Tuesday, 31 January 2012

They call me Mr Goodwin

Nah, that's no really fair to Mr Salmond cos the following letter the former RBS "economist" wrote to Mr Shred in May 2007 suggests he actually quite likes the pariah:

"I wanted you to know that I am watching events closely on the ABN front. It is in Scottish interests for RBS to be successful, and I would like to offer any assistance my office can provide. Good luck with the bid. Yours for Scotland, Alex"

Another more serious point of course is now that the seal's been broke can we expect to see other "Sirs" getting had up, like whaddabout Sir Callum McCarthy, the chair of the FSA when shit went tits up.

Petty political points aside, I'm far more interested in what the catering staff Mr Goodwin threatened with disciplinary action over serving the wrong type of biscuit have to say about it all. You know those real people who were subjected to his "management style" and unlike the direct reports subject to "Monday beatings", were earning fuck all as compensation.

P.S. (Feb 5th) a fabulous person pointed out the irony of Mr Goodwin's punishment - reducing a former member of the ruling class to the same status as the rest of us. The aforementioned fabulous person also opined it was a shame to take Mr Pariah's knighthood away because leaving him with it would have been on ongoing reminder as to how fucked up the ruling class he was a part of actually is. Ahhh, so that's why they took it off him.

Monday, 30 January 2012

Big Boy? Pants.

The Epicurean Dealmaker blog, is a really good blog that's both more literate and articulate than this thing and far more popular. But ……..… from a British perspective at least his latest chat on private equity strikes me as a bit iffy.

Add in a J-curve reference and I reckon his succinct summary of what private equity is and does could grace any finance dictionary. Except, reading it again I reckon there's another thing missing; history, which matters because the Dealmaker’s account is intended to justify as well as explain private equity.

For the Dealmaker private equity “is a valuable part of the financial ecosystem. It is particularly suited to helping businesses which require some sort of transformation, in structure, methods, and/or capital, in order to improve their value …. they are not asset strippers, “vultures,” or liquidators, either. Think of them instead as boot camp drill instructors, whipping out of shape or underperforming laggards into top-flight athletes.”

Hmm, this is the new management with no vested interests taking over and stripping out all capital consuming fat, chopping off any inefficiencies and implementing a new business model view of private equity where making money is almost entirely about adding value then selling on. It’s a lovely view and perfectly in keeping with what any self-respecting member of the British Venture Capital Association (BVCA) – the British private equity trade association - would tell you in public (Jon Moulton being a possible exception here).

Except right from the outset there's some economical with the truth thangs going on. An obvious one is that the bulk of the BVCA’s members aren’t venture capitalists at all just as the bulk of BVCA member deals by value and volume don’t involve venture capital. Rather, they're private equity bods who buy and sell established concerns, an arguably less moral activity than venture capital investments in wholly new businesses (the US equivalent here presumably being the rebranding of leveraged-barbarian-at-the-gate-buyouts as private equity). So yeah, this is a type of finance that tends to hide behind more user friendly labels.

Anyhoo, I reckon the Dealmaker misses a big trick with his chat on “dividend recapitalisations, when he says “dividend recaps … the relatively recent phenomenon of financial sponsors borrowing additional debt through their portfolio companies during the life of their investment, and using the proceeds to pay equity dividends to themselves and their limited partners”.

Now note the immediate qualification – “this is a relatively recent phenomonenon”, then ponder a while the actual nature of M&A activity over the last 100 or so years in Britain which is this - it occurs in waves.

Like according to Leslie Hannah’s Rise of the Corporate Economy you can, somewhat arbitrarily here, identify the peak of previous UK M&A waves occurring in 1881, 1898-1900, 1919/20, 1929, 1959-68 and 1973. Latterly, ONS data shows the number of mergers and acquisitions unsurprisingly peaked in 2007, the total having grown strongly from 20003/04.

So there you are then. Whereas the Dealmaker sets out generic notions as to the benefits of Private Equity, the reality appears somewhat different; actual dealmaking activity has repeatedly clustered around specific points in time. This, of course, is due to the influence of period specific factors, an obvious one latterly being the shifting willingness of banks to lend. I say shifting because well it does as was illustrated by the pre-credit crunch emergence of cov-lite debt i.e. debt sold to private equity investors with few if any of the covenants previously imposed by lenders so they could manage the risk they’d decided to take on. And lets be clear the emergence of cov-lite lending and the associated willingness of banks to lend against ever more aggressive multiples was a product of them competing to lend so they could hit their quarterly/annual sales targets.

What it was not was not a sudden recognition of private equity’s boot camp-like qualities. Rather, in practice bankers were eventually tripping over themselves to throw money at private equity. Now here is where a big boy defence presumably comes into play - bankers are big enough and ugly enough to do the appropriate due diligence and if they weren’t, well tough.

However, a criticism of private equity the Dealmaker seeks to challenge is that it loads up companies with unsustainably high levels of debt that ultimately fucks them in an eventually making lots of people redundant kind of way. Now if I was minded to argue private equity wasn’t to blame for well anything really, I’d argue that if someone offered me mad amounts of debt for hee haw, then of course I'd take it. Heck I could even cite the example of Focus DIY, bought for a couple hundred million and collapsed owing businesses, shareholders and funders around £1bn i.e. the private equity buyers had gone mad for the “dividend recaps” the Dealmaker mentions just in passing. Except with Focus this appeas to have been how the money was REALLY made and as the Dealmaker points out making money is the primary purpose of private equity. Operating efficiencies, new store layouts? I guess, but really it was about borrowing as much as possible then taking as much of that money out the business as possible via dividends (and I'm no even mentioning the sale and leaseback asset stripping other private equity bods did elsewhere in increasing numbers in the run up to 2007).

Except, that’s not quite in keeping with the boot camp instructor account of private equity is it? Rather, its about being able to spot someone dumb, desperate and/or arrogant enough to lend more (and more) cash than was ever paid to buy a business so as to do a "dividend recap" as a key determinant of private equity returns. And if the business fails, as Focus did, and people lose their jobs, then hey ho.

The other thing recent experience shows is that in an M&A wave, you know a fad, a euphoric precursor to a crash during which a disproportionate number of deals get done, being able to identify patsies, ahem, bankers (and in an aggressively competitive environment there will always be a few) becomes increasingly important as all the low hanging fruit gets plucked (a practical example here being the chat about taking Sainsburys private that in reality appeared based on f'all more than the ready availability of cheap debt vs expensive equity). So much so in fact, given the persistently wave-like nature of M&A activity, I reckon its worth taking away any qualified references to "dividend recaps" and emphasising how a key skill (value add even) of private equity is its ability to spot a dumb banker at 100 paces. That and exploit tax arrangements of course.

Sunday, 29 January 2012

Being and not being serious about executive pay

My initial criticism of the bollocks being shat about the RBS CEO’s bonus was primarily that it pandered to the media’s dumbing down agenda of reducing everything to personalities an approach personified by the ghastly as he is vain Nick Robinson. It’s also a disingenuous attempt by posturing politicians to pretend they’re doing something, when they actually aren’t. Except they are. At this “historic juncture” I reckon what’s so fucked up is that this bonus furore distracts from more serious (and complex) underlying issues.

So lets start with some facts. Early last year the HSBC CEO got a £5.2m bonus and the Barclays CEO got £6.5m, the latter being famous for stating "(t)here was a period of remorse and apology for banks and I think that period needs to be over". Neither had as fucked up an organisation or as many stakeholders or pressures to deal with as Stephen Hester i.e. Hester is doing a harder job for less money than his immediate peers and even if these other bods waive their bonus this year, they’ll still have oodles in the bank from 2011. Plus there’s also however many dozen more hedge fund managers and traders raking in more than Hester except they’re currently doing their damndest to go Greek on Greece. So is Hester the unacceptable face of an over-paid, if currently state backed, capitalism? Nope.

Despite this Hester getting pilloried in the press allowed some rim-jockey retard on the Guardian website to state he should only get paid as much as a primary school headteacher, a primary school and a global financial conglomerate employing >100,000 people being apparently interchangeable institutions. Alternatively, such fucktardness illustrates the level of debate underway, one that ignores dull stuff like Hester could walk into an easier job tomorrow that pays him as much or more than he’s getting and do so whilst being widely regarded by his peers as the victim of a witchhunt. It also ignores even duller stuff like the RBS share price and credit rating would get humped due to the management upheaveal this would cause and the resultant perception of political interference i.e. the posturing going on right now would cost the taxpayer a damn sight more than Hester’s bonus.

Really what the above illustrates is how fucked up politicians have deliberately made things. The issue IS NOT should Hester get a million pound bonus, instead it’s whether the system that sets executive pay is working and to a lesser extent is Hester the right person for the RBS job. The second of these is easy to answer; given the RBS board and UKFI both seem happy with him, yes he is. The first part is the far more complex problem, because no it isn’t working and is in fact a growing social problem, but one no major politician appears willing to seriously address.

Rather, to get a sense of scale about what's going on you need to read the Bank of England Governor Mervyn King’s comments from the other day: “Above all else, we must strive to maintain support for a market economy and an open world trading system. They provided the basis for the great prosperity experienced since the Second World War. The tragedy of the financial crisis is that those who have suffered most have been those who bear no responsibility for it, and who, whether employees or businesses, accepted the disciplines of a market economy only to find that others were excused that discipline because they were “too important to fail”. But the legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers. Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair. That sense of fairness underpins the commitment to a market economy” i.e. the basic legitimacy of Western capitalism is being called into question.

Crikey, them’s big potatoes. And the political response so far? Wouldn’t it be nice if things were a bit more John Lewisy and that RBS bloke shouldn’t get a bonus should he.

What this leaves us with is a seemingly untouchable economic elite intent on remaining just that thank you very much and a professional political class too removed, too ignorant and too power-obsessed to appreciate let alone articulate a growing degree of discontent and disenchantment that can only grow as public sector spending cuts persist, high unemployment continues and yer average punter finds inflation is still eating away his or her disposable income, albeit at a slower rate, in an economy where you can no longer borrow cheaply enough to paper over the cracks.

Slightly smaller potatoes would be changing the principles used to set executive pay given the current ones continue to generate economic inequality (not just, as Vincey-tit is largely suggesting, tweaking how the existing participants participate). Are politicians likely to do this I wonder? To give some random examples Tony Blair of JP Morgan and Zurich Financial Services, Norman Lamont, a consultant and advisor to various investment funds, Lord Andrew Turnbull, the former head of the UK civil service who chairs the hedge fund BH Global, or Patricia Hewitt, the former health secretary and an advisor to Cinven, the private equity house that bought BUPA, all seem perfectly placed to help here given their vast experience of both government and business.

In the meantime I reckon the decision of our lawmakers to moan about an individual outcome of a broader system rather than changing the system is already inane to the point of being counter-productive. I mean at least yer old skool Tory knew that to keep taking the piss out us plebs you had to give a little and not do it so fucking obviously.

So in the absence of any meaningful paternalistic gestures here are a couple of suggestions to start the ball rolling. First, draw out the practical lessons from Andy Haldane’s analysis of finance sector pay, most obviously the linkage between it and ROE, and start drawing up regulations that apply them as widely as possible. Also, control for company size in setting executive pay more generally so rewards reflect actual performance.

Second, change the law so that companies can only have one redundancy policy i.e. no more individually negotiated employment contracts for senior and or high earner bods that contain golden parachutes. I’m quite proud of this one cos I thunk it up by myself. Obviously, compromise agreements would be a way round it, so all compromise agreements involving over say £100k should be subject to independent audit to ensure they’re “real” rather than attempts to get round any one size fits all policies.

There. And see what I did with the random examples? Did you? Yeah that's right I was illustrating how cunt professional politicians have a very practical vested interest in preserving the status quo.

Monday, 23 January 2012

Grrr! Executive pay. Grrrr!

The thing that’s so cool about Sir Shred is how him being such a cunt lets dicksplash politicians pretend they're actually doing something by going on about how ghastly he is, being seen to be doing something being the raison d’etre of the political class. Even better doing so personalises what is a global macroeconomic crisis in line with the mainstream news's fixation with personalities as opposed to dull Reithian crud like educating and informing.

You'd have thought though that the obvious political lesson of the Sir Shred pension debacle was that as politicians couldn’t do anything about it, they should've shut the fuck up and instead concentrated on things they actually could influence. Except that was/is too hard. So instead they chose to avoid dull stuff like ensuring a proper enquiry was held into RBS complete with proper investigations so as to ensure the cunt was legally hung out to dry.

Unfortunately, personality politics clearly remains too appealling, so rather than anything that's actually serious we're still left with politicians a) identifying a specifc individual to be demonised, then b) going on and on about his cash so as to distract from the vacuity of taking such a “political” stance as opposed to doing or coming up with anything that actually matters a fuck. Hence we've Ed Miliband trying to outdo Esther Rantzen as a consumer champion by stating “David Cameron should act to stop Stephen Hester (the current RBS CEO) being paid a bonus of this scale” and Vince – the tit – Cable rolling out a raft of bollocks to supposedly curb executive excess.

Now before going any further it’s worth being clear about Stephen Hester the man who inherited Sir Shred’s utter fucking disaster. See the important bit there? That's right, Stephen Hester had fuck all to do with creating the RBS disaster and is working through it to make as much money as he can for the taxpayer. Some of the chat I’ve also heard is that he doesn’t like financing aircraft largely on point of principle, but that aside he didn’t cause the RBS catastrophe. In fact I mind hearing him, when he was still British Land's CEO, speaking at a property investment shindig a few years back. There, in my view, he provided a superbly realistic and succinct assessment of the UK commercial property market’s prospects. By contrast at the same conference useless auld Martin Wolf’s economic commentary dismissed the then emerging sub-prime crisis as something very unlikely to affect the global economy (the irony here being Martin Wolf subsequently sat on the ICB, whose recommendations RBS is now in the process of implementing). But, in politico land that kind of practical shite doesn’t matter. Much better to go on and on and on (and on) about fat cat banker bonuses etc., and how they shouldn’t be paid.

Except, actually howz about these apples instead, like howzabout a review of current tax arrangements with a view to using the tax system to address the growth seen in economic inequality over the past few years cos that kidna works elsewhere? You know, howzabout mad shit like looking at current taxes on wealth including all capital gains as opposed to how much people earn. Mebbe we could consider introducing differentiated taxes on consumption that take into account the nature and price of the good (relative to comparable items) being bought, like say 5% extra on an Aston martin as opposed to a Kia. And can we really go for tax “efficient” individuals and corporations, like REALLY go for them regardless of how many good lunches they take tax inspectors out for.

There you go. Oops, sorry, that’s too complicated isn’t it? Sorry. Much better to posture like Ed Miliband or come out with utter shite like Vincey boy who’s just issued the following on executive pay:

“Measures proposed include:
• making firms' remuneration reports easier to understand, and requiring them to explain executive salaries in relation to the earnings of other employees (Piece of piss really, “it’s a global market for labour at that level and don’t you know Americans earn far more for doing similar jobs” ya de ya de yada for christ sake please ignore nation specific differentials in top CEO pay)

• increasing transparency by requiring the publication of all directors' salaries (And? No seriously, fucking and?)

• giving shareholders a binding vote on executive pay, notice periods and exit packages - at present their say is merely advisory (as many people have already said asking fund managers to interfere in shit like that is like asking crafty turkeys to vote for Christmas. They won’t and don’t give a fuck anyway cos its only ever a tiny % of a company's revenues/cashflow. Plus they've largely bought into the CEO cult of personality shite so are only bothered with who the CEO is not what he’s paid. As for the Cairn chat, please bear in mind exceptions prove rules, single swallows don't make summers, etc.,)

• encouraging a wider range of people onto company boards, including academics, lawyers, public servants and those who have never served on a board before (Hearing shite like this reminds me of that story about Volkswagon and how they set up a slush fund to provide the trade union reps who sat on company boards with free whores, shopping trips and Viagra. Or rather than buying people off you could simply appoint token idiots. Cetainly, Jeffrey Sachs doesn't appear to impressed with Dambisa Moyo the black woman on the Barclays board)

• requiring all companies to introduce "clawback" policies, allowing them to recoup bonuses in cases where they are later shown to be unwarranted (nah, fair dos that is a goody)”

So yeah, the bollocks we’ve got at the moment is written in wholly cretinous terms as dictated by the media. It doesn’t address fundamental issues like the morality of how the people that fucked shit up for the rest of us are still doing very-OK right now thank you very much and it appears when confronted with shit like the growing disparity of wealth (wealth being different to income), the only response we get is don't pay him a big bonus, don't pay hin a big bonus i.e. a focus on incomes and contractual stuff that can't actually be touched as the Daily Mash spelled out superbly today in a manner I'm guessing is already influencing broadsheet commentary on the stupidity of what's being said.

Like when you think about it you start wondering whether all politicians, either through chance or design, are actually in a give-me-a-highly-paid role-as-a-senior advisor-when-I-leave-parliament cahoots with the cunts intent on fucking us all. I mean the "analysis" and crud being spewed right now is so wide of the mark in its stupidity its got poor sods like me actually presenting what could be construed as partial defences of multi-million pound banker pay packages its that bad.

In the meantime back at the Daily Mash you've got the statement they made about Ed Miliband being a “fucking child” and are left wondering how broadly applicable that is when it comes to assessing the political class’s grasp of what’s actually going on.

Like to give a serious example, why the fuck has Andy Haldane’s utter destruction of using ROE as a measure of bank executive performance no even got a mention yet by any mainstream politicians? Or more broadly should the longstanding association between executive pay and company size i.e. the bigger the company the bigger the wage regardless almost of performance, not be controlled for when setting exec pay? Oops that's too complicated isn't it. Sorry 2x.