People are angry about corporate abuses: tax avoidance, asset stripping, fat cat salaries and bonuses and much else. Corporate capitalism has lost its moral compass and its social values. It has plunged the world into recession and austerity and contributed to growing social inequality. The prevailing focus on shareholder value has placed short term profit ahead of constructive investment. The current structures of corporate law and practice are clearly in need of radical reform.
And yet the underlying principles of corporate law – providing for external investment in enterprises which combine the labour of workers to produce goods and services – are not inherently wrong. They have worked over the years to increase prosperity and living standards in many countries. What is needed is a realistic and pragmatic programme to eliminate abuses and promote fairer and more productive alternative corporate structures.
Continue reading Fighting Corporate Abuse: Beyond Predatory Capitalism
Globalisation reduces the cost of goods and services as their production migrates to the lowest cost parts of the world. The lower prices are a benefit for everyone and the low cost parts of the world, which are only now beginning to industrialise, gain tremendously in terms of economic growth and employment. So globalisation is a good thing, But there are some downsides. Jobs disappear in the advanced economies as production moves to the developing world. Up to now, the advanced economies have grown, bar a few booms and busts, more or less continuously, for the past 250 years in UK’s case. But the migration of jobs now seems likely in the advanced economies to be permanent and to be bringing the growth phase of their economic development to an end.
Permanent changes like this are difficult to forecast, and even appear difficult to recognise when they have happened. The initial response is to identify the change as a blip. Commentators today are identifying this quarter’s UK GDP data as indicating the end to the ‘double dip recession’. If miniscule GDP growth is recorded two quarters on the trot, commentators will surely be referring to ‘green shoots’. But it is equally likely that the slightly encouraging data this quarter is a blip and from now on, the lack of economic growth will be the steady state in advanced economies, which might more aptly be described as post-industrial.
Continue reading The Real Costs of Globalisation
When J M Keynes used the term ‘madmen in authority’ he was referring to his contemporary equivalents of David Cameron and George Osborne. At the end of last year, though he talked about it incessantly, it was clear that Cameron had limited understanding of the need to rebalance the economy – see http://www.gordonpearson.co.uk/09/mr-cameron-doesn%e2%80%99t-understand/. The real business of making and distributing things for people to use and consume creates real jobs. But Cameron didn’t seem to understand the difference between that real economy and the speculative, bonus driven financial sector. He said he understood, but then always succoured up to his friends in the City.
His lack of understanding, or his duplicity, seems only surpassed by fellow Bullingdon intellectual and purveyor of the greatest budget shambles in living memory, Chancellor George Osborne.
The financial columns have recently suggested full state ownership of RBS was being discussed by senior ministers and treasury officials. It would cost around £5bn. But Osborne was against it. A rational objection was that it would mean taxpayers taking on full responsibility for the bank’s toxic debts, as opposed to the 82% responsibility they already have. But Osborne’s real reason was his dogmatic focus on cleaning RBS ready for sale back to the private sector, even though that won’t happen any time soon. Only Vince Cable has come out publicly in favour of nationalisation so as to boost lending to industry, especially innovative SMEs, in order to get the real economy moving again.
Continue reading Our Madmen in Authority: the Bullingdon intellectuals
The threat to the world’s liberty today comes from the monopolistic power of unregulated corporates. That is exercised mainly through banks such as Goldman Sachs and financial intermediaries and traders such as Glencore. A year ago the Financial Times ran a series of articles showing how Glencore fix commodity prices for their own profit and everyone else’s loss. The Russian wheat and corn harvest being threatened by drought, the FT reported how Glencore made speculative long term proprietary trades in wheat and corn. When wheat prices failed to rise sufficiently for a profit to be made over the period of Glencore’s trade, their man in Moscow ‘encouraged’ the Russians to ban wheat exports. That had the desired effect forcing prices up sufficiently to enable Glencore to close its earlier bets at a decent return. The obvious side effect of the price rise was that the struggling millions had to struggle that bit more. That’s the Glencore way of doing business. (See http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/)
Glencore is currently in the throes of taking over of its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata is already big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and is highly influential in thermal and coking coal. Using the Glencore business method, they will together be able to create and exploit prices of all these commodities and more. And with Viterra also acquired, they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival.
Continue reading The Criminal Company
A couple of “industries”, audit and management consultancy, which have deliberately entwined themselves round each other and called themselves ‘professional services’, have developed strongly monopolistic tendencies. The degree of industry concentration is truly remarkable: the four leading firms employ around 650,000 people, earn revenues of over US$100 billion, and take around 80% of the global market for large and medium businesses, plus a huge involvement in public sector consulting.
The big four ceased to be truly competitive decades ago. They now exist for the benefit of their own people, rather than their customers. It’s a carve up comparable to the various cartels and closed shops which existed in the City of London prior to the ‘big bang’. It seems unlikely to last much longer.
Continue reading Monopolistic Complacency and the Big Four
The new rules on bank liquidity, now agreed by the Basel Committee on Banking Supervision, will contribute to reducing banks’ risk-taking. But not a lot, and only slowly. Under pressure from the banks themselves, the rules have been softened and their implementation slowed down. Timidity in tightening requirements is justified on the grounds that too fierce and too rapid rebuilding of bank balance sheets would take too much out of the real economy and so contribute to the much feared double dip recession. But beware!
Continue reading Basel’s New Banking Game Rules
The Financial Reporting Council (FRC), which oversees issues of corporate governance, has been busy recently. In June it published an updated UK Corporate Governance Code. Now, this month it has published the companion UK Stewardship Code for institutional investors. So we now have both sides of the governance coin, ready for implementation, the considered regulation by City insiders to prevent a repetition of the banking excesses which landed us in such a pickle two years ago. What do they amount to?
Continue reading Codes of Corporate Governance Practice
The problem with the Securities and Exchange Commission’s long overdue pursuit of the potentially fraudulent practice in Goldman Sachs is that it is likely to take a long time to conclude, will cost an arm and a leg, and its outcome is far from certain. If and when the UK authorities follow SEC’s example, it would be likely to cost more, take longer, and be even less likely to produce convictions.
The problem is that such legal actions engage with the details of credit default swops (CDSs), collateralised debt obligations (CDOs) and the whole panoply of financial derivatives that have been deliberately invented to mislead and defraud. CDOs were invented so as to deliberately disguise the real extent of liabilities and so make a firm appear less risky and therefore capable of taking on more debt, which was done with the same deliberate intention to mislead and defraud. This is a minefield where the attribution of blame and intent is full of deliberately confusing and opaque detail.
It would be better to step back from the detailed machinations and simply take a view of the truth and fairness of a firm’s published accounts. It is not difficult to do with the benefit of hindsight. Where balance sheets have been seen not to reflect a true and fair account of a company’s position, the auditor who certified the balance sheet should be prosecuted. They are paid vast sums for their expertise and diligence in certifying company accounts. Auditors who are party to misleading accounts, are guilty of either incompetence or dishonesty. They should surely have to face the full force of the law and be struck off by their professional body. Similar treatment should be meted out to those who presented the misleading accounts. And those who gained through their deliberate misrepresentation and have taken large bonuses as a result, should be similarly treated, with their fraudulently earned bonuses being repaid.
This would be a major change in accepted custom and practice, but it is to be hoped the SEC’S action against Goldman Sachs is a first step in that direction.
John Lanchester, writing in last Saturday’s Guardian, explained the essence of the Repo 105 deals which Lehman Bros did to create the false impression in their accounts that the company was fit and well. And Lehman’s accountants, Ernst & Young, were happy, as Lanchester explained, to ‘sign off on the deal … It was all within the rules.’
But it wasn’t. Company accounts, in Britain and in America, are intended to reflect a true and fair picture of the company’s position – otherwise what is their point? It doesn’t matter that custom and practice has become so fraudulent in financial circles. The only reason why auditors are still required in Britain to certify the accounts as “true and fair” is to be sure that the various clever creative ways of accounting to disguise the true picture, which in themselves may be perfectly legal, are not used to deceive. At the end of the day the accounts must give a “true and fair” account. If audited accounts are not “true and fair”, then the accountants responsible, and the auditors who signed them off, should be struck off and locked up.
So it turns out the top brass at Lehman Brothers were deliberately lying about their indebtedness to the tune of $billions. Shades of Enron! So what’s new? Speculative markets are based on lies. In the old days financial institutions such as pension funds and insurance companies, served some social purposes. Today, hedge funds, sovereign funds and the like, serve no social purpose. They exist only to make money for their investors and themselves, both being in a position to take risks with ‘loadsamoney’. They have no moral compass beyond ‘making as much money as possible’ to quote the famous economic mountebank, Milton Friedman. So, of course, they are liars. The accounting profession are culpable, deliberately falsifying balance sheets so they appear less risky than they are. And firms of auditors are liars, declaring the accounts to be “true and fair” when they know perfectly well they are nothing of the kind. But very few of these parasitic liars end up behind bars.