I’m picturing you reading this in your armchair beside a blazing log fire on Friday evening, Christmas tree lights twinkling over your shoulder, spaniels steaming at your feet, beaker of mulled wine in your hand. ‘Quite exciting while it lasted,’
I hear you say, ‘but thank God it’s all over. Here’s to Angela and Nicolas and the FTSE through 6,000 by New Year’s Eve. Might even have another pop at those Italian government bonds on Monday. Pass the ski chalet brochures.’
Or perhaps you’re shivering in your overcoat with a mug of instant soup, contemplating the latest dismal news from British manufacturers as well as the implications of Standard and Poor’s threat to downgrade all eurozone debt, including that of France and Germany, and the cloudy outcome of the EU summit at the end of the week after the apparently decisive clarity of the Merkel-Sarkozy meeting on Monday. The mood swings in this continuing crisis are extreme, we are nowhere near the beginning of the end, and what is bizarre is how easily share prices in London and Europe are ‘cheered’, as headline writers like to put it, at every stumbling step. As I write, the FTSE 100 index has added 400 points in a more or less continuous rise from its late November dip. If it’s higher again by Friday despite the S&P warning and any other bad news, I’ll raise a festive glass myself. But I can’t help wondering: are investors mad to be so easily led, or is there another explanation? Read on…
The grim reaper
Nick Clegg says it’s time to ‘get tough’ on ‘unjustifiable’ private-sector pay — though he gives no indication, and probably has no idea, what form ‘getting tough’ might take. Association of British Insurers director Otto Thoresen, the voice of the usually complacent community of institutional investors, calls for a ‘fundamental shift’ in bank pay to correct the balance between employees and shareholders. FSA chief Hector Sants and Church of England City guru Ken Costa were due to visit the St Paul’s camp on Wednesday in search of ‘rapprochement’ with Occupy protestors who believe what needs rebalancing is the entire relationship between bankers and the rest of the world.
As these and other players, some special-pleading, some self-promoting, some genuinely well intentioned, dance around the big issue of fairness in a time of austerity, I can report that a far more effective reformer has turned his attention to City pay scales. In the past he has often overreacted or sent mixed messages, but he has a long track record of making things happen. He also follows that old Keynesian dictum: ‘When the facts change, I change my mind.’ In the matter of bankers’ pay, he is in fact the baddest of former bad boys. I speak, of course, of Mr Market himself — whose forces are at work in the Square Mile with a vengeance.
The Centre for Economics and Business Research expects London banks to have shed up to 27,000 jobs (9 per cent of their workforce) by the end of this financial year, and to distribute bonuses of £4.2 billion — still a big number, but barely more than a third of the bonanza payouts of 2006-08 and closer to the levels of a decade ago. City recruitment has also fallen off a cliff: no one is expanding in the teeth of the euro-storm, while troubled firms such as UBS are shrinking fast and even the stronger ones — Goldman Sachs, Deutsche Bank and a handful of others — are relentlessly pruning head counts. Pay offers, I hear, are shrinking accordingly.
In the City blogosphere, panic has set in as 2011’s final cull approaches. And the doom-stricken mood has fuelled a conspiracy theory that widespread calls from investment bank ‘strategists’ for massive European Central Bank intervention to save the euro are really no more than a cynical call for any available measure that might save the bankers’ own jobs. Likewise, the reason shares keep going up in defiance of common sense, as noted above, may be partly because traders have selfish reasons to want prices looking ‘cheered’ at the year’s end. But Mr Market is not to be fooled, and in the new year I fear he will go about his reaping with the grimmest of vigour.
Voodoo business
West Register is the name of a narrow street in Edinburgh that my team of local researchers tell me boasts a cocktail bar called the Voodoo Rooms. West Register is also the name of a subsidiary of the Royal Bank of Scotland, whose fine old pre-Goodwin headquarters is just around the corner. This is the subsidiary into which RBS injected its ‘distressed’ property assets — commercial real estate of which it took ownership in lieu of repayment of loans that the bank (or its NatWest arm) should never have offered in the first place.
West Register’s purpose in life is to sell off these assets whenever someone makes a halfway decent cash offer, and this week it got shot of 918 tenanted pubs, known as the Galaxy estate, to Heineken for £412 million. The holding was a relic of the lost era, a decade ago, when owning pub chains — seen as cash-generative businesses, ripe for improvement and sitting on solid freeholds — was a hot fashion for City investors. Now pubs are closing all over the country, and Heineken in turn is expected to dispose of many Galaxy sites that are now unviable.
Taxpayer-funded RBS is well out of the struggling pub trade, but still has tens of billions worth of other skeletons in its cupboards. West Register has also just sold Great Leighs racecourse in Essex, and is trying to make something remunerative out of Newhaven docks in Sussex. Its portfolio includes shopping centres where no one wanted to shop, hotel and apartment schemes where no one wanted to lay their head, and acres of empty offices. Behind every distressed asset is a loan decision that looked good at the time and earned someone a bonus. If trade ever falters at the Voodoo Rooms, West Register could turn it into a showroom for everything it has left to sell and rename it Voodoo Banking.
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