大象传媒

Top of the in-tray for the next Chancellor - who'll probably be - is a momentous decision of absolutely no interest to most of the electorate.

It is whether to amend Gordon Brown's cherished sustainable investment rule. Yawn.

That's the rule which limits the national debt to no more than 40 per cent of gross domestic product - and was put in place by Brown in 1997 as part of his plan to prove that Labour could be trusted as steward of the public finances (all previous experience of Labour governments to the contrary).

If you're still awake, here's why this matters.

Unless the ceiling is raised or the rule is made more flexible, there will be severe constraints on the ability of the public sector to invest in new infrastructure - because, after years of splurging by Brown, the national debt is uncomfortably close to that limit.

One pressing case of a massive transport project that currently can't be approved because of the sustainable investment rule is - the hoary old proposal to link east and west London with a new train line.

The business community wants Crossrail. The London mayor wants Crossrail. Tony Blair wants Crossrail. Even Gordon Brown has indicated support for it and the is working overtime on its financial viability.

But it could require about 拢16bn of borrowing, of which more than half would end up on the Government's balance sheet, even after employing the most creative accounting techniques (a couple of billion could for example be dumped on , which remains outside the public sector for accounting purposes).

The Treasury has calculated that giving Crossrail the green light would bust the sustainable investment rule, no matter how the books are fiddled.

Now if there really is a need for Crossrail, it would seem nuts for it not to happen simply because public sector debt could end up a bit above 40 per cent of GDP.

But on the other hand, Brown's vaunted "prudence" in management of the public finances is already seen by financial markets as half-dead and on a life-support machine. Breaching or amending the sustainable investment rule could be seen as the switching-off of the oxygen pump and removal of the feeding tubes.

So it's a tricky one: fiscal virtue versus investment to sustain London's international competitiveness? Death for prudence or a new trainset for the fat controller?

Whatever's decided will say a great deal about the priorities in Brown's Britain.

PS I'm away for a few days, so probably won't be posting again till early June.

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• - What's this?

I have in the past made the appropriate conflict-of-interest disclosure: I am a lifelong supporter. But what follows, I hope, will not be tainted by the emotional investment I鈥檝e made in the club over many years.

Over the past few weeks, I鈥檝e been talking to Arsenal investors, former investors and executives to obtain a sense of what鈥檚 likely to happen at the historic club in the aftermath of the US billionaire Stan Kroenke buying a 12.2 per cent stake and David Dein resigning from the board.

Here is what I鈥檝e learned:

1) According to sources at ITV, David Dein was intimately involved in ITV鈥檚 sale for 拢42m of a 9.99 per cent stake in Arsenal to Kroenke.

2) The same sources say that at one stage that deal was conditional on Dein also selling his 14.4 per cent holding to Kroenke, though that condition was ultimately dropped.

3) It鈥檚 unclear whether Dein鈥檚 role in the ITV sale prompted the 鈥渋rreconcilable differences鈥� between him and fellow Arsenal directors which led him to leave the Arsenal board in April.

4) The close relationship between Dein and fellow Arsenal director, Danny Fiszman, ended some while ago, before the recent turbulence 鈥� but the cause of the original estrangement is a mystery.

5) The widely held belief that the development of Arsenal鈥檚 new stadium has put it into a financial straitjacket appears to be wrong 鈥� following a 拢260m refinancing of the stadium-related debt last July, which significantly reduced interest costs, net cash-flows have been enhanced and the club鈥檚 financial muscle is now probably greater than it鈥檚 ever been (or at least since the glory days of the 1930s, when star players worked for peanuts rather than gold bricks).

6) Annual turnover is running at around 拢170m excluding property sales, 拢200m including a contribution from the residential development at the redundant Highbury stadium, and a bit more if catering sales are imputed from profits shared with outside catering firms 鈥� which represents a tripling of turnover over seven years and means the club is narrowing the gap with Manchester United.

7) Arsenal鈥檚 expenditure on players (transfers and wages) is approximately 91 per cent of Manchester United鈥檚.

8) However the Arsenal board does not believe that even a top-flight club can combine on-the-field success over the long term with a highly-leveraged financial structure of the sort the Glazers put in place at Manchester United or even with the payment of dividends to shareholders.

9) Or to put it another way, the Arsenal board view the club almost as a mutual or a co-op, and they feel their primary responsibility is to pass it to the next generation of directors, shareholders and supporters in robust shape 鈥� and it is an article of faith for the board that net cash flows should always be positive in any given year, unless the club is making an investment that will significantly increase long-term cash flows.

10) That explains their wariness about selling out to Kroenke.

11) The absence of a dividend on the shares for many years, and the refusal of the directors to contemplate paying a dividend, means that it would be irrational for Dein to retain his 14.4 per cent stake 鈥� how can he simply sit on an asset worth perhaps 拢90m which is yielding zilch for him (and, note too, that he is no longer drawing salary or bonus from Arsenal which in 2006 was 拢500,000)?

What do I make of all this? First that Dein will probably sell his stake sooner rather than later. Second if Kroenke is genuinely committed to buying Arsenal, he will find it immensely difficult, since the board control roughly half the stock and seem committed to their way of doing things.

But then there is a Wenger factor. Everyone I鈥檝e spoken to says that the sine qua non of future footballing and financial success is that the Arsenal manager stays at the club. Which is why there is widespread anxiety that his contract ends at the end of the next season.

It鈥檚 probably not sinister that he hasn鈥檛 signed a new contract yet. Arsenal鈥檚 directors are confident that they are providing him with the wherewithal to do the job and that his decision to stay or go will ultimately depend on how his team perform for him next season. Which isn鈥檛 altogether reassuring鈥�

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• - What's this?

When Sir Martin Sorrell against his former Italian colleagues, Marco Benatti and Marco Tinelli, it was widely expected that he would share the costs of the case with his company, .

That seemed reasonable, in that the vicious 鈥淒on Martino鈥� blogs which irked Sir Martin were damaging both to him in a personal capacity and to his world-leading advertising business.

If anything, the allocation of costs should perhaps have been weighted slightly towards Sir Martin rather than the company, in that his determination to bring the court action probably gave rather more publicity to the noxious allegations than would otherwise have happened. Certainly I would never have noticed the absurd and malicious claims against him if he hadn't sued.

However, I have learned that WPP鈥檚 board has decided to pay the entire costs of the libel action 鈥� which run to 拢2 1/2m, a bit more than anticipated by most commentators.

The board didn鈥檛 make the decision lightly. The question of how to divide costs was assessed by its audit committee, advice was taken from the leading firm of solicitors, and there was a lively debate among directors.

But in the end, at a board meeting on May 10, the directors determined that WPP鈥檚 shareholders should pay. That will be disclosed in the coming few weeks, before the company鈥檚 annual meeting. I am intrigued by whether WPP鈥檚 owners will be happy that they are picking up the tab.

UPDATE: Here鈥檚 an odd thing.

A WPP spokesman tells me that 拢800,000 will be shown in the company鈥檚 accounts as the cost of picking up Martin Sorrell鈥檚 legal bill and that a further 拢200,000 has been spent on the bill of his fellow plaintiff, Daniela Weber, the chief operating officer of WPP Italy.

Which is all a bit odd, since the non-executive directors were given a paper earlier this month showing that the total cost of the case to WPP was 拢2 1/2m. I am at a loss to explain the significant disparity, as is everyone else to whom I have spoken for guidance.

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• - What's this?

It is the totemic deal of our age: the , the leading US buyout firm, for $3bn (拢1.5bn).

The creator of the global financial boom, China, has formed a partnership with one of the great manifestations and beneficiaries of that boom.

But it鈥檚 also quite an unnerving event. China鈥檚 desire to enjoy the private-equity spoils that its behaviour has created may signal the peak of this phase of global financial mania.

Here鈥檚 why.

The boom in private equity, hedge funds, stock prices and almost every asset class on the planet is the product of a world of excessive liquidity and low yields.

And one of the main drivers of this world of excessive liquidity and low yields is that the Chinese government has driven down interest rates over many years by placing the bulk of its $1200bn in foreign reserves in low-yielding US Treasuries.

But the penny has now dropped in Beijing. The Chinese 鈥� like almost every other investor in the world 鈥� now want something better than the paltry yield on US government bonds and the capital losses of a faltering dollar.

They want a slice of the sumptuous private-equity pie that they helped to create by splurging all their hard-won cash on US government debt.

But there鈥檚 a contradiction here.

Were the Chinese to divert their cash flows significantly away from US Treasuries and into private equity and other asset classes to a significant extent, the yield on Treasuries would rise and the return on these other riskier asset classes 鈥� including private equity 鈥� would continue to fall.

And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond 鈥� and at that moment, the bubble would be pricked.

So when the Chinese are buying into private equity 鈥� even if they are buying into a management company, as they are in Blackstone鈥檚 case, rather than putting cash in Blackstone鈥檚 investment funds 鈥� every investor in the world should take note.

If the end of the era of cheap Chinese-subsidised money were nigh, there would be a global market slump in hedge funds, private equity, shares, bonds, property, commodities and precious metals which would touch almost every life on the planet.

It would be absurd to forecast that kind of meltdown on the basis of a $3bn investment in Blackstone, but there鈥檚 a toxic smell around that deal.

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• - What's this?

has to cover possible fines to be levied by regulators and potential damages payable in civil suits for alleged 鈥渁nti-competitive activity鈥� in respect of the levying of fuel surcharges.

Confused? Well I think what has happened can be paraphrased as 鈥渃areless talk costs big money.鈥� BA has completed an internal enquiry and has come to the conclusion that certain unnamed employees said things to competitors that 鈥� under rules to prevent collusion and price-fixing 鈥� shouldn鈥檛 have been said.

Whether prices were actually rigged to the benefit of the airline is another matter entirely. I wouldn鈥檛 be at all surprised if no fuel surcharges were actually fixed in a way that damaged customers.

But it鈥檚 almost a matter of life-and-death to honour competition regulations to the letter in a world where competition watchdogs from Washington to London to Brussels are straining at the leash to bite. International companies like BA are governed by strict prohibitions against anti-competitive behaviour and potential fines are huge.

Just imagine being the employee or employees who chatted to those competitors. BA has said this morning that they鈥檝e almost certainly cost the company and its shareholders 拢350m. Yikes!

BA鈥檚 humiliation is also another astonishing chapter in the epic battle between Sir Richard Branson and the flag-carrying airline. As , it was Branson鈥檚 that originally blew the whistle on BA to the competition authorities for allegedly wanting to discuss fuel surcharges. But even Branson may not have expected the financial cost to BA to become quite so stupendous.

UPDATE 19:30: Passengers and shippers may indeed have been damaged by price fixing. But to be clear what BA has admitted, it is that its staff had inappropriate conversations with competitors about fuel surcharges.

Whether these conversations actually resulted in prices being manipulated 鈥� and if so by how much 鈥� has not been disclosed.

Even so, the mere fact that BA staff had these conversations is appalling for a business that has always claimed to put the interests of the customer first.

And if it were to turn out that any detriment has been more acute to cargo customers, rather than to passengers, well BA should still hang its head in shame.

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• - What's this?

Today's proposal from Andrew Tyrie that banks should send their customers regular statements of how much they have been charged - including both actual charges and what they skim by paying interest rates below the market rate - is significant for two reasons.

First it comes from a Tory MP - and is possibly a manifestation of a Conservative party that increasingly sees votes in being the champion of the consumer rather than the voice of business.

Second, it's remarkably close to thinking that's been going on inside the Office of Fair Trading for some time - though has not yet been made public.

The competition watchdog is examining how banks make their profits from providing current account services, as an adjunct to an investigation of the fairness of penalty charges for those who breach their overdraft limits.

The OFT fears that what it describes as "so-called free banking" disguises a multitude of hidden charges and may not represent the great value for customers that the banks claim.

Those charges range from quite substantial transaction fees every time we use our debit cards abroad, to the interest we forego by holding our cash in current accounts that pay zero or low interest rates, and the interest lost when money is held in transit.

Tyrie's recommendation - which, as I say, is already being mulled by the OFT - is for the banks to send us a regular estimate of those charges.

What would be the good of that?

Well, it should give most of us much greater confidence to shop around for the best banking deal.

What's the downside?

Well, there would be incremental costs for the banks.

And there would be plenty of rows about how to calculate the implicit cost to each of us of receiving sub-market interest payments.

Should the reference rate be the bank base rate? Or should there be some standardised deduction for administration costs?

And the problem would be even worse if we were sent an estimate of how much we are paying over the odds in overdraft interest rates. The banks, rightly, would want to make some allowance for the riskiness of lending to each of us - but capturing the financial cost of that would not be easy or cheap.

The bigger criticism of the Tyrie plan is that it could be seen as excessively nannyish, an unwarranted interference in the god-given right of all commercial businesses to charge us how and when they like.

Maybe so.

But it is incredibly difficult to compare the costs of current-account services provided by different banks.

What amazes me - and I've told bank chief executives this over many years - is that none of them have sought to break ranks by providing a really simple charging structure that would engender consumer confidence.

I've long thought that the first bank to do this of its own accord would take a big step towards becoming the Tesco of the banking sector (alright, I know some of you will grimace here 鈥� but you know what I mean).

The palpable fact that there isn't the banking equivalent of Tesco suggest to me that the market isn't as properly competitive as perhaps it ought to be 鈥� and that it mightn鈥檛 be such a bad thing to force the banks to tell us what they really charge.

Click here to read Andrew Tyrie's proposal (word document)

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• - What's this?

is the one that got away.

A quartet of private equity giants tried to buy the supermarket group a . But they failed - largely because some of Sainsbury鈥檚 founding family thought the offer was too low.

But at almost exactly the same time, another retailer, , was bought by KKR, the great veteran of private equity. And, as I鈥檝e mentioned before, although Boots is in healthcare and Sainsbury is largely in food, they have a good deal in common.

They're both worth about 拢10bn, give or take a billion or so.

They both face intense competition from and - though obviously in different parts of their respective businesses.

They've both been recovering after years of decline.

They're both run by executives trained by Mars - that's Justin King at Sainsbury and Richard Baker at Boots.

And they both have strong brand names and powerful market positions.

So there will be a chance to see over the next two or three years whether big businesses do better when owned like Sainsbury, in a conventional way - as a stock-market listed business - or whether its better to flee the stock market and be owned by private-equity.

As it happens, this morning Sainsbury has in effect stuck two fingers up at private equity 鈥� and at Robbie Tchenguiz, the property tycoon who owns 5 per cent of Sainsbury and wants it to demerge all its property into a separate, tax-efficient company, called a REIT.

Sainsbury has announced that the value of its properties is 拢8.6bn. But rather than do what a private equity owner would do, which would be to sell or mortgage most of that, it will hang on to those assets.

Why? Because it believes - like Tesco - that the value of those properties can only rise if its stores perform better.

So it's setting itself new three year targets for sales growth and for investment. And it's doing the complete opposite of Boots, in that it's not loading itself up with billions of pounds of new borrowings.

What that means is that it should have more resources to invest in the business.

So what will Boots have that Sainsbury doesn't?

Well, Boots won't have the bother and expense of keeping the City informed of its every sniffle and sneeze. And it'll provide infinitely more generous financial incentives to its top managers.

It'll be gripping to see whether Boots or Sainsbury eventually emerges as the stronger - not least because tens of thousands of employees depend on each of them.

Right now, Sainsbury seems to be moving out of its recovery phase and may actually be adding proper new sales for the first time in years. But what if it slips up?

Well Delta (Two), an investor which manages money from the gulf state of Qatar, recently became Sainsbury's biggest shareholder with a 17.6 per cent stake. And if Qatari interests wanted to own the whole thing, they have more than enough cash.

The modern rule for any company with decent assets and a good brand name, like Sainsbury, is that if private equity doesn't buy it, there's still a chance of a takeover bid from a Russian oligarch or an oil rich gulf state.

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• - What's this?

For more than 150 years, has been one of the great independent news organisations. No longer. This morning it has for 拢8.7bn by of Canada.

The reason for the deal is that both businesses are world leaders in providing information services to banks and investors: they believe that within four years they'll generate at last 拢250m per annum of incremental profit from getting together.

However the takeover is controversial because of Reuters鈥� other more famous - though smaller - business: a newsagency providing images and copy to media groups all over the world.

Its work in war-zones such as Iraq has been particularly valuable.

Reuters鈥� editorial principles of integrity, independence and freedom from bias are world renowned. Those principles are guaranteed by the structure of the business - which prohibits any individual from owning 15 per cent or more of the company. That prohibition is being waved for the Thomson family, which will end up owning 53 per cent of the enlarged business.

The guardians of the editorial principles are 18 eminences who are directors of , a special vehicle which has the power to repel all boarders. Why have they caved? Well the Thomson family insists it will honour Reuters鈥� editorial principles.

Reuters鈥� journalists are unhappy. There will be concerns that over time Reuters鈥� general news operations will become marginalised within an outfit that sees its future as supplying intelligence and tools to those who operate in global financial markets.

But don't expect many newspapers to campaign against the possible, long term threat to news standards and editorial impartiality. Among the British national press, the number of newspaper groups not controlled by individuals or dynasties can be counted on precisely three fingers.

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• - What's this?

The transfer of royal prerogative powers from 10 Downing Street to Parliament, as , sounds like a thoroughly democratic and progressive idea. But what does it mean in practice?

Well part of what the prime-minister-in-waiting proposes is giving MPs more power over public appointments. Which again seems appealing.

Enormous power, to make or break businesses and touching all our lives, is held by those who run the assorted utility, transport and postal regulators, the competition authorities, the media watchdog, the 大象传媒 Trust, and so on and so on. They are the potentates of the New Labour era. Naturally we would want our elected representatives to hold them to account on our behalf.

But hang on a tick. Doesn鈥檛 that happen already? Aren鈥檛 all these regulators and public bodies constantly being grilled by committees of MPs and scrutinised in minute detail by the value-for-money auditors?

They already get a healthy regular kicking from Parliament and spend much of their time fretting about the next beating. Perhaps one or two of them are a bit aloof and arrogant. But actually there鈥檚 evidence that Commons select committees have a significant influence on their agendas, rather more influence than Whitehall in some cases.

Before welcoming Brown鈥檚 putative return of power to the people, it鈥檚 as well to think for a moment about the system it would replace. For all the criticism of Tony Blair augmenting the powers of his office, he has in fact gone some way to reduce his own and his ministers鈥� personal ability to place their mates in public sector jobs.

Most top appointments are made after public advertisements and scrutiny by independent panels. Appointments to the of the Bank of England are the murky exception to this rule 鈥� which is amusing, given that they are in the Chancellor鈥檚 own bailiwick.

The prime minister or a departmental minister may retain the power to make the final choice, but only after candidates鈥� abilities and impartiality have been evaluated in a fairly methodical and detailed way.

That said, a disproportionate number of jobs still seem to go to Labour鈥檚 supporters and friends.

There, it seems to me, is the rub. Perhaps I鈥檓 too fastidious, but on the whole I鈥檇 rather politics played a minimal role in the appointment of board members and executives at most of these public bodies. What I want in a regulator or watchdog is intellectual rigour and fearlessness, not a sense that he or she is beholden to a political party or any interest group.

The risk of giving more power to parliament over public appointments is that party politics will play an enhanced role in choosing the successful candidates, more so than it does now.

Are Labour MPs really less likely to appoint a Labour friend to a top job than a prime minister surrounded by independent civil servants whose purpose is to keep him on the straight and narrow? Are they more likely to appoint someone they perceive as a political opponent?

Were there a hung parliament, as well there might be in a couple of years, the kind of horse-trading between the various parties when making these appointments could be unseemly.

And if parliamentary committees held televised, adversarial ratification sessions for appointees to public bodies, along the lines of US Congressional practice, would it be easier or harder to recruit top class technocrats, like John Fingleton at the Office of Fair Trading or Callum McCarthy at the Financial Services Authority? My guess is that a number of talented possible candidates for such jobs would de-select themselves.

So in advance of saying hooray for Gordon Brown鈥檚 proposal to advance parliamentary democracy, I want to read the small print.

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• - What's this?

As I mentioned yesterday, I am a bit concerned about the frothiness of stock markets - and I have become a bit more anxious about the risk of a fully fledged rout after looking at what is happening in China.

As , the value of shares traded yesterday on Chinese stock markets exceeded the aggregated trading on all of Asia's other markets. And what's driving stock-market mania in China is that millions of individuals are removing their cash from low-yielding savings accounts and splurging on shares.

Now there are two ways of looking at the 300 per cent rise in Chinese share prices over the past couple of years The optimistic view is that these market values capture the reality of China's turbo-charged economy, which has become one of the world's biggest in record-breaking time and surely therefore deserves a stock market of equivalent weight.

However I find it hard to ignore the paltry profits generated by Chinese companies and their poor accounting standards. Listed Chinese companies are typically trading at prices equivalent to 50 times their earnings - which brings back disturbing memories of dotcom lunacy from the not-too-distant past.

The earnings of Chinese companies may one day live up to the expectations implicit in their share prices - but it could take rather longer than investors hope.

Anyway I hope you will excuse my eeyorish tendency to see the downside. But I made a mental note to go long of cash this morning when a cab driver advised me to pile into China because "it's a sure fire winner".

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• - What's this?

Companies all over the world are going takeover bonkers. According to figures from Thomson Financial 鈥� whose parent, as chance would have it, is buying Reuters for more than 拢8bn 鈥� mergers and acquisitions worth just under 拢1000bn have been announced so far this year, which is about 30% more than in the last record year of 2000 (on a pro-forma basis).

If trends persist, some 拢3000bn of global companies would be bought and sold this year, which would be the equivalent of buying the state of Belgium 15 times over (if you assume Belgian can be acquired for a price equivalent to one year鈥檚 annual output or GDP 鈥� though I don鈥檛 suppose King Albert ll is a seller). Announcements of deals involving British companies as either buyers or bought total some 拢235bn since 1 January.

It鈥檚 proof that the animal spirits have returned to boardrooms and have also infected the acquisition committees of private equity houses. According to my banking chums, the next great British name to agree to be taken over will be EMI (probably by One Equity Partners, the private equity arm of JP Morgan).

This deal mania is also powering the stock market. Until last night, Wall Street had enjoyed its most consistent run of up-days since before the Great Crash 鈥� the Dow Jones Index closed higher 24 out of the previous 27 sessions, the longest winning streak since July 1927. The Dow is at record levels and the broader S&P 500 index is within a few points of its record set in March 2000.

In the UK, the FTSE 100 is approaching 6,600 and is nearer to its high of 6930.2 (set on 30 December 1999) than looked remotely possible just a couple of months ago when shares were distinctly wobbly.

What鈥檚 driving the market, is sentiment (no investor wants to miss out on the bull-market run) and liquidity (predatory companies and investors have more cash than they know how to use). The paradigmatic manifestation of this, according to traders, is that many hedge funds have taken off their downside 鈥減rotection鈥�: many are no longer hedging out 鈥渕arket risk鈥� in the way they normally do, for fear of missing out on the big gains.

There鈥檚 a hint of irrational exuberance in the air. That won鈥檛 surprise those of you who have observed the concerns of the Chinese authorities that their economy 鈥� the engine of the world 鈥� may be growing too fast, who have noticed the problems in the US housing market and who have worried that UK house prices could also turn negative with damaging consequences for consumer confidence.

Shares in British firms certainly don鈥檛 look screamingly cheap, as shown by this disturbing chart drafted by analysts at Morgan Stanley (download Excel file). It shows the median ratio of share-price to earnings (the PE ratio) for the 350 biggest UK companies. The median is the PE ratio of the company bang in the middle if you were to rank the companies from lowest PE to highest. What the chart shows is that since 1985 there has been a sharp fall in share prices more-or-less every time that the median PE ratio has risen above 18 鈥� and the median is currently 18.85

However, one chart doesn鈥檛 make a market rout. There are other ways of analysing British shares that don鈥檛 show them to be quite so expensive. For example, the PE ratios of the biggest British companies, those worth 拢50bn or more, is disproportionately low 鈥� largely because they are regarded as still a bit too bulky to face takeover bids from private equity firms. So the average PE ratio of British listed companies is under 14, which is not desperately expensive by historical standards. So don鈥檛 panic, but鈥�

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• - What's this?

Recent media coverage about BAE Systems has been pretty awful for the UK's largest manufacturer. It has focused mainly on continuing fall out from the way that the Serious Fraud Office was pressurised by the Government late last year to drop an investigation into alleged bribes paid by BAE to Saudis, in the massive Al Yamamah defence deal.

Just weeks ago, for example, it emerged that the US made a diplomatic protest about the ending of that investigation.

However BAE yesterday waggled two fingers at its critics by agreeing to buy a leading US manufacturer of protective armour for military and civilian vehicles, Armor Holdings, for well over 拢2bn.

Armor is a significant supplier to the Pentagon. It also owns proprietary technologies in the manufacturer of specialist armour.

If BAE were in seriously bad odour with the US, it presumably wouldn't be allowed to buy this business 鈥� which requires presidential approval under the Exon-Florio National Security Test for Foreign Investment.

I spoke to BAE chief executive Mike Turner yesterday, and he said that his US colleagues are in and out of the Pentagon all the time and have detected no reluctance on the part of the US military to do business with BAE.

However BAE has not sought any kind of pre-approval from the US Government, so there is a risk that the takeover of Armor won鈥檛 proceed as smoothly as BAE would like. Apart from anything else, BAE鈥檚 US competitors may not be able to resist the temptation to exploit the ever-present Congressional neurosis about sales of US assets to overseas businesses.

That risk came into focus overnight, as the FT has reported that the US Congress has asked to be briefed by the State Department on its diplomatic protest about the dropping of the bribes investigation.

Apparently, Congress won't approve a number of BAE exports from BAE鈥檚 existing US operations until satisfied about the termination of the Saudi investigation.

All of which is embarrassing for BAE, which very much sees its future in the US and as a supplier to the US military.

The uncertainty could be a bit worse than embarrassing because BAE is today endeavouring to raise 拢750m from the sale of new BAE shares.

Now my sense is that investors generally like the look of the Armor acquisition, although they may be slightly wary of the way that Armor takes this defence specialist into the civilian armoured vehicle market as well as the military one.

Turner, for one, is ebullient. He pointed out that in a series of investments over a few short years, BAE has become the world-leader in military land vehicles, at a time when demand from the Pentagon is significant.

But investors will be unsettled by the continued rumblings about the dropping of the SFO probe 鈥� which is not the best backdrop for selling 拢750m of new BAE shares.

If I were running a hedge fund 鈥� and there are no immediate plans for me to set up a leveraged long-short fund financed by licence-payers' money 鈥� I鈥檇 probably be making mischief in BAE shares this morning.

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Grant Hearn ought to be a pin-up for the private equity industry.

For the past four years, this product of a family of hoteliers has been chief executive of the distinctly unglamorous budget hotel chain, . Since taking the helm, he has transformed it from a lacklustre number two in the market, to a fast growing company that is shaking up the hotel industry.

He has opened thousands of new rooms and expanded employment. Along the way, a fat profit has been generated for its first private-equity owner, Permira, which sold out in August of last year. And its new owner, Dubai International Capital, is backing him in a second three-year growth spurt.

And he鈥檚 done it not by asset stripping or by squeezing working capital to unsustainable levels 鈥� which are the charges most commonly levelled against private equity 鈥� but by improving working practices, passing some of the productivity gains on to customers in the form of lower prices and improved marketing.

I interviewed him for a short item on private equity that鈥檚 being broadcast today or tomorrow on Radio 4's PM Programme. What impressed me is that his private equity owners gave him the resources and freedom to revitalise a business that was drifting when owned by the giant catering conglomerate, Compass.

Among his innovations was to adopt the pricing policies and internet-booking approach of the low-cost airlines, Ryanair and Easyjet. Travelodge's rooms are often cheaper for early bookers than those airlines' giveaway deals, when tax is included.

There are two statistics which explain both how Travelodge can cut prices and also make substantial returns for its owners. The time taken to clean a room has been cut from 40 minutes to 25 minutes and will come down to 20 minutes in the coming year. And the number of staff employed per hotel has roughly halved.

Those are massive productivity gains. In the case of room cleaning, they have been achieved by studying working patterns and sharing best practice. This year, the company is showing all its cleaners a DVD which demonstrates how a room can be prepared for occupancy in just 20 minutes. And on the basis of a Google search, customers don鈥檛 appear to believe that cleanliness has been sacrificed.

But here's what bothers me, and will prompt many of you to accuse me of being a soft-in-the head, bleeding heart something-or-other. The allocation of risk and reward in this business, after it was acquired by private equity, has been unevenly shared 鈥� as it is in most private-equity deals.

The managers of this business took risks, as did the executives in the relevant private equity firms and the investors in their funds. Hearn鈥檚 prescription to revive Travelodge might have been a disaster. He might not have been able to boost cashflows sufficiently to meet the increased debt-financing costs incurred after the takeover.

But their rewards have been huge, millions of pounds each for a small number of individuals.

However junior employees incurred the same risk of disaster 鈥� though one difference is that they didn鈥檛 choose to take on the risk of the private-equity deal, it was foisted on them. And they鈥檝e had no opportunity to participate in the investment rewards of the private-equity deal.

Their pay has probably gone up a bit. But have they captured a significant proportion of a staggering 100% improvement in their productivity, a doubling in their individual output? What do you think?

Just to be clear, I am not singling out Travelodge for special criticism. I would imagine that compared with many businesses in its industry, it treats its staff pretty well: otherwise it probably wouldn鈥檛 be thriving.

But it is the nature of our globalising world that the top prize for those with the fewest skills 鈥� even if they improve their output exponentially 鈥� is that they get to keep their low-paying jobs. Next time my boy moans about going to school, I鈥檒l probably feel compelled to tell him about Travelodge鈥檚 super-productive cleaners.

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The battle to make the biggest ever takeover of a bank is suddenly wide open again, thanks to a decision in a Dutch court.

That matters in the UK, because the contest is between Barclays and a consortium led by Royal Bank of Scotland, both of which want to own ABN of the Netherlands.

Barclays looked to have the advantage, having agreed a deal with ABN's management.

It also helped Barclays' cause that ABN reached an agreement to sell its US business, Lasalle, to Bank of America. The reason the sale mattered is that Royal Bank of Scotland badly wants to own Lasalle.

Well today, a Dutch judge said ABN had no business selling Lasalle to Bank of America without getting permission from its own shareholders.

That's a huge blow to the credibility of ABN's management. And it鈥檚 a famous victory for Dutch shareholders, which will reverberate through the boardrooms of the Netherlands 鈥� where directors of companies haven鈥檛 always pursued the interests of their shareholders as zealously as they might.

It also puts Royal Bank firmly back in the game to buy ABN. Except for one lethal possible consequence.

Bank of America may now sue ABN for tens of billions of dollars for reneging on the deal. And that would make ABN rather less attractive to both RBS and Barclays.

As a banker said to me this afternoon, this battle is a long way from being over, and it's going to be bloody.

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Here are some loosely connected thoughts about the abrupt resignation of Lord Browne.

1) His departure was not prompted by homophobia at BP or among BP's shareholders. In fact Lord Browne set out in a very public way a few years ago to transform BP into a model of a diverse, equal-opportunities employer - and has had considerable success in that respect. There is anti-gay prejudice in the City, and UK boardrooms, as there is everywhere in the UK. But that's not what did for him. He quit because of his humiliation at the disclosure that he lied to the court about how he met his former lover.

2) He is paying a very steep price for the misjudgement of lying to the court. Not only is there the loss of up to 拢15.5m of remuneration from BP, but it will damage his future employment prospects. In a world where companies are obsessed with their public reputations, he will no longer be perceived as the prize he once was.

3) There is something slightly strange that this blow to Browne should stem from a lie that was prompted by his understandable reluctance to disclose that he met his former boyfriend, Jeff Chevalier, via an online male escort agency. I am not downplaying the gravity of the lie. My point is that there have been serious questions about his stewardship of BP for a couple of years. The in the US, which killed 15 people in 2005, seems to me to be infinitely more serious than the cover-up of how he met Chevalier. Browne was not directly responsible for that disaster, but he was at the helm and is therefore accountable for Texas City and a raft of other problems in the US.

4) Browne's genius was in buying companies when the oil price was relatively low and thereby transforming BP into one of the world's great oil companies - to the considerable benefit of shareholders and the UK.

5) Integrating what he bought turned out not to be his forte. A more astute board would have spotted this earlier and taken steps to replace him long before his natural retirement age came within sight.

6) The big lesson of Browne's demise is that at the turn of the millennium he had simply become too powerful. Almost no-one - not shareholders, not journalists, not his fellow board members - seemed able to acknowledge that he might have weaknesses and frailties. His power within BP was excessive. The deference accorded to him outside BP was unhealthy. In terms of stature within British industry right now, there is no-one quite like how he was - and that's a good thing. He stayed at BP too long because nobody dared to mention that the chief executive known as the Sun King might not be wearing clothes.

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Only two years ago, Lord Browne was the most feted chief executive of any British company.

Now he has had to his 41 year career at BP.

And the main reason for his resignation appears to be his embarrassment that he lied to the courts when attempting to obtain an injunction to prevent publication by the of an interview with his former boyfriend, Jeff Chevalier.

Lord Browne told the court that he had met Mr Chevalier in Battersea Park in London.

In fact they had met on a male escort website.

The judge also pointed out that Lord Browne had attempted to 鈥渢rash鈥� Mr Chevalier's credibility by painting him as a liar, unstable, and adversely affected by dependence on alcohol and illegal drugs 鈥� but then could not furnish evidence, other than the claim of his butler that his wine stocks were diminishing.

The painful irony for Lord Browne is that BP has investigated Mr Chevalier's claim that he misused company resources and property and has dismissed them.

So Lord Browne has been hoist on the petard of how he tried to block Mr Chevalier's interview 鈥� though not by the substance of what Mr Chevalier claimed in that interview.

It's a personal tragedy for Lord Browne 鈥� and one that will have financial ramifications for him.

He is surrendering up to 拢15m in remuneration due to his decision to quit the company he loves.

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It was mayhem in Topshop last night for the launch of Kate Moss's new line. Female shoppers were frantically emptying racks and trying to sneak more than the maximum-permitted five-items-per-customer past surprisingly polite security staff.

Kate Moss, giggling in a long red dress stamped with her new retail brand, watched from behind a pillar in a state of some considerable nervous excitement. This was an image of our times.

So far it's been a great commercial success for Sir Philip Green, the billionaire owner of the totemic fashion chain. Even before the 8pm unveiling, sales at the Oxford Circus flagship store were up more than 20% on the same period last year, which he puts down in part to the buzz created by all the Moss publicity.

Is it sustainable? Green tells me that he is convinced that it is. An autumn range is planned and Moss is already talking to him about next spring's collection. Also he believes she'll travel well: the line will be sold in more then 20 countries, including the US (at Barneys).

Moss doesn't actually design the kit. But she says yea or nay to everything that bears her moniker. And the real designers told me last night that she has an exceptional eye (which they would of course say, but I am minded to believe them). They say she makes a contribution well beyond the power of her name.

What could go wrong? Well, the collection might not live up to all those expectations. Or the particularly excitable shoppers currently enamoured of Miss Moss might simply become bored with her. And then there's the reputational risk for her and for Green: neither would wish to see a repeat of the kind of media attention that was sparked in 2005 when she was photographed in close proximity to a Class A drug.

But, for now, Green is as ebullient as I've seen him since he trousered his 拢1.2bn dividend a couple of years ago. The Green-Moss partnership is certainly an odd one, but on the evidence of last night they are both committed to it.

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