In my list of things to do before I die, going up in a hot-air balloon with Sir Richard Branson ranks pretty low. But still I admire his fighting spirit: he hates to lose, or to let his enemies and critics get the better of him. He saw off British Airways’ dirty tricks over the Atlantic 20 years ago. He successfully bid for the rump of Northern Rock despite long being sniffed at by the City as an unsuitable person to run a bank. Joint venture partners who have crossed swords with him over the years have found him as merciless as he is litigious. And he’s not going to step aside gracefully to allow First Group to take over Virgin Trains’ West Coast main line franchise.
But whatever arguments he musters against the transport minister’s decision, I have a feeling the bearded billionaire’s days as a part-time railwayman are nearly over. When he was running Cross Country and West Coast trains and bidding for the troubled East Coast route as well, Branson was a dominant figure in the disordered landscape of passenger rail. But station-platform stunts never suited his image the way photo-ops with leggy Virgin Atlantic stewardesses did, and his trains never lived up to the promise of his brand. They were no more stylish than anyone else’s, their full-price fares became scorchingly expensive, and their reliability was often poor: from 2002 to 2005, the two Virgin services together averaged only 70 per cent punctuality. Branson’s grinning persona so irritated passengers who just wanted to get from A to B on time without gimmicks that when he looked like winning the East Coast franchise against the popular incumbent GNER, the businessfolk of Leeds actually got up a petition against him.
As a regular traveller between Euston and Manchester, I have a special dislike of Virgin’s cramped Pendolino trains; their celebrated ‘tilting’ motion makes me feel sick whenever I try to work on my laptop. So I’m sorry to see First Group (whose existing Transpennine and other services are no-frills, but non-nauseating) promising to bring in 106 new Pendolino coaches — as well as to pay £13 billion to the government between now and 2026, outstripping Branson’s £11.5 billion bid and effectively wiping Virgin off the railway map. Still, at least I’ll have the option of flying from Heathrow to Manchester instead — on the new Virgin service that Branson has announced as a spoiler for First Group’s triumph.
Big banking lies
Two of the biggest lies in modern banking are ‘we’ve learned from our mistakes’ and ‘it’s what our customers want’. That second one was the rationale frequently offered for toxic trading instruments which could be churned in huge volumes but also repackaged for sale to corporate customers on terms which disguised fat margins of profit for the bank. The recent case of mis-selling to small-business borrowers of ‘structured collars’ — swap contracts designed to ‘protect’ borrowers against a rise in interest rates that never came — was an egregious example. Supposed customer demand was also part of the business case behind the explosive growth of derivatives trading which began a decade ago and is now recognised as the most dangerous trip the banking industry ever embarked upon. You might think that they would have decided never to go that way again.
So it’s disturbing to come across figures from the US Office of the Comptroller of the Currency showing that five leading American banks — JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs — had between them, at the end of March this year, notional derivatives commitments of $289 trillion. That’s the equivalent of more than three years’ worth of ‘gross world product’, the aggregate measure of global economic activity.
Market participants will say it’s meaningless to quote gross contract value in this way because what matters is the wafer-thin margin between each bank’s carefully hedged long and short positions, or some such banker-speak. But the 12-digit number warns us that derivatives trading continues on an even more colossal scale than in 2008. Most worrying, these and other major banks, including HSBC and Barclays, are only able to trade in such astronomical volumes by accepting giant exposures to each other, thus ensuring that if one goes down, the rest will be sure to follow. Stricter limits on how much one bank can transact with another are the obvious way to reduce the domino risk, but when the Federal Reserve made a proposal in that direction earlier this year, Goldman Sachs claimed the impact on wider availability of credit could put 300,000 US jobs in jeopardy.
The real threat, of course, is that because lessons have not been learned all this must inevitably blow up again, not just putting millions out of work but sending the financial system back to the Stone Age. In 2008 most banks turned out to have no idea how much risk they were carrying; if their derivatives portfolios are even more swollen today, we must pray the regulators are watching them more closely than last time.
Polly and Peck
If Asil Nadir thought returning voluntarily to face justice after 19 years holed up in Northern Cyprus might win him some sympathy at the Old Bailey, he miscalculated. Before trial he was allowed to live opulently on bail in a Mayfair mansion with an electronic ankle tag, but the 71-year-old has now been found guilty of theft from Polly Peck — the 1980s conglomerate he built but bankrupted — and looks set to spend his next few years in jail. My splendid how-I-partied-with-Asil-Nadir anecdote has already appeared in this column (12 June 2011) so I won’t repeat it, but here are three things you probably didn’t know about the fallen tycoon: his most lucrative deal in the rag trade in the 1970s was a huge contract to make Libyan school uniforms; he was twice married to, and twice divorced from, his first wife Aycegul; and he owns a pair of parrots called Polly and Peck.