Saturday, January 24, 2009
Caroline Kennedy
Now that she is out of the running for Hilary Clinton's NY Senate seat, I wonder if Caroline Kennedy will be offered the Ambassadorship to Paris ( a town loved by her mother ) or London ( where the scion of the family had the same posting ) ? Both are the plums in the Foreign Service portfolio and would be a just reward for her friendship and support of the President. Old Europe needs to know it is still regarded as an unflinching and reliable ally in the new administrations view of the world.
The crying need for an ethic of finance - towards communalism
The destruction of goodwill on the balance sheets of the financial sector continues apace. Recent revelations that John Thain had authorized accelerated bonus payments at a time when he knew that Q4 earnings would reveal a huge write down have angered BoA shareholders and American taxpayers alike. This mornings revelations of the multi-million dollar redecoration of his office with $87,000 rugs and $1400 trash cans have only served to link Merrill's name with that of Enron in the pantheon of financial greed run rampant.
The root cause of all this has been the increasing commoditisation of money. There was a time when financial investors were prudent in their dealings recognizing that the capital they handled and advised was the sum of personal investors hard earned savings, corporate success, occasional good luck and the retirement dreams of young and old alike. To be in the financial sector implied probity and responsibility.In the mid-90's this conservative approach to capital management slowly started to change with restraint giving way to excess. Money was increasingly viewed as a basic commodity that could be limitlessly mined and endlessly leveraged without any link to the fortunes of the people,families and firms that provided it. Moderation as an appropriate ten plate was forgotten in an ethos that rewarded risk. Abstention was laughed at. Personal wealth enhancement replaced fiduciary conservatism in dealing rooms and as the guiding mantra for the industry as a whole. Greed blossomed in an environment where risk was down played.
After a decade of excess that moved from brokers to fund managers the party has finally come to an end. Risk has been shown to be alive and well and trust in the financial sector has evaporated. By placing their reward structure above that of their clients the current generation of managers in the banking sector have overseen the destruction of their companies, the impairment of their balance sheets and the undoing of generations of goodwill built up in their companies.
One first step to restore confidence in the banking system will be the SEC and FSA and others formally tasking independent directors with the duty of safeguarding client capital and ensuring that suitable questions are asked of management. The era of the cosy board must come to an end or governments will provide their own candidates. Going down that route opens up other dangers.
The root cause of all this has been the increasing commoditisation of money. There was a time when financial investors were prudent in their dealings recognizing that the capital they handled and advised was the sum of personal investors hard earned savings, corporate success, occasional good luck and the retirement dreams of young and old alike. To be in the financial sector implied probity and responsibility.In the mid-90's this conservative approach to capital management slowly started to change with restraint giving way to excess. Money was increasingly viewed as a basic commodity that could be limitlessly mined and endlessly leveraged without any link to the fortunes of the people,families and firms that provided it. Moderation as an appropriate ten plate was forgotten in an ethos that rewarded risk. Abstention was laughed at. Personal wealth enhancement replaced fiduciary conservatism in dealing rooms and as the guiding mantra for the industry as a whole. Greed blossomed in an environment where risk was down played.
After a decade of excess that moved from brokers to fund managers the party has finally come to an end. Risk has been shown to be alive and well and trust in the financial sector has evaporated. By placing their reward structure above that of their clients the current generation of managers in the banking sector have overseen the destruction of their companies, the impairment of their balance sheets and the undoing of generations of goodwill built up in their companies.
One first step to restore confidence in the banking system will be the SEC and FSA and others formally tasking independent directors with the duty of safeguarding client capital and ensuring that suitable questions are asked of management. The era of the cosy board must come to an end or governments will provide their own candidates. Going down that route opens up other dangers.
Thursday, January 22, 2009
Budget deficits to put '39 and '40 in the shade.
Just read an article stating that Ireland has the highest home owner ratio of any country in history at 82%. The Irish Finance Minister is reported in the press as saying 'we're bust'. See my comments about the Euro earlier this week. The budget deficit projection for the UK and Ireland in 2009 is 11% before counting in banking sector liabilities. In 2010 and 2011 national deficits are likely to be greater as a % of GDP than they were in 1939 and 1940.
Central Europe and Geithner
Impressed with what I saw of Tim Geithner's testimony to the Senate committee considering his nomination but horrified at the self absorption and superficiality of many of the legislators questioning him. One Senator wanted one word yes or no answers to complex matters of regulatory change - talk about grandstanding!
FT picks up on the excessive lending given by Austrian and Italian banks through their Central and Eastern European subsidiaries. Providing Swiss Franc mortgages to Hungarian Forint earners and assets was never going to be triple A rated. Rather than take the hit on their own balance sheets ( which the banks can't weather and which would drive them into government ownership ) the Austrian and Italian banks are now asking for crisis funds for the region from the ECB .
FT picks up on the excessive lending given by Austrian and Italian banks through their Central and Eastern European subsidiaries. Providing Swiss Franc mortgages to Hungarian Forint earners and assets was never going to be triple A rated. Rather than take the hit on their own balance sheets ( which the banks can't weather and which would drive them into government ownership ) the Austrian and Italian banks are now asking for crisis funds for the region from the ECB .
Wednesday, January 21, 2009
Qatar and its Boeing 787's
Just off the phone to an old colleague who is now working at a bulge bracket ( are they still called that ?) in the ME. Tells me that he hears that Qatar Airways is trying to buy production slots for Boeing 787 Dreamliners from airlines that are now having difficulty financing. Qatar was originally planning to introduce the 787 in 2013 but date of entry may be brought forward if they are successful. If true what a difference 6 months makes in terms of demand! I always find that airline gossip is as good an economic indicator as RoRo numbers.
Why would the ECB want the UK to join the Euro?
Sentiment on the trading and research desks of the big City firms is as dire as I've ever known it. The creeping realisation that the salary component of the remuneration package is likely to be larger than the bonus element isn't helping.Prop desks in many houses have had their hands tied and are ticking over at 10% of summer levels.
Lot's of talk about nationalisation of the banks, sterling at parity with the greenback, and a reduction in national installed capacity of 10%-15%. Some pundits are beginning to say the unthinkable that the UK will need to join the Euro. Question is why would the Europeans let us ? Entry would probably be at around £= 70/75 euro cents to make sense and that would only serve to boost UK competitiveness, and attract FDI into the UK from the rest of Europe. Whatever the outcome the UK government is at some stage going to have to address government spending with particular focus onpublic sector pensions. President Sarkozy remains convinced that the UK will have to come cap in hand to their European neighbours by the fall at the latest - the alternative being an IMF bailout. There's going to be plenty of fun ahead in the currency markets!
Lot's of talk about nationalisation of the banks, sterling at parity with the greenback, and a reduction in national installed capacity of 10%-15%. Some pundits are beginning to say the unthinkable that the UK will need to join the Euro. Question is why would the Europeans let us ? Entry would probably be at around £= 70/75 euro cents to make sense and that would only serve to boost UK competitiveness, and attract FDI into the UK from the rest of Europe. Whatever the outcome the UK government is at some stage going to have to address government spending with particular focus onpublic sector pensions. President Sarkozy remains convinced that the UK will have to come cap in hand to their European neighbours by the fall at the latest - the alternative being an IMF bailout. There's going to be plenty of fun ahead in the currency markets!
Tuesday, January 20, 2009
Fiat and Chrysler
Fiat's Chairman Sergio Marchionne has already said that he doesn't believe that an automaker can survive unless it produces 5 million units a year. Add Chrysler's output onto that of Fiat and you come up with a number of 3.5-4.0 million - a figure much closer to commercial critical mass than either achieves at the moment. Strategically,the proposed deal makes sense but it faces three obstacles :
- Can Chrysler cut it's current estimated burn rate of $50m a day and hold out until the new models arrive ?
- Will Congress continue to allocate funds to a Chrysler that is manufacturing a foreign designed product ?
- Can consumers afford new cars in the absence of credit in the general economy? They may like the product but not be able to afford it.
Good to see positive thinking on the part of Fiat's top team.
Year on year airline passenger numbers dire
Have just seen the IATA passenger numbers for November - they make pretty depressing reading and will fuel fears that the manufacturers will see a steep round of order cancellations in H1 '09.
Total international : -11.5% y-o-y
Within Far East : -19.1%
Within Europe : -17.4%
Within Mid East : +0.2%
Within North America : - 17.8%
Within South Pacific : - 5.6%
Interestingly it's not just premium traffic that's falling. IATA notes that economy travel is also slowing sharply and is now expecting negative numbers in all categories through to H2. Air France is said to be giving analysts guidance that its Q4 '08 numbers will fall towards a loss of E200m v a positive EBIT of E311m in the same period last year.
Total international : -11.5% y-o-y
Within Far East : -19.1%
Within Europe : -17.4%
Within Mid East : +0.2%
Within North America : - 17.8%
Within South Pacific : - 5.6%
Interestingly it's not just premium traffic that's falling. IATA notes that economy travel is also slowing sharply and is now expecting negative numbers in all categories through to H2. Air France is said to be giving analysts guidance that its Q4 '08 numbers will fall towards a loss of E200m v a positive EBIT of E311m in the same period last year.
Monday, January 19, 2009
Watering hole closures and strong defence
39 pubs are closing every week in the United Kingdom. This is a rate twenty times higher than it was in 2005.
What's the betting that American defence contractors benefit strongly from any stimulus package? Defence has the great twin benefits that the equipment has to be sourced and manufactured in the US and that the time to cut metal and secure/develop jobs is relatively quick. My guess would be tankers for Boeing, more F-22's ( probably including a sale to Japan ) and a replacement for the ageing Navy P-3 reconnaissance planes by a 737 derivative the P-8. In the UK and Europe the non-commercial players have been holding up rather well in the market so the same may happen here.
What's the betting that American defence contractors benefit strongly from any stimulus package? Defence has the great twin benefits that the equipment has to be sourced and manufactured in the US and that the time to cut metal and secure/develop jobs is relatively quick. My guess would be tankers for Boeing, more F-22's ( probably including a sale to Japan ) and a replacement for the ageing Navy P-3 reconnaissance planes by a 737 derivative the P-8. In the UK and Europe the non-commercial players have been holding up rather well in the market so the same may happen here.
Sunday, January 18, 2009
Leaving the Euro
Currency markets have got it into their mindset that one of the PIIGS will leave the Euro. A question that should be asked, but isn't, is what would happen if the ECB were to expel a country for willful non-compliance?
The political impetus to retain the Euro is strong in countries like Spain and Italy where expulsion from the common currency would be seen as an emasculation of their European credentials. They would fall into that strange second tier of peripheral states like the UK , in the EU but not of it. The leverage that can be applied by the ECB on countries and their governing political elites that fail to make the structural adjustments required is enormous. It would seem most unlikely that any of the major states could face the domestic and international political and economic consequences of going it alone.
Much more at risk of expulsion are economies like Ireland. There are those in the EU who might take a less supportive view of helping Dublin's economy if the Lisbon Treaty is rejected out of hand by their voters a second time. Some ECB sabre rattling pour encourager les autres can be expected - it would also do wonders for the strength of the Euro and inflation targeting.
The political impetus to retain the Euro is strong in countries like Spain and Italy where expulsion from the common currency would be seen as an emasculation of their European credentials. They would fall into that strange second tier of peripheral states like the UK , in the EU but not of it. The leverage that can be applied by the ECB on countries and their governing political elites that fail to make the structural adjustments required is enormous. It would seem most unlikely that any of the major states could face the domestic and international political and economic consequences of going it alone.
Much more at risk of expulsion are economies like Ireland. There are those in the EU who might take a less supportive view of helping Dublin's economy if the Lisbon Treaty is rejected out of hand by their voters a second time. Some ECB sabre rattling pour encourager les autres can be expected - it would also do wonders for the strength of the Euro and inflation targeting.
The Brits do envy well, goodwill, one hell of a problem
One of the UK's papers has a story ' Heathrow runway backers got special BA privileges'. The 'expose' shows that " the heads of several big companies that called for a third runway at Heathrow are members of a confidential British Airways club of elite businessmen who receive special favours. They are served by a team of BA staff who cater for their every need".
Reading further it emerges that BA has a special 'Premier' card for leading corporate Chairmen and others. The heads of WPP,Diageo, and Deloitte are all mentioned.
What is it about the Brits that makes them so envious? I'd be really worried if BA wasn't looking after the heads of major multi-nationals in a special way. With their huge travel budgets and international operations it would be positively remiss of BA not to court the heads of these corporations with premier treatment.
The airline has of course been doing this for at least twenty years so it may be stretching a point to claim that this is why business supported a third runway. Perhaps British companies just want a modern infrastructure base?
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Trust is vitally important for business. One of the worrying issues about the current downturn is the destruction of trust in long established franchises. Old established companies like Merrill's, Lehman's and Bear were all thought to have an institutional memory that would enable them to police themselves and prevent excess. If they weren't able to police themselves then who can? What price can be applied for goodwill on corporate balance sheets in future?
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Article on US credit losses in the WSJ shows Goldman estimates of $1.1 trillion for residential mortgages,$390 bn on corporate debt,$234 bn on commercial real estate,$226 bn from credit cards and $133bn for auto loans. When faced with numbers this big, why is there any surprise that banks are being nationalised?
Reading further it emerges that BA has a special 'Premier' card for leading corporate Chairmen and others. The heads of WPP,Diageo, and Deloitte are all mentioned.
What is it about the Brits that makes them so envious? I'd be really worried if BA wasn't looking after the heads of major multi-nationals in a special way. With their huge travel budgets and international operations it would be positively remiss of BA not to court the heads of these corporations with premier treatment.
The airline has of course been doing this for at least twenty years so it may be stretching a point to claim that this is why business supported a third runway. Perhaps British companies just want a modern infrastructure base?
-------------------------------------------------------------------------------------------------
Trust is vitally important for business. One of the worrying issues about the current downturn is the destruction of trust in long established franchises. Old established companies like Merrill's, Lehman's and Bear were all thought to have an institutional memory that would enable them to police themselves and prevent excess. If they weren't able to police themselves then who can? What price can be applied for goodwill on corporate balance sheets in future?
-------------------------------------------------------------------------------------------------
Article on US credit losses in the WSJ shows Goldman estimates of $1.1 trillion for residential mortgages,$390 bn on corporate debt,$234 bn on commercial real estate,$226 bn from credit cards and $133bn for auto loans. When faced with numbers this big, why is there any surprise that banks are being nationalised?
Saturday, January 17, 2009
Oozing charm
Noteworthy quotes from the biography of David Ogilvy ' The King of Madison Avenue' by Kenneth Roman:
"The good salesman combines the tenacity of a bulldog with the manners of a spaniel".
"If you have any charm ooze it".
"The consumer is not a moron;she is your wife".
"The good salesman combines the tenacity of a bulldog with the manners of a spaniel".
"If you have any charm ooze it".
"The consumer is not a moron;she is your wife".
An oligarch, Tony Blair and the accountants
This morning's Times profiles a supposedly dissident Russian oligarch who once worked for the KGB and now plans to buy London's Evening Standard newspaper. With reference to his time in the KGB he is quoted as saying " Don't confuse foreign intelligence with the KGB. The KGB was a notorious organisation linked to the the gulags. That's nothing to do with foreign intelligence". That's alright then. Wonder what he'd be doing if history had worked out differently and they'd won and we'd lost?
Tony Blair speaking at Yale this last week summed up his governments ten years of economic success " I have unfortunately come to the conclusion that it was luck".
Thought accountants were immune from the downturn? Think again. KPMG the big auditing firm is asking its 11,000 UK staff to take unpaid leave or face a widespread redundancy programme.
Tony Blair speaking at Yale this last week summed up his governments ten years of economic success " I have unfortunately come to the conclusion that it was luck".
Thought accountants were immune from the downturn? Think again. KPMG the big auditing firm is asking its 11,000 UK staff to take unpaid leave or face a widespread redundancy programme.
Toaster salesmen
Over dinner in London this past week heard a senior director at a large Wall Street house describe his soon to be partners at an even larger US retail bank as 'polyester suited toaster salesmen'. That's a sure fire sign that the integration of the two firms is going well! Everyone in the brokers London office was asked to reapply for their own jobs over the last couple of weeks- a request that went down like a lead balloon. If it wasn't for the fact that no one else is hiring there would be a mass stampede out of the front door.
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