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Archives for January 2007

Bonkers banks

Robert Peston | 12:39 UK time, Wednesday, 31 January 2007

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I鈥檝e spent a disproportionate amount of time recently talking to the chaps who run our biggest banks. And in their relationship with government, they are going through a very interesting phase. Having for years been persuaded (correctly) that the chancellor, Gordon Brown, was out to get them, they now believe (more-or-less correctly) that he 鈥 and his minister for the City, Ed Balls 鈥 have fallen in love with them.

balls_brown_203.jpgYup, the new Brown/Balls consensus is that the banks are exemplars of Britain鈥檚 economic future, a 鈥渒nowledge鈥 industry where the UK has a competitive advantage. They have shed their angst that the banks might be operating a cosy oligopoly in those bits of their businesses which serve individuals like you and me and also small businesses (or what鈥檚 known as retail banking). For the Chancellor and his brainy consigliere, the banks are to be charmed not harmed.

But here鈥檚 what irks the banks. Just when that lot in the Treasury have become chums, another part of the public sector 鈥 the regulatory side 鈥 is devoting all its energy and resources to biffing them. And it鈥檚 true that over the past few months there has been a baffling number of competition enquiries into various aspect of banking, not to mention a probe into whether specific banks and other financial institutions have been mis-selling payment protection insurance (policies that provide cover against an inability to repay a personal loan).

So here鈥檚 where I verge on acquiring some sympathy for the banks: the banking market in the UK is more competitive than it is in much of the rest of Europe; yet it鈥檚 the UK where the regulators are most aggressive in promoting more competition. For someone like me, there鈥檚 no such thing as 鈥渢oo much competition鈥. But there is a significant cost for the banks in complying with the non-stop requests for information and evidence from assorted watchdogs.

That said, the banks always succeed in alienating me at the last by the sheer silliness of their main arguments against the competition probes.

To remind you, there are two particularly resonant investigations: one by the into whether there is a proper transparent competitive market in payment protection insurance (PPI), which is additional to the FSA enquiries; and an initial information gathering exercise by the into whether the banks levy excessive penalty charges on current account customers who borrow beyond agreed overdraft limits.

The banks鈥 contention in both cases is that these issues are sideshows: that the big and relevant facts are that current account services in the UK are relatively good value (in fact notionally free to most of us) and that personal loan rates are very attractive.

As it happens, I think they are probably right about what most of us pay for current accounts and loans. By international standards, British consumers typically receive their personal banking services (current accounts and loans) at a pretty good price.

But here鈥檚 where the banks鈥 defence goes a bit bonkers. They say (in private) that the sine qua non of free banking is the right to levy steep charges on the fools, knaves and unfortunates who breach their agreed banking limits. And the underpinning of relatively low personal lending rates is the right to stitch up customers on the insurance policies that often accompany the loans. Now, they don鈥檛 put it quite like that 鈥 but, believe me, this is the inescapable implication of their representations.

Their apparent conviction is that they can only make a decent return on capital from retail banking through muddying the water when it comes to precisely how they generate revenue.

They seem to believe that most of us would never pay them a fair price 鈥 whatever that means 鈥 for the current account services we use or for the loans we take out. So we鈥檝e got to be subsidised by those who breach overdraft limits or by those who don鈥檛 mind paying too much for loan insurance.

Now obviously none of us would volunteer to pay more for any services. But standing back from our personal preferences, a market that functions with this degree of hidden cross-subsidy feels profoundly unhealthy to me.

It鈥檚 vital to all our prosperity that the banks make a proper financial return. But for that to depend on the ignorance, misfortune or negligence of a sizeable proportion of their clients can鈥檛 be satisfactory, sensible or sustainable. What do you think?

By the way, the FSA is running the banks a close second for its sheer silliness. Yesterday it fined GE Capital Bank 拢610,000 for PPI sales breaches. But that鈥檚 probably a fraction of what its parent company, the mighty General Electric of the US, spends in just a few days on flowers in its offices. In terms of overall group profits ($20.7bn after tax in 2006 from revenues of $163.4bn), it鈥檚 not even a rounding error, it鈥檚 the equivalent of that 20p piece that dropped down the back of the sofa which nobody can be bothered to fish out.

Of course, GE doesn鈥檛 like being ticked off in public. But guess what? I think it鈥檚 already over it.

Corus: Predicting prices

Robert Peston | 08:36 UK time, Wednesday, 31 January 2007

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On 20 October, Corus, the Anglo-Dutch steelmaker, for 455p per share in cash - or 拢4.6bn in total - by Tata Steel of India. At the time, Corus's board who were advised by the leading City firms Credit Suisse, JP Morgan Cazenove and HSBC -聯 said in a formal statement, that the takeover terms were "fair and reasonable". It recommended that shareholders accept the offer.

In the early hours of this morning, Corus ended up after a tense auction - at a price of 608p in cash or 拢6.2bn in total. That'聶s 33.6 per cent more than Corus'聶s board and its City advisors said was a "fair and reasonable" price just three months ago.

What on earth has been going on here? Did the Corus board, Credit Suisse, Cazenove and HSBC really not have the faintest idea what this business was worth? Just to be clear, they were advising Corus shareholders to sell out at 455p. And some presumably took their advice and sold in the market at prices well below 608p.

Maybe it was impossible to predict that a competing bid would emerge from CSN of Brazil. Corus'聶s advisers told me at the time of the initial bid that the company had been hawked around the world for months and 455p was as good as it was likely to get.

I suppose it is possible that Tata wouldn't have made a formal bid without a recommendation from Corus'聶s board. And CSN might never have come in with its offers if it didn'聶t think the sale to Tata was almost a done deal.

But these events do not reflect well on the ability of a company'聶s directors and its advisers to properly assess the value of the assets they in theory know best. They got it wrong to the tune of 拢1.6bn. Which is yet another illustration of why there are such massive opportunities to make supernormal profits for event-driven hedge funds. Efficient market theory? For the birds.

Equity and charity

Robert Peston | 10:30 UK time, Tuesday, 30 January 2007

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Private Equity's attempt to prove that it is caring and sharing by setting up a new charity has not been the public relations triumph it might have hoped (see what I wrote on 29 January).

If it was intended to demonstrate that uber-wealthy private equity partners are recycling some of the profits they make on buying and selling companies, it is not quite working out that way. One reason is that a chunk of the unimpressive start-up capital of 拢5.1m came from investment banks who were "invited" to make donations. As one banker said to me: "We were very conscious that if we didn't cough up, there would be a material impact on deal flow."

There is no doubt that private equity can have a positive impact on productivity and growth. But its management of what's normally styled as "external relations" is lamentable.

BA: Heavy turbulence

Robert Peston | 10:00 UK time, Tuesday, 30 January 2007

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It'聶ll be precisely 20 years since British Airways'聶 shares started trading as a privatised company on 11 February. And although in many ways its story since then has been one of success in a highly volatile industry, the relations between management and employees seem to have been ossified: by British standards, the company is unusually unionised; its trade unions are immensely powerful; and there appears to be considerable mistrust of management among employees.

In all those two decades, only one BA chief executive, Bob Ayling, tried to confront the power of the trade unions head on. And although he succeeded in pushing through changes to working practices after a painful cabin crew , the cost to corporate cohesion was perceived by his fellow board members to have been too great. Ayling was ultimately ejected from the cockpit. The unions may have lost the 1997 battle, but they could tell themselves they had won the war.

williewalsh_203pa.jpgFor shareholders in BA, the big question is therefore whether the dispute which ended yesterday will make it easier or harder for the current chief executive, Willie Walsh, to respond to the intensifying competitive pressures in his industry. Now for all the talk about consensus and compromise in the aftermath, if I were a trade unionist I would be feeling pretty content. There was overwhelming support for strike action from cabin crew, the company has made concessions in the way it manages sick leave, there'll be an above-inflation pay settlement this year and differentials between the different vintages of cabin crew employees have narrowed.

Now in terms of the financial stability of the company, it's hardly trivial that the settlement improves the prospects for a vital deal to reduce BA's yawning . But it's not obvious that what is arguably the business's great structural flaw -聯 industrial relations that are redolent of the darkling days of the 1970s and 1980s - is any nearer elimination. If I were a shareholder, I might be feeling a little bit airsick today.

Why it's time for business

Robert Peston | 13:15 UK time, Monday, 29 January 2007

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Here and now is the best time to be broadcasting or writing about business. The private sector and the unleashing of market forces across the globe is changing all our lives, mostly for the better, but also (if, for example, you are in the wrong job in the wrong place, or if you've been saving in many conventional pension funds) for the worse.

It's an epic drama called "Globalisation", with Tolstoyan themes: the emergence of great new economic superpowers, China and India, and the strikingly fast dissemination of IT and broadband technologies that have combined to engender rapid (and surprisingly stable) economic growth almost everywhere. They're manifested in news stories on a daily basis, such as this about the angst of the giant mining companies over China's agreed takeover bid for more or less the whole of Africa.

Then there are the great anxieties or our age: that the explosion of cheap credit around the globe over the past decade - which fuelled a boom in corporate takeovers, the explosive growth of and , and putative housing-market bubbles in the US and UK - will end in tears; that the world's most important economy, the US, is excessively in hock (largely, though not exclusively, to China); that the spoils of growth are being unequally shared, within countries and between countries; and that the oil economy's excreta, CO2, is poisoning all our futures.

maria_ap_203.jpgIt's entertainment and soap opera too. Last week's ousting by the world's biggest bank, Citicorp, of a high-flying executive, Todd Thomson - after he shared a private jet with a glamorous US business journalist, , whose sobriquet is the Money Honey - was a sizzler. But the recent turmoil at the UK's second largest company, BP - when its chief executive, Lord Browne, decided to quit 18 months early - was more Shakespearean tragedy, redolent of Julius Caesar.

So I hope that this blog will be a conversation about the important trends, the drama of breaking news, the big business personalities who are now in many ways more powerful than politicians, and - above all - the issues that touch all our lives and affects our futures. It would be surprising if in the coming weeks and months the agenda didn't include:

1) Is Tesco a great British success, the bringer of the good life to millions of consumers, or destroyer of high streets and local communities?

2) Are the high street banks the vital infrastructure of the economy, innovators helping us provide for our retirement, or oligopolists fleecing us?

3) Are small businesses being crushed by the burden of taxation and regulation or is complaining about mortal threats just part of the natural condition of being an entrepreneur?

4) Is the abandonment of final salary pension schemes by companies a dreadful betrayal of their employees or essential for their survival in a cruelly competitive world?

5) Does it matter that the wealth gap between the super-rich and the rest of us is widening?

6) Is it a good thing that unprecedented numbers of British companies are being bought by overseas outfits?

7) What are the implications of the growth of private equity, or the increasing number of companies that are going private backed by specialist funds?

This phenomenon of private equity is utterly compelling. Suffice to say for now that the British-based private equity funds - which are significantly smaller than their counterparts in the US - raised 拢27bn in new equity capital in 2005 (and considerably more in 2006). Now when they buy a company, they tend to deploy 拢4 of borrowed money for every 拢1 of the equity capital they invest. So that equity capital is sufficient to buy companies with a total value of almost 拢140bn.

To put that in context, Tesco has a market capitalisation of 拢32bn, Unilever's value is 拢18bn, and Cadbury Schweppes is worth 拢12bn. So these days only the very biggest businesses, such as HSBC (valued at 拢108bn) can be wholly confident they won't be taken over by private equity - for now.

The ToundhoseNow last week, the eminences of British private equity were out in all their pomp and finery at the most glittering of parties held in London's magnificently refurbished Roundhouse. Only rarely in the history of this nation can so many stupendously wealthy individuals have been gathered in one place. Many of those present were worth many tens of million pounds each, some worth comfortably more than 拢100m. According to a banker, the collective net worth of those at the do was more than 拢10bn.

They were there for "charidy", to launch the Private Equity Foundation, a new charitable trust endowed by private equity's leading firms and individuals. It's part of a slightly belated charm offensive, to show that some of the high returns generated by the buyout of companies will be ploughed back into good causes. So far it's raised 拢5.1m, which is a fraction of what a private equity partner can expect to earn in just one big deal that goes right. "Frankly the charity has got to do a lot better if it wants to impress," said one of the guests.

Now private equity makes its profits by buying companies and making them more efficient. Some of this improved efficiency is fairly simple financial engineering, the replacement of equity by debt in a company's balance sheet (a subject to which I will return in later postings). Some of it stems from cost reduction, often involving job cuts.

buffini.jpgInevitably, therefore, private equity hasn't endeared itself to the trade union movement. And outside the Roundhouse last Wednesday night were protestors from the GMB, who've been targeting one of the UK's leading private equity houses, Permira. The GMB has been trying to embarrass Permira over job cuts at Birds Eye and the AA, two companies it controls (Permira shares ownership of the AA with another private equity house, CVC).

And the trade unionists have focused much of their campaign on Damon Buffini, Permira's managing partner. They've put his face on posters, they've picketed his local church, they've littered Labour's last annual conference with leaflets attacking him. But arguably they've shown poor judgement in painting him as villain, because in many ways he symbolises the opportunities available in a meritocratic UK. He was brought up on a council estate in the Midlands by a single mum, he's black and he went to local state schools.

Today Buffini is probably one of the UK's top five business people. He embodies one of the great debates of our time: Britain as a place where excessive spoils accrue to a tiny minority versus Britain as a place where any of us can make it big. Sadly he won't be taking part in that debate, because he shuns publicity as though it were pure kryptonite.

About Robert Peston

Robert Peston | 09:00 UK time, Monday, 29 January 2007

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Since 13 February 2006 (a date etched forever in my memory) I have been the 大象传媒鈥檚 business editor.

Robert Peston, on the set of the Ten O'Clock NewsThe move into broadcasting was a big one for me, because for the previous 24 years I鈥檇 been a print journalist. My previous roles have included financial editor of the , political editor of the FT and city editor of the .

I鈥檝e won a few awards (including Wincott Financial Journalist of the Year, and the What the Papers Say Investigative Journalist of the Year), and I鈥檝e written a book about Gordon Brown (Brown鈥檚 Britain) which attracted a bit of attention and was described by Sir Howard Davies (the director of the London School of Economics) as being of "unusual political significance".

I鈥檓 a lifelong Arsenal supporter, not one of the monstrous regiment of Gooners-come-lately, but will try to prevent that particular affiliation from encroaching here.

How this weblog works

Robert Peston | 08:30 UK time, Monday, 29 January 2007

It might be worth explaining a little about how this weblog works (and I'm grateful to my colleague Nick Robinson for much of this explanation). When you come to the front page, which you will always be able to access at bbc.co.uk/robertpeston, you will see all the latest entries I have written, with the most recent at the top of the page. Scroll down the page for previous entries.

On the right hand side of the page, you'll see a calendar. When any date on that calendar is blue, that means there was one or more entry published on that day. Click on the date and the page will display that day's items.

At the bottom of each entry are two words - "permalink" and "comments".

鈥 Permalink simply means "permanent link", and is useful if you want to bookmark a particular entry, or send it by e-mail to a friend.
鈥 "Comments" means just that. Click on it, and you will be able to add your comments to that particular entry - more of which in a little while.

Clicking on an entry's headline takes you to that item's own page, where it is printed in full with all the comments which have been published. From there, if you want to go back to the main index page, you can click either the words "Peston's Picks" at the top of the page, or on the word "MAIN" which you'll find on a beige bar. On that bar you might also see the words "PREVIOUS" and "NEXT" - these simply take you directly to other entries in chronological order.

A word about comments

The main thing which makes blogs different from a newspaper column or even TV or radio broadcast is that it is a conversation between the author and the audience. So the success of this blog will depend on you letting me know what you think about the news, and indeed about what I've written myself.

We are aiming to publish as many comments as possible in this weblog, though unfortunately we can't guarantee to publish every message you send, and they will only be published after we have had chance to read them first.

Try to keep your comments short and relevant to the blog entry you are commenting on. As you might expect, we won't publish e-mails which are abusive or offensive.

You should also be aware of our privacy policy, which, for technical reasons, is a bit different from our usual.

One other thing...

I also want to say a word about RSS. You might have seen a little orange button with these letters on other 大象传媒 News pages and on other websites, but you might not know what it's about.

Put simply, if a site provides an RSS link, it means you can see its entries in a much quicker way than coming to the website. You can, for instance, see an automatically updated list of headlines in your "bookmarks" folder, if you use an internet browser such as Firefox. Or you might use a specific program to browse lots of sites quickly.

There's lots more about how RSS can make browsing the internet easier on .

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