Category Archives: Financial Sector

The role of the financial sector and its management

The Importance of Competitive Markets

The general purpose of all business should be to innovate and grow, developing technologies, employees and products, delivering value to customers and shareholders as well as for the common good (which includes for future generations living on this planet), through their operations in competitive markets. This is a worthwhile aim from which the economy as a whole and the general population should benefit. That is the arguable aim of ‘light touch regulation’. It is ‘light’ so as to avoid the bureaucratic strangulation of competition and the benefits that flow from it.

But there is a huge flaw in this reasoning. The basic assumption is that unregulated markets are competitive. But the reality is somewhat different.  While most markets are competitive when they first emerge, as they mature, the most successful players achieve greater market shares and in due course become dominant. Such markets are not at all competitive, but are in effect controlled by monopolistically empowered leviathans. Continue reading The Importance of Competitive Markets

Impending Disaster, made in Davos, by Bilderburg

Our world is headed towards disaster. That appears to be widely accepted; as are the reasons for it and what should be done to change direction to a safer, more sustainable, future. The Green Party exists for little else. All that is lacking is the power to achieve that change. Disaster is defined in many different dimensions: climate change, global population growth, unsustainable inequality of wealth and incomes within and between nations, global food insecurity and many other measures of impending doom. The underlying reason why those in power steer their disastrous course, always assuming they are not motivated solely by their own short term self-interest, is their belief in a fundamentally flawed version of what was formerly known as political economy.

Nobel laureate Paul Krugman flagged up one of the most basic errors of the currently dominant Friedmanite take on neoclassical economics [‘Challenging the Oligarchy’, Krugman, New York Review of Books, 17th December, 2015]. Friedman had argued that the development of monopolistic businesses was of no importance since it made no real difference. Krugman identifies that as one of Friedman’s fundamental errors. A complementary Friedman error was to claim business had no responsibility other than to make as much money as possible for stockholders. No wonder discredited ex-Barclays CEO Bob Diamond regarded Friedman as his ‘favourite economist’!

Market power has huge implications for economic behaviour. Failure over the past three decades to pursue anti-trust regulations vigorously has been a major reason for the economic trends we are now experiencing. Krugman identified two as of major importance: the financialisation of business and the ever increasing degree of inequality. Neither is sustainable in the long term, but it is unclear how their termination will be achieved.
Continue reading Impending Disaster, made in Davos, by Bilderburg

Fighting for Fairness in 2016

Fighting for fairness and social justice for the population at large may be a minority concern at Westminster, but it has considerable appeal beyond that bubble. The problem is how that legitimate, democratically supported pursuit might be achieved, without any un-British revolutionary disturbances. That is the recurrent problem for Parties seeking social justice for all. Traditionally, they only come to power following prolonged periods of social injustice. And the only Parties currently onside are the Greens and Corbyn-led Labour.

We’ve been here before. The 1929 Wall Street crash followed by Hoover’s austerity driven Great Depression. That ushered in Roosevelt’s presidency and the stimulus driven New Deal, the second wave of which he introduced as follows:
“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that government by organised money is just as dangerous as Government by organised mob.” Was that really 1936?

That quotation is borrowed from “What a Waste”, a study of the disastrous social effects of outsourcing of public services to private business interests reviewed in the previous posting on this site. It also includes a quote regarding the disposal of public assets from Joseph Chamberlain in 1885:
“Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.”
Continue reading Fighting for Fairness in 2016

Screwing care homes still makes the easiest money

Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.

Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%.

£500million of debt is a popular care home sum. When private equity Blackstone acquired Southern Cross, then leading UK care home operator, it sold the freehold of the care homes, pocketed £500million proceeds, lumbered the care home business with the costs of leasing back their homes, floated the business on the London Stock Exchange and beat a rapid retreat. It took around 5 years before the rental payments bankrupted Southern Cross. Meanwhile Blackstone were able to repeat the predatory exercise with the £500million.

The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.
Continue reading Screwing care homes still makes the easiest money

Ring-fencing or Separating Banking Activities

The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.

However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it.
Continue reading Ring-fencing or Separating Banking Activities

Devastation by High Frequency Trading

From time to time important challenges emerge from the most unlikely sources. Like the Investor’s Chronicle’s dogged 1970s uncovering of Denys Lowson’s criminality, Lowson being a former Lord Mayor of the City of London. Or Computer Weekly’s ultimately successful campaigning against the bureaucracy’s claim of gross negligence on the part of the pilots of Chinook ZD576 which crashed in 1994 on the Mull of Kintyre killing all 29 occupants.

Thanks in large part to Computer Weekly the real cause was revealed as software error in the helicopter’s computer system. Now the magazine PCPlus, whose prime focus is on the latest computer hardware and software, devotes 11 full pages of its current issue to what it refers to as the ‘virtual money crash’, and the role of High Frequency Trading (HFT) in producing what it describes as the ‘unpredictable and unstable world economy’.
Continue reading Devastation by High Frequency Trading

Glencore and their ilk are screwing the world

The system is wrong, not the people. The financial sector is out of control and is screwing the rest of us. We know traders will trade in anything that looks like making a profit. We know they make profits out of rising prices, and falling prices, it’s just a matter of betting correctly. And we know, if they’re big enough, or close enough to one that is, they can start stories going which affect prices and then bet accordingly. Though we might have thought that was illegal. This month the Financial Times has run a series of articles on Glencore showing how they influence commodity prices for their own profit and everyone else’s loss, and how they are expected to increase their stranglehold in key areas.

Glencore, the world’s largest commodity trader, is in the news because its initial public offering of shares to the London Stock Exchange, scheduled for late May, is expected to value the company at between £60 billion and £73 billion, putting it comfortably in the FTSE100 index on its first day of trading. It may be big but the FT reports that Glencore has paid “almost no corporate taxes on its trading business for years in spite of bumper profits.” That may be no surprise since that’s how these financial sector firms are allowed to work, but the way it trades, revealed in relation to Russian wheat and corn, is more interesting.

Continue reading Glencore and their ilk are screwing the world