Obama the war president

Why stockmarkets will rise 50% in 2012

Waiting for my host in Zafferano, an Italian restaurant in Knightsbridge, I eavesdropped on my lunchtime neighbours and found myself surrounded by the themes of the moment. The husband and wife couple to my left were Germans, on a romantic weekend break in London, accompanying the gourmet menu with a bottle of Crystal champagne and undoubtedly heading to their hotel bedroom for an afternoon of nookie. They had an air of confidence, as befits the new masters of Europe.

On my right, the 35-year old Scottish redhead was working hard. He was making predictions for markets in 2012 in a desperate attempt to convince the bored investor sitting on the other side of the table to leave some of his funds with him, having clearly lost money in 2011. The air of bravura dissipated in the air, leaving the smell of his lack of confidence.

The myth that anyone can accurately predict what is going to happen in 2012 has been dispelled. The catchphrase of 2008, ‘return of capital rather than return on capital’, is back in vogue. Inflation, albeit much higher than any index reveals, is an acceptable price to pay on cash when compared to the risks of investing in other instruments.

The other myth, that money is cheap, also needs to be dispelled. Real interest rates are negative but the usual mechanisms of transmission are clogged up. Banks are being forced by markets, regulators and their (increasingly) non-performing loans to shore up capital. Not only are they not lending but when they do, they are arguably pricing risk correctly and demanding interest rates way above their apparent cost of capital, which makes the loans often unaffordable. Additionally, the private sector has been pushed out of the market by desperate sovereign states with acute financing needs. There is thus less money available and at a higher price, pace quantitative easing.

But this could turn tomorrow.

Close your eyes, dear reader, and imagine the degeneration of the Iranian situation. Another internal rebellion by the Green opposition street movement leads President Mahmoud Ahmadinejad to seek salvation via the unifying power of an external enemy. Using the excuse of the EU’s oil embargo and the US posting of an aircraft carrier in the Gulf, Iran closes the Strait of Hormuz, through which 35% of all seaborne traded oil passes. The price of oil explodes, rising 50%.

President Barack Obama declares war. The US economy takes off as it goes into war production mode. Investors and companies who have been sitting on piles of cash – estimated in the trillions – move quickly to invest it. Historians draw parallels with the end of the 1930’s depression on the back of World War II. Economic growth and inflation (which conveniently chips away at high sovereign debt levels) take off. The euro survives in its present form for no other reason than the arrival of positive growth numbers for most of the developed world and more profitable money-making opportunities; investors focus on riding the stockmarket bull.

By the end of 2012 share prices are up 50%. The fact that global equity markets lost almost $6.3 trillion in 2011 is a distant memory.

President Barack Obama is re-elected on the back of his successful waging of the war. Patriotic reasons ensure that enough Republicans shift their vote to him and the Democrats, thus changing Congressional voting patterns and breaking the Washington impasse. There is a bittersweet taste to Obama’s victory, but like all politicians, being in power erases any conscience prickings on how he got there.

Skiing blind over much of the Christmas break was a revelation. As snowstorms raged we fixed our eyes determinedly on ski guide Harry’s red bottom and followed him over the Austrian Alps. The glory of the endless powder snow, more than we had seen in decades at that time of year, was balanced by the fear of inadvertently heading over a cliff.

Courage comes in many different forms, not just physical. In Spain, new Prime Minister Mariano Rajoy vowed to move mid-week holidays, of which there are many, to the nearest Monday, thus eliminating the emblematic puentes. These create ultra-long weekends by bridging isolated working days. There are enough of them in a year to lower Spain’s productivity. His willingness to take an axe to the sacrosanct is hopefully indicative of the courage he will show in tackling labour reform. The country’s most damaging structural impediment to job creation is the elevated cost of firing workers. Explaining that to the Spanish public is not an easy task.

Meanwhile, Mervyn King, governor of the Bank of England, has reportedly been busy with road shows to convince other countries of the wisdom of the Vickers plan. He has been working especially hard on Germany, as the German adoption of the plan to separate retail/commercial and investment banking would lend credence to this counter-productive and expensive notion, which ignores the lessons of history and is set to be implemented only in the UK.

Banking crises are generally mundane, based simply on too many banks piling in together to lend money to people and institutions that cannot afford to pay them back. Examples range from the Latin American debt crisis to the more recent subprime and Greek debt crisis. The increased interconnectedness of the global banking system amplifies calamities from a domestic arena to an international one. I fail to see how Vickers’s recommendations tackle any of this.

The overturning of the old order even happened at the Loruenser Sporthotel in Zuers, Austria. Not in the form of London-style riots, nor the civil unrest seen in Cairo and Tunis. Instead, on opening the Christmas Eve menu, guests who had been going there for generations saw a Russian translation of the classic wishes for peace. There was a sharp intake of breath. The hotel’s owner, who had sworn never to let Russians into the hotel only four years ago, had broken his vow. A family of five were later spotted in the bar.

A revolution also occurred in Italian politics. Silvio Berlusconi’s babes, those glamour girls with stuffed lips who he appointed to political posts, vanished from the pages of the newspapers. Mario Monti, the new prime minister, took special pride in appointing women to his cabinet with technocratic skills and wrinkles. One is even overweight. In fact, dare I say this, she looks not unlike Angela Merkel.

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Germany thanks the southerners

Saudi investment opportunities

Angela Merkel today gratefully acknowledged the southern European contribution to the euro. “Without the incorporation of those sunny southerners, the euro would be the deutschmark. It would have reached Swiss franc levels, ruining our exports,” she stated, while munching on sardinas at the opening of the Museum of Greek Siestas & Tax Evasion. “Instead, we have this delightfully devalued deutschmark, which has allowed our trade surplus to reach a three year high.”

As she flicked the tail of her flamenco-inspired suit, she thanked Germany’s fellow members in the EU and the Eurozone for being responsible for nearly two thirds of the country’s foreign trade. “Vielen Dank for being less competitive than us and buying our goods,” said Merkel, as she headed off for a week’s holiday in the newly opened Deutsche Acropolis Hotel in Athens.

In truth, most Germans bristle with resentment at having to bail out a bunch of “lazy” southern Europeans who lack a Teutonic work ethic. Similarly, many English smirk at the continental chaos and cheerily anticipate the collapse of the euro. Both would benefit from a bit of perspective.

UK growth this year is now forecast at 0.7%, down from an earlier 1.7%, on the back of the Eurozone crisis. Britain is already seeing a fall in exports to the Eurozone. At 40% of total exports, the impact of a continental recession will be brutal, let alone the unknown effect of a euro collapse. Additionally, British banks are being forced to increase their provisions for the debt of peripheral countries, adding even more impetus to the existing credit crunch.

The flowering of, respectively, nationalist stereotypes and schadenfreude does a disservice to both nations.

Mario Monti, the technocrat who is due to announce a cabinet which he will lead as prime minister, has had an effect on Italy’s borrowing profile. The spread between German and Italian bonds fell on earlier speculation about his appointment, while on Monday Italy sold €3bn of new five-year bonds at 6.29%, a high rate but one that is below what it would have had to pay if Silvio Berlusconi had still been ensconced.

Spain’s Monti is Jaime Caruana, a former governor of the Bank of Spain and now head of the Bank for International Settlements. The Popular Party, set to win a majority in the election on Sunday (20 November), should appoint him Minister of Economy asap. Spain’s spread would fall 100bp. Appoint him Vice President as well, like Rodrigo Rato was in Aznar’s government, giving him more influence, and it would fall another 50bp.

Admittedly, giving up Swiss franc earnings for euros and a role that will see him turn into a St Sebastian figure, pierced by the arrows of countless critics, does not sound attractive. But money has never been Caruana’s motivator. And the saint was cured by Saint Irene of Rome. (It is true that Sebastian then preached Christianity to Emperor Diocletian and was subsequently clubbed to death, but surely martyrdom is a small price to pay in these apocalyptic times?)

These times are also ones where investors are stumped as to where to invest. Dr Florence Eid, founder of Arabia Monitor, believes Saudi Arabia is one possible answer. The IMF forecasts its economy will grow at 6.5% in 2011.

“The King’s financial support package represented a 23% increase in the budget for 2011. This was on top of an existing and fairly ambitious industrialisation, infrastructure and human resources strategy,” she says. “This implies that over the next five years there will be a gold mine in all sectors. The country will be a construction site.”

The IMF forecasts 6.5% growth in Arabia this year, with high unemployment, housing shortages and inflation as the three main tests facing the economy.

The $136 billion in government funds, announced in February and March, was aimed at preventing the unrest from other Arab countries spreading to Saudi Arabia. Bar a few Shia rallies in the Qatif area, which the Saudis blamed on Iran, the Arab spring did not lead to serious disturbances. Eid and her team at Arabia Monitor believe the stability will continue.

“Saudi Arabia is run by a family that has shown over the years it can deal with challenges, from the Iraqi invasion of Kuwait, to the rising Islamic tide, to the demographic challenge of needing to create opportunities for the 50% of the population that is under 25 years old,” says Eid, whose firm specialises in Middle East and North Africa (MENA) research and advisory services.

A recent Chatham House roundtable, however, concluded that the Arab Spring poses a great threat to Saudi Arabia because it endangers the core patronage network that underpins the state. The foreign affairs institute also forecast major upheavals in the House of Saud when the next generation of princes are considered for succession.

Eid notes that despite foreign criticism of its governance, the royal family has developed a “fairly pronounced and healthy respect for technocratic expertise.” The ministries of finance and health, plus the central bank, are run by technocrats who have been in the same jobs for a number of years. The same criterion does not apply for ministries that are seen as crucial to sovereignty, such as that of foreign affairs.

The IMF points to high unemployment, housing shortages and inflation as the three main tests facing the economy.

Eid argues that the Saudi invasion of Bahrain to support the ruling family and squash demonstrators calling for more rights for the majority Shias and more democracy should be seen within the context of the GCC. “It was reassuring for the international investor community. It showed they had teeth and were open to putting to one side their non-intervention policy when events happen in their backyard,” says Eid.

The Lebanese-born, MIT PhD says analysts are mistaken in assuming that the new Crown Prince Nayef Al-Saud will roll back reform when he becomes king. She believes he will continue on the path of gradualism and “evolution rather than revolution.”

Robinson Hambro, the Board Search firm I co-founded with Rupert Hambro almost a year ago, is evolving too.

Last week we were quoted in the Financial Times on the subject of recruiting women to UK boards: “You don’t need five goalkeepers on a football team, you need a mixture of abilities and positions. There has been a tendency to appoint directors who have run divisions of FTSE companies when most women haven’t done this. Instead, the cleverest women we know, who would add value to boards, tend to have risen in professional services firms and asset management and media.”

Much the same can be said about the Eurozone. Not everyone can run a current account surplus. Or a current account deficit, for that matter. There has to be a balance, just like a team.

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London and Caracas: two sides of the same coin

Income inequality and the foreign conundrum

There are echoes of pre-Chavez Venezuela in the UK these days. A classic example of elite capitalism and the virtually insurmountable gap between the haves and have nots. In Caracas, the elite lived in guarded mansions in the Eastern hills of the city with bodyguards accompanying them everywhere. The benefits of decades of petroleum revenues never made it into the barrios of the Western hills of the city. President Hugo Chavez was the result.

The erstwhile elite still live in their mansions, but they no longer run the country. Their children study in American universities, as their parents did, but they no longer expect to come back home. Meanwhile, an incompetent former army officer runs the economy into the ground. His anticipated death from cancer may well be a blessing to his country. Hopefully, if and when the old guard make it back into the seats of power, they will have learned some lessons.

Countries in the developed world look ever more like the old-style emerging markets. They are burdened by unsustainable debt and weak-willed leaders grappling with unruly legislatures. Income disparity is beyond the point of reason. Inflation is much higher than official statistics show. Youth is suffering from high rates of unemployment and, even more harmful, the desperation of knowing that is the status quo for years to come.

The indignados in Spain, the Occupy Wall Street demonstrators and the UK youth protesting in front of St Paul’s Cathedral have been peaceful. According to Ed Howker, author of “Jilted Generation: How Britain has bankrupted its youth”, they are not the armed with the revolutionary idealism that is a classic at that age, but with jilted expectations. They want jobs and housing.

These are the children of the middle class. In the developed world, a swathe is being cut through that class, which is the one that brings stability, pays taxes, forces government accountability and shops. Intergenerational downward mobility is set to rise in the next years as the crisis continues and taxes increase.

In the developing world, there are outstanding leaders in the economic field – central banks and finance ministers – while the middle class expands as economies grow. That is the where the jobs are. Some of those young need to pack their bags and sell their skills in the emerging world. Mobility of labour is no longer one-way, from developing to developed countries. The paradigm has changed and we all need to adjust.

In the last year and a half, overseas investors have bought almost £6bn of London housing stock, according to property group Savills. A prime example of this phenomenon sat at the table next to mine at a Mayfair club a few weeks ago. “I VANT zat house on Carlos Place!” the bejewelled creature exclaimed to the Englishman sitting in front of her. He was leaning so far forward in his eagerness to smell that Russian money that I feared for the untouched pot of tea between them.

Exposure to foreign funds, be it via luxury brands, banks, board memberships or property, has had a beneficial effect on a small percentage of Londoners. Not unlike Castro’s Cuba, where exposure to dollars is the defining income factor. A doorman at a boutique hotel in Havana has a lifestyle envied by the doctor whose earnings are in pesos. Unless that doctor has a family member in Miami who is sending dollar remittances.

Youth unemployment may be as much as one in two of 15-24 year olds in the developed economies, according to the International Labour Organisation, with many having given up trying to look for a job.

Moving abroad to where the jobs are is one option. Creating more at home is another. Heaps of evidence demonstrates that this comes from small and medium sized enterprises. Yet virtually nowhere in the developed world is more than lip service paid to us.

I say us, for I epitomise an entrepreneur from the developed world. The headwinds we face, specifically in the UK but largely repeated in the rest of the West, include being subjected to pretty much the same heavy-handed regulation as large companies. The social security taxes and pension contributions for full-time employees are onerous enough to be a disincentive to hire. Meanwhile, the illogical favouring of debt over equity (interest on debt is tax deductible, equity is not) works against SMEs, which generally cannot access bank debt and therefore rely more on equity.

The UK’s recent move to separate retail/commercial banking from investment banking will harm SMEs even more than they are being harmed in other countries. Banks in most of the developed world aren’t lending to them because of the need to bolster capital for regulatory reasons. The UK is now compounding the problem. Those that say the banks will be given a long lead time to make those changes ignore the fact that bank management and the markets don’t tend to hang around.

As UK banks figure out how to find enough capital to finance two banks instead of one, plus having to overcapitalise their retail arms, credit is set to become more expensive. This will probably be marginal for the large corporates who have a choice. It won’t be for SMEs and small to middle-sized corporates as Peter Sands, Chief Executive of Standard Chartered recently told the FT.

The French were so intent on stopping the Germans after WWI that they built the Maginot Line. It was totally ineffective. As human beings, we appear to have a mental blockage which leads us to perennially prepare to fight the last war.

Thus with banking. In order to ensure no repeat of the 2008 crisis, regulators told banks to boost their capital. Governments, meanwhile, issued large amounts of debt to be bought by the banks. Banks stuffed themselves with risk-free sovereign bonds which have proved to be laden with risk.

And, as one senior banker told me, the UK decision to separate the two types of banks is fighting a war that never was. It is a myth that retail/commercial banking is “safe.” German commercial banks were not making enough money from their business and thus bought into sub-prime mortgages. American banks bought Latin American debt at a time when Glass-Steagall was still operative in the US and then had to deal with the ensuing Latin American debt crisis.

This new banking system will not be copied by other countries. But it will harm the City, SMEs and the UK.

There are advantages as well as disadvantages to an influx of money and foreigners.
“London is the true cosmopolitan city. You can be yourself,” said one of the world’s outstanding pianists, Mitsuko Uchida. Having heard her perform Schumann’s Piano Concerto with Claudio Abbado and the Lucerne Festival Orchestra a few weeks ago, I am immensely grateful that this view has led her to base herself in Kensington.

Cosmopolitan cities have existed throughout history. Trading hubs where many nationalities lived side by side, such as Alexandria in Egypt, which led Lawrence Durrell to write his epic “Alexandria Quartet”, Smyrna (now Izmir in Turkey) and Shanghai, among others. London now occupies that place due to its financial and professional services sector, its safety and an acceptance of individuality that attracts creative figures.

One of the benefits of our large numbers of millionaires and billionaires is the existence of the Institute for Philanthropy, whose history goes back to the Rockefeller Foundation’s workshops in New York. The Institute hosts a programme for a small number of donors based on intensive seminars and peer-to-peer learning, as well as visiting charities doing inspiring work in their communities and hearing from outstanding philanthropists like Sigrid Rausing.

It takes as much insight and rigour to be successful in the world of philanthropy as it does in the world of business.

Author Lawrence Durrell regarded himself as a citizen of the world who happened to have a British passport. Alexandria, one of the world’s most cosmopolitan cities between 1860-1961, fitted him like a glove. Greeks, Italians, French, English, Maltese, Armenians, Lebanese, Syrians, Turks, Bulgarians, Jews and Egyptians lived in harmony.

Tallying the nationalities living in London would take too long. Perhaps, though, one doesn’t need to live in a cosmopolitan city, for as Durrell wrote in his quartet: “A city becomes a world when one loves one of its inhabitants.”

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New era regulators and a passionate conversion

How tinkering may ruin bank boards

Take a look at the Financial Times, where Robinson Hambro authored an editorial on the Financial Services Authority and its excessive interference in the running of the boards of banks.

Or read the article in the text below:

The passion of the convert is a frightening thing. Be it former smokers who cast glances of derision at office staff puffing away on the pavement or, more specifically, the regulatory backlash on the back of the financial crisis, converts allow little room for a nuanced approach.

One hopes that the government will allow for a degree of flexibility in the separation of retail and investment banking as set out in the Independent Commission on Banking’s report, which is to be published in a couple of weeks. Recent leaks suggest banks will be allowed a longer time frame in which to apply this major upheaval to their business models.

Conversely, the Financial Services Authority (FSA) has shown a new-found rigidity. The UK regulator, lambasted for its ‘light touch’ regulatory approach, now boasts of its intrusive approach. There is no doubt that its earlier regime was one of the causes of the financial crisis, but it has swung so far the other way that it is causing harm.

This is especially true of its enhanced regime for significant influence functions (SIF). These are positions of responsibility within financial services institutions, namely those that can affect a firm’s risk profile, and range from chief risk officers to top traders and all board members, both executive and independent.

The FSA is rightly trying to tackle the lack of understanding shown by some executives and independent directors when dealing with the business of the financial institutions they were involved in. But its approval process has become a “nightmare” according to a top City lawyer, while existing and potential board members lambast the junior staff interviewing them and the morass of definitional bureaucracy.

Although there are some outstanding individuals at the FSA, it cannot afford to pay private sector salaries to the recruits – nor, for that matter, can the Bank of England, into which much of the regulator will be subsumed.

The FSA expects potential non-executive directors (NEDs) to know the financial institution backwards, despite not yet being on the board and therefore not privy to confidential liquidity ratios and the like. To try and ensure success, financial institutions now need to brief the candidates as thoroughly as possible, and help figure out who the independent members of the interviewing panel are, while guessing how this might affect the questioning.

The regulator deems it a success that around 10% of the candidates withdraw. The City view is that good people are being lost due to the intrusiveness of the process.

What is not being counted in that percentage are the potential non-executives who no longer want their names put forward. To be kept hanging around is unenticing to senior executives with a proven track record, while the indignity of possible rejection looms large. Not least if they are already on a board.

Why does this matter? The pool of non-executives for financial institutions is not a large one. A heavier burden of corporate governance requirements and an awareness of potential liabilities – including on the reputational front – makes the job less appealing than it used to be for outstanding directors who are prime candidates.

Overall, the recruitment process is becoming more expensive and the pool of candidates smaller, with “group think” arguably becoming even more pernicious. The risk to business increases when securing the right people for a board becomes too difficult. The best candidates are not only the (rather obvious) former partners in accountancy firms and the like – hence the current drive to diversify boards. It is questionable how the SIF process tallies with the current attempt to promote more women onto boards.

Interestingly, the intrusiveness of the SIF process also runs counter to some recent studies on board performance and share price. Most recently, a report by law firm Eversheds showed a positive correlation between share price performance and the number of independent directors on boards who had little or no direct sector-specific experience. The law firm focused on 241 of the world’s largest companies, including 50 banks.
A host of approaches are being used to improve governance and risk-taking at financial institutions in order to avoid another systemic financial crisis. There is no doubt that corporate governance at many financial institutions was proved deficient and the FSA is rightly keen to correct this. But it is key that boards have a diversity of complementary experience, recruited from as large a pool as possible.

The regulator’s SIF regime is proving counterproductive and needs adjustment. Regulation should not stifle governance, but improve it.

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The coming Euro Ministry of Finance

SIF and the Mayr: intrusive interventions

How the mighty are fallen! Not only Dominique Strauss-Kahn, the IMF head who allegedly sexually assaulted a chambermaid, or former Egyptian President Hosni Mubarak and his Tunisian counterpart Zine al-Abidine Ben Ali.

There are a host of others: one of the world’s foremost Israeli football agents, a household-name UK broadcaster, plus a number of European chairmen. Last week they were all at the infamous Mayr Clinic, whose mission it is to clean out its residents’ guts to restore them to health and energy via a quasi-liquid fasting cure. One would imagine the conversation would range from the FIFA scandal to Greek debt restructuring.

Instead, bowel movements vied with colonic irrigation, while in the dining room a guest desperately scraped away at the last vestiges of the sheep’s yoghurt and another gloated over the waiter’s mistake in handing him three rice cakes instead of two. Lady X trotted through in a towelling robe with pop socks while Lord Y failed to notice that some of his soup was finding its way onto his robe – not unusual when one is only allowed to eat soup with a teaspoon.

The talk was rather more interesting mid-May at a dinner party at my house (I dare not focus on the mouth-watering meal served, for the rules at the Mayr are strict – lights out at 9pm, no talking at meals – and one may be asked to leave for any infractions. Fantasising about chocolate cake may well count).

At the dinner, a former EU Commissioner presciently pointed out that the crisis in the euro area would lead to talk of political integration. Sure enough, earlier this week Jean-Claude Trichet, president of the European Central Bank, called for a “ministry of finance of the union”. He envisaged the ministry overseeing fiscal and competitiveness policies of the member states, enforcing regulation of the union’s integrated financial sector and, crucially, having the right to veto specific spending decisions.

At first glance, a wild card thrown onto the table by an intellectual with only four months to go in his current job. After all, there is no political will at a time when a weakened German Chancellor and French President are focused on their electoral misfortunes and on Greek crisis management. Without the two behemoths of the EU on board, a Ministry of Finance for the EU (more likely the euro area) won’t happen.

But a different scenario may be possible. It all hinges around the price Germany would exact for the inevitable Greek debt restructuring. This will probably hinge around a Brady Bond-like scheme, deepening the German commitment to the euro and the EU. Angela Merkel will need to convince her electorate that bail-outs for Greece and others will not recur and a Ministry of Finance for the Euro area with a German in the driving seat and the right to veto uncontrolled spending plans by member states could well be the price. It resembles the bargain around the creation of the euro: the European Central Bank was purposefully located in Frankfurt and drenched in Eau de Bundesbank. The Euro Ministry of Finance would go down well in Baden-Wuerttemberg, where two months ago the Chancellor’s party lost a seat it had held for 60 years.

A German executive who had just sold his firm to a large American bank sat in the Clinic reading his book with a couple of Q-tips stuck into his nostrils. The clinician came by every 5 minutes to twist them. The treatment is called nasal reflexology and is aimed at clearing the sinuses.

On your first day at the Mayr you giggle when you see such a sight. A few days later, you sit there in the same position, focusing not on the ridiculousness of your position, but rather incandescent with anger that a friend was given 8 gluten-free croutons in the vegetable soup and you only 4.

One can get used to the most intrusive experiences with the hope that they will accomplish what they say they will. This does not necessarily make them right or effective. At times, they can even be counter-effective.

Thus with the Financial Services Authority (FSA) and its enhanced regime for significant influence functions (SIF) at financial services institutions. SIF are those that can affect a firm’s risk profile. They include board members, chief risk officers and the like. The FSA is rightly trying to tackle the lack of understanding shown by some executives and independent directors when dealing with the business of the financial institutions they were involved in. This was, after all, one of the myriad reasons for the financial crisis.

But rather like the thrusting Q-tips, they have gone too far. The approval process has become a “nightmare”, according to a top City lawyer. The FSA expects potential non-executive directors to know the financial institution backwards, despite not yet being on the board and therefore not privy to the more confidential liquidity ratios and the like. Lawyers say that around 10% of the candidates have withdrawn after the first interview with the FSA. The regulator sees this as a success, a weaning out of those who are not qualified. The City view is that good people are being lost due to the intrusiveness of the process.
There are also potential NEDs who no longer want their names put forward. To be kept hanging around with the potential for humiliation is unappetising to senior executives with a proven track record.

To comply with the FSA, major firms are asked to allow the regulator to interview candidates at the short list, rather than preferred candidate, stage. To try and ensure success, the financial institution involved now needs to brief the candidates as thoroughly as possible, while the headhunter needs to help figure out who the independent members of the interviewing panel are and make some guesses as to how this might affect the questioning.

Overall, the recruitment process is becoming more expensive and the pool of candidates smaller, with “group think” arguably becoming even more pernicious. The risk to business increases when securing the right people for a board becomes too difficult.

The best candidates are not always the (rather obvious) former partners in accountancy firms and the like – hence the current drive to diversify boards. Interestingly, the intrusiveness of the SIF process also runs counter to some recent studies of board performance and share price. The Board Report by law firm Eversheds showed a positive correlation between share price performance and the number of independent directors on boards who had little or no direct sector-specific experience (my italics). The law firm focused on 241 of the world’s largest companies between January 2007 and December 2009. It included 50 banks.

There are strict rules at the Mayr. Woe to he who breaks them. Management reserves the right to ask the sinner to leave: there are consequences, and they are just, for sinful behaviour.

But not in the world of the economists, a profession that accepts no responsibility for forecasts that err widely and fails to see that mea culpas for the financial crisis must come from them, as much as from bankers, financial journalists, regulators and other protagonists.
A classic example was in the FT, where economics commentator Martin Wolf wrote about IMF candidate Christine Lagarde that she is “an extremely likeable and impressive person. But she is not the perfect candidate: her economics are limited.” His advice is for her to ensure she has a “first-rate economist” as her first deputy managing director.

The ability to accept one’s shortcomings and thus avoid pomposity is perhaps a gene that is absent in economists. To prove that my BSc (Economics) at the London School of Economics has not corrupted me, I must admit that a year ago, when the euro was at a four-year low to the dollar, I stated in this column that a Greek debt restructuring was inevitable. That looks ever more likely. I also stated, with the same assurance, that the euro would continue heading south. It stands at $1.4595. It then stood at $1.2235. You can’t win them all.

As I leave the Mayr Clinic, I am not sure I agree with Socrates: “We don’t live to eat, we eat to live.” But I do know that having made fun of its scatological emphasis, I have been unjust in not mentioning the golf, the wonderful massages, its warm staff, Lake Worth and the magical forests. I, like many of those mentioned anonymously in this column, will return for a yearly cure.

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History’s verdict: Zapatero vs de Gaulle

The de facto eurozone haircuts

It wasn´t just Emperor Nero who fiddled while Rome burned. Two other political figures come to mind.

Post World War II, Charles de Gaulle was preoccupied with "la gloire" for France and, rather less admirably, for himself. At the time, the French were starving. In the summer of 1945, the country had less than two weeks´ supply of grain, while the winter was much worse. Malnutrition was such that the generation raised in this period were to be shorter than the previous one. With some humour and a large degree of exasperation, the governor of the Bank of France, Emmanuel Monick, told a foreign diplomat that Belgium was handling its affairs far better than France.*

Similarly, Prime Minister José Luis Rodríguez Zapatero of Spain, who announced last week that he would not stand in the 2012 elections, for years persisted in his obsession with social tinkering while the economy blew up and unemployment reached over 20%. In the last six months he has been browbeaten by foreign politicians and Spain´s business community into paying attention to the economy.

The one advantage left wing governments often have is the ability to bring the unions with them. There are times in Spain’s recent history – as well as that of other countries – where that has worked. Zapatero failed to do so.

Fiscal austerity, pension and labour reform have been imposed, but the lack of political impetus behind the necessary measures means the latter two have sunk without much trace. This is no time for complacency for – however dissimilar to Portugal´s plight – Spain is next in the firing line if the markets lose confidence.

It would be best for the country if general elections due next year were brought forward to allow the proper (and painful) application of economic policy to take place and to ensure continuity at the Bank of Spain in the first period of a new government. Governor Miguel Angel Fernández Ordóňez´s term ends in 2012.

The conservative Popular Party has an unpopular prime minister in waiting, Mariano Rajoy, but two good candidates for finance minister: Luis de Guindos and Cristóbal Montoro. They will have their work cut out as taxes will need to rise, the situation of the savings banks is much improved but in need of further action, and the drifting reforms will need to be applied with a degree of seriousness currently lacking. Charles de Gaulle might have been the wrong leader post-war. But no-one can argue with his courageous leadership in France’s darkest hours during the war.

As for Zapatero, what comes to mind is a Spanish gypsy song: "Zapatero remendón, arreglate tus zapatos, ya!" ("Shoemaker, fix your shoes, now!"). Zapatero fiddled with the shoe laces. A tragic political epitaph.

Mario Blejer, a respected former central bank governor from Argentina, says that a debt restructuring of at least some of the eurozone periphery countries (Greece, Ireland, Portugal) is inevitable.

He notes the "perverse dynamic" of Ireland´s rescue package. Priced at 6%, the package adds up to 40% of GDP and thus debt to GDP ratios will end up being higher in 2012 than this year. Additionally, the IMF and the EU, who granted the loan, have seniority over other creditors, taking away any incentive for the private sector to lend to Ireland.

Blejer, who served as head of the Bank of England´s think tank for officials from central banks around the world, is bemused by all the discussion about prospective haircuts on European country debt. "Bail outs with a haircut are in effect already happening. The ECB is buying the sovereign bonds of Greece, Portugal and Ireland in the secondary market at less than the issuance price.

This is a de facto haircut for the private sector," he says, noting that up to about 17% of the total sovereign debt of these countries has been bought so far and over 100bn euros of less than stellar collateral has been accepted.

He is disappointed that at the March eurozone summit, the European Financial Stability Mechanism (EFSM) was only given the power to buy bonds directly from struggling governments. Additionally, this was made conditional on the imposition of austerity measures. Blejer believes it would have been better to allow the EFSM to buy troubled economy bonds in the secondary market, which would have helped narrow the spreads and limited the deterioration of the ECB´s balance sheet. It would also, says Blejer, have made the coming debt restructuring much easier.

"Argentina would never have grown again if we had not restructured," he says, "…although it could have been done in a more amicable way."

How the mighty are fallen! The IMF has admitted that short-term capital controls are "squarely within the toolkit" for dealing with speculative capital. I well remember subscribing to the IMF´s orthodoxy in the 1990s and pressing central bank governors and finance ministers in emerging markets on the need for further capital liberalisation. Over lunch in Club 31, the Bank of Spain´s canteen in Madrid, a central bank official told me it was all a matter of fashion. "We don´t call them capital controls, those don´t exist. It is called macroprudential policy,¨he said, with a twinkle in his eye.

Perhaps though, I am being unfair to the IMF. As John Maynard Keynes said: "When the facts change, I change my mind. What do you do, sir? "

The gulf between the City and the government has barely narrowed, as I evidenced at a dinner party recently. I hope that the recent interim report published by the Independent Commission on Banking, a panel of experts, which suggested changes to the UK banking sector, signifies a peace treaty between the government and the banks, rather more than Project Merlin did. It represents a sensible compromise that has satisfied neither party fully – often the mark of success in a negotiation.

*French data from "Paris after the Liberation," an outstanding book by Anthony Beevor and Artemis Cooper.

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