they act - then suddenly they went over board and sent me a return ticket to either Paris or Brussels, Business Class. I had not asked for that or expected it, but had clearly touched a raw nerve.


2. Air Travel - Budget Airlines


I recently had to travel to Germany and, late as usual, I could not get back to Dusseldorf in time to catch my flight home and so had to make for the nearest airport which happened to be Ryan Air hub at Frankfurt-Hahn airport. It should be noted the 'Frankfurt' title is pretty stretched as it is over 200km from Frankfurt, about as far as Birmingham from London. No matter, it served a purpose. I called to buy a ticket but as I was inside a 4 hour limit to buy either online or by phone (I didn't know such a limit existed), I had to go to the airport to buy the ticket. I was quoted €239 over the phone which I was assured was the all-in price. When I got there, the price was €354 and I had to check a bag in for extra, I had also to pay for automatic check-in which did not work and priority boarding, the total was closer to €400 for a single flight.


It was late by several very sweaty hours and most of the time we had to wait at a packed gate. It went over the 4 hour trigger to get looked after but nobody manned any desks for Ryan Air and we were told to call them when we got back even though there were small families with thirsty children. When I got back I was told that you had to write in as salespeople didn't handle customer support calls and all is done in writing. Naturally I have received no reply.


For budget airlines, there is misconception that it is implied you only pay for what you get. That is not true - all airlines are governed by the same international compensation policy which have clear guidelines - Ryan Air get away with it as no one calls them out on it while they do not have staff focused on dealing with customer problems or complaints. There is a 'like it or lump it' and 'you pay peanuts, what do expect?' policy in action.


Buying A Car


Some years ago I bought a BMW 7 series - why, I don't know. I went into the garage to buy a 5 series and ended up with an exceptional deal on the 7 series that had languished on the showroom floor. It was an odd car - luxurious and annoying at times but very nice to drive. After about 4 months a recall letter came through and the engine management software needed a bug fixed so I booked the car in to have it done. I was expecting to pick it up later that day but got a call - they had done the fix but there was a problem with the transmission or gearbox. They needed it for another day.


4 weeks later and I still did not have my car back. They had put brand new software, put all the settings back to the factory ones, and still the transmission was stuck in 4th gear. They then tried to get me to take a replacement car for a while but I went to the garage to find my car and found it with it's transmission on the floor beside it, laid out like animal entrails. I turned to the manager and said I wasn't going to have that car back - it was clearly not going anywhere fast let alone back to me. It was not fit for purpose, i.e. driving.


There was long exchange of letters, some help from the Citizens Advice Bureau and a solicitor. In order to stop adverse publicity and have the law poking around, the garage agreed to replace the car with a new one and said I could have any BMW to the same value. I went for the 645i and applied the same discount which sent them into fits as they could sell those quickly. After some wrangles and legal threats, they agreed and I got my new car.


The key factors here were that the car was less than 6 months old and was effectively 'not fit for purpose' in that I couldn't drive it and they had changed the transmission once and could not get it to go. The law was in my favour within that 6 months period. The second thing was that it was the garage, not BMW who had to remedy it. In fact, BMW did not want to know and made it absolutely clear to me, in very legal terms, that they were not responsible for selling me a car not fit for purpose even though it bore their name and they manufactured it. It was entirely the dealer's responsibility.


Finally, it does not matter how big or expensive the item is, if it is not 'fit for purpose' you have six months to exercise your rights and demand your money back or a new product - your choice.


Buying on the Internet


I recently bought a new computer for my business on my credit card - it was with PC World Business. When it arrived, after a few goes, the power block failed. I phoned Sony as PC World said it was a warranty issue. Sony said they would send a new power block to see it it fixed the problem. Clearly this was my work PC, and so I exercised my right to reject it under the 7 days cooling off period you have for any goods or service bought on the internet.


In praise of PCWB, they were excellent and made no quibbles. They took the product back, collecting and delivering the new one of my choice at the same time at no extra cost and credited the full amount on my card within two weeks (with a bit of prompting).

PCWB are a good company - there was never any question of taking the product back for a full refund and the service was superb. I didn't replace it with another Sony, I bought Lenovo instead and it is excellent.

Shock News - Brown Is Appalled

Now they are in for it. Gordon Brown has gone public on the fact he is 'appalled' having found out that some financial firms are continuing - or even extending - their bonus culture.

The world must be a constant surprise to poor Mr. Brown. I mean, he thinks and says one thing and people do the opposite. He observes how things should be and then, blow him down with a feather, things behave very differently. It must make him very excited about getting up each morning as he would keen to find out what else has happened he didn't expect.

In the case of the banks, he clearly thought that because all those executives and traders who had been making millions had run up against a wall and lost the lot, that they would feel a great deal of contrition and not want to go through it all again and earn even more money than before. How it must have shocked him that, after he saved the world, and used the hard earned cash of his loyal and worshipping public to bail out the failed financial people that they did not kiss his backside for saving their rotten necks and then all become the financial equivalent of monks - living off the land, wanting no rewards save the joy of living, weaving baskets, treading grapes and distilling fortied green liquors.

Now it has come to his attention that indeed bank executives and other financial people are not behaving the way he had anticipated. In fact, the moment their companies were saved by the global $11 trillion of bail outs, of which Mr. Brown contributed £1.5 trillion on our behalf, it seems that they immediately whooped it up and started all over again. It turned out that the credit crunch had not dried up the flow of cheap money after all - these financial genii had found a new source, the public. Even better, they did not have to seek their permission to get the cheap money, there were no rules or nasty contracts attached, indeed there were no real requirements to pay any of it back - all they had to do was to lose a load of money and the public would continue to pay. If anything, the financial world had a new instrument that allowed them to take even more risks and try to earn even more money which they could pay themselves as they had discovered the one thing that was missing from their bold scheme/scam to make money - an unlimited underwriting of all debts they incurred should they fail, now or in the future.

Mr. Brown must be shocked indeed. After all he gave all that money in good faith. He did not ask for seats on the Boards at banks he had 'invested' in, instead he wanted them to carry on with much the same staff as before as he was convinced they would not want to risk all that again. He did not go to the regulator and sack him for total incompetence and sleeping on the job as that would be churlish - instead he asked the same incompetent fool to write up the rules again with slightly different language and give them a new grand name - Macroprudential Regulation - which would help make it abundantly clear to the public how banks could not overstep the mark again. The fact the public had no idea what the title meant but could plainly see that none of the regulations had changed did not seem to occur to him. It must have sounded different when that hopeless fop, Lord Turner and his willing but intellectually challenged sidekick, Hector Sants, had presented it to him like the characters from 'Pinky and The Brain'.

You see Mr. Brown has a head for dates. He knew that one year ago from today, Lehman Bros bank failed and was allowed to collapse. Inside, he knew that was a massive mistake by the Americans as he had stepped in and saved all the UK banks. Not one of them had been lost and every saver's bit of cash and mortgage had been saved. He even went after those nasty Icelanders who had 'stolen' the savings of many people including our Local Authorities who also had played gambling games with people's money. It came as a nasty shock to Mr. Brown that in a world of derugulation and globalisation, which he decreed should be saved at all costs, that if British subjects had put their money into foreign banks who went bust, then they would not get their money back.

15 September 2008 must have been a dark day for Mr. Brown, and as he went to bed that night with his mug of cocoa he must have thought, 'Now there's something new I learnt today - what went up must come down, particularly if it was traded on hot air.' Sadly, he failed to connect the very clear dots. The financial system he was hell bent on saving was only being set up to carry on, there was no understanding that the system was flawed at its very heart and merely giving the cancer victim an aspirin may only stave off pain for a short while but it does nothing to solve the problem.

But now he is back and fighting. The new eco-friendly light bulb has gone on in his head and he has decided that banks now must be regulated more vigorously. He is going to fly to Pittsburgh in his superman outfit and tell those G20 leaders exactly what for and demand that the world once again follows his fearless lead. In aggressive language he has said:

'Now I will want an agreement - because we are talking about banks in other countries as well as banks in Europe - at the G20.' Clearly Mr. Brown has read the Ladybird version of the banking system and discovered that other countries have banks too - this globalisation thing may have some credence to it, you know.

In a rare moment where he admitted that he was less than perfect, he said. 'It's true that the mood of opinion in Britain was that we needed less regulation and not more. Now we've found we need more.' It was a clear 'No sh*t Sherlock' moment and he obviously believed he is the only world leader that had discovered that banks were out of control in the past - thanks to his own personal 'light touch' approach because he did not want the poor lambs to become uncompetitive and leave the City of London as a third rate financial centre where people came for loans of last resort only.

'We should have all been supervising more,' said Brown sternly as he neatly deflected the blame to fictional others whose role also was supervising even though it was his fault that the FSA stuck their feet up on their desks and played online poker while the banks melted down. Now he wants us all to feel we can trust banks.

At this point, it seems that Brown has lost touch with reality. You see, the public never trusted banks as they watched young numbskulls make millions by creating and trading products that served no earthly purpose and had lost all connection with the assets they purported to represent. In our feeble way, we had already guessed that the banks were trading blocks of nothing and pretending they were worth something. We also know that the same is happening again. It must come as another terrible shock to Mr. Brown that banks are buying former Lehmans open derivative positions for anything from 10 to 50 cents in the dollar in wild speculation that when the liquidators have unravelled the mess, they might find some of them are worth something.

Now, maybe I'm being naive here. We have just bailed out the whole system, we have collectively paid trillions to do so, covering the immense losses that allows liquidators to write down such derivatives to virtually zero because we allowed such contracts not to be honoured - a debt obligation was forgotten about, a default swap was allowed to disappear. Now, in the aftermath of the largest corporate failure in his history, we are going to allow the vultures in the banks to pick over the failed pieces and find small nuggets of gold in order to make money again trading the very same products that ruined us.

We must be stark raving crackers, the lot of us.

It isn't regulation that is needed - Yvette Cooper's 'Janet & John' book on the financial system does not quite suffice in situations like this. The banking system needs a fundamental reform and the time to do it was when they needed the money to survive as they would have had no choice but to comply. Instead, the whole gravy train is back on the tracks again, the banks are making money, the leaders of the countries are satisfied disaster has been averted and the system is slowly reviving. The banks have all their power restored and the very people who ruined us are being paid for their thoughts and leadership on the solution. It is not a bit of wonder that they do not want change and now they are once again 'Masters of the Universe' and the types that Blair, Mandelson and Brown bent their heads and so very gently kissed the backsides of before, are once again calling the shots.

Mark my words, there will be few constraints applied to the system - reform will not come and companies will be allowed to make money out of Lehmans' losses. 15 September 2008 was a very dark day for the world generally. 15 September 2009 is even darker because we have just reset the House of Cards to be puffed over by the gentle waft of a butterfly's wings - again.

A Long, Hard Winter Ahead

The hot air may be copious and the fervour close to boiling point, but the prospects are of a long, hard winter of discontent.

There must be an election by June next year, that cannot be avoided, unless Mandelson deposes Brown and instigates some kind of Putin-esque review of our Constitution that would allow for another unelected official leading the country this time without a General Election. Perish the thought - I hope.

The mastermind himself is expected to rally the country to the Labour cause in the next few days with a stirring speech to some expensive and unnecessary Think Tank that he could have written himself which will warn of hard choices ahead and that all Labour spending commitments are to be reviewed. It comes hot on the heels of the emergency measures which brought forward spending schemes in the face of the economic crisis and now that we have blown more money than a Premier League team owner has in bailing a slim minority of super-rich people out, we can now look forward to having a more frugal future because of it.

Interestingly, Mandelson himself, in a massive volte face on the last 12 years of Labour governing, has said that they can no longer solve problems by 'Throwing money at them'. If only Labour had thought of that before wasting so much money without thinking things through on health, education and defence to name but a few, but the biggest waste has been the bank bailout itself where no one will ever know exactly how much was required to solve the issues - they just kept throwing billion after billion in a frenzy of pure guesswork, with zero accountability to the poor fools who had to stump up for the bill.

It will be Labour's enduring legacy - the biggest spenders of money on record and so little to show for it.

Spending cuts are necessary without doubt. This year's deficit alone will be £175bn and we are forecast to have a National Debt of well over £1 trillion by 2014, and that's just on last month's projections by Alistair Darling who has been having a terrible problem with his calculator of late. We can expect around 10% cut off the budget in short order and that means many services will be hit.

In retaliation, the TUC has already issued stern warnings that it does not share the Labour view and will fight any cuts in services, particularly if it leads to more unemployment. In fact, by the TUC's estimates, if Labour get their way, unemployment will rise to a staggering 4m and we are already back at the heights of unemployment last seen at the end of the last Conservative Government.

Meanwhile, the Conservatives themselves are keen to start at the top. They have a vision which is quite appetising - less Politicians, less spending on bureaucracy and fewer layers of fat administrators on magnificent pension plans. However, as always with the Conservatives, it is short on detail and put together by a few former public school swots who keep shouting 'I know, I know!' with new zany idea. Meanwhile, school sneak, George Osbourne, stalks the room looking for those not paying attention with a length of Bunsen burner hose. The policies just reek of half-arsed schoolroom projects which just have a nice thought but are probably totally unmanageable let alone unachievable.

What it all points to is that we are going to have an unpleasant Winter of party warmongering with soundbites probably even lobbed into the Queen's Speech while the TUC continue to threaten and spit with venomous possibilities of strikes which can only make matters worse - but you cannot preach logic to a Trade Union. Their only recourse is to chuck their toys out of their prams and go on strike which is equivalent to taking a scalpel to your nose in order to spite your face.

Bah, humbug. With talk of a 'false dawn' in the housing markets and 'double dips' on the recession, I just hope that we have some decent Bond Films on over Christmas because I really could do without nauseous comments by Mandelson, Brown, Cameron and Osbourne spoiling my holidays.