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Certified Distribution02/11/09 – 29/11/09 is 102,194
FIRST TULLETT –NOW US BANKS MULL EXIT
WALL STREETS banks are seriously considering relocating many of theirEuropean bankers out of London fol-lowing the bonus super-tax, sourceshave told
City A.M.
The industry has been workingclosely with its US-based lobby group,the Securities Industry and FinancialMarkets Association (SIFMA), to decide whether to relocate some Europe,Middle East and Africa (EMEA) teams.Early soundings suggests the US banks derive just 20 per cent of theirEMEA revenues from the UK itself –even though their regional headquar-ters and most staff are in London. There is a growing feeling that whilesome bankers will have to remain inthe UK to deal with domestic busi-ness, it makes no sense for those who work primarily on European or otherdeals to remain in London given theuncertain tax regime. Yesterday Tullett Prebon, the inter-dealer broking firm headed by City veteran Terry Smith, said all of its 700-odd brokers would be eligible to trans-fer to its offices in Switzerland,Singapore or Bahrain if they wish todo so. Tullett said it had long beenreceiving queries over theunfavourable tax policies in the UK, but that the stampede of concernsraised by the pre-Budget Report last week had caused its management torethink their position.“The key for us is to defend our rev-enue streams, and that means retain-ing our broking staff,” a Tullettspokesman said. One employeedescribed the news of the tax, which will see City banks pay a 50 per centone-off levy on all bonuses over£25,000, as a “head of steam which blew the lid off a boiling kettle”. Tullett is also understood to haveconsidered the option of moving itsown headquarters to another domi-cile, following a threat to do so fromarch-rival ICAP, headed by MichaelSpencer.Mayor Boris Johnson said Tullett’sannouncement “should serve as areminder that the threat to our com-petitiveness is very real and the capi-tal’s hard earned competitive lead is being damaged.”
BUSINESS WITH PERSONALITY
www.cityam.comIssue 1,037 Tuesday 15 December 2009
FREE
BA on strike:
12 DAYS OFMISERY ATXMAS
p2
Dubai bailout:
ABU DHABISTUNS THEMARKET
p5
LLOYDS Banking Group, which yester-day successfully completed a record- breaking £13.5bn rights issue, ispreparing to pay out its bonus pool infull. The move, which follows mount-ing anger in the City over the govern-ment’s super-tax, will see the firmhaving to hand over an estimated£100m in payments to the Treasury aspart of the 50 per cent levy. The payment of the bonuses, the bulk of which will be for amounts between £20,000 and £40,000, willsurprise government ministers whoexpected most banks to rethink com-pensation policies in the light of theimposition of the bank bonus super-tax in last week’s pre-Budget Report.Lloyds’ bonus pool is expected toreach between a quarter and a thirdof that of Royal Bank of Scotland(RBS). Only a very small number of itsstaff are in line for very large, £1m-plus payouts.But
City A.M.
has learnt that Lloyds, which is still 43 per cent owned by the government, is determined to bite the bullet and pay bonuses itfeels its staff deserve even if thatmeans taking a substantial hit. Just as remarkably, most other banks in the City are now preparingto follow suit, according to sourcesthat have been involved in discus-sions between the different institu-tions. This is especially likely to bethe case at many US firms, which feelthey cannot allow massive pay differ-ences to arise between London andNew York.One of the main exceptions is likely to be RBS, which could reduce theamount it pays out as a result of thetax, partly because the government’sstake in the firm is much higher thanit is in Lloyds. The government, which expectedto raise around £550m in total fromthe tax, is now likely to make farmore than that, sources said yester-day. PricewaterhouseCoopers hasalready raised its estimate for the taxtake to £2.5bn.But the news that it is set to cash in will be bittersweet to the Treasury, which has repeatedly said it wantsfinancial institutions to pay staff lessand retain more capital.Lloyds’ decision will be interpretedin the City as the latest sign that the bank is returning to rude health, hav-ing been brought low by its disastrousacquisition of HBOS.Chief executive Eric Daniels, whosereputation in the City was at a low ebb last year, is increasingly beingseen as one of the surprise winnersfrom the credit crunch.Many of those close to Lloyds now expect UKFI, the institution whichholds the Lloyds shares on behalf of the government, to offload a signifi-cant portion of its shareholding inthe first few months of 2010. Theexact timing will depend on marketconditions. They argue that the government will be keen to show it has made areturn on its investment before theelection and consider a profitableexit price to be anything over 64p ashare, compared to yesterday’s clos-ing price of 55p. Some banking ana-lysts have a target price of 100p forthe Lloyds share price, which, if cor-rect, could see the government sell-ing shares at a healthy profit.Lloyds’ estimates of the level at which a reprivatisation would beprofitable is drastically different to what was being discussed just a few months ago.In June this year, UKFI calculatedthat its break-even exit price was122.6p per Lloyds share. But followingimplementation of Project Seaview –the nickname given by Lloyds insid-ers to yesterday’s fundraising and exitfrom the asset protection scheme –and UKFI’s take up of its rights, thegovernment’s break-even exit price will be reduced to 73.5p, Lloyds believes. This falls to 64p once allother payments are included. The bank calculates the govern-ment has so far spent £20.3bn on it.From that it subtracts the £144m feespaid to the government for the under- writing of the rights issue, as well asthe £2.5bn break fee from the assetprotection scheme, leaving a net out-lay by the Treasury of £17.6bn. Thissum would be recouped if the govern-ment sells all of its shares at just 64p.Banking sources believe that thegovernment may use an unusualmethod to reprivatise all or part of Lloyds –largely because the market would be unable to cope with hugenumbers of shares put on sale all atonce.One option would be to access theconvertible market through an equi-ty-linked security with a debt compo-nent (either government debt orLloyds debt) and a call option or war-rant over UKFI’s ordinary shares. Alistair Darling was said last nightto be adamant that he will not softenthe 50 per cent tax on bonuses, evenas a growing number of banks and brokers threaten to move offshore.LLOYDS RIGHTS ISSUE: P6
LLOYDS POISED TO PAY£100M IN BONUS TAX
Alistair Darling is setto raise far more thanexpected from his50 per cent super-taxon bank bonuses
Eric Daniels has seen his reputation recover in recent weeksPicture: Micha Theiner/ CITY A.M.
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Bank is preparing to pay bonuses to all itsstaff as planned despite 50 per cent super-tax
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Many other City firms –apart from RBS –also leaning towards paying out bonuses in full
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Government hoping for early Lloyds share saleat a profit after successful £13.5bn rights issue
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CITYA.M.
15 DECEMBER 2009
BRITISH AIRWAYS (BA) is facing hun-dreds of thousands of pounds of loss-es after its cabin crew votedoverwhelmingly in favour of a 12-day strike, threatening to paralyse theairline over the peak Christmas andNew Year period. A bitter row over jobs, pay and working conditions escalated yester-day, when more than 12,000 BA members of the Unite union votednine to one for the walk-out, which will start on 22 December and willrun until 2 January. Eighty per centof members turned out to vote.Chief executive Willie Walshslammed the strikes, which are esti-mated to cost the airline around£50m a day, or as much as £300m forthe full 12 days. Walsh called the move “senseless”,and added that the union “mustunderstand that there can be noreturn to the old, inefficient ways if [BA] wants to ensure long-term sur- vival in the interests of our cus-tomers, shareholders and all ourstaff”. The union is up in arms over BA’smove to slash the number of cabincrew on both longhaul and short-haul flights, as part of a massiverestructuring aimed at saving morethan £100m. Unite has also attackedthe airline’s plans to freeze pay forcurrent staff and hire future staff ata lower rate of pay.Len McCluskey, assistant generalsecretary of Unite, said: “We havetaken this decision to disrupt passen-gers and customers over theChristmas period with a heavy heart.”BA reported record losses of £401mlast year, and has indicated it willlose at least as much again this year.News of the strike came just hoursafter BA announced that its pensionfund deficit had ballooned to £3.7bn.BA also announced head of invest-ments and alliances Roger Maynard would step down as chairman of thepension trustees.MORE: P12
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Selfish strikes to cripple British Airways
WHAT a tragic outcome at British Airways. The airline’s management ishardly perfect but it is almost unbe-lievable that BA’s staff have chosen to walk out like this. The strike – sup-ported by an astonishing 92 per centof those voting – will last for 12 hellishdays from 22 December to 2 January,ruining the holidays of at least 1mtravelers and angering all of its cus-tomers. BA is hemorrhaging cash, itspension deficit is gigantic and coulddestroy its merger with Iberia – its lastchance – and it needs to slash costs, as Willie Walsh, its combative boss,knows all too well. It is a tragedy thatmany of the staff don’t seem to under-stand this. If anything, the cuts they object to may actually turn out to betoo timid to avoid disaster. The stark truth is that time is running out forBA; we must all hope that this strikedoesn’t turn out to be the beginningof the end for a once great airline.
BLAME THE EURO
Many different factors helped to fuelthe bubble but they all had one thingin common: an excessively low cost of borrowing. But one of the main driv-ers of the folly has until now beencompletely ignored: the EuropeanUnion’s economic and monetary union, which drove down yields ongovernment bonds across theEurozone, even though the underly-ing economies – Greece, Italy andIreland – hadn’t really changed. Lowerinterest rates, needless to say, helpedpromote unsustainable house priceand commercial property booms. A fascinating piece of analysisreaches me from Monima O’Connor, aformer JP Morgan banker and head-hunter. In 1990, Italy’s short-termrates were approximately 18 per cent,France’s 10 per cent, Spain’s 15 percent, Germany’s 6 per cent and theUK’s 10 per cent. By 1996, as the align-ment process with Germany movedahead, rates in Italy and Spain weredown to 9 per cent, France andGermany were at 4 per cent and theUK was at 6 per cent. Final conver-gence took place when the euro wasintroduced and the prevailing interestrates on 2 January 1999 was 3.25 percent for the 3-month Euribor.Obviously, some differences remainedand some of the reduction was due toimproved inflationary and fiscal per-formance – but a lot of it was also dueto political strong-arming, pressure being brought to bear on analysts andsome cooking of the books. Within nine years, O’Connor calcu-lates, rates had fallen by approximate-ly 50 per cent in nominal terms forItaly, 60 per cent for France, 40 percent for Spain, and 33 per cent forGermany. One result of this phoney low interest rate environment anddeclining real rates of return was thatinvestment managers, investment banks and particularly pension fundstrustees sought out higher rates of return in alternative asset classes.Structured products became moreattractive and there was a boom inreal estate. Artificially low costs of bor-rowing triggered artificially highamounts of credit creation. This specifically European dimen-sion to the bubble has been largely for-gotten. It is also clear that the pressureon the euro is intensifying. Greece’sdebt burden is soaring out of control:it is denominated in euros, which Athens cannot print (only theEuropean Central Banks can do that)and it cannot devalue either. Greecemust either introduce swingeing cut- backs, be bailed out by Germany,default on its debt or quit the singlecurrency. What a euro-mess.
allister.heath@cityam.com British Airways customers face misery over Christmas Pictures: PA
NEWS | IN BRIEF
Google to pair phone with T-Mobile
Google plans to sell two versions of itsown-branded mobile phone: one with aservice contract with T-Mobile USA andanother that is unlocked, a source famil-iar with the matter said last night. Thephone, manufactured by HTC, has anumber of code names such as HTCPassion, Dream or Nexus One and couldbe available directly though the Googlewebsite as early as 5 January, accordingto the source. Google said on its officialblog that it was testing the phone. Itsdecision to sell an unlocked version of the touchscreen phone, allowing con-sumers to pick a carrier of their choiceto provide wireless service, is a radicaldeparture from industry thinking.
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EDITOR’S LETTER
ALLISTER HEATH
DIARY
CITY A.M. ANDINTERACTIVEINVESTOR LAUNCHJOINT VENTURE
P10
BA in winter of discontent
COUNCILS THREATEN ICELAND BANKACTION
Council leaders have threatened tolaunch legal proceedings against afailed Icelandic bank which they fear will not repay £150m in depositsmade by local authorities before thecredit crunch. British councils had£900m of deposits in Iceland when atrio of its banks collapsed. So far bare-ly £100m has been returned,although further repayments areexpected in the spring.
“RADICAL” WELFARE SHAKE-UP TO BEUNVEILED
More powers for jobcentre staff, areview of employmentschemes forthe sick and new curbs on Londonhousing claims will be unveiledtoday by ministers in the latest shake-up of the welfare system. The “back to work” white paper will boost supportfor youth unemployment and estab-lish reviews into a range of areas –from flexible working to employmentprogrammes– while broadly endors-ing the thrust of existing welfare andemployment policy.
FINANCE DIRECTORS JUMP SHIP AMIDSTORMY SEAS
Turnover among finance directors inthe UK’s biggest listed companies hasincreased sharply amid the turbu-lence of the past year, research hasrevealed. The number of FTSE 100finance directors who stayed in their job for the entire 2008-09 financial year dropped by 16 per cent, accord-ing to research by the Reward Technology Forum.
INSURERS FACE REFORM OF RULES OFDISCLOSURE
Millions of consumers could benefitfrom proposed laws that would pre- vent insurers from rejecting claims because a policyholder did not dis-close information they were neverasked for.
GOVERNMENT AIMS TO ENSUREROTHSCHILD CAUGHT BY BONUS TAX
The Government is expected toextend the scope of its controversial banker bonus tax to ensure that theCity house of N M Rothschild andother banks with non-standard year-ends do not slip through the net, The Times has learnt. Rothschild had been set to avoid the tax because,unusually among UK investment banks, it pays its annual bonuses in June, two months after the tempo-rary tax is due to end on April 5 next year.
OLD SPITALFIELDS WORKSHOP SELLSFOR £3.75M
A former sweatshop in Spitalfieldshas been sold for 25 per cent above its£3m asking price after being on themarket for only one month. TheGrade II-listed property on FournierStreet went to sealed bids.
CITI RECRUITS LAWYERS FOR EMIBATTLE
Citigroup has hired two of the mostpowerful lawyers in the US from legalfirm Paul Weiss to fight its corner inthe bitter multi-billion pound legal battle launched by entrepreneur Guy Hands. Paul Weiss chairman BradKarp will be handling the case along with Ted Wells, who has representedformer NY Governor Eliot Spitzer.
AUTOMOTIVE ASSISTANCEPROGRAMME UNDER ATTACK
MPS have called for the Governmentto take urgent action over its ailingflagship support package for automo-tive manufacturers, labelling it a“wasted opportunity”. The BusinessInnovation and Skills Committee saidthe performance of Lord Mandelson’s£2.3bn Automotive AssistanceProgramme (AAP) was “deeply con-cerning”.
WAL-MART USES ITS STORES TO GETAN EDGE ONLINE
For almost a decade, Wal-Mart StoresInc. has been boasting that it willdominate Internet retailing the way it dominates strip malls, toppling Amazon as the world’s largest onlinemerchant. And every year, those boasts have proved hollow. But thisholiday shopping season, Wal-Marthas started aiming at what it sees as Amazon’s Achilles’ heel: the costs anddelays of shipping online purchasesto buyers.
APPLE FACES DELAY ON IMACSHIPMENTS
Consumer electronics giant Applesaid Monday it is “working hard” tofill orders for one of its newest desk-top computers even as reports mountthat the machine’s screens are mal-functioning. Apple said it was run-ning roughly two weeks behind.
WHAT THE OTHER PAPERS SAY THIS MORNING
FRENCH President Nicolas Sarkozy yesterday unveiled a
€
35bn (£31bn)“grand loan” the government willtake out to fund universities, renew-able energy and the digital economy.Of the total,
€
22bn will be raisedthrough government borrowing, with the rest coming from bailoutmoney repaid by banks to the Frenchgovernment.France’s universities are the main beneficiary of the money, with
€
11bngoing towards the construction of upto ten world-class campuses. Researchinstitutes will get
€
8bn while
€
5bn will be spent on renewable energy.CITIGROUP and Wells Fargo yesterday became the last two major US banksto repay the bailout money they received from the US government. This means they will escape therestrictions on cash bonuses imposedunder the Troubled Asset Relief Program (Tarp).Citigroup said it would repay $20bn (£12bn) while Wells Fargo willpay back $25bn. The announcements came a day after President Barack Obamaaccused Wall Street firms of rushingto pay back Tarp money to escape gov-ernment curbs on big bonus payouts. The US Treasury pumped $45bninto Citigroup to save it from col-lapse last year, but $25bn was con- verted into a 34 per cent stake. Thegovernment intends to sell theshares in an “orderly fashion” in upto a year.Citi plans to issue $20.5bn of capi-tal and debt to raise the money to exit Tarp, comprised of $17bn of commonstock, $2.8bn of prepaid commonstock purchase contracts, and $700mof subordinated notes. Wells Fargo will sell $10.4bn instock to raise funds for its repayment.Citi also struck a deal to pay bonus-es in shares rather than cash nextmonth. It will issue $1.7bn in stock toemployees instead of cash they wouldhave otherwise received as part of their compensation.By the end of the year, taxpayers will have reaped $3.1bn of dividendsand interest payments from Citi. Analysts said the announcements“represent a positive step for Citi”.Citi said the repayment wouldresult in a pretax loss of $8.1bn and it will take another $2.1bn pretax hitfrom the cancellation of a loss-shar-ing agreement with the government.“We owe the American taxpayers adebt of gratitude and recognise ourobligation to support the economicrecovery through lending and assis-tance to homeowners and other bor-rowers in need,” said chief executive Vikram Pandit.“Citi is raising a lot of capital andthe government will still own achunk of stock for six to 12 months, but net-net the announcements rep-resent a big positive step for Citi in itsturnaround,” said analysts atDeutsche Bank.
Citi and WellsFargo to payback bailouts
PRESIDENT Barack Obama took topUS bankers to task yesterday, tellingthem to lend more money to small businesses and to embrace financialreforms. A day after calling bankers “fatcats,” Obama said since they had ben-efited from taxpayer bailouts they owed “an extraordinary commit-ment” to help rebuild the economy.“Given the exceptional assistance banks received to get them through adifficult time, we expect them toexplore every responsible way to helpget our economy moving again,” thepresident told executives of a dozenmajor banks at a meeting that lastedone and a half hours.Bank of America pledged to increaseloans to small firms by at least $5bn(£3bn) over the next year.DIARY: P10
Obama criticisesbanks over lending
BANK of New York Mellon chief execu-tive Bob Kelly said in a memo toemployees yesterday that he was notleaving the bank, quashing specula-tion he was in new talks to becomeBank of America’s next chief execu-tive for the second time in twomonths.“Given some of the press reports wehave seen in recent weeks, I wanted you to know and to hear from medirectly that I’m not leaving BNY Mellon,” Kelly said in a memo that was distributed to all Bank of New York Mellon employees yesterday evening.
BNYM man willnot run BofASarkozy unveils€35bn state aid
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Citigroup chief Vikram Pandit says the bank owestaxpayers a debt of gratitude Picture: REUTERS
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