ShareSoc Chairman's Blog

Posted by ShareSoc at 00:00, June 5 2012.

Halfords Buy Backs to Cease

Halfords issued their Preliminary Results for the year ending March 2012 last week. One significant statement in there was the “Board has resolved to bring the current [share] buyback programme to an end and does not intend to undertake any further buyback activity in the new financial year”.

It’s interesting to study the cash flow trends last year. In reality there was free cashflow (after capex, finance costs and taxation) of £70m. Dividends cost £44m, and share buybacks cost £63m. So £37m more was returned to shareholders than was generated. How was the shortfall made up? By increasing debt of course which rose from £103m to £139m.

Although debt is still not particularly high at this company, I have never thought that share buybacks were particularly meritorious and borrowing money to undertake them seems to make even less sense. I did raise the issue of the large buybacks at this company at their AGM last year so it is good that the directors seem to have changed their stance somewhat on this matter.

There is a very good presentation made to analysts by the CEO and Finance Director on the Preliminary Results here: http://presentations.thelincolncentre.co.uk/halfords/20120531/

Let us hope that the Halfords AGM is not held at 9.00 am in Birmingham this year, or I may not be able to congratulate the board on their wisdom regarding buybacks.

The share price did fall after the results announcement, probably because there was another statement in there which said: “Retail sales in FY13 have been very disappointing so far”. Cycling and outdoor leisure product sales have been lower than expected, probably because of the poor spring weather. They may not improve over the Jubilee bank holiday either, but retailers are notorious for blaming the weather for poor sales – Halfords winter sales were blamed on the weather being too good which reduced sales of replacement car parts.

One minor criticism though is that the aforementioned presentation took at long time to be issued and even then was difficult to find, with no live access to the conference by private investors. So such investors were potentially disadvantaged versus institutional analysts. I may raise this at the AGM.

Posted by ShareSoc at 09:10, June 6 2012.

Plus Markets – Attempt to defeat sale and remove directors

Some shareholders in Plus Markets, the AIM listed company that runs the Plus Stock Exchange (PLUS-SX) and other operations are unhappy with the proposed sale of that exchange to ICAP for £1. They plan to vote down this disposal and remove some of the directors at the forthcoming General Meeting called to approve it by tabling additional resolutions.

The sequence of past events is as follows. On the 14^th May, Plus Markets announced the closure of PLUS-SX having failed to find a buyer for the business after looking for some time. PLUS-SX has never gained the number of listings and volume of trading necessary to make it viable with the result that it has consistently lost money. On the 18^th May Plus Markets announced the sale of PLUS-SX to ICAP for a nominal £1. The company subsequently rebuffed an approach from Gulf Merchant Bank (GMB) who issued a press release saying they had made a revised offer.

Simon Chapman, a shareholder in Plus Markets, is reported to be leading the opposition and wants to oust the Chairman and Chief Executive of Plus Markets. He claims that the CEO, Cyril Theret, and Finance Director, Nemone Wynn-Evans will collect £423,000 in fees if the sale is completed and that financial advisers to the company will collect about £960,000. Criticism was also aimed at the exclusivity agreed with ICAP, and the fact that ICAP will be able to use the tax losses accrued by PLUS-SX so it might be worth much more than £1 to them.

Comment: This whole process seems to have been somewhat rushed at the end of the day and the license to operate an exchange was surely quite valuable (assuming it could be transferred) as there are in fact very few such licenses in the UK. This certainly looks to be a case where shareholders should study the offer document carefully before deciding whether to support the disposal. Mr Thompson will have to move quickly though if he is to get resolutions on the agenda for that meeting or any other to remove some directors.

Posted by ShareSoc at 13:40, June 10 2012.

Cable to Back Down on Pay?

More than one newspaper has reported that Vince Cable may water down his commitment to a binding vote on shareholder pay by having the vote every three years rather than annually as originally proposed. This allegedly is on the basis that it would increase bureaucracy and that “institutional investors had argued that an annual vote could have made investors less inclined to protest for fear of destabilising management teams” (Daily Telegraph). The Financial Times reported the BIS as saying that a three year remuneration policy would encourage longer term thinking on pay, but the option of an annual vote would still be open to companies and shareholders if they want it.

It is certainly the case that an annual vote, combined with a longer Remuneration Report required to document pay policy more clearly, might introduce some more bureaucracy. But companies can change a great deal in three years (both positively and negatively). Regrettably it might let companies revise pay upwards (by taking up the option of revising pay annually), but not revising it downwards when profits disappear or a company shrinks on the basis that a “three year policy” had been put in place.

The merit of this proposal may not be a one-sided debate. What do you think?

Posted by ShareSoc at 14:45, June 12 2012.

Two suitable cases for treatment? Graphite Enterprise and Intercede

I attended the Annual General Meeting of Graphite Enterprise Trust PLC (LON:GPE) yesterday. There were over 30 shareholders present and the meeting was chaired by Mark Fane. Like two of the other directors he has served on the board over 9 years, but I chose not to raise that issue publicly in the meeting, although I did express my concerns to him afterwards.

Mr Fane commenced the meeting by summarising the announcement of the “Interim Management Statement” for the 1^st quarter that had been issued in the morning. Net asset value had risen by 2.6% in that period. It would have been higher but for the depreciation of the Euro against sterling as many of their investments are in Europe and hence denominated in Euros.

Tim Spence who is the Investor Relations manager for Graphite Enterprise, the fund manager, then gave a presentation, following by other staff from the manager (Emma Osborne and Rod Richards). You can see their ppt presentations here which are well worthwhile reviewing: http://www.graphite-enterprise.com/assets/downloads/reports/AGM%20presentation%202012.pdf

Questions were then taken from the audience.

I raised the issue of the share price discount (although this had been covered in the manager’s presentation). I said that although I accepted that a higher dividend or buy-backs might not have a big impact on the discount, I could not see why a tender offer should not be considered. Shareholders would gain the advantage of being able to sell shares at a premium to the current share price.

The answer given from the Chairman was that it would have only a very short term impact on the discount, but I responded that it would immediately benefit shareholders and gave the example of Dunedin Enterprise who had recently done a tender offer.

I also covered the issue of the dividend and gave these figures: last year the profits were £37m, but they only paid out £1.6m in dividends. The Chairman suggested most of those profits were “capital” profits and hence should be treated differently.

After some banter, I finally argued that I liked to see an active discount control policy in all investment trusts, whereas this company seemed to have simply made a decision to do nothing.

Mr Richards suggested that this was the wrong time to return cash to shareholders. They should be investing cash in new investments now as they were at the bottom of the “cycle” (i.e. private equity deals were now cheap) rather than returning cash to shareholders.

A fuller (4 page) report on this meeting and more in-depth analysis of the discount issue is present on the ShareSoc Members Network (available to ShareSoc members at http://sharesoc.ning.com/forum/topics/the-agm-forum?commentId=6389471%3AComment%3A17837) . In summary I do not agree with the arguments of the board and the fund manager that nothing should be done. The board seems to think that the high discount will rectify itself without any action on their part, but I doubt it will.

Graphite Enterprise may well be the focus of a campaign by ShareSoc. One company that is already so is Intercede (LON:IGP)  due to their past pay policies. The company issued its Preliminary Results for the year ending March yesterday and some comments on them were issued to our supporters in this note: www.sharesoc.org/Intercede_Update_3.pdf (click on to read).

Posted by ShareSoc at 00:00, June 19 2012.

PLUS-SX sale assures its survival

Although many shareholders in Plus Markets group were unhappy with the sale of Plus-SX at the price obtained, which was narrowly voted through yesterday, it at least ensures that this market for micro-cap companies will continue to operate. There was a definite threat that the FSA would withdraw its license to operate if a deal did not go through soon.

At least for investors in Plus-SX listed stocks, it should ensure that a publicly quotation will continue to exist even if the liquidity in that market has always been very poor. ICAP, who are the buyer, certainly have the resources to maintain and develop this market. There has been a real gap in the availability of equity finance for such companies, which is why their financing tends to be dominated by private equity. Why Plus-SX never managed to grow the market to a viable size is not clear as there must be thousands of companies who might be suitable for such a market and the listing obligations were not onerous. For example, many of the AIM companies that delist might well be suitable for a listing on a lower cost exchange. Or for those micro-caps needing to raise equity funding, surely better to have a public listing with some ability to raise finance and the ability for some insiders to sell shares than be subject to the onerous obligations imposed by a typical private equity finance deal? Perhaps the big problem is that the latter tends to conflict with the former so some investors might oppose such a listing. ICAP will have to tackle this issue though if they are to make a success of this market. Let us hope that they have plans to do this rather than simply use the exchange license for other activities.

Posted by ShareSoc at 07:39, June 23 2012.

The Growth of Execution Only Trading

The AGM of the Share Centre was one of the few in which I hold shares which I did not manage to attend this year (one’s diary gets a bit crowded at this time of year as there are so many AGMs in the spring). But there was an interesting presentation given at the meeting which is now on the company’s web site – see www.shareplc.com/sharemark/2594/510.pdf

In it one particularly interesting slide is number 11 which shows (based on a report from Compeer) that there are now 3.5 million execution only nominee accounts in the UK. That’s been growing steadily since 2003 when it was only 1 million. Some investors may have more than one account of course, but it shows the large numbers of people who invest directly in the UK stock market.

In addition it shows how nominee accounts have probably grown in comparison with other ways of holding shares (in certificated form or personal crest accounts). This is unfortunate because most such accounts disenfranchise investors (i.e. do not provide voting provision or information provision). The Share Centre (who have 6.5% of this market according to the presentation) are one of the few brokers who provide a simple system to enable shareholders to record their votes, although even that is not perfect. That may be one reason why their share of this market is growing though.

ShareSoc has of course criticised the nominee system repeatedly for destroying shareholder democracy. We would like to see the whole structure reformed so as to provide simple information and voting arrangements for all shareholders and ways for shareholders to communicate with one another so as to re-establish the positive influence of private shareholders over companies. With modern electronic system capabilities, this should not be difficult. Don’t forget to sign our e-petition on this subject if you have not already done so – see http://epetitions.direct.gov.uk/petitions/16769

Posted by ShareSoc at 09:04, June 25 2012.

Natwest/RBS Banking Debacle – was it avoidable?

A significant number of the readers of this blog might be customers of Royal Bank of Scotland (LON:RBS) who have been affected by the computer failure that has frozen access to accounts and delayed payments in and out. After a number of days, problems still continue and RBS may have a large bill in prospect to compensate customers for the inconvenience, or interest and penalty charges that were unnecessarily incurred. That’s apart from the damage to the reputation of the company that might deter people from banking with them in future. So this is also of concern to RBS shareholders.

The difficulty apparently arose when a new software update was installed. Should this be seen as an “act of God”, or just one of those technical cock-ups that will happen in the modern world? Well the author of this piece just happens to be a former IT manager (I am a Member of the professional body for IT experts, the B.C.S.) and am a director of an E-payment company which runs credit card and other payment platforms (see www.ixaris.com) . I am sure my former bosses would not have found it acceptable to have their systems out of action for several days, and I certainly would not do so in my current role.

New software updates corrupting existing systems are a well known problem, and reflect either a failure to test the new environment properly before installation, or a failure to provide adequate roll-back procedures. This is surely a failure of competent IT management if these problems occur in such a large and experienced company as RBS. It reflects badly on the professionalism of the IT world in general if these kinds of events can still happen. In essence these failures are avoidable and any experienced IT manager knows they may happen so suitable precautions should be taken.

Whether these events occurred because RBS has been cutting back on IT staff of late, and hence may have lost relevant experience and expertise, I do not know. But I do suggest that it is rather symptomatic of past events at RBS where the company under the leadership of Fred Goodwin raised its risk profile by excessive gearing, and ultimately took a fatal bet on the ABN-AMRO acquisition. It might imply that the culture of risk taking at RBS still continues, which is certainly not good news for shareholders.

The sooner the Government (in effect you and me who own more than 80% of RBS) gets shot of responsibility for RBS, surely the better as company culture can be difficult to change. But in the meantime, perhaps the Government should institute an inquiry into what happened at RBS because the failure of such an important banking system is of national significance.

Posted by ShareSoc at 12:33, June 29 2012.

Barclays, Rensburg AIM VCT and Remuneration

The manipulation of LIBOR at Barclays (the only bank that has yet owned up to it but there were probably others involved) and the recent accounts “freeze” at RBS (commented on in a previous blog entry) will surely continue to put off investors from buying bank shares. There may yet be criminal prosecutions at Barclays (giving false information to a third party from which one gains financial advantage is surely fraud) and the massive claims that might result from those businesses who were doing deals based on Libor must shake confidence in banks even further.

It became very apparent during the banking crisis, and subsequently, that the culture in some of the UK’s largest banks has become one of speculation in pursuit of profit and the latest example extends to simple dishonesty to achieve those objectives. When you can’t trust the management, or don’t like the culture of a company, you should simply not invest in that company – that’s been my long standing motto from past experience. If you can’t trust them to deal honestly and fairly with customers, you can't trust them to respect the interests of investors, particularly smaller ones.

Rensburg AIM VCT is a company where ShareSoc has been running a campaign for some time. The long-term performance of the company, the high management fees paid and the length of service of the directors all tended to give the impression that the company might not be being run in shareholders interests, particularly when our suggestion for a change of investment policy was rebuffed out of hand.

Well some changes have been made. Share buy-backs and dividends have been increased so at least investors are getting their funds back and can reinvest them elsewhere. The investment management agreement has been changed which should result in much reduced fees being paid. And noticeably there is no incentive performance fee in the new agreement! Would that other investment companies did that whereas the trend is to introduce such fees (ShareSoc has repeatedly criticised the benefits of such arrangements). But investment policy remains unchanged, the lack of independence of the directors and questions on the long term viability of the company have caused us to recommend shareholders vote against all three of the directors at the forthcoming AGM – see our note to shareholders in this document for more details: www.sharesoc.org/Rensburg%20AIM%20VCT%20Newsletter%205.pdf . At least we can claim that ShareSoc has had some impact already because before we started this campaign not a lot had changed at this company for many years.

Remuneration in the banking sector is widely acknowledged to be excessive (often based on profits that proved non-existent, or may well soon prove to be fraudulent). ShareSoc has been putting in a lot of effort of late putting our views to Parliamentary Committees on Corporate Governance and Remuneration in financial institutions and on the new Enterprise and Regulatory Reform Bill that will introduce binding votes on pay (see the last two entries on this page of our web site for details: www.sharesoc.org/consultations.html . There is also now a consultation just been issued from the BIS on revised remuneration reporting requirements (including a single figure for total pay which may help) to which we will be responding. Getting the views of private shareholders across to the Government and politicians takes a lot of effort but ShareSoc considers it a high priority to do so. Only by such means can we get the things we advocate in our Manifesto.

Posted by ShareSoc at 11:02, July 3 2012.
How to Change the Culture of Banks?

As the fall out from the Libor fixing scandal continues, it has become ever more apparent that the culture of banks has generated the failings that started the banking crisis in 2008. In summary this resulted in the taking of more risk (by excessive leverage for example), culminating in outright illegal activities to maintain company profits (and of course bankers’ bonuses).

It is good that Parliament is to look at this issue – to quote Mr Tyrie who is leading the inquiry, it is “about the standards and the corporate culture of banks”. But fixing the culture of any company is very difficult. In banks, they have probably been recruiting wide boys and chancers for the last twenty years (i.e. people more motivated by money than anything else), so it’s not going to be a quick fix.

Is it not ironic that Bob Diamond claimed to have introduced an ethics rule at Barclays after kicking out six staff who spend £60,000 for lunch? But one simple step would be to recruit a replacement for Mr Diamond who was not motivated by large bonuses. Only if the bonus culture is destroyed from the top down will real change take place.

Will that take place while the existing board structure and selection procedures are in operation? Probably not. It’s worth pointing out that ShareSoc believes that shareholders should have the ultimate say in who gets appointed as a director and their pay should be also determined by shareholders. In other words shareholders should dominate nomination and remuneration committees that give their recommendations directly to a company general meeting, rather than such committees being solely composed of directors. This would be one simple step to solving the cultural problem because shareholders are often there for the long term while executives come and go, and shareholders are generally more risk averse as a result.

But nomination committees have to do their job properly and select leaders with the right background, and could I suggest not from those with a past career in investment banking in the case of Barclays as another step in changing the culture.

In reply to ShareSoc, post #13

But nomination committees have to do their job properly and select leaders with the right background, and could I suggest not from those with a past career in investment banking in the case of Barclays as another step in changing the culture.

If you do that then you will CERTAINLY have people running the banks who don't have the tools to understand what is going on in their institutions!

It seems to me that this witch-hunt of senior bankers has got completely out of control and moved miles beyond the sort of reasonable, measured comment about the need to refresh management and organisational culture.

In my personal opinion, it will be a REAL struggle to find managers who are both competant and willing to take a role where they know for certain that they are going to get crapped on from a great height by politicians and the public if anything should happen to go wrong - IRRESPECTIVE of whether it is actually something that was controllable by them, IRRESPECTIVE of whether it "happened on their watch" and IRRESPECTIVE of whether they had taken reasonable steps to mitigate, put things right or whistleblow.

The  way things are going, we are going to get the UK's banks run by people who aren't competent to run them and who are incentivised to hide any skeletons they happen to chance across - which will mean that the UK gets the worst of all possible worlds!

This villification of bankers was started by Gordon Brown in order to deflect blame from himself - and it is HIGH time that it was stopped in its tracks.

ee

In reply to emptyend, post #14

This villification of bankers was started by Gordon Brown in order to deflect blame from himself - and it is HIGH time that it was stopped in its tracks.

And what exactly is it that GB is to be blamed for? The chief criticism relates to the creation of the tripartite authority, leading to lax regulation. Blaming GB for everything doesn't wash with me. How come the same crisis afflicted many countries globally, especially the US with good 'ole George Dubya in charge? Besides lax regulation, the other big mistake that these politicians made was the (unsurprising) mistake of assuming that the good times would last for ever. There are very few politicians wise enough to avoid that error. I don't seem to recall the opposition calling for tighter regulation, before the events of 2007/8 took place.

Why is tighter regulation necessary? Because of the invidious bonus culture led to banks taking foolish risks. I see nothing wrong with vilifying those that have rewarded themselves and their colleagues with gigantic bonuses for taking outsize risks with other people's money that have ended up being backstopped by taxpayers' money, to avoid a complete collapse of the financial system.

I'm not surprised if current or former investment bankers don't like the opprobrium being heaped on them, but it has taken enormous pressure just to curb the most outrageous excesses.

This bonus and entitlement culture has to stop. We need banks to focus on prudent banking. Depositors' money should not be used to help finance risky operations. Yes, I most certainly would like to see a non-investment banker running the operation - and have him splitting off Barclays Capital into a separate company. Let an investment banker run that (obviously), but without the support of the retail banking operation and without implicit taxpayer subsidies.

Mark

In reply to marben100, post #15

And what exactly is it that GB is to be blamed for? The chief criticism relates to the creation of the tripartite authority, leading to lax regulation.

True....but then he can also be blamed for:

a) sidling up to Victor Blank at a Spencer House cocktail party and inducing him to buy HBOS by offering to waive all the competition issues

b) Claiming for year after year in the Budget that he was being "prudent" and had "abolished boom and bust" - whilst the reality was that he was busy stoking the biggest debt-fuelled boom in history in order to keep the financial sector tax cash-cow capable of being milked to finance Labour's spending plans.

c) Ramping up PFI spending in order to keep Labour's spending out of the statistics for public debt. We'll all be paying for that for years.

d) Turning a blind eye to the need for checks and balances in the financial regulation system and failing to realise that the FSA was simply not fit for purpose (despite doubtless being told this on many occasions by the Governer of the BoE).

e) Promoting the knighting of Fred Goodwin - and kow-towing to a whole bunch of other incompetants as he taodied his way round the City.

So...yes...the actual trigger was a problem in the US mortgage market. But we got hit much harder than the USA because Browns obduracy and neglect had left our financial system much more bloated, enfeebled and under-regulated than happened in the USA.

And THEN, when he realised the shit was hitting the fan, he lashed out and tried to heap all the blame on the bankers (and foreigners). No judgement, no morals, no understanding of the City, no backbone, no honesty and just no bloody good!! We'll be paying for his incompetance for decades!

Blair should have fired him when he thought about doing so in 2005 - if Darling had been appointed then we might have had some chance of a better outcome!

Yes, I most certainly would like to see a non-investment banker running the operation - and have him splitting off Barclays Capital into a separate company. Let an investment banker run that (obviously), but without the support of the retail banking operation and without implicit taxpayer subsidies.

No problem with the idea of splitting the banks up if shareholders really want to do that - though the entire global banking system has been organised and financed on the principle of universal banking.....and that will cost vast fortunes of shareholders money to disentangle systems and managements that have been consciously and deliberately merged over the last 15 years (which was something else that Brown thought was a good thing and encouraged!). Just DON'T leave non-investment bankers in charge of investment banking operations - that was one reason why Fred Goodwin's team cocked things up so spectacularly!!!!

I'm not surprised if current or former investment bankers don't like the opprobrium being heaped on them

There was no need for that sideswipe - you know perfectly well that I and various other former investment bankers were relentlessly vocal (against strong opposition on TMF) from 2002 onwards in trying to warn bank investors of the dangers of holding banking shares! We may not have identifed precisely what would tip the financial system over the edge - but we repeatedly warned that the banks' managements didn't understand the business being written in their name and this could only lead to disaster. The last thing that we should be doing is repeating the mistakes by appointing managements who are not competant to rectify the problem - and that is what the original poster appeared to be advocating.....

....you cannot simply slash and burn top managements in a fit of pique - SOMEBODY has to be hired to do the job....and the chances are that anyone sensible will now run a mile from top management positions at banks thanks to the unthinking pillorying that such managers are now forced to endure.

Finally - do NOT be surprised if Bob Diamond makes many of these points at the Select Committee tomorrow.

ee

In reply to emptyend, post #16

Interesting points ee... but deserving of some further analysis:

a) Clearly, Brown's motiivation for this was to effect a rescue of HBOS at a time of absolute crisis. Lloyds shareholders were the chief party to suffer from that - but surely that's far more Blank's fault for succumbing to Brown's blandishments (and possible threats). Looking at the "bigger picture", the probable effect of pushing through this takeover was to lessen the crisis - but to the detriment of Lloyds shareholders.

b) Now that, I agree, is the most significant point - but I certainly don't think he deliberately stoked an unsustainable boom. From my reading around this issue, the biggest factor was that interest rates remained as low as they did for as long as they did, and that no controls were imposed on bank reserves/securitisation.

Here is where I object to your OP: bankers were not compelled to go on the spree of leverage and securitisation that they did. This was surely driven by the bonus culture and excessive greed. Few outside the investing banking industry understood what was really going on (including many bank directors). What I really object to is calls to "stop bashing the bankers" - when little in their behaviour seems to have changed. A complete cultural change is what's needed. Major shareholders share some blame here too - as they indirectly encouraged these excesses.

However, again, I suspect that many shareholders didn't understand the consquences of demanding unrealistic rates of return on bank capital: that's a lesson that current bank shareholders should learn. They are reliant on the bank executives, who are supposed to know what they are doing and ought to be acting prudently. Clearly, that wasn't happening. We need a banking culture that does not reward excessive risk taking, nor force staff into taking such risks to maintain their positions. Huge bonuses and a macho culture are a significant factor in this, IMO.

The other criticisms you make, which certainly have some validity, are far less significant to the big picture, so no point arguing about them.

Until I see a cultural change, I will continue to criticise bank executives. I do see some signs of hope in Hester's recent (relative) pay moderation and applaud him for that. It gives him a lever with which to make the sort of cultural changes I'd like to see at RBS. There is an awful lot of ordure that needs cleaning from these Augean stables.

I'd better make it clear that my posts on this thread (as opposed to the ShareSoc ones) are entirely my personal views, not necessarily those of the ShareSoc Board or its membership.

Mark

One more thing...

The last thing that we should be doing is repeating the mistakes by appointing managements who are not competant to rectify the problem - and that is what the original poster appeared to be advocating.....

I think it is equally true that investment bankers don't understand (or have any interest in) retail banking. ISTM that that is one key reason why the "universal bank" model really isn't a good idea: yes, investment bankers must be put in charge of investment banks and retail bankers in charge of retail banks. The core retail banking operation must not be vulnerable to investment banking failures.

A consequence of this is that capital for investment banking will be more expensive. Then investors will have a true choice: take a bigger risk (without taxpayer support) by investing in investment bank debt or equity and get a higher immediate return, or accept a lower immediate return in exchange for taking little risk and having a deposit guarantee. That is how it should be.

Yes, it will be painful and expensive to effect this separation.Shareholders need to be aware of that.

I hold no financial sector equity (but do hold some preference shares).

Mark

Professor John Kay sums my views up neatly in the final paragraph of an article today: http://www.ft.com/cms/s/0/a8c00988-c430-11e1-850c-00144feabdc0.html 

Perhaps banks should operate to standards as high as those of casinos. There are two main arguments for splitting the utility of retail banking from the trading casino. One is to stop croupiers gambling with house money; the other is the incompatibility of trading and banking cultures. The

In reply to marben100, post #17

Mark,

Lets leave G Brown on one side. I'm in no doubt about his culpability but he is now a side-issue and we have to deal with the fallout going forward.

This para is at the nub of the debate:

Here is where I object to your OP: bankers were not compelled to go on the spree of leverage and securitisation that they did. This was surely driven by the bonus culture and excessive greed. Few outside the investing banking industry understood what was really going on (including many bank directors). What I really object to is calls to "stop bashing the bankers" - when little in their behaviour seems to have changed. A complete cultural change is what's needed. Major shareholders share some blame here too - as they indirectly encouraged these excesses.

We differ on the "banker-bashing", but yes - shareholders were also to blame...and not for the first time either [I once did some work with Marconi - who went bust because they were finally persuaded after years of shareholder nagging to spend Weinstock's GEC cash pile on acquisitions at precisely the wrong time in the market].

BUT it is completely disingenuous of politicians, the press and others to "keep bashing the bankers". Politicians certainly played their part (as discussed above) but so also did the press (in encouraging rampant consumerism and playing ZERO role in journalistic investigations of what was actually going on in the financial system) and, of course, the general public - who had "never had it so good" and happily borrowed and spent to an extent that would have had our forefathers turning in their graves! ....

- People don't blame drinks companies for producing and selling alcohol to people who then abuse it

- People (mostly) don't blame tobacco companies for continuing to sell their addictive products to those who are hard-up and unable to get off the habit

....and in both cases there are substantial social costs imposed on the rest of us as a result of both activities.....

...so why is it "OK" to single out bankers for bashing when they were merely (in 99.9999% of cases) carrying out lawful business that was being encouraged by Government and the Press, and allowed by the Regulators who were supposed to be protecting the public? 

The short answer is that it ISN'T justifiable in any way shape or form. Certainly the culture and practice in banking needs to change - and you can be certain that the bank managements and other stakeholders all recognise that only too well......but that DOESN'T mean that the rest of us should "forget" that we were all complicit in the debacle and continue to vindictively pillory bankers for excesses which ( in the overwhelming 99.999% of cases) were completely and utterly beyond their control.  The real cause of the crisis was actually groupthink - nobody with any influence was shouting about the dangers of so much debt in the economy (which is something else I blame Brown for, as his hubris got the better of his brains): The Bank of England had been emasculated by the transfer of powers to the FSA and the FSA had a culture of cost-minimising box-ticking because it was funded by the industry and not incentivised (or technically equipped!!!!) to ask tough questions of the banks - and I know this last point well, having approached three successive FSA MDs to see if there was any role for someone with my knowledge of the debt capital markets...and there simply wasn't - they had nobody with any proper industry expertise!

But, coming back to your wish to continue "bashing the bankers", the real problem isn't any of the above - it is that by continuing to "bash the bankers" we are in severe and imminent danger of shooting ourselves (and the UK economy) in the foot!  Only in the UK does this unremitting "bashing" mentality exist - and if it continues for much longer we  in the UK will have:

• banks that are less competitive internationally
• banks that are run by second-grade people, because the better people will work elsewhere without the public opprobrium that UK banking now attracts
• London will be much less attractive as a financial centre ( damaging the surrounding economy)

Is that REALLY in the interests of the UK?

I'd better make it clear that my posts on this thread (as opposed to the ShareSoc ones) are entirely my personal views, not necessarily those of the ShareSoc Board or its membership.

Actually, it would perhaps be best for ShareSoc to clarify the status of the comments in the name of "ShareSoc" on this board. I can see that you are clearly speaking for yourself and that is fine and clear .....but the ShareSoc post to which I responded was clearly expressing a first-person personal view of the anonymous author - and I'd suggest it is that aspect which is unsatisfactory.

Regarding your second post:

I think it is equally true that investment bankers don't understand (or have any interest in) retail banking. ISTM that that is one key reason why the "universal bank" model really isn't a good idea: yes, investment bankers must be put in charge of investment banks and retail bankers in charge of retail banks. The core retail banking operation must not be vulnerable to investment banking failures.

I agree the core point there that the core retail banking shouldn't be vulnerable to investment banking failure and that the universal banking model is riskier. However, it may be helpful to explain some context:

For many years they were completely separate. The US had formalised this in the Glass -Steagall Act, but repealed its key provisions in the late 1990s due to pressures arising from international competition - the UK had allowed purchase (but not integration, initially) of stockbrokers and jobbers by commercial banks in the 1986 "Big Bang", and London was overtaking New York as a financial centre because commercial and investment banking became ever more closely integrated. So (taking NatWest as an example, as I was there at the time) the trading arm of County Bank (Natwest's investment banking arm) was moved into the same floor at 135 Bishopsgate as the main bank's FX trading room and, over time, various trading desks were moved across the floor (so, for example, the derivatives traders were moved into the FX trading room).....and, in the space of a few years, full integration came about. The other source of international pressure was the Swiss and German banks - who had ALWAYS followed a universal banking model....but perhaps had been more conservative than the anglo-saxon newcomers in the way they actually ran their banks!

Splitting these things up is most definitely a very major and medium-term exercise....and not one to be done lightly. Neither will it be costless for corporate customers - who will lose access to various global banking services that are currently provided as a "one stop shop". These points seem to be being completely overlooked in the debate!

A consequence of this is that capital for investment banking will be more expensive. Then investors will have a true choice: take a bigger risk (without taxpayer support) by investing in investment bank debt or equity and get a higher immediate return, or accept a lower immediate return in exchange for taking little risk and having a deposit guarantee. That is how it should be.

Yes - all fair comment. Capital for investment banking SHOULD be relatively scarce and expensive - and should have no state safety net. Retail banking is IMO a pure utility operation - and should be regulated in a similar way to the way that water and power utilities are regulated.

If we could turn the clock back, I would say that structurally and culturally the banking industry was "in the right place" in about 1996....and that most of what went on in the following decade was a spiral of excess that was inevitably going to lead to a crash of one sort or another. I would like to see UK banking go back to 1996 - which was a world where integrated services could be offered to customers, but also one in which there was a healthy tension between investment banking and commercial banking and a large degree of separation in terms of management and culture.......but the danger is that these calls for separation in fact take us back to the 1970s, where many banking/dealing services were very much more costly and cumbersome than we have taken for granted today.

rgds

ee

Posted by ShareSoc at 17:00, July 4 2012.

Press release on Barclays, plus a trio of AIM company presentations

ShareSoc has issued a press release on Barclays LIBOR rate manipulation debacle and Diamond’s pay (a truly unbelievable £120m that he has collected while a director of Barclays with probably more to come). It analyses the causes of the banking sector scandals - see http://www.sharesoc.org/ShareSoc_Press028%20Libor%20Debacle.pdf 

Last night ShareSoc members attended three presentations by AIM companies: DQ Entertainment, Pittards and @UK. Some brief and informal notes on these companies and the presentations are present on the ShareSoc Members Network blog. But let me say that these were certainly educational sessions even if many of the attendees might not have jumped to invest in them.

In reply to emptyend, post #20

...so why is it "OK" to single out bankers for bashing when they were merely (in 99.9999% of cases) carrying out lawful business that was being encouraged by Government and the Press, and allowed by the Regulators who were supposed to be protecting the public? 

Let me make one thing clear, I have no desire to "bash" the myriad of junior staff who were and are simply doing lowly paid jobs - and I'm sure that sentiment is true of the majority making such remarks. What we take issue with is the senior staff, who awarded (and in many cases, continue to award) themselves with huge packages.

There are a myriad of possible answers to your question (why is it OK...?), but let's look at just one example: the recent interest rate swap misselling scandal. It seems clear that the root of this scandal was, once again, a cultural change that turned one-time pillars of local communities (traditional banks) into sales offices. Instead of addressing the real banking needs of consumers and small businesses, they became driven by sales targets set by remote head offices. Hardly surprising that products got missold.

What government policy, exactly, was it that led to that cultural change? AFAICS it was driven by short-term profit seeking by senior executives to the exclusion of all other considerations, including possible impact on the banks' customers and knock on consequences. It wasn't government policy that caused morality and prudence to go out of the window (though the "loadsamoney" culture encouraged by govt. policies in the 1980s played a big part, IMO).

I am utterly unrepentant (and indeed feel it my duty) to criticise such behaviour and (more importantly) do what I can to see it changed.

I don't see how we can just roll things back to 1996 - because I see nothing so significant that changed in 1996 that led to the brakes being taken off unfettered greed. It goes back much further than that.

ShareSoc's proposed solution is to give shareholders greater power over the nomination of directors and determination of their remuneration. I have attended many AGMs this year, and seen far too much cronyism and too many "placeman" non-execs. Surely it is obvious that that is what happened at many banks and was a key contributory factor in the cultural change that you and I both deprecate? Many (but, of course, not all) boardrooms seem far too cosy to me. Your own NED experience at a very small company will have shown how untenable it is for NEDs in FTSE100 companies to fulfil their roles properly, whilst holding numerous directorships.

Giving more power to shareholders is a necessary but not a sufficient condition. The other part of the solution is to pressure institutional investors to play their part and take active responsibility for ensuring that the right combination of talent is directing and overseeing their businesses and that pay is reasonable. How can the utterly disproportionate increases that have taken place in the Boardroom over the last 30 years possibly be justified? I am pleased to observe that institutions DO now seem to be becoming more active, but there's a long way to go and vigilance will be required to prevent backsliding.

I do appreciate that this is global problem. The "occupy" movement, which began in the US, and spread globally, shows that it is gaining global recognition too. ShareSoc and I, however, can only address UK situations, though we are members of international investor representation groups, WFIC and EuroInvestors.

Regards,

Mark

In reply to marben100, post #22

let's look at just one example: the recent interest rate swap misselling scandal. It seems clear that the root of this scandal was, once again, a cultural change that turned one-time pillars of local communities (traditional banks) into sales offices. Instead of addressing the real banking needs of consumers and small businesses, they became driven by sales targets set by remote head offices. Hardly surprising that products got missold.

I'm not at all sure that is right (at least in Barclays case - I heard vastly more comment about such a cultural shift in relation to Lloyds!). If you listened to Diamond at the Select Committee today, you will have heard him explaining to the committee (who didn't appear to grasp the point) that:

(Floating rate + swap to fixed) is equivalent to a fixed rate loan.....

...and many Barclays customers apparently WANTED to have fixed rate loans and Barclays were, in most cases, merely giving customers the economic equivalent of what they asked for.

The fact that they now bitterly regret that decision (because interest rates have plummeted, thanks to the aftermath of the financial crisis) is NOT the fault of Barclays (save for, no doubt, a relatively small number of situations where the product sold was actually misrepresented). Of course the number of people complaining is high - but it is high for the same reason that personal accident cases in relation to car accidents is high....namely the encouragement of fraudulent and/or false claims by "Claims Management" companies...and the opportunity to make a quick buck back and assuage their "buyer's regret". If you don't believe me on that, I suggest you check out the details when they have all passed through the ombudsman etc.....and also check the Daily Telegraph for Friday (or Thursday) last week - because these Claims Managers were out advertising for "swaps misselling" business THE DAY AFTER the story broke in the press.

I am utterly unrepentant (and indeed feel it my duty) to criticise such behaviour

...and I am utterly unrepentant about defending the vast majority of honest, hard-working bankers (INCLUDING most of those at senior levels) who are doing their level best to ensure that the industry can recover and thrive and be a major export-earner and employer in the UK.  In particular, I consider it my DUTY to point out that the baying mob who ignorantly tar every bank and banker with the same brush (thanks to the past actions of a few handfuls of people in an industry that employs millions) are fundamentally wrong in very many (but not of course all) of their criticisms and proposed remedies. These are VERY dangerous times - and the unthinking pillorying of banks and bankers is making things worse and much riskier, NOT better!

As such, I find myself in complete agreement with Boris Johnson - which is a slightly unusual experience.....but it is ABSOLUTELY ESSENTIAL that the mob don't tear down or handicap major financial institutions in their thirst for revenge - because that is what it is driving all the venom that has hounded Diamond out of Barclays....naked envy and revenge!

Remember that I was one of those pointing out the risks in these areas before they happened. I've got no axe to grind.....I haven't worked in a bank for 15 years........the time to get all concerned about these issues was in 2000-2005 - NOT now when everyone and his dog inside and outside banking knows that there are issues that need to be addressed and the regulatory people are fully engaged, properly resourced and on the case of anything that looks like a problem. Decapitating bank managements and vast reorganisations of the banks are the most dangerous possible response that people and politicians can have to the present situation!

I don't see how we can just roll things back to 1996 - because I see nothing so significant that changed in 1996 that led to the brakes being taken off unfettered greed. It goes back much further than that.

The point is that in about 1996 I would judge that the cultures and organisational structures in banks were in a sensible balance - consumers got a good range of good value products that were considerately sold and the investment banking tail didn't wag the commercial banking dog. That is my considered  judgement, as someone who has spent 30 years working in the industry or watching closely from the outside (in equal measure). The fact that you think the problems go back much further indicates your willingness/keenness to throw the baby out with the bathwater!

ShareSoc's proposed solution is to give shareholders greater power over the nomination of directors and determination of their remuneration. I have attended many AGMs this year, and seen far too much cronyism and too many "placeman" non-execs. Surely it is obvious that that is what happened at many banks and was a key contributory factor in the cultural change that you and I both deprecate? Many (but, of course, not all) boardrooms seem far too cosy to me. Your own NED experience at a very small company will have shown how untenable it is for NEDs in FTSE100 companies to fulfil their roles properly, whilst holding numerous directorships.

I don't disagree that there is too much cronyism and placemenship amongst non-execs - especially serial non-execs. I have previously suggested somewhere here (or perhaps in emails to you/David) that there should be a low numerical limit on non-exec directorships held by an individual. Two NED roles in a public company seems quite enough to me...and NEDs should be as independent and independently-minded as possible.  This is relatively easy to change - institutions simply need to boot out those who do not appear to be pulling their weight or who are potentially conflicted thanks to too many interests.

Banks are a special case however. I would characterise bank boards historically as being rather akin to the clubby types who are names at Lloyds.....financially aware but perhaps not at the cutting edge of finance. If I was unkind, I might suggest that some of them have been a bit thick - or at least totally unaware of the way that modern financial markets work (nb - I think this is less of a problem now). As an illustration, I was once asked by my bank's Global Treasurer to speak to a (titled) board member about a personal investment proposal he was considering....and it rapidly became clear to me that the proposal was in fact most likely to be a large-scale attempt at fraud. It took all my reserves of tact and patience to allow him to reach that conclusion himself, rather than be told by someone 3 rungs down the foodchain that he was a gullible twat.

Regarding your point about institutional involvement, I fully agree that they need to be more proactive....and perhaps some are doing so. However, from where I sit there is a vast over-reliance by institutions on the advice of box-ticking consultants who advise them which way to vote on resolutions without themselves having reached rational conclusions about what "independence" actually means. For example, some consultants have advised voting against directors who own millions of shares outright but who happen to have small numbers of options as well. Why? Because they think that options prejudice independence. No consideration at all is given to the balance between shares owned and options. They would have a point if the options dwarfed the shareholding - but they don't when it is the other way around!

rgds

ee

Correction: the link in #21 above should read:

http://www.sharesoc.org/ShareSoc_Press028%20Libor%20Debacle.pdf