In a Time Warp?

So when did either Goldman Sachs or JP Morgan ever care about public relations? I suppose if you are back behind your iron gates of Mordor it would never even cross your mind. Their results last week were positively eye watering, but not wholly surprising. Whether wanted or not, these organisations were the lucky recipients of US “state aid” which enabled them to be in the right place at the right time, and with the right money, to pick up others assets at fire sale prices. Then if that wasn’t enough, they were then able trade with fantastic margins at a time when others could not. So no surprise with their figures, except at the sheer gall of announcing such huge bonuses at a time when unemployment figures are breaking records of personal grief as the recession slashes thousands more jobs, each creating a maelstrom of depression amongst those affected.

It is not that I am against great pay and great bonuses for astonishingly successful work, but would no-one think of putting such announcements into context, not just for those losing their jobs, but for the oppressed taxpayers in both the US and UK who are footing a much longer term bill for this financial and economic fiasco caused by financial irresponsibility at a senior level. From the attitude of tax payers today, including those in the City, if the banks are stupid and irresponsible enough to get themselves in further troubles again, then their organisations will die and their investors will lose their money - and the taxpayer will not come to the rescue.

Perhaps this then leads me onto to the recommendations from Sir David Walker for “better bank boards”. The immediate reaction of ruffled feathers probably means that he has got quite close to some sensitive targets. I particularly liked his views on bank non-executive directors in that they should be increasing the amount of time they commit to their role from an average of 20-25 days per year to 30-36 days. I think a quick glance at the report and accounts of some of failed financial institutions suggest that some directors are more focused on remuneration than taking time to understanding the underlying business. Take the unfortunate case of Louise Patten a non executive director at the failed bank Bradford & Bingley. She was paid £58,000 for attending 13 meetings. She was also non executive chair at property company Brixton plc (recently rescued by Segro plc), for which she was paid £143,000 and non executive director at retailer Marks and Spencer, for which she was paid £73,000 to attend 16 meetings. She is also a
special advisor at Bain & Co. Remuneration seems to be a bit of specialty for Ms Patten as she was chairman of the Remuneration Committees at the failed Bradford & Bingley and at Marks & Spencer, which recently received strong shareholder criticism for the high compensation package given to Stuart Rose for rather more moderate performance. If perhaps directors like Louise specialized in one field like banking, property or retail, rather than remuneration, the directors might have had sufficient knowledge to have prevented the failure of some of our banks we are now all paying for.

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Another story that immediately acquired the “didn’t they learn anything” tag was Nationwide’s announcement of a 125% loan to asset value mortgage. Now of course this is only available to a very narrow range of clients in negative equity and, for a number of people, potentially quite helpful, but the message to the rest of the world is that the financial services industry is “at it again”. If the finance world thinks it lives in a bubble then someone is only going to pop it.

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At the time of writing the news of the fatal explosions in Jakarta has just come through. The main suspect will be the Jemaah Islamiah, the al-Qaeda related terrorist organisation. Sadly this will yet again dent the recovering tourist industry for this nation which still bears the scars of the memory of brutal Bali bombings. Indonesia is not a radical Islamic nation but almost inevitably has an angry minority however, as the nation with the world’s largest Islamic population, its actions in handling the bombings will be watched carefully. This, though, will not stop the development of this emerging nation whose economic strength, primarily based on commodities, especially palm oil, will still continue to develop over the next few years. Unlike its other ASEAN neighbours, it is its sheer size that will ultimately ensure its greater influence in the region.

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Good news for the capacity strapped mortgage market - there is a new entrant! Yes even as questions remain over the ability for mortgage providers to increase availability a surprising source has arrived on our shores. After the rushed departure of the foreign banks over the past two years in comes the Bank of China.

Four distributors are now officially offering products from the Bank of China which is currently the third largest bank in the world by market capitalization and has had a presence in the UK since 1929. Perhaps this is a sign of the future as oriental investment capacity is spread into Western markets. You never know but we may yet end up with the “Leeds & Shanghai Building Society”.

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And finally... on a train north previously known as “National Express”. Question to one of the stewards “So, who do you work for now?”, answer “British Rail, I think, now”. “Does that make any difference?” I enquired further, “No, not at all, except I don’t have to try to be pleasant to anyone like you any more SIR.” “Thank you comrade”, I replied. Actually both the bacon sandwich and the service were very good. Given the number of franchisees and makeovers we have seen over the years, I can only presume these trains must be more paint than metal by now.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.