I think I’ve spotted the ‘trash and cash’ merchants, dining at Mayfair’s best tables
A posse of hedge fund managers came round to The Spectator the other day, not to indulge in ‘trash and cash’ — or the even less attractive ‘pump and dump’ — but to participate in a breakfast discussion about how they are perceived by the media and the political world, and what they ought to do about it. I was asked to kick-start the debate, so I gave it to them straight in the croissants. Most journalists are not sure who you are or what you do, I began, but what we think you are is ‘a slightly sinister, super-wealthy clique who occupy all the best tables at the best restaurants in Mayfair’; and what we think you do is to use secretive methods to provoke and profit from market price-swings that frighten the pants off ordinary people. Warming to my theme amid a rattle of irritated coffee cups (you can hear a podcast of all this on the Editorial Intelligence website), I accused our guests of causing inflationary spikes in oil and grain prices, and seeking to profit from the Northern Rock crisis at its height by short-selling shares in Alliance & Leicester and Bradford & Bingley on the back of false rumours.
The latter gambit can now be seen as a trial run for last week’s ‘trash and cash’ bear raid on HBOS, whose shares fell by 20 per cent before the Bank of England stepped in to quash whispers that HBOS was in trouble. Those whispers seem to have started in the Far East, rather than Mayfair, but the incident was a perfect example of how footloose funds make markets more susceptible to manipulation. What was interesting about the response of our hedgie guests to my accusations was that they seemed to have little awareness of their impact on the real world: their answers were all about technique, with barely a word about responsibility. One made a distinction between what is ‘permissible’ by regulators and what may or may not be ‘acceptable’ in what he clearly regarded as the ill-informed court of media opinion. Another protested that hedge funds never collude to move markets, missing the point that a bandwagon of false-rumour-chasing is as unhealthy, in its effect, as an old-fashioned City concert-party.
Also present were several members of the Treasury select committee, led by its chairman John McFall, who each in turn warned the hedgies that they need a far more articulate and transparent case in their own defence if they are to avoid the kind of hostility that was drummed up against their cousins in private equity last year. But the question I failed to ask in my ungracious welcome speech was how many of those present were non-doms, and had already made plans to leave Mayfair for an address where political inquisitors and ill-mannered hacks, as well as taxmen, will leave them alone. The moral is that regulation and scrutiny can do little to change global market behaviour: only self-awareness and personal rectitude can do that, perhaps provoked by stinging losses.
‘Nothing is so little known to the average depositor as the real position of the bank in which he deposits his funds. What is he to do when told by people “who know the City, Sir,” that “Bullion and Co. will go yet, rich as they are,” and that he will have nowhere to turn to for cash on Monday morning? He has no means whatever of judging how matters really stand, and as for showing nerve, he prides himself upon his pecuniary timidity.’ That is part of what The Spectator had to say in May 1866, after the run on Overend and Gurney, and you will be able to read more of it in our forthcoming 180th Anniversary special issue. It reminds us of Christopher Fildes’s observation that at every turn of the financial cycle, ‘human nature is the constant’ — and it reminds me not to place too much faith in personal rectitude: our correspondent also identified as a cause of the 1866 panic ‘the astounding system of lying just now prevalent on Change’.
A rule made for breaking
I have never fully understood the aversion of corporate-governance theologians to the idea of a successful chief executive moving up to become chairman. That is what Sir Stuart Rose plans to do at Marks & Spencer, retaining the chief executive’s role while encouraging the heads of M&S’s clothing, food and finance divisions to compete for his crown. Institutional investors are up in arms — and it’s true that M&S has had succession troubles ever since the unhappy last stand of Sir Rick Greenbury a decade ago. But really such decisions should be made case by case, according to the needs of the business, the compatibility of the senior team and the fitness of non-execs to rein in an over-powerful chairman if need be. Among M&S’s competitors there is a recent example of a chief executive who moved very effectively into the chair: David Jones at Next. Stuart Rose has been a tower of strength at M&S, and at a moment when the retail economy is bound to turn down it would be folly for shareholders to disrupt his succession strategy for the sake of a rule that just does not fit every case.
The next boom
I have a hunch that one of the perverse outcomes of the new mood of ‘pecuniary timidity’ will be to the benefit of Britain’s fast-growing venture capital industry. Erosion of confidence in banks has reversed normal risk criteria. If you happen to have half a million in cash that you don’t need in a hurry, are you really comfortable keeping it in a high-yielding account with Fishibanki of Iceland or even with the high-street institution you’ve had accounts with all your life, but whose shares have just inexplicably plunged? Or would you feel safer holding a portfolio of stakes in unlisted companies, unaffected by current market whims, whose managers you have met and whose products you understand? You know some of the companies will go bust, but you also know one or two have the potential eventually to multiply your money. Meanwhile, the less willing the banks are to finance small companies with big ambitions — in ‘green’ technologies, for example — the more opportunities there are for venture capitalists, who tell me they have never been busier. This may even signal what the next City boom will be, five or seven years hence: a dotcom-style rash of over-hyped flotations of save-the-planet businesses that were first funded by wily venture capitalists in the depths of today’s credit-crunch gloom.