Saturday, August 30, 2008

Can The Last Company To Leave, Turn Off The Lights.

Having written an article about the new taxation rules from Alastair Darling and how these would see businesses quitting the UK, we now see more and more companies upping sticks and moving to pastures new.

George Osborne Britains Shadow Chancellor wrote in a letter to Alastair Darling that a decision yesterday by serviced office provider Regus to leave the UK is more evidence of the damage done by the confusion caused over the business tax regime.

Mr Osborne added that the changes, combined with 10 years of a Labour Government, had "left us with some of the highest corporate tax rates in the European Union" and called on the Chancellor to fund a cut in the UK rate by simplifying capital allowances.

But Mr Darling dismissed Mr Osborne's accusations out of hand, telling him he was "wrong".

"Surveys by respected international bodies including the World Bank and the World Economic Forum consistently show that the UK is successful at providing a business friendly environment and a competitive tax system," Mr Darling said in his response.

Regus is the third company this week to announce that it is to move abroad because of business taxes. Asset manager Henderson and engineer Charter are moving to Ireland where the tax regime is more business friendly and Regus - whose chief executive Mark Dixon already lives in the tax haven of Monaco - is moving to Luxembourg.

They will follow pharmaceutical group Shire and United Business Media who have already relocated to Ireland this year.

Charter, Regus and Henderson all said concerns about possible changes to Britain's tax regime were a key driver of their decisions to leave. "It is fair to say tax is an important consideration for us and we feel like we are doing the right thing," said Mr Dixon yesterday. "I think certainty of tax is crucial in business and what we want is for there to be no surprises. Luxembourg can offer that." Mr Dixon, who hails from Essex and started life as hot dog salesman, also said Luxembourg offers value for money that London, with sky-high property prices, does not. The Regus boss warned the capital must try harder to keep international businesses.

"London has to face up to the fact that the world has become a lot flatter and is much more competitive than it has ever been. As our business model proves, you can be based almost anywhere these days," he said. Regus shares slipped 1¼ to 74½p, valuing the group at £706m.

Philip Yates, chief executive of Henderson, said earlier this week: "There is too much uncertainty about the long-term structure of the tax regime and the fact that so many other companies are looking at a move is a more eloquent testament to that than anything I could ever say."

Mr Osborne urged Mr Darling to reduce the main corporation tax rate from 28pc to 25pc, and bring about a "permanent simplification of the tax system".

The shadow chancellor concluded: "With companies leaving Britain, weakening an already ailing British economy, I urge you to adopt our proposals in order to restore our competitiveness and help prevent any more companies from deciding to leave the UK."

Mr Darling, however, told Mr Osborne the corporation tax rate remains under review, but added changes must be "consistent with transparent and fair tax policy that protects the sustainability of the public finances".

Good news is that Labour are hanging on to power by the skin of their teeth and, barring David Cameron being found with an orange in his mouth, wearing suspenders and visting 5 hookers dressed like Nazis, he should be in power shortly and we can say au revoir to this disasterous experiment with conservative-socialism.

Tuesday, August 26, 2008

Lehman and 'Club Fed'

Well it's the last week of summer, traditionally a time when you could hear a pin drop in the markets but with the way things are at the moment leaving the desk, for some, is not an option. Especially at Lehman Brothers, where the phones must be on fire with the activity of looking for a buyer.

The question on everybody's lips at the moment is 'When will Lehman Brothers finally give up the ghost?

You would think from all the chatter in the markets that the troubled bank would be heaving its last breath around about now, but is there a reason to suggest that we haven't seen the last of Lehmans?

The take on all this in some quarters is that Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.

Asking people to believe that being a member of 'Club Fed' is an affective guarantee for your bank may be a little stretch, but look at the history. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.

Given the access that Mr Fulds has to the Fed one would assume that he will be chatting to his buddies about keeping the Fed's loan window open until around about the time that Lehmans are out of hot water.

If they are forced to sell there are problems with Lehman assets, however. Buying the Neuberger Berman money managemnet unit for example has thrown up problems. The New York Times suggests that anyone looking at the unit would end up paying twice, once for the firm and a second time to keep all the brokers from leaving.

We have seen issues like this occur with UBS, although they were not selling off the UK wealth management unit, a number of employees (enough to 'devestate' the business according to UBS) were to leave to join Vestra Wealth a start up backed by Goldman Sachs. Vestra were intending to bring on UBS wealth managers and with it, one would expect, their clients, this was at least until UBS took them to court. Anyone buying an investment firm at the moment will have this part of the deal to consider and prospective purchasers looking at Lehman will be thinking no differently.

We all know that things are a little jumpy on certain stocks, Freddie and Fanny, for example, but Lehman investors are also suffering the news roller coaster. The New York Times reports

"Last Friday, a spokesman for Korea Development Bank was quoted by Reuters as saying: “We are studying a number of options and are open to all possibilities, which could include [buying] Lehman.” The brackets and the word “buying” were included in the Reuters report.

Lehman’s stock jumped almost 15 percent that day as investors rushed into the stock on the basis of the word in brackets before it settled down to about a 5 percent gain.

The same spokesman told The New York Times and a half dozen other media outlets that he had been misquoted in the Reuters article. “Such reports are erroneous,” he said. Lehman’s stock has since fallen back to where it was before the article was published.

Nuance can often get lost in translation, and who knows what was really supposed to be in those brackets."

With all the problems we see in the banking world at the moment it is great to see that there are some firms out there willing to give solid advice on cost cutting.

McKinsey & Company, the managemnet consultants, published a helpful report last week on how investment banks can cut up to $2 billion in noncompensation costs.

“Initiatives to curb expenditures need not be extremely demoralizing to frontline employees,” McKinsey says, trying to find ways to save money without affecting the worker bees. So what does it recommend? Getting rid of the consultants.

Yep, you read that right.

Friday, August 15, 2008

Adulterous Banker Gets What's Coming

As we have stated many times on this blog, the Internet can be a very large pain in the posterior if a rival or any general mischief maker decides to target you on the web. We have been the subject of such a campaign previously and it is not pretty.

The latest one to hit the headlines is a story about a wealthy New York banker who had allegedly stolen Tommii Cosgrove’s wife and Cosgrove was not going to let the matter rest. “The story doesn’t end until I say so,” the husband wrote on one post.

Three months later, the quiet resignation of a prominent financier from the merchant banking arm of Credit Suisse has sent shudders through Wall Street and sparked an angry debate about internet users who pursue private grudges in public forums.

(from The Times - ) The banking career of Steven Rattner, a Credit Suisse managing director, has been wrecked by an internet vendetta that has also caused unwanted headaches for a different Steven Rattner, the billionaire founder of the Quadrangle investment group and a prominent Democratic party fundraiser. The Quadrangle Rattner has no connection with the Cosgrove affair.

Credit Suisse said last week that Rattner had resigned to “spend more time with his family”, but the banker acknowledged to The New York Times that he had had an affair with Cosgrove’s wife five years ago and had quit to avoid further aggravation.

“I feel like the star of a bad made-for-TV movie,” Rattner said of Cosgrove’s long-delayed campaign of internet vilification. Cosgrove, an Australian disc jockey and interior designer, declared himself “triumphant”. The resignation brought an apparent end to the bizarre story of a scorned husband who had plastered media websites with salacious accounts of his wife’s supposed activities in London. Cosgrove’s message was always the same. “Steve Rattner paid my wife $500,000 (£260,000) to leave me” read the headline on many of his posts.

In rambling accounts of what happened next, Cosgrove variously accused Rattner of lavishing gifts on the woman he knew as “Kelly Milne”; of taking her on business trips to Macau, Hong Kong, the Philippines, France and Monaco; and of promising her a Ferrari and a house if she stayed with him for at least two years.

It remains unclear why Cosgrove waited several years before launching his attacks on Rattner, who has apologised to his wife and family and is trying to rebuild his marriage. The Cosgroves have since divorced.

Cosgrove said last week that he “had to put my life back together again” and then he had to track down Rattner. It is clear from his early postings that he had confused the Credit Suisse Rattner with the Quadrangle founder, who was obliged to reassure his colleagues that identities had been mistaken.

Both Rattner and the websites that unwittingly hosted Cosgrove’s rants also discovered that there is little legal protection from a determined and vindictive aggressor. The Gawker website suggested last week that Rattner should have sued for libel, but others pointed out that internet libel law remains distinctly hazy – at least in America – and further negative publicity was exactly what the banker was trying to avoid in order to spare his company embarrassment. (-End)

The thing is, as much as I abhor the fact that the web can be used for the whimsy of any person to ruin another persons career, reputation or relationship, I have to say that in this case the guy got what he deserved.

I am sure those of us that are married and love our wives, would have gone a little further than to post a few bad words on web sites. Personally I would have gone around to his house the second I found out and settled it mano e mano, if you know what I mean.

Friday, August 08, 2008

UBS Face $25bn Bite In The ARS.

If all wasn't already bad enough for the beleaguered UBS, things are now starting to get serious. Facing prosecution in the US for various charges of aiding tax fraud the US authorities also threw in a charge of fraudulently selling auction-rate securities.

UBS is close to resolving those claims and may make a promise to retail and institutional clients to buy back the securities, valued at $25 billion by regulators.

On Thursday, Citigroup agreed to buy back about $7.5 billion of the debt, as part of settlements with New York Attorney General Andrew Cuomo and the U.S. Securities and Exchange Commission.

Zurich-based UBS, the target of three state complaints over auction-rate sales, has been in talks this week with Massachusetts, Texas, New York and the Securities and Exchange Commission in an effort to settle the claims.

"We are consistently working with regulators towards a comprehensive solution for all auction-rate securities investors," UBS spokeswoman Sabine Woessner told Reuters, but declined to comment on the report.

(Definition - Wikipedia) An auction rate security (ARS) typically refers to a debt instrument (corporate or municipal bonds) with a long-term nominal maturity for which the interest rate is regularly reset through a dutch auction.

It could also refer to a preferred stock for which the dividend is reset through the same process. In the dutch auction, broker-dealers submit bids on behalf of potential buyers and sellers of the bond. Based on the submitted bids, the auction agent will set the next interest rate as the lowest rate to match supply and demand. Since ARS holders do not have the right to put their securities back to the issuer, no bank liquidity facility is required

The market started to fall apart Beginning on Thursday, February 7th, 2008. Auctions for these securities began to fail when investors declined to bid on the securities. The four largest investment banks who make a market in these securities (Citigroup, UBS AG, Morgan Stanley and Merrill Lynch) declined to act as bidders of last resort, as they had in the past. This was a result of the scope and size of the market failure, combined with these own firm's need to protect their capital during the 2008 financial crisis.

On February 13 (2008) 80% of auctions failed. On February 20th, 62% failed (395 out of 641 auctions). As a comparison, from 1984 until the end of 2007, there were a total of 44 failed auctions.

On March 28th, 2008, UBS AG said it was marking down the value of auction-rate securities in brokerage accounts from a few percentage points to more than 20%. The markdowns reflect the estimated drop in value of the securities that the market has seized up, while UBS wasn't offering to buy the securities at the new lower prices.

Beginning in March 2008, several class action lawsuits had been filed against several of the large banks. The lawsuits were filed in federal court in Manhattan alleging that these investment banks deceptively marketed auction-rate securities as cash alternatives.

On July 17th a National Task Force, be made up of officials from several states including Missouri, began investigating at the St. Louis, MO Headquarters of Wachovia Securities. Some in the media were calling it a raid and officials called it a "Special Investigation" at the St. Louis offices. Media reports also said that Wachovia Securities part of Wachovia Corp based in Charlotte, NC did not comply with request by officials which prompted the "Special Investigation".
It is also stated that other Securities Firms are also a part of the investigation. The Missouri State action was prompted by complaints to the state and total of more than $40 million of investments that were frozen.

Citi then announced it would be buying back these securities and now UBS looks to be negotiating a similar situation.

It is a tough time to be a banker, especially one with UBS, we just hope that certain commentators, who have been calling the bottom in the banking sector, are right!

Thursday, August 07, 2008

Deutsche Bank Call The Commodity Top

I love to look at indicators in the market that are not necessarily in the playbook of the professional analyst. I wrote a report that held up the humble chocolate croissant as a market indicator, I warned of recession having spoken to a French teacher and a few weeks ago I wrote an article discussing the rise of websites, dedicated to the buying and selling of gold and singing the praises of the commodity market to private investors, as an indicator of a bubble about to burst.

It would take a brave man, however, to call the top of the market but it looks like Deutsche Bank have taken the plunge calling the top of the commodity cycle and advising clients to take profits before the economic downturn casts its spell on the sector.

The bank warned that oil will slide back towards its "marginal production cost" of $60 to $80 a barrel; gold will slump to $650 an ounce as the dollar recovers against the euro; copper, lead and tin will slowly halve in price; grains will calm down as harvests in Australia and the Eurasian Steppe return to normal.

There is a wider view now that a correction in the sector is imminent, with some analysts drawing parallels with the technology boom. They fear the worst.

"The run-up over the past few years is eerily similar to the surge in the Nasdaq index in the late 1990s," says Paul Ashworth, of Capital Economics. "Back then we were told things were different because of the arrival of the internet. Traditional valuations didn’t apply anymore.

"Now the surge in energy prices is being justified by demand from emerging Asia and low interest rates, even though the reason interest rates are so low in the US is because the financial system is in a complete mess and the economy is in recession."

The boom in markets in general has been caused by the easy money of recent years but tightening by lenders is now having the reverse effect.

"Now that the latest bout of easy credit has come to an abrupt end and housing is a bust, the bubble in commodities is the next one to watch," Ashworth adds.

Graham French, of the M&G Global Basics Fund, a global equity fund, is not predicting a correction that is wild but he believes that natural resources stocks have become 'stretched'.

"The strength of global commodities demand, in particular from industrialising countries, has resulted in very pronounced rises in the share prices of many natural resources companies in recent years," he says. "While I expect this demand to remain robust in the long run, I believe this scenario has left company valuations in a number of cases looking quite stretched.

"It is important to take an increasingly selective approach to investing in commodities-related companies. I prefer cash-generative, non-speculative, attractively-valued companies with strategically important assets."

Mark Harris, portfolio manager at New Star, has already taken profits and is gradually winding down his exposure to Oceanic Australia Natural Resources and BlackRock World Mining.

Its not all doom and gloom for the commodity investor, however, as, according to Ian Henderson, the fund manager of the leading JPM Natural Resources fund, the three main tenets underpin his positive conviction regarding the attraction of the sector over the long-term: population growth, infrastructure demands and compelling valuations.

"One cannot speculate about a continuing commodities boom without acknowledging the underlying reasoning for the surge. And this demand is energised by fast-growing populations and the infrastructure needed to support their evolving needs. It’s a self-propagating cycle."

Mr Henderson cites a huge drift towards the cities, with urban populations in India and China currently standing at 29pc and 40pc respectively, compared with the US, which currently stands at 81pc.

"As this drift continues in emerging market countries, more steel is needed to build railways, more coking coal is needed to smelt the steel. More energy is needed to power the railways and the new homes," he says. "All of this has little to do with the relatively short-term effects of credit crunches, recessions and belt-tightening around the world as they are largely government mandated projects. These will continue as nations recognise the need to spend on infrastructures to further increase their wealth, irrespective of short-term blips."

Traders are, obviously, more short term in their trading than most investors in the sector, however, the strange position that the trader is in is that the long term argument for investing in commodities is actually quite compelling. According to the latest World Energy Report, the emerging nations – notably China and India – are going to continue to support and fuel energy prices for the next two decades.

The report reveals that the world’s primary energy needs are projected to grow by 55pc between 2005 and 2030, at an average annual rate of 1.8pc per year. Demand of oil equivalents will reach 17.7bn tonnes compared with 11.4bn tonnes in 2005. Fossil fuels will remain the dominant source of primary energy, accounting for 84pc of the overall increase in demand between 2005 and 2030.

Oil demand will reach 116m barrels per day in 2030 – 32 mb/d, or 37pc, up on 2006. In line with the spectacular growth of the past few years, coal sees the biggest increase in demand in absolute terms, jumping by 73pc between 2005 and 2030 and pushing up its share of total energy demand from 25pc to 28pc. Most of the increase in coal use arises in China and India.

Some $22 trillion (£11.4 trillion) of investment in supply infrastructure is needed to meet projected global demand. Anthony Eaton, from JM Finn, the boutique fund manager, recently said: "The recent spikes in energy and food prices highlight how stretched global infrastructure is in meeting just the needs of Western economies, never mind the 80pc of the world’s population living in non G7.

"This is a global phenomenon and is likely to build in relevance if current forecasts prove anywhere near accurate."

One thing we can be sure of is that the commodities market will continue to present opportunities for profit both long and short for the active trader

Monday, August 04, 2008

UBS Make Move On Pickpockets

We have often reported on UBS's troubles, not from a case of schadenfreude, but because it is a big deal when the biggest bank in Switzerland gets its knickers in a twist. But today I am pleased to stick up for the bank in a case that has probably touched all of us in the industry at one time or another.

If you have ever started a business in the financial industry you will have suffered the problem of spending hard earned money training people up and spending cold hard Euros on marketing. You get to the point where you now have a decent client base producing good money for your operation then, suddenly, someone in your company decides that they can do it better and leaves to start their own company, taking 'their' client base with them.

Of course the excuses fly "I built the relationship"... "The client only wants to deal with me"... "The client is worried about your business"........... all b******s, in my opinion.

It is a very easy way for someone to set up their business on the back of your money. Garden leave is supposed to take care of this or your cast iron contract, drawn up by expensive lawyers who told you it was unbreakable.

The truth is garden leave and contracts rarely work and you find yourself seething at the fact that you have affectively helped someone else start their business with far less risk than you did.

Enter UBS. They have decided that they won't be having any of that having just won an injunction preventing start-up wealth manager Vestra from poaching its staff and clients.

High Court judge Charles Openshaw said he believed some of the bankers who quit to join Goldman Sachs-backed Vestra had acted as "recruiting sergeants" for Vestra whilst still at UBS.

"Every business is entitled to expect loyalty, fidelity and diligence from their staff. That is part of the bargain for which they are paid," said Mr Justice Openshaw. The bank has lost 75 employees to Vestra, which was founded by David Scott, and is suing the company, Mr Scott and four key former UBS bankers - Duncan Carmichael-Jack, Neil Pedley, Paul Pollard and David Guild.

Vestra believe they have done nothing wrong and a comment to the Telegraph from a source close to Vestra said: "UBS are showing they are rattled by the competition and are trying strangle it at birth. What Vestra has done is perfectly legitimate - staff and clients should be free to make their own decisions and there has been no abuse of confidential information."

The Judge in the case, Mr Justice Openshaw, appears to disagree saying "I am firmly of the view that the claimants have put forward a formidable case that there was an unlawful plan to poach staff and clients from UBS." He added: "It is in my judgment an unlawful conspiracy dressed up as lawful competition."

It may appear to be a situation that is petty when you consider the problems in the market at the moment but I believe that this is an important case for our industry.

Spending money to build a business only to have it taken from under you is not a pleasant experience, but should UBS win this case it may become a little easier to protect effort and cash that has been spent building your business from those that would use their positions in your organisation to take what is yours.

Friday, August 01, 2008

The Old Grey Whistle Tax

You have to love the Internet. Gone are the days where articles can be written and it's only Mr Giles Farquarson-Smyth who can make a comment in a long-winded letter to the Times.

Simple and straight to the point are the rules of today's commentators. My favourite of the day was from Mr Fredrick Davies commenting on an article about Labour's tax hikes.

"I sometimes wonder what those idiots in the Inland Revenue are thinking; I mean, come on, you cannot be THAT stupid and be able to hold a job, can you?"


What was this precision perfect insult about? Labour's complete cock up of the capital gains tax rules, an old favourite of ours.

You remember this farce. Darling decides to make poster boys of private equity millionaires ripping off tax payers by having carried interest in their funds which has them taxed at only 10%. Darling says he is having none of that and creates a flat rate of 18%.

Realising he has now just almost doubled the tax for hard working people who have been running a business for years, he brings in the 'Entrepreneurs Relief' which is a one time £1mn taxed at 10%.

Fair enough, but in practice this is now causing the golf courses of Britain to be deserted of the grey haired retirees who have built their businesses, paid their dues and moved on to well deserved golfing and gardening.

These once great business owners had happily settled into retirement, leaving the running of their enterprises to the next generation. But they had retained their shares as an investment, for old time's sake.

Enter Darling's capital gains Entrepreneur's Relief - and all hell breaks loose.

The more pessimistic predictions suggest that our grey heroes will leave the 19th hole a little worse for wear, preparing themselves to go back to their companies and ask to be reinstated.

The reason being is that the new tax relief comes with some strict rules (no surprise there then), including one that requires the entrepreneur to own at least 5 per cent of the shares and be either an office holder (i.e. a director) or an employee of the business if they want to claim the relief when the shares are finally sold.

Basically leaving the oldies holding a fat tax demand if they sell their shares without complying with these rules. Having already taken a hit by the retrospective loss of indexation (which inflation-proofed gains before 1997), they are unlikely to be in the mood to help the Chancellor out any further.

All this against the backdrop of falling stock market, falling houses prices and a potential recession. Is there any wonder that Gordon Brown has the lowest approval numbers in history?

The only 'Entrepreneur Relief' on the horizon is the impending crushing of the Labour Party in the next general election. I just hope the next mob take a good look at the indirect taxation scams that have been thrust upon the people of Britain and sweep them aside.

I fear, however, that David Cameron is Tony Blair in a different party, rather than Maggie Thatcher in a suit.