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UBS roguecosts riseto $2.3bn
UBS was forced to admit yesterday thatit has lost $300m (£190m) more fromthe actions of a “rogue” trader than itpreviously thought. The revision sees the cost of the inci-dent swell to $2.3bn, equivalent tomore than 90 per cent of the maxi-mum annual cost-savings the bank hadhoped to make by laying off 3,500 staff.Switzerland’s biggest lender alsosuggested yesterday that the trades inquestion involved “unauthorised spec-ulative” bets on various S&P 500, Daxand Eurostoxx index futures, ratherthan on the Swiss franc, as some hadthought. The bank said that although thetrades were “within the normal busi-ness flow” of its equities operation,“the true magnitude of the risk expo-sure was distorted” because the hedgesthat traders are required to put inplace had been fabricated.UBS claims that the non-existenthedges entered into its records were“fictitious, forward-settling, cash ETF[exchange-traded fund] positions”,trades that had never actually beenexecuted.It says that the irregularities came tolight last Wednesday during a review of Kweku Adoboli’s trading book, which ithas now unwound. Adoboli is thenalleged to have “revealed” the extent of his trading activity.On Friday police brought chargesagainst Adoboli: the 31-year-old traderis accused of “fraud by abuse of posi-tion” by the bank.MORE: P6-7
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Bank of England governor Mervyn King has said it is open to another phase of quantitative easingPicture: REX
THE BANK of England will this morn-ing talk up the success of its originalquantitative easing programme, in amove which will be interpreted asincreasing the chances of furtherasset buying to boost the economy. The Bank’s £200bn asset-purchasesmade in 2009 “may have raised thelevel of real GDP by 1.5 per cent to twoper cent,” the Bank’s latest quarterly report states – concluding that theeffects of the policy have been “eco-nomically significant”. The report also estimates that QEhiked consumer price inflation “by between 0.75 to 1.5 percentage points”. The Bank’s QE was kicked off inearly 2009 after its monetary policy committee “judged that without addi-tional measures nominal spending would be too weak to meet the two percent CPI inflation target in the medi-um term.” Yet since then CPI inflation has bal-looned to over two and a half times thetarget rate. CPI hit 4.5 per cent in August, and is widely expected to topfive per cent in the coming monthsdue to rising energy bills. The Bank’s failure to forecast theinflationary pressures that have hit UK households was criticised by econo-mists at its monetary policy round-table, according to minutes of themeeting published today.
BANK: QE KEPT UKECONOMY GOING
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www.cityam.comIssue 1,470 Monday 19 September 2011
FREE
THE FORUM: OUR NEW COMMENT PAGES
TODAY: ED BALLS SLAMS OSBORNE; THE LORD MAYORDEFENDS THE CITY; SAM BOWMAN ON CAPITALISM
P24-25
BUSINESS WITH PERSONALITY
“Inflation had been high, had con-sistently surprised on the upside and was a key factor in eroding realincomes,” the minutes state.Economists at the event also warned of a risk “that additional exter-nal price shocks would erode dispos-able income further”.Stubbornly high price pressurescould dampen the Bank’s prospects of a second phase of quantitative easing(dubbed QE2), analysts have said. The minutes of September’s meet-ing of the monetary policy committee(MPC), released this Wednesday, areexpected to reveal whether the nine-man rate-setting group is moving clos-er to loosening policy. The first phase of QE could have been the equivalent of a further 1.5 tothree percentage point cut in interestrates, according to an estimate intoday’s report. Bank rate has been keptat 0.5 per cent since March 2009.Bank governor Mervyn Kingdropped strong hints last month thatmore easing could be on the agenda. The case for QE2 was endorsed overthe weekend by business secretary Vince Cable. Speaking at the LiberalDemocrats’ party conference inBirmingham, Cable cited the UK’s“demand problem”, saying that moreQE should commence “quite soon”.LIB DEM CONFERENCE: P3, P17BANK OF ENGLAND REPORT: P12-13
Certified Distribution01/08/11 till 28/08/11 is 92,745
News
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19 SEPTEMBER 2011
Greece bracesfor more cuts
GREECE was bracing itself yesterday as the government pledged to taketough action to avoid default follow-ing an emergency cabinet meeting.Prime Minister George Papandreoucancelled a visit to the US to hold themeeting, a day before EU andInternational Monetary Fund inspec-tors hold a conference call withfinance minister Evangelos Venizelosto hear how Greece will plug this year’s budget shortfall.But Papandreou did not announceany specific new austerity measureslast night that some had expected aspart of the conditions attached to thenext tranche of Greece’s bailout. The
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8bn (£6.96bn) loan install-ment forms part of a
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110bn bailoutsecured last year, which Greece needs by October before it runs out of money.Paymaster nation Germany yester-day exerted pressure on Greece to faceup to its financial responsibilities.German finance minister WolfgangSchaeuble told Bild am Sonntag:“Membership in a monetary union isan opportunity, but also a heavy bur-den. Measures for alignment are very difficult. The Greeks must decide whether they want to bear this bur-den.”He added that Greece must prove itis living up to its existing austerity plan before the IMF loan will bereleased.Reports in Greek newspapersclaimed that the government hasoffered to cut 20,000 more public sec-tor jobs in order to get its hands onthe next payment.But as Greece’s finances headedtowards dire straits, Germany voted tomove towards the political left.Germany’s Social Democrats beatChancellor Angela Merkel’s conserva-tives in a regional vote in Berlin yester-day, handing Merkel her sixthelection defeat this year ahead of akey Eurozone vote in parliament intwo weeks’ time.Merkel’s centre-right coalition suf-fered a further setback when their junior coalition partners at thenational level, the Free Democrats,failed to clear the five per cent thresh-old needed to win seats – for the fifthtime this year. Their eroding support could desta- bilise Merkel’s coalition, analysts warned. The G20 is due to meet on Thursday and Friday in a bid to stop the bur-geoning debt crisis centred aroundGreece spilling out to imperil banksaround the world.
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Poverty of debate is holding us back
IT is obvious that companies need to work harder to make sure that alltheir employees deliver the goods. This must apply to everybody, includ-ing CEOs, who are hired by sharehold-ers to maximise their value. They should be paid a lot if they do well andfired without massive payoffs if they fail. It should be written into contractsthat rewards incurred for profits thatturned out to be little more than amirage can be clawed back. It should be made as easy as possible for share-holders in a Plc to rein in their CEOs if they are doing badly; capitalism only works when owners are able to, anddo, exercise their property rights.But by the same token, successful business leaders who create billions in value should not be criticised for earn-ing a lot. The aim must be to alignincentives with performance, root outrewards for failure, make sure highpay is approved by shareholders, andimprove corporate governance – notembrace the failed egalitarian policiesof the past. This should not be about“curbing” pay – it should be aboutcurbing undeserved pay, as deter-mined by the owners of the business.It is a shame, therefore, that every-thing Vince Cable touches becomes anexercise in class war and inflamingsentiment against “fat cats”. The goodnews is that a lot (though not all) of his proposals are sensible; as ever, theproposed action doesn’t match therhetoric. But the damage caused eachtime politicians such as Cable deliber-ately stir up envy and anti-businesssentiment is huge; it keeps erodingsupport for capitalism and makes itharder to have a constructive discus-sion on how to reform the system tomake it better and to create more wealth for as many people as possible. This poverty of debate is why
City A.M.
is today launching The Forum, anew daily comment section in ournewspaper (see p24-25) and on our website. Our aim is to help debate,inform and provide a platform for voices interested in building astronger, more prosperous free mar-ket economy. We will be inviting arange of guest contributors to pen arti-cles for this section, including com-mentators, City figures, analysts,think-tankers, economists, businessleaders, and MPs; crucially, we are alsokeen to publish the best articles,emails and tweets from readers. TheCity and Westminster are now talkinga completely different language; TheForum will help bridge the gap. Weare grateful to CityJet, the airline, forsponsoring our new pages. Today’s contributions include a col-umn by Ed Balls, the shadow chancel-lor, telling us why he thinks GeorgeOsborne is wrong; a provocative com-mentary by Sam Bowman, a brilliant young writer, on why we need morecapitalism, not less; and a pithy op-ed by Michael Bear, the Lord Mayor of theCity of London, on three policies hethinks would help the Square Mile. We also have a short, tweet-lengthnote by Alan Miller, one of London’stop fund managers, arguing thatexchange traded funds were wrongly blamed for the trading scandal thathas cost UBS $2.3bn. Last but not least, we have a short tweet arguing that theeuro must be saved. You may not agree with some or allof these views. Neither do I. But that isthe whole point. The Forum is aboutdebating and discovering the solu-tions that will help us return to sus-tainable growth, create jobs,strengthen the market economy, boost personal freedom and help build a better world. Do join in.
allister.heath@cityam.com Follow me on Twitter: @allisterheathGreek finance minister Evangelos Venizelos speaks after an unscheduled cabinet meeting
NEWS | IN BRIEF
United Tech eyeing Goodrich
US diversified manufacturer UnitedTechnologies Corp is exploring atakeover of aerospace companyGoodrich but the two sides are not yetclose to a deal, according to a source.Reports last week said UnitedTechnologies was lining up $10bn to$20bn in financing for a US acquisitionthat could shape up as its biggesttakeover in a decade. A move by UnitedTech could mark the start of a moreaggressive phase of consolidation in theaerospace sector to prepare for cuts indefence spending in the United Statesand Europe.
Bank chief: Italy may default
Italy cannot rule out the risk of defaultthough it can weather the crisis if itseconomy returns to growth, the head of Italy's largest retail bank IntesaSanpaolo was quoted as saying yester-day. "We should know the risk of defaultis there," Corrado Passera told Italiantelevision channel La7, news agenciesreported. "We shouldn't take it forgranted that we can make it withoutcourageous choices," he said, citing highpublic debt and low economic growth.
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ALLISTER HEATH
Editorial Statement
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FEARS OVER RETREAT ON VOLCKERBANK RULES
The Volcker rule, which bans US banks from trading for their ownaccount, is set to include exemptionsthat some officials fear will weakenits impact, people familiar with thesituation have warned. In the wake of UBS’s $2.3bn (£1.4bn) loss last week,alleged to have been caused by theactions of a lone trader, proponentsof a tough rule to constrain banks’proprietary trading are concernedthat dangerous activity will continueunder the guise of customer-relatedtransactions.
LOGJAM FOR LISTINGS IN US CREATESLONGEST WAITING LIST SINCE 2007
A logjam of US initial public offeringshas stretched to its longest in four years while the number of companies withdrawing deals has increased. Anxiety over the Eurozone debt crisisand the economic slowdown has hitequity fundraising, dashing hopes of a revival that followed strong debutsfor internet companies such asLinkedIn and Pandora.
LLOYD’S BRACED FOR RECORD £1.5BNHIT
Lloyd’s of London looks set to reportlosses of more than £1.5bn on Wednesday, its worst first-half loss onrecord, after a strong of disasters leftthe insurance market facing estimat-ed claims of $3.8bn (£2.4bn). London-listed insurer with operations atLloyd’s have already reported hefty first-half losses on the back of a six-month period that made 2010 themost expensive for natural catastro-phes on record.
NAILS INC POLISHES PERFORMANCE
Nails Inc, the privately owned nail barand nail polish brand, has tripledprofits, showing that women aresplashing out on brightly colourednails despite the economic climate.
JOBS AND GROWTH STIFLED BYFAILED PLANNING LAWS
Britain’s “creaking” planning systemis driving investors away and threat-ening economic recovery, a group of leading businessmen declare today. They have thrown their weight behind ministers’ controversial plan-ning reform, arguing that it is vital tosimplify the process in favour of new retail, technology and pharmaceuti-cal ventures. In a letter to The Times,they say that the changes — bitterly opposed by countryside groups andenvironmentalists — are essential toproviding jobs and growth.
LONDON HAS AN OFFICE BLOCK GLUT –BUT IS IT BOOM OR BUST?
Research by The Times shows thatmore than £5bn of office property isup for sale in the City and Canary Wharf. More than a fifth has come tomarket in the past ten days.
HORNBY TO USE PRINCE HARRY MODELFOR BRITISH ARMY IN AFGHANISTAN
Hornby, the toy train and model com-pany, is to bring out a range of tanks,helicopters and soldiers based on theBritish Army in Afghanistan next year, with one of the plastic soldiers mod-elled on Prince Harry. The range of models on a 1:48 scale include six dif-ferent soldiers on patrol and will besold under the Airfix brand.
IKEA FOUNDER PLEDGES £1BN TOCHARITY FOLLOWING NAZI PASTREVELATIONS
IKEA’s billionaire founder IngvarKamprad has pledged £1bn to charity in a move which follows revelationsabout his Nazi past. The 85-year-old businessman has instructed the IKEA foundation, which has owned thecompany since 1982, to more thandouble its charitable spending to closeto £100m a year.
SAMSUNG COUNTERSUES APPLE INAUSTRALIA
Samsung Electronics widened a glob-al patent dispute with Apple by filinga countersuit in Australia, while alsoappealing a key ruling in Germany. The South Korean company said ithas filed a lawsuit in Australia alleg-ing Apple’s iPhone and iPad 2 tablet violate a number of wireless-technol-ogy patents held by Samsung.
THAI AIRWAYS TO SCRAP JOINTVENTURE WITH TIGER AIRWAYS
Thai Airways International PCLChairman Ampon Kittiampon saidthe carrier is scrapping its plan toestablish a low-cost airline withSingapore’s Tiger Airways Holdings.But Tiger Airways Chief ExecutiveChin Yau Seng said Thai Airways hasinformed the Singapore-based low-cost carrier there is no change in thestatus of their joint venture.
WHAT THE OTHER PAPERS SAY THIS MORNING
BUSINESS secretary Vince Cable willtoday kick off a government consulta-tion on how to cut down on thoseexecutive pay packets that he says areundeserved.Speaking at the Liberal Democratconference in Birmingham, Cable willsuggest that there is a market break-down when it comes to pay for execs.“I want to call time on payouts forfailure,” he will say, adding: “The dis-connect between pay and long-termperformance suggests that there issomething dysfunctional about themarket in executive pay or a failure incorporate governance arrangements.”It is not clear what data the consul-tation will draw upon to evaluate thelink between long-term performanceand executive pay and whether thereis a disconnect. The paper will ask respondents toevaluate a range of measures to curbsome remuneration. These include the possibility of making shareholder votes on the mat-ter binding, rather than merely rec-ommendations as they are in many cases at present.Cable will also suggest that compa-nies’ remuneration committees, whoare in charge of deciding on execs’pay, could have some form of employ-ee representation. And the consultation will ask whether companies should have toimprove the way they disclose pay tomake it easier for shareholders tounderstand.Cable will also preemptively hit back at critics who say he is anti-busi-ness, saying: “There is absolutely nothing wrong with generousrewards for those who build up suc-cessful businesses... Our goal isabsolutely not to set limits on pay.”Despite fiery rhetoric in the pastthat has seen the business secretary refer to City traders as “spivs” and callfor banks to cut down their “excessprofits”, in practice he appears ready to consider a more conciliatory lineon pay.
Cable to lookat worker sayon bosses’ pay
TIM Tookey is leaving Lloyds BankingGroup, where he is finance director,to join the insurance group FriendsLife, a part of Clive Cowdery’sResolution Group. Tookey, who is believed to have been in talks with Friends Life for sev-eral weeks, will team up with Andrew Briggs, a former Lloyds colleague overfive years, who is chief executive.Lloyds Banking Group played downthe suggestion that Tookey’s movecomes after a falling out with chief executive Antonio Horta-Osorio. Butthere are now few senior people leftat the bank from the reign of formerchief executive Eric Daniels. There is said to be tension withinthe bank caused by the large numberof new head managers, who have been brought in from Osorio’s former bank Santander. Tookey was a key figure in negotiat-ing the recapitalisation of LloydsBanking Group. The intention is tofloat Friends on the stock market in2014 and the group has earmarkedpotential transactions ahead of thatpoint. “This is a massive opportunity for Tim. It’s a big challenge,” said asource last night.Friends Life is expected to confirmthe appointment today.
Lloyds loses finance directorin latest change of the guard
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The business secretary Vince Cable is on the war-path again
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CITYA.M.
19 SEPTEMBER 2011
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BINDING VOTES
The government will look at whethershareholders could be given a bindingvote on approving executive pay
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REPRESENTATION
One option being examined is havingemployees represented on the remuner-ation panel, to ensure that decisions canbe challenged
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STRUCTURE
The government will also consult onhow to simplify and improve the struc-ture of incentive schemes and the like
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DISCLOSURE
A requirement for companies to publishthe total pay for each individual directorcould be introduced
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EXPLANATION
The government is looking at forcingfirms to give reasons when they paybonuses when performance targetshave not been met
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REMOVAL
The consultation isn’t just looking to addnew rules –it will also look at disclosurerequirements that could be removed
ANALYSIS |
WHAT THE CONSULTATION WILL ASK
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