Banditry

So there’s an interesting piece on Bloomberg quoting the Sunday Times saying that Fosters Group, the Aussie wine and beer company, might sell its beer operations (branded Carlton & United Breweries, confusingly enough) to SABMiller.

This makes sense. Since I was working as a drinks industry reporter getting on for ten years ago, I’ve been saying Fosters should flog off the beer business. They’re a combination of a global premium wine company, a low-margin domestic beer business, and one mysteriously popular global beer brand – which, oddly enough, has almost entirely disappeared from their home turf. Being a global wine distributor, while providing a global beer company with a global brand, and an opportunity to distribute their other brands into Australia, was always going to be a better call.

I’d always taken a British take on ‘appropriate buyers for CUB’, on the basis that Heineken (formerly Scottish & Newcastle) owned the EU rights. Obviously, that would’ve been a good fit. But I’d forgotten the fact that the USA is the world’s largest beer market, that Foster’s is a popular import brand in the USA (”throw another shrimp on the barbie”, etc), and that Miller owned the US rights to the brand.

Meanwhile, SABMiller – which, like Kraft Foods, is part-owned and heavily cash-backed by Altria (= Phillip Morris) in a desperate attempt to stop all their shareholders’ money going to compensate lung cancer victims – has fallen way behind Anheuser-Busch Inbev in the “being a serious global brewer” stakes.

A leading position in a mature but profitable beer market (yes, oddly enough, selling beer to Australians is popular. See: selling crack in Baltimore; selling expensive houses in Mayfair) is nice from a cash-generation point of view. And for some utterly mystifying reason Foster’s is a much-loved beer brand everywhere except Australia, and as brand promotion becomes global it’s becoming important to have the rights to your most important assets, rather than having them owned by some comedy convict jokers [*].

So if the news is true, then it’s a good call on SABMiller’s part, as well as a bloody relief to Fosters Group (who’ll presumably have to rename themselves to ‘Australian Wine Company’ or a made-up name like Geadeo or something). And some kind of deal with Heineken to sort out the global rights would probably also be sensible.

And no, none of my alcoholic drinks market wisdom would have made the slightest difference to share-tippery at any point ever. If you want to make money on markets by thinking you know more than people about fundamentals, horse-racing is still a better bet. Stock analysts are still voodoo-merchants; my skills are only worthwhile if you actually want advice on what to do if you’re trying to market grog.

[*] dear the Australian Department of Immigration and Citizenship: I don’t believe that all Australian businessmen are comedy convict jokers. As the owner of an official certificate of being an Australian Businessman, I take Australian business very seriously. And mentioning Alan Bond and John Elliott at this point would be deeply unfair, and the fact that Mr Elliott used to own CUB isn’t even slightly relevant.

Yes, I know MGM (or, more accurately, the latest in a long bunch of shysters to own the rights to the MGM name and to make James Bond movies) are in serious financial trouble.

But if I was in serious financial trouble, and I owned a money tree, but I couldn’t afford to harvest the money tree due to my serious financial trouble, then I’d sell someone the rights to the next harvest of my money tree. Then, I might be able to do the following money tree harvest myself. At a worst case, the money tree’s money crop hasn’t just rotted on the branches.

So I’m genuinely perplexed about the weird machinations that mean we’re not going to get another Bond movie until forever. What incentive have MGM’s management got to not sell the rights to make a new Bond (which will make copious quantities of money, unequivocally) to someone with dollars, rather than sitting around making nothing until they go painfully bust?

I suspect it’s an accounting / US law / principal-agent problem, but would appreciate guidance from anyone who either knows, or can come up with a vaguely sensible reason for MGM’s management to do what they’re currently doing…

So, on BP, let’s assume that it gets so busted by compo claims that its entire US business gets liquidated and sold to Exxon (as seems to be the current, insane narrative: “we’ll pretend BP are evil rather than the same as everyone else, so we don’t have to stop the drilling and the oil greed…”. I don’t think it’s an anti-British thing, by the way – I’m sure that if Exxon had been the unlucky chaps, they’d've got the whole take-one-for-the-team treatment.)

At that point, the American liabilities are ringfenced, and BP can continue to do as it does in the North Sea, Asia and Africa, bringing quantities of money that are undeniably copious, albeit less large than its shareholders pre-spill might have hoped.

At that point, British and Chinese BP shareholders are perfectly safe in their holding of the company. But what happens to American shareholders? Is there a mechanism by which the US government could appropriate US-held BP shares, and is it an ‘unprecedented, practically war’ thing or a ‘yeah, we do this’ thing if so?

…which brings the technical question: is there any divergence between movements in BP shares on the LSE, and BP shares on the NYSE? That would be an interesting indicator, if so…

I’m a Keynesian who believes in fiscal expansion in tough times, and I’m a market-favouring leftie who believes in progressive taxation (whilst trying to minimise disincentives to work at all levels).

However, I’m embarrassed by Richard Murphy of TaxResearch.org.uk, and the way in which the press tend to print his daft views as a serious example of Keynesianism economics and left-wing thinking.

He isn’t an economist, he’s a man who knows a great deal about the specifics of UK tax accounting, and has lots of other views that aren’t really based on much sensible – and are only paid any attention to due to the spurious argument-from-authority that his tax accountant background gives him.

It’s the equivalent of someone dealing with the (serious, real) debate on pharmaceutical companies pushing too many overpriced lifestyle drugs based on cherry-picked trials that don’t reflect real clinical benefits over generics or non-pharmaceutical responses, by interviewing a loony quack like Gillian McKeith.

While there’s been a lot of commentary on the British Airways strikes, the analysis (whether pro-company or pro-union) tends to miss two major points.

The business model is unsustainable – but that’s the management’s fault, not the unions’

BA’s model before the global financial crisis was to charge a fortune for excellent service in Club World and First, while matching its competitors’ prices and service levels in World Traveller. Together with BA’s massive global coverage and its excellent connections between the financial boom centres of London, New York and Singapore, this business model allowed BA to attract a lot of passengers and make a lot of money.

This was lucky, as BA’s cost base is and remains far higher than that of its competitors. Not on planes, or marketing, or even management – but on staffing. At the time, the money that bankers were willing to pay to fly to Singapore in a bed whilst being served champers by reassuringly camp gentlemen was so vast that BA could get away with paying long-serving cabin staff double the national median wage.

However, this wasn’t a sustainable business model unless you believed the boom times would never end. BA should have taken advantage of the good times to stuff its current crews’ mouths with gold (pay rises, massive early retirement packages, one-off bonuses), in exchange for permission to hire new recruits under less generous contracts so that the long-term cost base was more sensible. Virgin Atlantic pays new recruits gbp15,000 ranging up to about gbp30,000 for senior crew, and anyone who’s flown on Virgin will confirm that this is enough to attract motivated people who provide excellent customer service.

Unfortunately, BA’s CEO for most of the boom – Rod Eddington – had approximately no aptitude for long-term strategic thinking, so kept with the status quo for an easy life (my assessment of his aptitude is supported by his report on UK transport policy two years ago, which managed to miss out high-speed rail completely. I’ve only just discovered via Google that he’s done much the same half-arsed job in Melbourne). Willie Walsh has a better track record, but by the time he’d taken over and settled in, the recession was already imminent. Now, BA has to cut costs for long-term survival, but doesn’t have the money to bribe its staff to accept the cuts.

The unions are in a far stronger position than most commentators realise

BA’s enterprise value – the amount that its assets plus goodwill are worth, before taking into account its financial liabilities – is something like GBP7bn. The reason its market cap is only GBP3bn is because it also has a GBP4bn pension deficit. In other words, money that BA owes to its workers and former workers accounts for more than half of the company’s total value.

This has two policy implications.

One is that Red Tory Philip Blond’s suggestion that the government should mutualise BA isn’t quite as insane as it looks – more than half the company is already owned by the workers, and if things were to get worse then the pension fund has priority over the shareholders as a creditor. A deal like the one the US government brokered for GM, leaving the workers as majority shareholders, isn’t totally implausible.

The other consequence of this ownership pattern is something which should make BA shareholders rather nervous.

If the industrial action were to turn into a major, long-term dispute that drove down passenger numbers and revenues to such a severe extent that BA had to go into administration, then the pension fund would have priority over BA’s assets (including not only its physical assets, but also its brands, goodwill, systems, etc). It’d be hard work to rebuild BA as a global brand after that kind of collapse, but it wouldn’t be impossible – particularly with worker ownership ending the company’s labour crisis overnight. The shareholders, however, would lose everything.

So while the “nobody backs down” outcome isn’t good for either side (as the workers lose salary in the short term, and in the long term their pensions end up secured on a much less valuable asset), it’s a lot more optimal for the workers than it is for the shareholders. This makes negotiations, erm, challenging.

Conclusions? None really, except that I wouldn’t want Willie Walsh’s job, and Rod Eddington shouldn’t be put in charge of the strategic direction of a whelk stall (although he’s probably competent to administer one day-to-day).

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Update: another conclusion is that if you blame the strikes on Gordon Brown’s ‘weakness’, you’re so utterly clueless that you shouldn’t even be allowed to assist Rod Eddington at his whelk stall…

Update 2: Jim notes that BA’s business model is also unsustainable in the sense that the oil’s going to run out. This is true, and worth a read (I’m not yet totally sold on Jim’s view on precisely when the oil’s going to run out, but that’s mostly based on sheer incredulity that if the oil’s really going to start running seriously short by 2015, governments and large companies haven’t done more to mitigate that. The GFC highlights that this may be over-trusting of me…).

When I grow up, I wouldn’t object to being an incredibly rich, disgraced, highly influential, not-proven-guilty-of-fraud Wall Street figure and would-be press baron.

However, unlike Henry Blodget, I don’t think I’d devote a day’s worth of output to slating other financial commentators for being insufficiently productive, hard-working, etc. Worrying about the productivity of people who actually work for you is stressful enough – and besides, I’d want to leave at least eight waking hours a day outside of work to enjoy my enormous pile of ill-gotten gains.

(I am, however, also a little jealous of Felix Salmon. If any multinational news organisations want to pay me a decent-ish New York salary to tweet and blog about finance and the economy all day, then you know where to find me…)

In explaining how he avoided falling into the common liberal trap of supporting the Iraq war, Dan Davies listed the maxim “Good ideas do not need lots of lies told about them in order to gain public acceptance“. The fact that all the main proponents of the Iraq war were lying like rugs about WMDs inherently casts doubt on the case for war, even if you believe that a war for regime change would have been justifiable in its own right.

I was reminded of this when looking at the website for the Robin Hood Tax campaign (the Robin Hood Tax is the new, nauseatingly cute, name for the Tobin Tax on financial transactions):

The Robin Hood Tax will not impact on personal banking or on retail banking. That’s because it targets a distinct area of bank operations – high-frequency large-volume trading, undertaken by financial institutions in the ‘casino economy’. 

If you change money to go on holiday, send remittances abroad, invest in a pension fund or take out a mortgage, you will not be affected by this tiny tax.

The Robin Hood Tax consists of a levy on:

financial assets such as stocks, bonds and foreign exchange, traded both physically and as derivatives (options, forwards, futures and swaps).

Hence, any money you change (whether for a holiday or for remittances) and any investments that your pension fund makes will, very obviously, be taxed under it. The tax will, definitely have a negative impact on ‘good’, non-casino-y transactions like people buying shares in companies to generate income for their retirement, or companies converting euros from their export sales into pounds.

This doesn’t, in and of itself, make the Robin Hood Tax a bad idea. That negative impact could well be outweighed by the benefits of the revenue raised and of dampening the speculative excesses of the global financial system (I’m sceptical of the latter: we all know with each successive crisis the speculative excesses of the GFS turn out to be concentrated in areas that aren’t regulated or taxed or indeed understood. But that’s for another day).

But the tax’s proponents are simply lying that the negative consequences for the real economy simply don’t exist, rather than acknowledging them and saying that the benefits are larger. And that definitely triggers my Iraq filter.

Over at Bystander’s, some sanctimonious caants are talking a load of sanctimonious cant about one of the financial services community’s finer comedians, Bernie Madoff, and why he’s a Very Bad Man Indeed.

They pointed me to this document, which is absolutely superb – the self-pitying ramblings of people who, having grown used to receiving copious quantities of pretend money-for-nothing, now believe their lives are ruined because they have to live off their employee pensions.

My comment there was:

Some people who were super-rich are now rich; some people who were rich are now on the same level as everyone else. And all of them were *utterly, unimaginably stupid* to entrust their money to someone like Madoff. Their whiny sense of entitlement doesn’t exactly contribute to one’s sympathy for them, either. “Oh noes, I’m no longer a gazillionaire, instead I just have to live on my pension like every other bloody pensioner…”

For those who’re wondering ‘what happened to the money’, there never was any – he paid out the $60bn that he received as fake profits to his investors. In other words, he took $60bn from gullible shmucks, and paid it out mostly to the same gullible shmucks. That’s why ‘harmless redistribution’ above – the scheme’s only impact was to reward early investors at the expense of latecomers, like all Ponzi schemes.

…and if I were a US taxpayer, I’d be marching in the streets against the greedy morons getting a penny of my money in compo.

…and I stand by every word. I simply don’t understand tough sentencing for financial crimes, given that money simply doesn’t matter that much, and nearly everyone who loses out in a financial scam thoroughly deserves to do so.

Just sent this letter to the Observer’s readers editor:

Re: ‘Light-touch’ reforms raise fears of new bank disaster

This article from Sunday 12 June has one of the most inaccurate sentences I’ve ever seen anywhere:

“Critics point out that it was a subsidiary of Northern Rock, Granite, that contained the liabilities that led to the collapse of the bank: Granite owned £49bn of mortgages that were sold by Northern Rock and moved offshore to the tax haven of Jersey.”

1) Granite wasn’t a subsidiary of Northern Rock, it was an umbrella term used to cover several different offshore organisations that were structured as charitable trusts and that specifically weren’t owned by NR.

2) Northern Rock didn’t have any liabilities through Granite – the whole point was that NR wasn’t liable for Granite’s debts. Rather, Granite’s bonds were secured against the mortgages that it bought from NR.

3) The collapse of the bank had absolutely nothing to do with Granite – it was because NR was reliant on short-term financing to cover the mortgages that it *hadn’t* sold to Granite, and this short-term financing dried up as the crunch began.

Perhaps Nick Mathiason should read the article I wrote on Granite last February before writing any more pieces that mention Northern Rock…

Cheers,

John Band

I’m genuinely not sure that I’ve seen a sentence that wrong-headed in a serious newspaper before, ever…

Let’s assume you’re an excellent journalist (yes, I know for most bloggers this would be a bit of a heroic assumption, but never mind). You spend 15 years working your way up through various jobs until you’re editor of a national title. You do the job very well.

Then the chairman of the large media company that owns your title offers you a job as head of finance. You take it on; you fail to spot the risks in the strategy your predecessor was running and so continue with it; the company gets run into the ground; and you’re rightly fired.

In a reasonable and sane world, should you:
a) apply for editor jobs, and be taken seriously as a candidate because you’ve a strong proven track record in editorial, and the fact that you messed up corporate finance isn’t at all relevant
b) never be allowed to work again, save perhaps as a cub reporter or a night sub?

The sane answer is a, right? So why the hell is there such a fuss about Andy Hornby, who was an extremely good manager at Asda and running HBOS’s retail division, but didn’t understand the systemic risk of reduced liquidity or the lack of controls in HBOS’s corporate banking department, being hired to run retailer Alliance Boots…? He’s a good candidate for the job.

(more generally, I don’t get the public’s general anger against bankers, politicians, etc. Yes, they messed up. You messed up. We all mess up. We’re people, it’s what we do. The bankers didn’t kill anyone, they just cost us a bit of money. It’s only money. Nobody in the UK will ever have to starve on the streets, so the money doesn’t really matter, beyond ‘it’d be nice to have a new car this year’. So stop being such pathetic childish bitter twats about it…)