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CityAM 23/09/2010

CityAM 23/09/2010

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Published by: City A.M. on Sep 23, 2010
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Issue 1,226 Thursday 23 September 2010
FTSE 100t 5,551 .91 -24.28
DOWt 10,739. 31 --21 .72 NASDAQt 2, 334.55 -14.80 £/$1.56 unc £/¤1.17 unc ¤/$t 1.34 -0.01
Certified Distribution
02/08/10 – 29/08/10 is 93,782
HE is the man in charge of promoting British
business and luring foreign firms to the UK.

But yesterday the private sector finally lost patience with business secretary Vince Cable, after he gave a rabble-rousing speech attacking virtually every sector in the City.

He said bankers were “spivs and gamblers”;

railed against the “murky world of corporate behaviour”; and said accountants, lawyers and advisers who work on mergers and acquisitions were “accomplices”.

And Cable stunned his audience when he claimed bankers “did more harm to the British economy than [RMT leader] Bob Crow could achieve in all his wildest Trotskyite fantasies.”

He also slammed the free market, claiming
“capitalism takes no prisoners and kills compe-

tition where it can” and pledging to stop “short term investors looking for a speculative killing”.

And Cable said the “tax base” should be shift- ed to property and land to stop people from avoiding income tax.

Business leaders hit out at the Lib Dem totem, with former Labour City minister Lord Myners saying it “sounded like a speech from the opposition” and could drive investment

away from the UK.

Serial entrepreneur and former Channel 4 chairman Luke Johnson told City A.M. Cable had caved in to the socialist elements of the Lib Dems.

The Tories were unwilling to condemn the speech, refusing to comment on the Lib Dem party conference. Cable now faces a colossal struggle to regain the confidence of the City.

He is meant to be the defender of British business. But yesterday Vince Cable
drew widespread condemnation for attacking companies and capitalism. Meet...
He obviously feels he
needs to pander to the
more socialist elements
among the Lib Dems.
It's of great concern if

the minister who is sup- posed to liaise with and understand business is making comments like

this.Luke Johnson,
former C4 chairman
Takeovers allow con-

trol of poorly run busi-
nesses to pass into
more efficient hands.
Cable has harsh things
to say about capital-
ism: it will be interest-
ing to hear his ideas for

an alternative.
Richard Lambert,
director general, CBI

Cable is intent on
destroying any inward
investment into the UK.
Insulting and threaten-
ing the very people
who you desperately
need to build your
economy is not clever

or statesmanlike.
Simon Denham,
Capital Spreads
It sounded like a

speech from the oppo-
sition. Not a member of
the government. He is
secretary of state for
business. This is exactly
the sort of talk that
frightens away foreign

Lord Myners, former
Labour City minister

His speech today was a
two fingered salute to
those helping to drive
the economy forward.
Cable clearly has an
issue with capitalism,

whatever he’s been
spouting to the con-
Ken Brotherston,
CEO, Kinsey Allen Intl

You can't step up to the
plate as business secre-
tary and still behave as
a liberal campaigner.
This is another brick in
the wall, saying to the
outside world that
business isn't as wel-
come as it used to be.

Digby Jones, former
director general of CBI

I make no apology for
attacking spivs and gamblers who
did more harm to the economy
than Bob Crow could achieve in

his wildest Trotskyite fantasies.
BA jumps last
Iberia hurdle

IBERIA has approved British Airways’ (BA) plan to tackle its £3.7bn pension deficit, removing the last remaining hurdle to their merger plans.

The decision was made by Iberia’s board, which met yesterday to decide whether it should approve the pro- posals set out by BA chief executive Willie Walsh.

Iberia’s decision means the merger plans, which have already received EU clearance, will gather pace.

Under the merger agreement, Iberia had the right to back out of the $8bn (£5bn) tie-up if it didn’t like BA’s proposals for plugging the black hole in its pension fund.

A statement from Iberia said: “This decision represents another step for- ward in the merger process.”

The final approval will be left in the hands of both sets of sharehold- ers, who will vote on the tie-up in November.

BA shareholders will own 56 per cent of the newly merged company, which will be called International Airlines Group. The remaining 44 per cent will be held by Iberia sharehold- ers.

In June, BA detailed its pension recovery plan, which commits to annual contributions of £330m, with a three per cent rise every year.

Rhetoric is spiralling out of control

PERHAPS the most depressing part of Vince Cable’s nasty attack on corpo- rate Britain, capitalism and finance was his embarrassing misreading of Adam Smith. The great economist agreed with Cable that business peo- ple dream of setting up cartels – but he made it clear in the subsequent sentence that the best way to prevent this was for the government to step aside and allow a truly free market.

Cable’s speech was based on so many misconceptions that to demol- ish them all would fill half this news- paper. Take pay. Virtually all service

sector industries pay a large propor- tion of their revenues to their workers in the form of wages. In many firms, it can be up to 90 per cent – the only other costs are often office rent, tech- nology, basic office supplies and tax. A figure of two-thirds is certainly not uncommon in large service sector firms. This is the natural product of competition and the fact that there is, on average and over time, a strong link between an individual’s produc- tivity (pounds he or she makes for employers) and his or her pay.

If anything, banks pay their staff a much lower than average proportion of revenues; Goldman Sachs, for example, is now paying out about 43 per cent. But because revenues gener- ated per staff are hugely higher in finance than in other industries, aver- age incomes are equally larger. This is true even today with much lower lev- els of leverage. So when the politicians claim that they are angry at the banks for their “behaviour”, what they are really saying is that financial firms

should defy economic gravity by push- ing down compensation ratios. Ironically given Cable’s misinformed rants, this could only work in a global cartel and if staff were banned from leaving to small start-ups.

The politicians’ contrived “anger” also has to do with the supposed refusal of banks to lend to solvent bor- rowers, a claim which is never backed up with any robust figures. In any case, this shouldn’t concern invest- ment bankers, fund managers and other non-retail financiers – yet they too are coming under fire. It is always assumed that only the supply of lend- ing is down, not its demand; yet this is an absurd claim. Of course supply is down: three years ago, an army of dodgy, under-capitalised institutions (including Icelandic banks) were lend- ing as fast as they could. This supply no longer exists – and rightly so.

It may be that lending is somehow artificially scarce – as opposed to more prudent, rational and expensive – but I have yet to be shown any real proof of

this (surveys of wannabe borrowers, such as small firms, don’t count as they are not objective). Please email me if you have some real proof that banks are curtailing lending en masse for the “wrong” reasons, as opposed to making the odd stupid mistake or pricing loans more expensively to reflect the increased risk of default and the increased cost of capital and liquidity requirements.

With bank profits up, and intensify- ing competition for staff globally, compensation will rise again. The only way to stop this would be to destroy the industry, which would bankrupt Britain. Given that a total shutdown won’t happen, and that firms cannot do anything other than hike pay at the moment, all hell is about to break loose politically. As we are already dan- gerously close to a tipping point, with Britain’s anti-capitalist mindset begin- ning to chase away global capital, the result is looking all too clear: an almighty, devastating train crash.


THE BBC has agreed to give the public spending watchdog complete access to its books for the first time.

Under a deal announced yesterday, the National Audit Office will be able to vet contracts with top executives.

It will also be able to scrutinise the BBC’s contracts with other compa- nies, to ensure the licence-fee payer is getting value for money.

Currently, the NAO is only allowed

to carry out value-for-money studies if invited by the BBC Trust, the corpora- tion’s governing body.

However, the BBC does not have to hand over details of its star’s salaries. Director general Mark Thompson was only willing to do so if the NAO signed a confidentiality agreement, which it refused to do.

The announcement was made by Liberal Democrat culture spokesper- son Don Foster at the party’s confer- ence in Liverpool yesterday.

BBC opens up its books
BBC director general Mark Thompson will come under greater scrutiny Picture: REUTERS
Lost order could cost BAE £150m

BAE Systems could lose up to £150m
from a cancelled order for three off-
shore patrol ships, after Trinidad and
Tobago said they wanted to back out of
the deal. The first of three ships, which
are built in portsmouth, was set to be
delivered within the coming weeks but
the defence group received notification
from the Caribbean island that they
were no longer needed. BAE said it
would talk to the Trinidad government
in a bid “to find an equitable solution”.
The deal was originally signed by VT
Shipbuilding in April 2007. BAE acquired
the contract when it acquired parts of
VT in October 2009.

McDonalds to sell lattes to Brits

Fast-food retailer McDonald’s is to tar-
get the rapidly expanding British coffee
market by selling espresso-based drinks
alongside Happy Meals and Big Macs.
McDonalds said it sold 84m cups of cof-
fee last year and, since re-launching its
coffee business three years ago, sales
have jumped 39 per cent. The food chain
expects to cash in on the expanding
British coffee market, which is expected
to grow by some £2bn by 2012.

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BA chief executive
Willie Walsh saw the
airline’s pension recov-
ery plan approved by
trustees in June


Siemens’ German workers have struck a deal that will see their jobs secured indefinitely, in an arresting move that highlights how the finan- cial crisis has triggered a fresh con- sensus


and management in corporate Germany. The engineering group said it had sealed an agreement with its works council and the IG Metall workers’ union that includes a pledge not to make any forced redundancies among its 128,000 German work- force.


Louis Dreyfus, the French family- owned conglomerate that owns one of the world’s largest agricultural commodities trading houses, is exploring an initial public offering of

some of its businesses, according to
people close to the company.

The banking crisis has led to a struc- tural shift in the way UK companies fund themselves, with a greater share of funding coming from bond mar- kets, according to a report from Standard & Poor’s. Bond markets have replaced banks to become the main provider of new debt financing on a net basis since the third quarter of 2008, according to the report, which is based on Bank of England data.


Axiom Telecom, a UAE-based mobile phone retailer, plans to launch an ini- tial public offering that could raise Dh200-300m ($54-$82m) for troubled conglomerate Dubai Holding , one of the retailer’s main shareholders. Bankers say that the Dubai-based dis- tributor could offer a 30 per cent stake on Nasdaq Dubai.


Lehman Brothers could emerge from bankruptcy early next year, having returned more money than expected to its creditors, the Wall Street Bank’s liquidator said. In a statement to the US Bankruptcy Court in Manhattan, Lehman Brothers Holdings said that it was optimistic that its reorganisa- tion plan would be ready for the court’s confirmation in early 2011.


The leading software manufacturer said while demand for its flagship Creative Suite 5 (CS5) software pro- gram, which includes Photoshop, continued to be positive, sales in Japan and to its US education cus- tomers could be weaker than expect- ed. At least three brokerages cut their ratings on Adobe’s stock to “neutral”.


Bonnie J. Hoxie used her position as secretary to Disney’s head of commu- nications to obtain price-sensitive information. It has all the ingredients for a film but not one that family- friendly Walt Disney would typically make. FBI agents posing as hedge fund traders; confidential informa- tion about a corporate giant; a young woman on the make from Los Angeles.


Sainsbury’s looks to take on rivals Waitrose and Marks & Spencer using products aimed at people who are eat- ing in more. J Sainsbury has radically relaunched its £1bn range of upmar- ket food as it looks to capitalise on the trend for eating in and steal market share from rivals.


The Food and Drug Administration approved for sale the US market’s first oral drug to treat multiple scle- rosis—a disease typically treated with more cumbersome injections and infusions—in another sign of the improving picture for MS treatment. The drug, fingolimod from Swiss pharmaceutical giant Novartis, is one of a group of new oral therapies being developed for MS.


A Bank of Japan policy board member said Wednesday that the central bank would take action if downside risks to the Japanese economy materialise, suggesting the BOJ is inching toward a looser monetary policy stance amid growing concerns over the health of the global economy.

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CANADIAN fertiliser firm PotashCorp yesterday buttressed its defences against BHP Billiton’s hostile $39bn (£24.9bn) bid, filing a lawsuit against the miner in an Illinois federal court.

The suit came as BHP’s chief execu- tive Marius Kloppers faced the scruti- ny of investors over his $11.3m paycheque for the past financial year – a 9 per cent increase on the previous year. The firm’s annual report showed Kloppers received a $2m salary, $2.3m cash bonus and almost $7m in short and long term equity awards.

PotashCorp’s legal action, which seeks to block the bid and win an unspecified amount in relief pay- ments, accuses BHP of concealing a longstanding interest in making the acquisition and feeding the market misleading information on its own intention to enter the potash indus- try as a new competitor. That strategy, the lawsuit contends, drove down

potash prices, allowing BHP to make its offer at a “low-ball” level at which it would not have to first gain approval from its own shareholders.

Under UK law, a bidder must put its offer to a shareholder vote if the intended deal exceeds 25 per cent of its own market capitalisation. Based on BHP’s closing price on 19 August, the day before the offer emerged, the bid represented almost 23 per cent of the company’s market cap.

“BHP’s announcements were strate- gically timed, intended to colour investors’ views of the future for PotashCorp, and designed to raise the spectre that BHP was the 800-pound gorilla about to become a major com- petitor of PotashCorp,” the suit states.

BHP insisted its $130-a-share offer would not be delayed, adding: “We believe this lawsuit is entirely without merit and will contest it vigorously.”

No counter-bids have yet emerged, though China’s Sinochem is said to have engaged Deutsche Bank and Citi to advise it on a potential offer.

sues BHP over
hostile offer

YIELDS on UK government bonds saw their sharpest fall in 18 months, after the US Federal Reserve said it was open to a new round of quantitative easing (QE) to help revive the flagging American economy.

The yield on the benchmark 10-year gilt dropped by 15 basis points to 2.97 per cent, the biggest drop since the Bank of England started buying up government bonds in March last year.

Gilts were given a further boost when the minutes from the Bank of England’s most recent Monetary Policy Committee (MPC) meeting showed increased concerns about the outlook for the economy.

But Sam Hill, a UK fixed income strategist at RBC Capital Markets warned it would be difficult to justify more QE with inflation already higher than target.

The UK rally tracked similar move- ments in the US gilts market, where yields


10-year Treasuries slid to their lowest level in three weeks.

Gold prices saw yet another spike, with spot gold setting a record of almost $1,300 an ounce, while the dol- lar lost 1.5 per cent on a trade weight- ed basis, on fears that another round of stimulus would mean an effective devaluation of the currency.

HSBC dismissed suggestions its chief executive Michael Geoghegan threat- ened to quit unless he was elevated to the role of chairman.

The firm branded the speculation “offensive”, saying Geoghegan, who has been at the bank 37 years, has no intention of stepping down.

A spokesman said: “It is nonsense
that Mike threatened to resign unless
he was appointed chairman.

“The suggestion is offensive to both him and the company. As previously stated, the board is working under due process to finalise HSBC’s succes- sion plan following Stephen Green’s already-announced departure and this proceeds in line with the sched- uled timetable.”

Outgoing chairman Stephen Green will quit the firm in January to take up a full-time government role as trade and investment minister.

Gilts rally after
Fed opens door
to more stimulus
HSBC says Geoghegan
did not threaten to quit
Michael Geoghegan denies threatening to quit HSBC
Picture: REUTERS

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