A 2007 Valedictory

The problem with globalisation is that it cannot globalise politics.

This propos, from a November presentation by Joseph Stiglitz, is self-evident: capital flows unconstrained (mostly) internationally but political economy – and this scribe chooses to define that as the socially judicial art of satisfying unlimited wants with limited resources – remains a national concept whose essence frequently changes at borders.

Thus trade treaties are asymmetric and reflect, more than anything, the existing balance of negotiating power. Even after the often hailed GATT/WTO Uruguay round OECD tariffs for goods from poorer nations are 4 times higher than those from OECD members. No area is more illustrative of this than agriculture where, not only are there high tariffs, but OECD countries subsidise 48% of total farming production. That political attachment to subsidies - recognised, hidden or (especially) re-defined - explains in large part the demise of Doha last summer. Piss-taking has its limits.

Nonetheless, between WTO rules, IMF conditionally and a lop-sided market-economy dogma advocated by the developed there remains an aggregate force that presses down upon developing nations and undermines local culture, social justice, environmental protection and access to developed country intellectual property – most notoriously HIV/Aids medicines.

This is not a moralistic bash-the-North piece. It is an argument that their national politics are myopically getting in the way of a greater (including their own) economic, political and social stability. Examples abound but nowhere, probably, is it more media-obvious than in the havoc being relentlessly wrought upon the environment by capital. Love of sovereignty can have significant negative externalities.

Expecting the scales to drop from the eyes of the developed ahead of future trade discussions, as Mr Stiglitz’s presentation appeared to implicitly hope, is futile. Not much of value has ever been given away by power; and negotiation, rightly, is here to stay. And on this count there is encouragement to be found in Doha’s very failure: it showed that the pivot in the balance of such negotiations can move Southward - 'take it or leave' does not always work. Still, pleasing at it may be, that trend is not yet strong enough to yet help the very poorest.

Happy New Year.

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Clip (includes some effing and blinding) no relation to finance; and tenously linked at best to holiday fare...Happy holidays.


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Today’s data release shows core CPI moving up, annualised at 2.3%. It would be unfortunate were it to continue that way; but for the man who put ‘deflation’ on the Fed agenda when still serving with Mr Greenspan, this is conceivably, for now, a Not Altogether Bad Thing as far as Mr Bernanke is concerned.

Historically speaking, the Fed (probably) need not have the violent inflation shakes yet (Exhibit A). Even assuming the official data have issues of understatement, in the absence of a shock, inflation does not spike. It creeps.

Exhibit A: Cap Utilisation & Core CPI since 1970

Thus various Taylor Rule graphs floating around cyberspace show the next US rate move will still be down. These pictures look somewhat like Exhibit B. Yet the devil etc. Are the sensitivity factors for output and inflation gaps appropriate in light of a newish Chair (Exhibit B assumes Greenspan’s)? Are GDP forecasts understating the effect of the persistently cheap dollar? Do inflation forecasts underestimate the pressure from input prices?

Exhibit B: Simple Taylor Rule model
Near imponderables, really; and through it all it is hard to know - despite all the moves to greater Fed transparency and so forth - what Mr Bernanke is truly the most concerned with. The prime suspect would appear to be seized up credit markets. A scholar, as the media frequently reminds, of the Great Depression it is plausible that he considers Job 1 avoiding an inefficient allocation of capital paralleling that which helped choke economic growth in the 1930s. This is certainly the view underlying Fed futures which, as with the Taylor Rule, imply another lop come January.

That outcome looks likely to cloud the outlook for core inflation significantly; and even in the presence of an unofficial, fuzzy and asymmetric Fed PCE/CPI target, risks ordaining inflation a persistently complicating factor.

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The secret of comedy?

Timing.

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The judges gave mixed reviews to the competitors this week. Bruno Tonioli felt that the European Central Bank and the Bank of England fell out of step and utterly spoiled their rumba:
“Jean Claude, you were masculine and powerful – a French Valentino tonight. And there is little sexier than a younger man dancing with an older woman. But the Old Lady is just too afraid of it. 6!”
Arlene Phillips had this to say of ABN Amro and the Royal Bank of Scotland:
“It was the most disturbing jive I have ever witnessed – at times it looked like the proverbial caricatured Dutchman and Scot fighting over bonus pennies rather than dancing. 5!”
Len Goodman, like all the judges, found pleasure in Northern Rock’s tango with its many partners:
“You could teach us all a thing or two about dirty dancing. It was frenetic, raunchy, passionate stuff - sizzle and sausage! 10!”
Craig Revel Horwood thought that BHP Billiton and Rio had plenty of work to do to make their samba work:
“Marius, you show a freedom of expression not present in Tom’s strangely camp and passive performance. But you’ll need to improve your posture, energy and sex appeal to draw Tom out and make this a really horny routine. 2!”
And everyone was in agreement regarding the Viennese Waltz of departing competitors Sainsbury’s, Asda, Tesco, Morrisons, Safeway, Robert Wiseman, Arla, Lactallis McLelland, Dairy Crest and the Cheese Group:
“Passionate about lowering prices? You did well to maintain your hold until that end bit when you were badly found out. Still, a majestic routine in its own way - but hardly fresh or romantic. You made Charlie Prince look like Fred Astaire.”
Have a grand week-end. In the meantime, US viewers can check out our stateside version, Financing with the Stars.

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Amongst the most sought information on this site is that concerning the Baltic Dry Index (BDI). And, indeed, at a time when equity markets offer little reassurance a rocketing BDI – now over 10,000 – looks a promising place to find comfort.

The last time the BDI was covered here it was just over 7,000. That was in August. The thesis then was that a counter intuitive opportunity existed in the scramble to finance and build new ships. That still holds and one notable development for those interested in riding the idea has been the Suez-EDF merger which will see the former spin-off its environmental waste and recovery activities.

Still, more interest lies closer to current happenings. Volumes of traditional ship financing remain immense (despite some signs of pullback amongst, most visibly, German banks) and are allied with increasing private equity activity. Shipping IPOs in the current quarter are well into double figures and this drive to increase fleet sizes shows up in record ship prices: some existing 7 year old ships (capesize class, for example) are commanding the same prices as similar new build tonnage.

There comes a point where ship buyers have to judge whether freight rates, and the outlook for freight rates, can justify these prices. Sustained by the China and India demand stories they evidently judge that they still can; and in this they are succoured by the q4 seasonal surge in transport prices, typically driven by heating oil demand.

However, a mitigating factor of the profit hopes of ship buyers is the cost of bunkering – in broad terms ship fuel. Shipping consultants McQuilling Services provide a useful insight into how sharply these bite into what appear to be reassuringly strong freight rates. And one shipping CEO this month appears to provide industry confirmation of this. If, as he suggests they must, these bunker costs are successfully passed on down the line they are likely to infiltrate even the core inflation measures of the US.

Yet perhaps the most significant challenge to the China/India decoupling hypotheses comes from the generalised flight to government paper. 10 year US constant maturity rates typically relate positively to the BDI with a lag of 3 to 6 months. There is currently a sharp divergence from this trend which, time will tell, either supports the prevailing shipping enthusiasm for decoupling or may come to be seen as the proverbial warning shot to the head.

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Sir,

You may have seen the programme Teen Boob jobs: too much too young on the UK’s ITV2 television channel on 12 November. Let me make it plain from the outset that my viewing interest was that of a respected cosmetic surgeon. However, there were two revealing comments from the section covering “Toni” that may spike the interest of the finance world.

[1] Toni’s Mum: She can make decisions and half the time she does make right decisions.

[2] Toni’s best friend: How you gonna afford it and stuff?
Toni: I’m getting a loan.
TBF: You do realise you’ve got to pay extra money back?
Toni: Yeah, I know that. Obviously.

Some in the financial world might say that Toni’s Mum was the inspiration for Mr Mervyn King’s breaking cover yesterday with the motherly cautionary observation that:

"…if there were to be an adjustment of risk premia in equity markets with a fall in asset prices then that could have a bigger impact on the world economy."

That may be so: at least both parties are resigned to the inevitability that youth and the profit motive will have their heads – don’t entangle either with one’s own neuroses and paranoia even if a 50% success rate worries one a bit.

And indeed, why (else) should one? It is such bold and far-sighted personal development decisions as Toni’s that keep the economy humming along. This is, after all, recurring spending: Toni knows from her research that implants require decennial maintenance. And, as a surgeon in the field, I can personally attest to the fact that my discretionary spending is largely dependent on clear-thinking patients like Toni.

Which brings me to the second comment: what unexpected wisdom demonstrating an awareness and fiscal responsibility that those who lament the state of our youth must only find encouraging! And it may offer, if I may be so bold, an entirely new definition of asset-backed loans for investment bankers to work their securitization magic upon: unsqueezable breast-backed instruments can slide neatly into the breach left by sub-prime, AAA securities et al.

All well worth considering in light of the commerce ministry of China’s recent first-time public worries about reduced financing availability for silicone prosthesis procedures in the US (I can read between the lines of the FT-speak). If Toni and those she exemplifies were unable to invest in themselves the consequences may be dangerous for the carefully calibrated production capacity hundreds of laissez-pas faire mandarins have carrotted-and-sticked into place over there for so many years.

In all our interests, this is surely a test of chaos theory to be avoided.

With kind regards to you and your readers I remain,

Yours sincerely

Professor Sir “Siv” ABC Papier-Wobbler
FRS FRCS (Oxon), MDMS PhD (Cantab), FRCP FRCOG (Guadalahara), MS (Karachi), MS (Bangkok), B Litt (Phil), D Litt (Ottawa), B Sc (Liege)

PS/Here's an excerpt from the programme should you have you missed it:



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  • Writing break due to travel. How is it a small, less open than it thinks emerging tropical economy pegged to the US dollar looks as healthy as it does? Second trip required.
  • Billiton BHP: is there a serious argument contradicting China’s socio-political need to stop further consolidation of its iron ore suppliers? Steel employs at least 2 million and has been producing at rates a sinking US construction market cannot soak up. And as fast as China pushes into shipbuilding, car and fridge manufacturing to maintain employment one wonders if the demand is really there (and sustainable). Higher input costs that a reduced iron ore supplier base will demand surely will come at an inconvenient moment. On the other hand, blocking a $140bn+ deal is not a gimme.
  • Does anyone watching banks believe that Tier 1 ratios mean much in the current climate? “What is capital?” looks an unanswerable Jeopardy question making even previous favourites (of the scribe, at least) Royal Bank of Scotland and Credit Agricole appear unattractive investments – whatever PE, book valuations and divis would seem to say. And RBS is probably not helped by the leverage it took on to make the ABN deal either. Chairman Sir Tom McKillip may have bought £500k of shares 2 days ago but show us signs of those vaunted synergies first and then let’s talk.
  • Markets seem to be suffering the cramp during coitus experience (potentially embarrassing analogy but there it is). Except financials who just have cramp.
  • Is sterling’s strength against the dollar some sort of time-lagged joke?
  • Finally, and this is probably trickier than it sounds, is Shire Pharmaceuticals plc worth breaking a rule for?

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This is an abridged version of an article originally published in the latest The Price Report newsletter


There have been times in the past when central banks have let big firms fail, but concurrently supplied bridging liquidity in order to prevent needless collateral damage to credit markets. A classic – and successful – example was the Fed flooding credit markets in 1970 in the wake of the Penn Central Railroad failure. Penn had sought a federally guaranteed loan bailout to mitigate the effects of, mainly, poor management decisions. They argued they should be saved because bankruptcy would threaten the entire commercial paper market in which they had borrowed heavily.

The specific risk they claimed was that the railroad’s creditors would find their own funding cut off due to their exposure to Penn and a domino effect would be triggered down the commercial paper market line. The Fed did not buy this. It let them fail but provided temporary liquidity to the other actors in the commercial paper market.

An elegant approach and one that gave no reward to the company for its poor stewardship.

In contrast, during the US savings and loans (S&Ls) crisis of the 1980s, all sorts of panic measures were taken to avoid the bankruptcy of thrifts – including the poorly run ones – and thus to preserve political fiefs at state and national levels that it was thought out-of-pocket ex-depositors would otherwise have stormed. The term “insolvent”, for example, was re-defined; bills were passed granting S&Ls retrospective tax-relief on mortgage losses; federal deposit insurance limits were raised; and S&L net worth requirements were debased by broadening qualifying capital criteria.

Some of the results were unintended. Frauds came to light including that of Michael Milken’s linked financing schemes (“I’ll send deposits your way if you buy these worthless junk bonds”); and numerous S&Ls took greater moral hazard related risks than they should have and consequently failed. By the end, estimates of the total cost to the US taxpayer fell in the $200bn range – and that is 1990 money.

Nevertheless, by the time the Long Term Capital Management (LTCM) crisis broke the temptation to intervene prompted by a tendency to overweight and understudy the political considerations was again visible. Or perhaps ingrained. The US central bank took the view – with persuasion from the macro fund itself – that this was one firm too big to fail and stepped in. Or, to be fair, Mr Greenspan’s view was not that LTCM was too big to fail, but that it was too big to liquidate quickly. What the worth of that distinction is in practical terms is debatable.

By intervening the Fed appeared to have discouraged a credible and timely private sector rescue of LTCM by Warren Buffett. This is a disputed point; but it is clear that such an offer was made, rejected and withdrawn whilst the Fed and LTCM were talking. Intervention also amounted to a rejection of the idea that a global capital market valued in trillions of dollars is well able to absorb crises, demonstrate swift refractory snap-back times and make rapid order from chaos. Further, it glossed over the moral hazard dangers the Fed’s actions would engender. The Fed still went ahead and brokered a deal they later labelled a private-sector solution – but one with far better terms for LTCM managers and shareholders than they would have got from Mr Buffett.

It is hard to escape the depressing conclusion that regulators had come to believe only they can save, and know when to save, the market from itself. Is it a surprise, therefore, that when we look at the Northern Rock debacle we can hear distant echoes of all these events?

In today’s credit crisis, of which Northern Rock is a small, visible symptom, regulators are conditioned to believe, partly by precedent and partly by lobbying from the ranks of the distressed, that the potential fallout is of catastrophic scale and warrants major intervention. But there is a new twist: the source of this crisis is too much easy money for too long, a problem that permeates the entire system. Stepping in this time with a strategy of feeding credit markets liquidity does not look an apt policy stance.

There is thus not only the risk that regulators have become too trigger-happy in general saving those who do not merit it and penalising the prudent. There is also the further concern that they are lighting a match in the arsenal. When recession, re-balancing, and regeneration do come – and they cannot be legislated or re-inflated away into perpetuity – the price of such good but distortive intentions may well be that the final denouement is more protracted, painful and expensive than it otherwise could have been. That is the lesson of previous inelegant interventions that have tried to work against the market dynamic.

A light-touch interventionist philosophy that delineates clearly between market order and laissez-faire is what financial overseers ought to be striving for. That does not exclude safety nets: but these should not overly mitigate the downside of risk-taking – however great the political need to be seen to be doing something to smooth that jagged but necessary cornerstone of the market economy.

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Some idle thoughts as equity investors line their pockets. A genuine liquidity issue?


UPDATE: This graphic and text (in addition to comment 1 below) sets out the difference in perspective and expertise on interest rate derivitives between the essentially equity focussed bean counting (cum archair economist) scribe and a quant who trades the instruments and looks to lock down a return no matter what rate permutation the Fed adopts.

TRADEABLE SYNTHETIC BASIS CHART ENCLOSED....


DEC EURO'S.. THEY GO UP CAUSE THE FED WILL EASE..
OR THEY GO UP CAUSE THE "BASIS" WILL NARROW... TWO OPTIONS FOR THE PRICE OF ONE!

FFF8 1/31/2008 50 0.0467 ASSUMING NO OCT AND 32% PROB OF DEC..
FFG8 3/12/2008 42 0.0467 THIS IS WHERE JAN AND FEB FUNDS ARE..

WITH A LITTLE COMPOUNDING =>'S 4.68%
DEC EURO'S WHICH ARE OF COURSE WHERE T THREE MONTH LIBOR IS ANTICIPATED
TO TRADE... 94.05.. OR 4.95%

A) COMPARING FUTURES TO FUTURES ELIMINATES MOST OF THE CASH/FUTURES BIAS..
BOTH ARE JUST EXCHANGES FOR DIFFERENCES.. NO REAL MONEY EXCHANGES..

C) THREE MOVING PARTS.. DEC EUROS.. PROBABILTY OF FED MOVING AND "SPREAD"
GIVEN THE FED ON HOLD DEC EURO'S NOW IMPLY THAT THE SPREAD
WILL BE 20 BASIS POINTS.. TO BE CONSISTENT WITH 95.04 FUTURES
PRICE..

B) FFF8 1/31/2008 50 0.0475 FED DONE...
FFG8 3/12/2008 42 0.0475
DEC EURO'S AT 95.04 IMPLY 20 SPREAD!!!
TO FED FUNDS BETWEEN DECEMBER AND MARCH..

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Last call for gloats before Eng vs Fra tomorrow at 21h00 (French time).

One from the English...
...and one from the French, Australians, South Africans, English etc etc:



In mitigation though, Global Consciousness World leaders are united in praise for the New Zealand All Blacks after hearing they will contribute to the planet's carbon footprint reduction by dropping the Aussies off on the way home.

NB: ... and these were some of the more gracious ones that hit my email...

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The decision today by British Land plc to pull its £1.7bn Meadowhall sale offers a counterpoint to the FT story reporting big banks’ linked financing deals aimed at clearing some of the $200bn of leveraged buy-out debt they carry. Besides the obvious that the excess leverage / high valuations partnership looks to have been carried too far it also demonstrates an encouraging market clearing mechanism – zealous regulators take note.

In fact, they have. Of these developments one is reported by the FT to have said, "When we start seeing innovation on how to fix the problem and bring in new investors, it will be a good sign that things are turning".

Whatever the accuracy of the latter part of that statement, this particular mechanism is not an innovation: during the 1980s savings and loans (S&Ls) crisis a variant was used (with some success) to convince desperately-seeking-deposits thrifts to take on what, in some cases, they failed to spot were toxic syndicated junk bond packages (ie take this cash but buy some junk from us). Then it was the likes of Wall Street-wise Michael Milken doing the convincing; and the by comparison provincial S&L boards were often too willing to believe the supposed merits of the deal.

This time the negotiators looked evenly matched which, with luck, will keep all bank balance sheet transactions economically genuine.

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  1. British Land pulled their attempted sale of the £1.7bn Meadowhall shopping centre in Newcastle. The firm said "the uncertainty in financial markets has made the prospect of realising an appropriate value unlikely". The appropriate price in question would have equated to a yield of 4.6% in what is an unsettled UK commercial property market. Swiss psychiatrist Mrs Kübler-Ross inadvertently did some pertinent economic work on this sort of decision in her 1969 book “On Death and Dying”. A graphic summary:


  2. Big Rugby World Cup weekend and a wistful reminder that the hair quota has again been cut with the exit of Tonga and Finau Maka. It might have been so different – Maka plays professionally in France (Toulouse) and is also a French citizen. That raised the possibility of a hirsute mafia of Maka and Sébastien “Cro Magnon” Chabal both being selected by French coach Bernard Laporte. Didn’t happen and the scribe can’t help but wonder what might have been…


  3. Skivers’ Paradise, also known as Facebook. Mooted price tag of $10bn. Ad click throughs negligible. Alternative revenue models yet to be dreamed up and proven by Steve Ballmer (or whoever). Steve. Baby. It’s a no-brainer: this thing could be as big as Friendster and Geocities. Combined. Back up the truck.


  4. Joga bonita: simulation or crippling, wheelchair foul in the Interbank Lending Crisis Cup Final? This recording of the Financial Select 11 versus the Market Dynamic Squad lets you review the controversial sending off call of the MDS fullback Bill Poole for his tackle on striker Jim Cramer. Were referee Bernanke and (look carefully) his linesman assistant Mr Trichet correct?

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Dear IT Support,

About a week ago, I upgraded to RateCut! 1.0 from LiquidityHog 4.2, which I had used for a couple of years without any trouble. However, there are apparently conflicts between these two products and the only solution was to run RateCut! 1.0 with LiquidityHog 4.2 turned off.

To make matters worse, RateCut! 1.0 is incompatible with several other applications, such as InflationTarget 2.0 and FiscalSoundness 4.5. It does work pretty well with HouseBubble 6.9 though - and that's software that wouldn't even open when LiquidityHog 4.2 was running. But overall, and to cut a long story short, just as with the prior 2001 releases of RateCut! this latest version 1.0 has proved no better for the stability of my system.

I had previously tried a shareware program, TalkTheWalk 2.1, but it had the spyware program IgnoreHim 3.2 and trojan horse HedgeFundsGoneBad 2.8 bundled in which actually left my system worse off than before.

So anyway, I deleted TalkTheWalk 2.1 and installed the Maestro 8.4 browser. However, this does not do what it says it does on the packaging. In fact, since I unpacked it, it does the opposite and keeps giving me warning messages about something called the PunchBowl 9.2 virus.

As a final resort, I bought the web-spider BigBanks 6.2 to try and get a handle on everything. However, this is very unstable software and prone, without warning, to launch the CramerRant and Multi-Whine worms no matter what other program is open. It also keeps demanding the latest version of RateCut! every other day.

The result is that I am now considering running RateCut! 1.0 and RateCut! 1.1 at the same time and simply upgrading to InflationTarget 5.0 to see if that works. I’ve heard FiscalSoundness 4.5 isn’t that essential anyhow and removing it might even help me break my record game scores in WeakDollar 1.5 and GoldBug 2.8. What’s more, I’ve heard WeakDollar 1.5 actually works well alongside BustTheBudget 5.0 and could even help me improve the performance of CurrentAccount 6.2 which, even after so many patches for so many years, still crashes regularly.

Sincerely,

B Bernanke.


NB: Inspired by the Wife 1.0 stories...

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There is something profoundly and depressingly self-serving in the arguments that the price of saving the little people and wider economy from rampant speculation in and irresponsible selling of financial instruments (exotic and vanilla) is to save, also, the prime instigators of the problems.

That argument is, of course, frequently advanced by Mr Greenspan (and lately by Mr Bernanke). Yet what we more accurately have here is a failure to action the axiom of William Martin (made famous by one of his successors, Paul Volker) that the job of central bankers is to take away the punch bowl just as the party starts to swing.

In contrast, by the time sales forces start hawking as serious investments great volumes of (for example) CDOs backed by car loans the party has begun to look a lot like a Mick Jagger groupie night in. The consequence has been pain amongst assorted hedge funds, miscellaneous financial firms and banks - pain which also menaces the ‘real’ economy.

All might untangle non-catastrophically if the current US central bank strategy of easing just as banks all tighten lending practices/standards to protect their balance sheets succeeds. There is cause for hope here as it has worked before as part of the standard Fed toolkit for crises over the last decade.

But, notwithstanding the prior successful use of such bridging liquidity by the Fed, it should be asked if this crisis is different and far more self-inflicted than growth worries (1996 cut), Asian contagion (1998 cuts) or 9/11 (2001 cuts) were.

Specifically, central banks - and the Fed foremost - failed to control the growth of credit caused by the quick, sharp 2001 cuts and leisurely hikes over the next five-odd years to June 2006. Hardly an external shock (though initiated by one); and further easing now risks perpetuating the same issues. That is an important difference from prior crises; and, although the likelihood of creating a structural problem does ultimately depend on how deep the Fed cuts this cycle, credit weaning is not a gimme.

Hindsight is marvellous of course. But as early (or maybe that should be 'as late') as 2004 there was widespread concern about credit growth. Below this post, for example, is a letter sent by an ordinary reader of this space to the Bank of England in 2004. Doubtless one of many that both Mr King and Mr Greenspan recieved that year it now appears particularly timely.

Yet still the punch bowl stayed out; and is out.

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Last night I had the strangest dream. I was on the sunny side of the street of a long and winding road. Abruptly, I looked round and - mercy, mercy me – Chairman Bernanke was next to me. I wanted to touch the hem of his garment but instead I said,
“Chairman, please don’t make me cry. Already the debt situation looks like a supermassive black hole. I know you’re not my slave but, for the love of the common people, now’s the time for some responsibility – do you really want to hurt me?”
He replied,
“Unbelievable - it’s the same old song as ever from you guys. Wasn’t 2006 a good year? Hell, it was a very good year. Sure, you want perfection. But we can't get there from here. We've many rivers to cross as we run through the jungle that is global finance. Look, I’m under pressure, man. There’s so much trouble in the world of economics: banks bawling for rate cuts – pump it, give it to me baby, easy money, it’s urgent yadiyadiyadiya; savers claiming I haven’t been loving them for the longest time, where is the love, call me cause I got the 1040 blues, dadidadidadida. The bottom line is that we are family and must solve things together. One love, okay?"

"Already I’m tired of being alone in this job - think I asked for this? Alan used to say it was nice work if you can get it but I'd rather be going home to Dillon – oh, Carolina. I always had a feeling – OK, it was more than a feeling – that Alan wanted to give it up for me. He said as much by telling everyone he was 'mad about the boy Bernanke'. But, hell, there ain’t no sunshine right now. Do I blame Alan? No, but some guys have all the luck. No scar tissue even when the market cuts like a knife and his every utterance received like it came from a burning bush."

"You say we got a huge asset bubble. I second that emotion – this baby’s got back – and every night I say a little prayer it don’t burst. Yeah, I’m keeping the faith. You don’t like it? Cry me a river.”
Awaking in a sweat I wished on the moon that it was just my imagination. Running away with me.

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UPDATE: the 21 Sep edition of the Daily Telegraph reports an example, perhaps, of the moral hazard banks (and N Rock in this case) engage in when knowing there is a lender of the last resort handy. Still want to fixate on Mr King?

Today the Governor of the Bank of England faces a Treasury Select Committee where, in the wake of the Northern Rock episode, he is not likely to receive a sympathetic hearing. Already the media characterise Mr King as an “academic” (a put-down, apparently) and “very difficult” when the chips were down.

Mr King is not a Sir Humphrey Machiavellian pragmatist. That is a description, for better and for worse, that can be made of Mr Greenspan and, on recent evidence, Mr Bernanke. Mervyn was never going to fudge it on moral hazard; and for this he is going to be made to pay.

Yet the fundamental issue is over-aggressive lending and investment practice in an easy money environment - not whether Mr King bowed to City, Treasury and Downing Street in such a way as to make their lives easier. It may be convenient to attack the “difficult” regulator when things tank; but it is nonetheless misplaced, hypocritical and profoundly unfair.

Still, Mr King does have a fault in this: governments will always protect bank deposits (ie votes) and Mr King perhaps did not grasp how overarching this truth is. Whatever the debate on deposit insurance schemes and the inherent moral hazard risks of a lender-of-last-resort policy no incumbent politician will permit, if it is possible, Zimbabwe-queue comparisons with his administration. For this reason Northern Rock savers were never in danger.

Ex-post the Financial Services Authority, in concert with the Treasury and the Bank of England, will doubtless move to justify their existences by kicking off debate on the deposit insurance scheme front. However, this is an entirely political exercise and there is enough evidence (think back to the Savings & Loans debacle in the US) suggesting that such regulation is in itself a source of moral hazard (in both banks and customers) that contributes to crises. Not that this will ever make such protection other than a political given.

And so Mr King will carry the can for not pulling with the "team". This scribe sincerely hopes during today’s cynical Select Committee confrontation that he gives better than he gets.

Postscript: Cynical it was; yet Mr King held his own with a clever legislative defence. Moreover, it was Deputy BoE Governor Sir John Gieve who was given the real working over by the Chair, John McFall MP, with a hysterically frenzied series of questions surrounding his holidays and which concluded with the rush to judgement "You've not been doing your job".

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Maxed out on the fed funds and discount rate cuts - very bold. Hat and salt this way, please.


Still, can't get one line of the Shame and Scandal calypso out of my head: "your Daddy ain't your Daddy but your Daddy don't know" (c/f previous post).

Postscript: By popular demand, the Madness cover


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On general release from tomorrow, 18 September and...



...it might just blow heads clean off shoulders.

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Prudent financier:
Chancellor, are you not concerned that by authorising the effective bail-out of Northern Rock Building Society you will be seen to be tacitly endorsing the reckless lending and off balance sheet shenanigans that many in the UK’s banking sector have been engaging in?

Chancellor of the Exchequer:
We must be absolutely clear about this, and I would be quite frank with you. The plain fact of the matter is that at the end of the day it is the right, no the duty, of the elected government in the House of Commons to ensure that government policy, the policies on which we were elected and for which we have a mandate, the policies after all for which the people voted, are the policies which finally when the national cake has been divided up, and may I remind you we as a nation don't have unlimited wealth, so we can't pay ourselves more than we've earned, are the policies... I'm sorry, what was the question again?

(With thanks to Yes, Minister circa 1982)

And so it begins. Were the BoE and Mervyn King serious about moral hazard earlier this week?

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With the Fed decision on Tuesday it is a shame the CPI data will not appear until Wednesday. Still, the latest retail sales and industrial output/capacity utilization numbers will be here tomorrow.

But will the picture for these change much from what is already known?

Exhibit 1: Retail and Capacity Utilization trends

It does look like CPI will soften on this trend. Yet going forward commodity prices are a wild card - seen the level of the Baltic Dry Index recently (ie record high)?

The view that infrastructural bottlenecks are behind much of the BDI price increases in ship borne goods is valid; as is the idea that centrally-controlled China is boosting demand in a way the free market would not. But inflationary pressure is inflationary pressure, whatever the reasons.

On the other hand, try telling that to Mr SPX currently riding the crest of hopes for a 50 basis point cut in Fed funds next Tuesday.

Greasing the system's liquidity is one thing but how will the uncomfortably leveraged take such respite? As a dodge-the-bullet breathing space to deleverage? Or as a signal that moral hazard is no more? What the ECB is doing, for example, injecting record billions to reduce the rate differentials on short term interbank and longer term 'official' lending rates surely only punishes the prudent whilst encouraging the foolhardy. The Fed has also been at this - does it really want to continue?

Secretly the scribe wishes the Fed would use its other monetary tools instead of bailing the imprudent with the FF rate under cover of maintaining market order. But the best he should hope for is a mere 25 bps drop - and maybe, on a close look at Mr Bernanke's record and pronouncements, that is not as outrageous as the futures markets imply.

Even so, that may still only delay a worse day of reckoning when central banks will bail no more and commercial finance houses suddenly find absorbing asset losses is simply beyond some of them. That is not the case today; and they should take, or be made to take, their medicine whilst able to.

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Exhibit 1: Gone Daddy Gone - where is the Love?

Buy the dips still?

Maybe. But as US model indicator after model indicator of the scribe's has clicked into bear stance only one (but to many the most important) is now left tottering positive: the main US market stock indexes. A stubborn legacy, perhaps, of a lot of easy money.

Alternatively, the model is shite.

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Foreign undergrads at universities in the American South will detect cultural differences: ask for a rubber in a crowded lecture hall and chances are an eraser will not be forthcoming; despite an agricultural appearance three country boys in a pickup truck asking where the hoes are will not be referring to farming implements; and members of the law enforcement community generally do not appreciate the benefits of healthy debate.

But learn about clipping, pass interference and pre-game tailgating and all is forgiven. Well, most.

Such are the ties that bind some to listen to a college football game until 03h30 Western European time. Course, when it’s a win between the hedges over previously condescending Georgia fans defending a ranking of 11 it is worth the trouble; and it is misfortune for the scribe that so few Georgia alumni are available locally for abuse. Still, they’ll probably recognise the Spurdawg as their Daddy without further reminding of his long dominance of them.

Post-game retirement to Group for celebrations as in previous years was not an option. But a recent photo of the establishment from a friendly native reassures that its decor is as inviting as ever. No doubt the broken bottles underfoot, the stench of well-stale bodily processed beer defending a 10 metre perimeter around the offending toilets and the diplomatically-challenged bouncers still complete the same charming debauched formula.

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It as good as the +1% consensus. Only much better.

Utilization capacity continues to hum at a pace re-emphasizing the inflation threat the Fed has to handle amid what are increasingly political calls to ease the plight of over-lenders and over-borrowers. Then again self-interest is what makes the system so dominant.

Equity markets have made a small initial jump on the news; but perhaps the odds-making on the two Fed funds cuts over 60% of polled economists expect by year end has been complicated a shade: Mr Bernanke's goal is to prevent a lack of credit liquidity in the interbank market getting out of hand whilst keeping a grip on inflationary pressure - he is not in the business of saving from insolvency those who got greedy.

Or at least that is what his published utterances appears to say.

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UPDATE, 13h00 (GMT+1): iSoft have just announced they are discussing the terms of an auction process with the UK Takeover Panel

The UK's Takeover Panel rules were not designed with Schemes of Arrangement, a structure under which a bidder need gain 75% control in order to squeeze out the remaining quarter, in mind. The only previous case the scribe has read of with two competing bids somewhat similar to this involved Tata and CSN's cash bids for Corus. Then, the Takeover Panel made them enter a snap auction. The bottom line now: iSoft have a duty to shareholders to encourage further bids - and it would be a surprise if they do not find a way to do this.

IBA have control of over 25% of the share capital. Yet for all the offensive quality this appears to imply its strongest feature is a defensive one: CompuGroup have over £250m in cash and new debt facilities to throw; IBA circa £180m most of which is, in fact, other people’s money (OPM). So although the IBA stake sabotages the CompuGroup Scheme of Arrangement it is probably aimed more at discouraging an open bidding war that they would lose (as resources and available info stand).

The OPM is Allco, Chairman Cohen’s ex-employer. It is stunning Allco would even consider taking up such diluted equity sitting on a foundation of what are truly extremely modest IBA operations. Justifications of ‘exciting growth prospects’, unless they are ironic, surely refer to the target for they are engaged in the financial equivalent of stuffing a Mini with rugby prop-forwards. And the car will still not go any faster unless they successfully scrum/mug the iSoft/CompuGroup combo.

IBA’s bid is already within £15m of its resources this round. Would Allco stump up more? Who knows, since they are all good friends currently defying prudent financial logic. They must already know Deutsche have been accumulating for CompuGroup since January; and the German firm probably had agreements over at least 15% of iSoft’s shares before IBA’s second cherry bite. Nonetheless, come 27 August when IBA announce annual results expect a bumper production to showcase its bid.

That aside, who knows what else is up various sleeves.

NB: Writer holds iSoft equity; and (hostage to fortune warning) he calculates a final CompuGroup bid (if they come back) 8p to 10p higher would win it.

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Sautéd chapeau even in this fabulous culinary nation is not tasty. 50 bps to the discount rate (not Fed funds) and stick Jim Cramer in the FOMC forthwith, if you please.

Now, as markets climax in relief there is a tiny question that arises: who was imploding that badly to merit this?

Then there’s the medium-sized question (but not by much from the biggie below if you're currently in the deleverage spit-roast position): is it enough to reduce the half-lives of the financially toxic such that they become operationally treatable?

And the biggie: temporary or not, is it in the best interests of the wider economy?

Ack, ack, ack, ack, ack.

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Seeking some calm and balance for their popular 'Mad Money' show, CNBC's recruitment department are currently in intensive negotiations to get this commentator off the sports desk and into the business team as soon as possible.


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Dear Investor,

In these troubled times ‘solidarity’ is more than a word the French bandy about during unemployment rallies. It is a clarion call to stand firm, shoulder to shoulder as the credit barbarians bear down upon us. They demand redemptions; but I ask you to stand pat and trust us although for all intents and purposes matters are entirely out of our hands. God, Buddha, Muhammed, Joe Smith Jnr and whatever it is the Scientologists want - the entire deity community and its acolytes really - will prevail for we are all on the same side here (yes, their Earth-living reps tucked a little something away with us too). Faith, please.

In this scenario you may get your cash back and we may not go bust (there’s no telling). But let me remind all our investors that there is no foundation for the assertion that panicking and bawling like a banshee for your cash is the only way to avoid being stitched up like a kipper. Remember all the warnings from our regulatory friends - historical precedent is no guide to current or future events when it comes to investing (whatever your customer service rep implied on this when soliciting you was probably exaggerated).

Alternatively you may keep bansheeing for your cash like some of the unreasonable whinertards we invest for. That appears to be your legal right (pending reply from our lawyers). But we believe if one investor breaks rank, the floodgates will open and we will be in turn broken. More importantly, of course, so will you. We would certainly be forced to liquidate and you will catch a baby grand from a great height. Still, you would get something back but I do not think there is any reason to share our scary data on that front now. Just bear with us and assume zero. We need to stay in business to protect ourselves – and more importantly, of course, you the very, very highly esteemed client. That’s why we have frozen your money. For you.

Rest assured we've communicated the situation to all our investors. Except management insiders of whose choices and actions we may or may not inform you of at a later date depending on how active regulatory bodies show themselves to be in the coming months.

Please do not write us about guarantees that we may or may not have implied, made or suggested. Ditto on prevailing legislation binding us to respect client wishes regarding withdrawals. Ditto on how much we've made in the last 5 years when you were not really paying attention. We are aware and discussing with our legal department.

Kindest regards,


ANO Financial


PS/Bestest to the wife and kids.

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August 1, 2007

"As far as the U.S. subprime crisis is concerned, BNP Paribas's exposure is absolutely negligible,''
Baudouin Prot, CEO
“We'll benefit from having had a particularly prudent risk policy”
Georges Chodron de Courcel, COO

August 9, 2007

BNP Paribas freezes three of its negligibly exposed prudent funds due to the "complete evaporation of liquidity in certain market segments of the U.S. securitization market."

They did this, they say
"to protect the interests and ensure the equal treatment of our investors, during these exceptional times…[we'll let up] as soon as liquidity returns to the market allowing net asset value to be calculated".
In other words, as soon as these funds are worth something, the énarque / arisotcrat management combo will let you know how well you've been 'protected'.

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Was that a sop Mr Bernanke tossed out earlier?

A reference to credit tightening ‘turmoil’ in the financial markets was politically inevitable; and enough to feed the grist mills of most prejudices.

In spite of that most observers will continue to assume that the only bailing out scenario conceivable would be one in which the wider US economy was also under grave threat.

That is simply not clear as is. Maybe it will become so for the popular (it seems) belief that excessive leverage and credit will not in due course have a wider reaching non-housing sector 'real world' economic impact is a touchingly faith-based one.

Still, that is not a call for cuts: an unmedicated end to the liquidity bender must be (up to a point) preferable.

The Chairmen just prescribed a chill-pill. But, really, he had little choice.

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Sneak preview of the Federal Reserve Board’s minutes appearing, officially, next week. The resemblance to Jimmy Cliff’s Many Rivers to Cross may be a reflection of the Board's summer holiday spirit. Sing along with the genuine article of the great track here.

Cramer’s really quite cross
Cause we won’t open the discount window
He wonders when the Fed lost
Its means to cut like The Maestro

Seems the Big 5 have got memory loss
But whilst the penny’s dropping they’re still alive
Credit’s been loose, sloshing round for years
And they’ve more than survived upon its rising tide

And now this noise from their constant moans
It's such a drag – wish it were overblown
Sure, they’re hurting and yes we do know why
Still, looks like they’re gonna cry

Cause we don’t give a toss
And as for cuts Ben’s biding his time
There has been data he’s found all by himself
None of which are exactly sublime

Yes, they've got many rivers to cross
Cause there’s no way the rate holding’s over
Wandering, they are lost
As they travel along in search of more easy clover


NB: Inspired by a marvellous Cassandra comment and conceived (how sad this is) during idle late night reveries.

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When Robert Cray wrote that line he did not have fixed income markets in mind. In fact, the scribe is fairly certain no blues songs cover the topic. Which is one reason why the world has blues-man convert Jim "Where'd my Groove Go" Cramer.

The scribe has shared carefully selected, little known but useful management tips here before. And here is another: when you’re in deep shit, it’s best to keep your mouth shut**.

Mr Cramer acknowledges the merits of this tip. Shortly before ignoring it in the following CNBC-sponsored missive which may be described as truly entertaining (whatever one’s own assessment). Is it worth asking where the market pro ends and the tv-loid journalist begins?


"Riverdance" Chuck's insights at this point would be wonderful. Immense balance sheet over there, true. But what does Mr Prince make of dicier balance sheets where lending commitments overshadow the capital base? You know – like Merrill Lynch’s and the rest of the Big Five US investment banks.

The Fed decision and minutes next Tuesday are looking unmissable.

*Given Mr Cramer's history, the scribe wanted to call this post "About that buying opportunity". But casting the first stone is not honest.

**Not, ahem, offered as a life philosophy.

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Whilst a collection of credit market actors have marched unsuspectingly into their Isandhlwala the Baltic Dry Index cruises on, unperturbed, to the record 7,000 level. This is China (mainly) at work, of course: and shippers are in part coping by holding back vessels that, through age, would be destined for the breakers in less buoyant times.

The scale of the veteran vessel build up is this: for each of the next four years 25 million dead-weight tons (dwt) of old steel hits the 25 year old mark, the age generally regarded as the useful life of a vessel. That 100m dwt is in addition to 80m dwt of vessels already aged between 25 and 29 years old. Thus a total of around 180m dwt is due in at the knacker’s yard by 2010.

To put this in context, in each of the last three years breakers have scrapped only 10.6m, 5.7m and 6.6m dwt. Scrap yards, seriously struggling for work through scarcity, will have a boat-load coming their way shortly. If freight rates hold, it will be an orderly feast. If they don’t it will be a riotous one.

Before rushing off to buy into ship-breakers there is something else to consider. It is a largely unregulated industry mostly in the hands of family firms; it is fiendishly difficult to make profits on due to the diverse products extracted and sold into quite different markets; there is no pricing power; and it is ever more political given the environmental pollution it generates. Once dominated by the US and Europe, then the Far East, since the late 1980s it is now India, Pakistan and Bangladesh who rule the roost (such as it is).

That trend speaks to the importance of labour costs over the technical expertise required to dispose of ship pollution safely. However, ‘responsible disposal’ is an ever-hotter topic with NGOs, sovereign governments, industry associations and even the subsidy-toting EU becoming involved. The latest (July) result of the blather is a set of International Maritime Organisation interim ship recycling guidelines, a development that probably, should it grow teeth, will promote and benefit new waste/breaking business alliances.

The prime example of this it that established by three Suez subsidiaries (waste disposal, industrial dismantling, metal salvaging) which last September won a contract to dismantle a French frigate. It wants to do the same to the Clemenceau aircraft carrier, star of the tug of war between France, India and Greenpeace over the last several years.

With the vast tonnage hitting its shelf life and strong environmental (and increasingly so) political momentum expect more such groupings – and maybe go so far as to consider their investments merits.

Usual disclaimers.


Sources: Clarksons Shipping Intelligence; McQuilling Services; International Maritime Organisation Library Services

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Top 5 “We didn’t expect this to happen” quotes, reverse order:

5. General Henri Navarre on Viet Minh General Giap’s deployment of 300 105mm artillery pieces overlooking the French position at Dien Bien Phu (1953)

4. Everyone, the twist at the end of The Crying Game (1992)

3. Everyone, Julia Roberts marries Lyle Lovett (1993)

2. Everyone, Alexandre Vinokourov wins the Albi time trial on this year’s Tour de France days after crashing and taking 30 stitches in his knee (2007)

1. Macquarie spokesman Peter Lucas on subprime fallout being less contained than advertised, losing two of the group's funds A$300m or 25%. But no worries, mate - the funds' underlying assets are "fundamentally healthy" (31 july 2007).

Strange - that's also what Dil said to Fergus.

NB: It's all happening. Add Oddo & Cie ("we took this decision in the interests of our clients") to fellow liquidators Commerzbank, IKB, Basis, Absloute and Macquarie in the 'it was unforseeable' crowd [cf the 'never one cockroach rule' of the last post]. Of the visible in France, AXA and BNP Paribas may also be in discomfort.

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RIP American Home Mortgage, you stood by your approach
Even as your methods invited reproach
Except from peers the subject they would not broach
For which of them wants to be the next scurrying cockroach

NB: OK, that's probably it for the poor verse.

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Shall I compare thee to a margin call?
Thou art more subtle though less temperate.
Rough iTraxx does shake the darling hedges of summer,
And Bear Stearns’ lease hath all too short a date.

Sometime too hot the eye of credit derivative shines,
And often is his subprime complexion dimm'd;
And every REIT from REIT some time declines,
By fright, or forced-selling’s changing course, tanked-out;

But thy eternal cycle shall not fade
Nor lose possession of that danger thou ow’st;
Nor shall Death brag thou couldn’st trim his credit lines
When in eternal lines to time thou has always’st:

So long as men can over-leverage in hand with prime brokers,
So long lives this, and this gives life to thee.

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I’m telling you - this thing can’t be demasted
The soft landing’s been too beautifully crafted

(One trader said to the other)
And, like before, my brother

Buy the dip and it’s not us that’ll be shafted.

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Get the feeling that markets are confronting their own doping scandal today?

Close:

FTSE100 (3.15)%
DAX (2.39)%
CAC40 (2.78)%

In progress:

SPX (2.13)%
DJ30 (1.62)%
Nasdaq (2.18)%

10 Year Treasury yield: 4.79%

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Is it naïve to desire a government that does not promote corrupt practice; and which tries, mostly with sincerity, to represent its citizens honourably?

In DESO’s own words they offered “defence exporters an unparalleled network of contacts throughout Whitehall.” In the morally vague arms industry this afforded the illusion of legitimacy to otherwise suspect deals. What looked like a bribe was, in DESO-speak, a ‘special commission’; and accusations of promiscuous propagation of weapons were, in DESO-land, mere ‘security building measures‘.

No wonder British arms exports flourished: years of lavish UK Foreign Office ‘entertainment’ spending in its key embassies; and DESO with its veneer of quasi-legality over the kick-back culture of arms selling.

The scribe passes over the economic justifications for DESO - the academic research is inconclusive. But the scribe’s experience as a Treasury civil servant is not: UK overseas aid decisions have been distorted by arms deals in the past - and the Malaysian Pergau dam aid conditionally linked to the sale of BAe Hawk fighters springs to mind on this count.

It was said at the time that the Thatcher/Major governments were permissive of such arms deals – it was a Tory vice. Yet 15 odd years later a Labour Prime Minister arbitrarily prevents the Serious Fraud Office investigating an alleged massive breach of the rule of law in the BAe Typhoon aircraft sale to the Saudis on the grounds of national security. The deal, named by one of its key piss-taking originators 'Al Yamamah' or 'Dove', reveals a judicial process that has also been distorted.

Plus ça change? Maybe. But the original reason the state created DESO was in order to ’assist’ the UK’s arms industry. This it clearly helped do (insofar as it may reasonably be argued it merited assistance) but at some cost to self-respect. And impartiality: in the Al-Yamamah episode ring echoes of President Eisenhower valedictory warning of the military-industrial complex spreading its tentacles into the furthest reaches of government policy.

But for those without qualms DESO’s demise has little impact on the investment attractions of the large UK defence companies.

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There must be a London Stock Exchange regulation against parting company with your CEO on his nation's Independence Day.

However, Dicom's 4 July speaking in tongues episode over (background post here) the groundwork it laid seems to have heralded today's refreshingly straightforward announcement.

May this be the renaissance worthy of the strong financial and market position Dicom is still in.


NB: Author holds Dicom equity.

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NB: Originally published 23 July. Republished verbatim 22 Aug less balance sheet exhibit pending IBA's new cash offer.

Since CompuGroup tabled their cash bid for iSoft at 66p/share the market has assumed no further bids will be forthcoming. That is, iSoft equity is trading slightly below the 66p offer.

A comparison of the latest bid versus IBA's effort (in the shape of what the balance sheet of either combined group might look like) shows how different the approaches are: CompuGroup is leveraging hard, perhaps in part because of an unwillingness by the founder to reduce his two thirds controlling stake. IBA, on the other hand, has room to make a fight of the sale via additional leverage and could up its offer with a cash component.

As is, it appears that one of these bidders is either badly underestimating the earnings capacity of the enlarged company; or the other is doing just the opposite. If the correct assessment is in between observers ought to ask themselves what the downside is on a punt at circa 64p.

Usual disclaimers.

NB: Scribe holds iSoft plc equity

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UPDATE, 23/7/7: Rash IBA conclusion below. IBA/iSoft significantly under leveraged vs CompuGroup/iSoft. Higher cash & paper counter-offer not unrealistic.

It is fair to say that the scribe has been surprised that iSoft did not attract louder bidding interest from either private equity (PE) or trade competitors. But as this 11th hour bid from CompuGroup Holding AG shows, the large lady has been mezza voce rather than finished.

Look closely at CompuWho?, floated moments ago it seems in Frankfurt, and who's that peeking out from the shadows? Why, it's General Atlantic, big PE iSoft holder and hitherto curiously absent from the fray.

General sold down a circa 66% voting interest in CompuGroup at floatation prices to 16.5% (as of last week). Meanwhile, their iSoft holding, circa 5% and acquired at 214p/share, has long been unchanged. Neat work between holdings, eh? Some claw back is better than none at all.

Cannot say the same claw back fate struck Deutsche Bank, CompuGroup's financial advisers. Starting in January they built a stake over five purchases of 9.05% in iSoft - over 21 million shares. Yet today's offer document says:
"The interests of Deutsche Bank and its affiliates consist of, as at 19 July 2007, a long position of 82,359 iSOFT Shares." para 17.
Wonder where that 21 million went (and at what price) since there is no trace of a transaction by Deutsche on the iSoft RNS announcements between the 9.05% of 28 June and today. Surely all good clean innocent fun as usual though. At least that's what the FSA's market manipulation prosecution success rate suggests.

That aside, a marvel of immaculate timing, planning and (so far as this observer would guess) mostly leak free negotiations all round (despite at least two confidently large stakes built up in the last 3-6 months).

A final investor note - academia suggests (well, some of it) at this point in a cash bid selling your iSoft holdings and clambering aboard CompuGroup AG in Frankfurt. But have a look at the numbers first of which the 2006 accounts are entirely in German. Presumably that will change as the still timid numerical detail (listen to the conf call questions for entertainment on this count) of the purchase plan is fleshed out.

And spare a thought for IBA and Mr Cohen. In the face of cash their tank is surely empty.

NB: Author holds iSoft plc equity

CompuGroup's 'transaction overview' presentation

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A young bull and an old bull survey a large herd of heifers in the valley below. Says the young bull, "Hey, let’s run down there and have us one!” The old bull replies “Nah. Let’s walk and have them all.” *
Canadian Prime Minister Harper, Old Bull if you will, has taken the ambled route since his finance minister Jim Flaherty announced the decision last October to tax distributions of the country’s income trust sector under the wonderfully named “Tax Fairness Plan” (TFP).

Hopes had been high amongst the energy trust subset that concessions/exemptions would be made beyond the 4 year tax holiday. But no - Old Bull is going to have them all.

To put this in perspective, PM Harper broke an election promise pursuing the income trust tax element of the TFP. So when it became law on June 22 the energy trusts must have taken a long hard look at their lobbyists: the bill had survived three readings, a Committee stage and a Reporting stage in the Commons - and the same again in the Senate - all without concessions/exemptions.

Some now hope the legislation, enabled by a minority government, will not survive its creators by much. Canadian minority governments have an average life span of 18 months and so, the thinking goes, there is a potential re-rating catalyst in the offing if the Tories fall before 2011. Mr Harper’s conservative administration is now 19 months old and the latest polls are not good.

However, there is no obviously superior opposition alternative waiting in the wings. Certainly there is no opposition confident of outright victory were an election called next month. Moreover, times are economically sweet stupefying the average voter’s civic motivation; and, in any case, this scribe has yet to see a government, new or incumbent, significantly reduce its revenue by wiping taxes off the books merely out of the goodness of its heart.

If this legislation is ever rolled back it will most likely be on a commodities downturn in a time of political compulsion. It is one thing raising the cost of capital for energy trusts when times are good. But let sector job losses hit or ‘energy security’ become the focus of public attention and electable minds backtrack soon enough.

Through it all, the financially soundest energy trusts appear ‘holds’ at worst whatever form they might choose to take post-2011: until then they yield as much as 15% (think of the wonders of compound interest); sector consolidation seems inevitable as changes to the tax system impact marginal trusts; conversion to alternative trust-like tax structures is not out of the question though tricky (domicile changes); and the Magic of Chinese Demand continues.

* Obviously this is the polite version.

PS: That cowboy suit.

NB: Author holds Canadian energy trust units

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Banking in the UK, together with (ironically) pharma and tobacco, are consistently the top 3 most profitable sectors over most time horizons. But this year, despite earning forecasts generally holding steady, banks (on both sides of the Atlantic as it happens) have suffered a price derating in a rising interest rate environment.

This turn has brought a premier bank like RBS, for example, to the point where it forward yields 5.4% and sells on a earning multiple of less than 10 dropping to under 8 on forecasts. And yet it is still willing to be party to a deal paying 20 times forward earnings for the distinctly ordinary ABN Amro franchise. It is implicitly telling shareholders it can simultaneously grow and cut its bit of the purchase beyond the profitability point despite the impressively high price.

RBS performed this feat with its Nat West purchase in early 2000. But this time there is no obvious domestic overlap where nearly 20,000 jobs can be shed. Its targets look wishful; and without LaSalle as part of the deal the strategic benefits do not seem compelling.

Its consortium partners, largely out of focus in the UK press, appear better placed. Fortis, especially, is pursuing a company transforming deal and wants the core Dutch network where it might be able to do a Nat West. And Santander is after ABN Amro’s Brazilian ops where probably it would do better than Barclays given its existing franchise there. In fact, it is curious, given their relative strengths in Brazil, that Barclays has not tried a divide and rule tactic to beak the opposition by conceding a sale and dealing directly with the Spanish. Or maybe it has/is.

Meanwhile, a rival bid is supposedly in the offing from Citigroup, Banco Bilbao and ING* - a team bearing an uncanny resemblance to the RBS consortium. Oh, to be an ABN Amro equity holder.

In contrast, institutional cross holders in the various bidders must be somewhat concerned. Possibly all the more so with the potential for further rate rises sparked, perhaps, by inflation data appearing over the next couple of days with the US numbers. That would raise financing costs, unbalance the deal’s value assumptions and make banking operations less straightforward and profitable.

Doomsdayish? Maybe. But all in, it is not looking a bad toss to lose for RBS shareholders.

*source, with a pinch of the proverbial, is Dow Jones (13 July) citing German financial newsletter Der Platow Brief. Citi would not comment; and BBVA & ING "weren't immediately available to comment" either.

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So many M&A stories to consider. Yet the most intriguing, although it never left (or intended to leave, it seems) the stalls, is Vodafone / Verizon.

The details and numbers are stunning enough. But it is the ducking and diving of the breakers of the piece, FT Alphaville’s Hume and Murphy, that truly impresses. The ‘how’ they got it is something; but the implied politics of the ‘why’ the Vodafone source(s) sprung are likely even better - possibly the best (untold) chapter of the entire episode.

Back in the markets, speculators have curiously bid up Verizon without, it seems, taking in the full story. A key element of this is the possibility of Vodafone exercising their 'wireless' put: in such circumstances Verizon would be compelled to pay them between $10bn and $20bn (according to FT Alphaville's sources).

Sounds eminently shortable to this scribe.

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