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Any Other Business

The ticking parcel I failed to spot and the oil-price prediction I got spot on

15 October 2008

12:00 AM

15 October 2008

12:00 AM

The ticking parcel I failed to spot and the oil-price prediction I got spot on

Last week’s global stock market panic, the overture to this week’s astonishing round of state interventions, was in part provoked by fear of humongous losses in something called ‘credit default swaps’. These arcane inventions by Wall Street rocket-scientists are a form of derivative contract — or ‘weapon of financial mass destruction’, as Warren Buffett put it — akin to debt insurance. A ticking parcel of at least $400 billion worth of them relates to bonds issued by Lehman Brothers before it went bust. Since Lehman paper is now priced at only 8 cents on the dollar, enormous claims are about to emerge against the parties to the swaps. The trouble is, as New York’s insurance superintendent Eric Dinallo observed, ‘No one knows who owes this money, how much each counterparty owes, or whether any of these counterparties will now be in trouble themselves.’

As I read that, I recalled a misty day in April 2005 when I lunched in the private restaurant at the top of the Gherkin, the London headquarters of the Swiss Re insurance group, with three masters of the money universe, traders of 30 years’ experience apiece. This credit derivatives market is getting out of hand, they agreed cheerfully as we savoured the recommendation of Swiss Re’s sommelier: no one knows how much paper has been issued, or who’s holding it, or what it’s really worth; fortunes are being made trading it, but one day it will blow up in our faces. That was three and a half years ago. I thought little more about it until last week. It was a huge story and I missed it. But then so did Swiss Re: the Gherkin was sold last year for £630 million, but that sum covered less than half of Swiss Re’s losses so far on credit default swaps.


At least I got one prediction spot on. In early August, when oil was $120 a barrel, I wrote in the Daily Telegraph that by mid-autumn, ‘after a couple more months of gloom-laden statistics from the industrialised economies’, the price would be ‘down by as much as a half from its June peak’ of $147. I was convinced that hedge funds and other speculators had enormously amplified the impact of temporary real-world supply shortages, and that as soon as the moneymen moved out, normal price levels of $60 to $80 a barrel would return — ‘normal’ meaning the prices on which oil giants such as BP base their long-term plans. What I didn’t know was that not only had Chatham House just issued a report predicting ‘a spike of over $200’, but that war would break out in Georgia that very morning, sending the price skidding upwards again. Peak-oil nutters proceeded to hurl abuse at me on the Telegraph blog, but victory is mine: last Friday the official Opec oil price touched $72.67, a fraction below half of the peak. You could say that makes me Nostradamus compared to most financial pundits these days, or that it merely proves the old saying: even a stopped clock is right twice a day. Either way, I wish I’d had a large bet on it.

While I’m on a roll, it must also be worth betting that there will be no bankers on the next New Year Honours list. Nor will there be any gongs for energy company chiefs, after a year in which some households’ combined gas and electricity bills will have risen by almost 50 per cent. That makes ‘fuel poverty’ a far more pressing social problem this winter than negative equity (which hasn’t bitten yet) because you can also bet that domestic energy bills will not fall in line with oil prices, even though oil-driven rises in wholesale imported gas prices provided the excuse for such shocking tariff hikes in the first place.

By contrast, the former British Gas chairman Sir Denis Rooke, who died last month, held the rarest of honours, the Order of Merit — despite a famously belligerent manner with ministers, and a predilection for shouting at journalists. When the Thatcher government set out to privatise British Gas midway through Rooke’s long chairmanship he fought furiously against any proposal that might interfere with the corporation’s monopoly or his own autocratic power. One of the non-execs on his board — placed there by Rooke’s bête noir, the energy minister Nigel Lawson — was our distinguished contributor Sir Martin Jacomb. I asked him what it was like being sent in to corral such an intemperate chairman, and the answer was surprising: ‘In many ways he was impossible, but he really captured my imagination and became a great friend. He ran a very good business and on major issues of gas strategy he was right. His phrase was that we should “use gas wisely”, which in his terms meant not using it for power generation — and if we’d followed that advice, we wouldn’t be dependent on imported gas today. Denis was absolutely dedicated to public service, and he thoroughly deserved the OM.’

First awarded in 1902 and limited to 24 living members, the OM is dished out by the Queen for exceptional service in any field ‘we see fit to recognise’. The fact that so few corporate chiefs have ever been judged to deserve it is an interesting observation on how business is regarded in Britain. Rooke may in fact be the only person ever to receive it for running a company. The only financier recipients on the all-time list are the current Lord Rothschild, who is at least as well known as a patron of the arts and heritage, and Lord Franks, who was chairman of Lloyds Bank in the 1950s before he became doyen of ‘the Great and the Good’. As for the more numerous Companions of Honour, a sort of junior class of the Order of Merit, you have to go back 50 years to the philanthropist Lord Nuffield, founder of Morris Motor Co, to find anyone who ever turned a profit in the private sector.

On the other hand, you might say, one feature of the Augean stable that is currently being washed clean is that it became all too easy for moneymen to acquire the respectability of knighthoods and lesser honours. The internet also offers a list of people who have refused gongs in recent years, and funnily enough there’s only one businessman on that too, and he’s back in the news this week after new revelations about his dealings with Tony Blair: it’s Bernie Ecclestone, who is said to have declined a CBE in 1996.


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