Saturday, 24 July 2010

Dubai As Thriller Central...

In the Telegraph today, I've been explaining why Dubai is thriller-central, a natural place for anyone writing about spies and mercenaries to set a story. And there is, of course, a scene there right at the start if 'Death Force'. You can read the piece here

Wednesday, 21 July 2010

Fire Force In the Charts....

I've just been checking The Bookseller chart for last month, and Fire Forece made number 12 in the Heatseekers chart. Fantastic stuff....

Steer Clear Of The New Lord Hansons...

In my Money Week column this week, I've been arguig that investors should steer clear of financiers such as Nat Rothschild, and Hugh Osmond. They look like the new Hansons. Here's a taster....

In a dull, nervous market, they have at least provided a splash of colour. In the past few months, investors have seen two high-profile IPOs by celebrity financiers – Nat Rothschild and Hugh Osmond – raising huge sums of money to create new listed acquisition vehicles.
Investors appear to have bought into the concept enthusiastically. Both men come across a new generation of Lord Hanson’s, the fabulously successful 1980s tycoon, who used his company as a vehicle for a series of high-profile takeovers, gobbling up huge chunks of British industry, and making a fortune for his army of loyal and devote shareholders along the way.
But the Rothschild’s and Osmond’s investors are making a big mistake. This is the wrong decade to be trying to recreate the acquisitive conglomerate that was so successful three decades ago. There is very little money left to be made through financial engineering. If investors want high rates of return they should be looking to small companies, technology entrepreneurs, or the emerging markets. The new generation of mini-Hansons are not going to deliver it for them.
There is little escaping the ballyhoo that surrounded both IPOs. When your name is Rothschild, it is not too hard to get pulses racing in the financial markets: it remains, a couple of centuries after the dynasty was founded, the best brand name in high finance. Nat is the latest in a long line of Rothschild’s to play the markets with consummate skill. He may be best known in this country for his very public row with George Osborne in 2008: it was Nat Rothschild who claimed that Osborne tried to solicit a donation from the Russian billionaire Oleg Deripaska after visiting his yacht off Corfu that summer. But Rothschild has been known for some time as a hedge fund manager with excellent links to the Russian mega-rich.
Last week, he successfully floated Vallar in London, raising £707 million from investors for a shell company that plans to make acquisitions in the mining and natural resources industry. Together with James Campbell, a former Anglo-American executive, the new business will hunt out lowly-rated assets and piece together a new conglomerate. Investors loved the concept. The company raised comfortably more than its £600 million target for the float.
They were just as keen on Hugh Osmond’s new venture. Back in March, the financier raised slightly more than £400 million for his vehicle, Horizon. Osmond first made his name on the floatation of Pizza Express with his colleague Luke Johnson, and went on to create the pubs chain Punch Taverns. He’s made plenty of money for his backers over the years. The idea behind Horizon was to find companies that had taken on too much debt, buy them, restructure their balance sheets, and get them back into good shape. It has been linked with the homebuilder Crest Nicholson and the car repair chain Kwik-Fit, although it hasn’t completed a deal yet.
Both companies look to have ambitions to become the Hanson of the new decade. Through the 1970s and 1980s, Lord Hanson built up a hugely successful conglomerate. He’d buy up companies such Imperial Tobacco, strip out and sell-off irrelevant subsidiaries, toughen up the financial discipline of what remained, and make a fortune for his shareholders in the process. One of Mrs Thatcher’s favourite tycoons, he helped re-shape British industry in that turbulent decade, and although he didn’t leave much of a lasting legacy – the Hanson that remains is quite a small building products company – he was a hugely influential figure in his day.
Just like Hanson, Vallar and Horizon are acquisition vehicles run by celebrity financiers, built around the idea that they can buy up assets cheaply, work them harder, and piece together a conglomerate founded on the personality of a dominant financier.
The trouble is, it is not likely to work. The climate in which they are operating is very different from 30 years ago.
First, there aren’t many underperforming conglomerates out there ready to be broken up. One of the most successful tactics of the corporate raiders of the 1980s was to target big companies that had lazily put together a mix of businesses they didn’t understand very well. But every company has slimmed down to its core business at least a decade ago - there aren’t any left to break up.
Next, there are not many companies that are being inefficiently run. Two decades of chief executives mouthing the mantra of shareholder value mean there aren’t many companies that can be easily made leaner, or more focussed – and certainly not by men who are better know for their financial connections than for their ability to actually run a business.
Thirdly, two decades of pressure from the private equity industry mean that most assets are ‘sweated’ about as far as possible. There isn’t much fat out there to cut, and certainly not in the way there was in the 1980s. Likewise, if there was value to be created out of re-structuring a balance sheet, the chances are one of the leveraged buy-out funds would have already bought it.
True, Osmond may be looking to restructure companies that have taken on too much debt. But if they are good businesses, their existing banks or shareholders will surely do that for them. Rothschild may use his contacts to find mining assets that are worth a lot of money – but why won’t their owners list them themselves, or sell them to one of the resources giants?
The reality is, there is no low-hanging fruit out there, which is all these kind of
acquisition vehicles can pick.
Investors should realise that there are likely to be very meagre returns from financial engineering in the next decade. That era is over. If you are looking for above average returns, you should be looking at small entrepreneurial companies, at technology stocks, or to the emerging markets. That is where the growth is coming from – and not from celebrity financiers, no matter how illustrious their track record or family name.

Monday, 12 July 2010

The EU Still Hasn't Got to Grips With The Greek Crisis....

I've just agreed to write a quick book for Wiley and the Bloomberg Press about Greece, the euro and the sovereign debt crisus. More about that later. In the meantime, my latest column for Money Week is about just's a taster.

The debate about whether Greece can survive in the euro is getting more surreal with every week that passes. The leaders of the European Union and the European Central Bank are still insisting that a Greek default on it debts is impossible. It doesn’t even need to be thought about.
But a glance at the price of Greek debt, and the cost of insuring it against default, tells you something very different. The country isn’t going to be paying back the money it owes – not in full, anyway.
There are almost certainly going to be defaults sooner or later. The problem is, the bland, myopic assurance from European finance ministers that it can’t even be contemplated is only going to make the crisis worse.
It is time, they stopped burying their heads in the sand, and started figuring out how to cope with the consequences of Greece going bust.
The degree to which central bankers and politicians are still in denial is neatly illustrated by the fiasco of the ‘stress tests’ that are currently being carried out on Europe’s major banks. At an EU summit last month, the German Chancellor Angela Merkel and the French President Nicolas Sarkozy cooked up the wheeze of testing the ability of the continent’s main banks to withstand whatever economic storms might get thrown their way.
It was not, in principle, a bad idea.
The markets have been speculating feverishly for months over the possibility of huge losses on dealings in Greek, Spanish or Portuguese government debt lurking somewhere within the banking system. The tests will probe the soundness of each bank, look at how it might stand up to different shocks, decide whether it has enough capital to pull through, and recommend if it needs to find some more cash from somewhere.
That, surely, will reassure the markets?
Well, probably not? Why? Because the possibility of a Greek default will not be among the scenarios under consideration.
According Jose Manuel Gonzalez-Paramo, the Spanish board member on the ECB, the regulators don’t need to test the scenario of a sovereign default by one of the euro zone countries. Why not? Because the idea is “absurd”, apparently. “ The euro cannot allow a default and therefore there’s nonsense doing a stress test based on that,” Gonzalez-Paramo said last weekend.
That is, to use his own phrase, ‘absurd’. The possibility of a default is the one thing that the markets are really worried about. It’s a bit like BP saying it has run though all the possible future scenarios it might face, and costed them fully – but it has ignored the ‘absurd’ possibility that it won’t be able to cap the oil currently spilling out of its well in the Gulf of Mexico.
A Greek default is precisely what the EU should be worrying about. Greek government bonds currently yield 10.2%. That is more than four times the 2.5% yield on German government debt. If both Greek and German government bonds are rock-solid investments, on which there is zero possibility of default, how come the German bond is four times as valuable as the Greek one? Simple. You’ll almost certainly get your money back if you buy the German bond, but if you buy the Greek one you probably won’t. Indeed, a survey released this week by CMA DataVision concluded that Greek debt was now the second riskiest in the world. Venezuela was still a worse bet. But Iceland, Egypt and Romania, those paragons of fiscal rectitude, had all pulled ahead.
It is nonsense to pretend that there can’t be a default by a euro nation. Greece is stuck in a deflationary trap, from which there is unlikely to be any possibility of escape unless it restructures its debts, or devalues its currency, or quite possibly both. Even if the austerity programme for Greece agreed with the EU and the International Monetary Fund works, and there is not much sign that it will, Greek debt will still rise to 139% of GDP by next year, according to calculations by the Bank for International Settlements. The debt burden just keeps on growing, the capital markets remain closed to the country, and sooner or later the interest payments are going to become unsustainable.
And yet, the EU and the ECB are sticking to the line that Greece will be just fine, and the euro will look in great shape once the markets calm down.
That is the wrong way around. Instead, they should be planning for an orderly, managed default by the Greeks, and possibly the Spanish and the Portuguese as well.
In truth, a default need not be catastrophic. A decade ago, Russia defaulted on its debts, but came back quickly. Thailand effectively defaulted on its debts during the 1997 Asian financial crisis by devaluing it currency sharply. But a decade later the Asian countries, including Thailand, are all growing strongly again.
But it is far better if the default is managed and controlled.
There are two big problems that need to be addressed if Greece goes bust.
First, the European banks have huge exposure to Greek debts, as well as the rest of the highly-indebted euro zone countries. Between then, French and German banks have an estimated $1 trillion in paper issued by Greece, Spain, Portugal and Ireland. If that suddenly has to be written down to nothing, it could trigger a wave of banking collapse right across the continent.
Next, the cost of borrowing for Spain and Portugal, and possibly Ireland and Italy as well, could soar as investors start worrying they would be next. If they were locked out of the capital markets, it could make default inevitable.
But both problems can be addressed easily enough. Make sure there is enough support for the banks to make sure there are no collapses. Next, make sure there is money available to fund the Portuguese and Spanish deficits until the markets get back to normal.
It is far better to deal with problems early and decisively. Just denying that Greece could ever default is not doing anyone any good --- it almost certainly will, and the sooner the EU owns up to that, and start planning for the fall-out, the better.

Wednesday, 7 July 2010

Still Time To Break Up The Banks

In My Money Week column this week, I've been arguing there is still time to break up the banks. Here's a taster....

Nearly two years on from the collapse of Lehman Brothers, and there is still little sign of fundamental reform in the way the global banking industry works. In the US, President Obama has allowed the regulation of Wall Street to be watered down so much that it won’t make much difference. The Europeans have lost interest. And the banks have gone back to behaving pretty much exactly the same way they did before the crisis struck.
Despite that, the British should ignore the rest of the world. Even if no one else is prepared to attempt it, the UK should press on with splitting up its biggest banks. Britain is a relatively small economy. It simply can’t afford to shoulder the risk of another calamitous banking collapse – and should get on with doing something about it, even if no one else wants to.
In the immediate aftermath of the credit crunch there were plenty of calls for a radical break-up of the banks. We were constantly told that there would be no return to the wild risk-taking, the bonus culture, and the short-termism, that characterised the financial markets for much of the past decade.
But, two years on, there is plenty of evidence that everything has gone right back to the way it was. The banks are paying out big bonuses. They are trading in high-risk sovereign debt, even when it is obvious many of the countries whose paper they are buying are bust. They are expanding enthusiastically.
In the US, President Obama, last week ducked the challenge of serious change. The financial reform bill that emerged from Congress was watered down so much by the big banks and their lobbyists that it is not going to make any real difference to the way the industry works. Instead of prohibiting the big banks from trading derivative on their own account, and investing in hedge funds, it merely limited their ability to do so, and not very effectively either. The big Wall Street banks - Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have emerged two years after the credit crunch with an even tighter lock on the American capital markets.
Neither has the European Union done any better. It has proposed new legislation on the hedge funds and private equity funds, its two favourite targets. But since the hedge funds didn’t create the crisis, that is about as relevant as blaming our cricket team for the failure of our footballers to perform better at the World Cup. It simply misses the point. The Swiss central bank has talked about splitting up its two giant banking groups – UBS and Credit Suisse – but has so far failed to actually follow up its words with actions.
It would be easy for the UK to give up. If the rest of the world isn’t getting serious about financial reform, then it is hard for the one, smallish country to do it by itself. Easy, but wrong. In fact, the UK should press on with splitting up retail and investment banking.
The Chancellor George Osborne has already established a commission to study precisely that issue. We don’t yet know what it will conclude. But whatever the outcome, it is too risky for the UK to allow the City to carry on as before.
There is no reason to worry about the foreign banks. If JP Morgan, Deutsche Bank, or Credit Suisse want to have big offices in London that is fine. It doesn’t matter in the least to British taxpayers if they take wild and crazy risks. If they make money, they will have to pay taxes on the profits, either in corporation tax, or as income tax on the bonuses they pay to their staff. If they lose money, then it is American or German or Swiss taxpayers who will have to bail them out. For the British, that is a heads-we-win-tail-you-lose deal. There is nothing to complain about in that.
But the British banks are a different matter. As the Governor of the Bank of England Mervyn King put it in a speech: “If a bank is too big to fail then it is simply too big.”
True enough. The UK is a medium-sized economy, with an out-sized financial sector. RBS grew to be one of the biggest banks in the world, trading in every corner of the globe, but when it ran into trouble, it was the British government that had to pick up the bill.
It was affordable once – it won’t be affordable a second-time around.
Banks such as Barclays, mainly through its Barclays Capital division, and HSBC, are simply too big to be under-written by the British taxpayer.
The solution? Force them to split out their UK retail arms from their investment banking and global operations. When a bank fails, the risk to the UK economy comes from ordinary depositors losing their money. If an investment banking division, mainly trading derivatives on Wall Street or in Singapore, collapses, it doesn’t matter very much to the economy in Woking or Wigan.
Of course, the banks will fight it. The business model of collecting money from millions of ordinary depositors, then deploying all that capital in the world markets has worked very well. It has paid for a lot of bonuses. But the risks ultimately gets transferred to the taxpayer – and they are no longer sustainable.
The rest of the world may be ducking the challenge. It will be hard to be the only country demanding serious change. But the UK should stick to its guns. If the don’t like it, allow them to re-locate elsewhere. It would be better to allow one or two of the big UK banks to switch their headquarters to the US, or an offshore centre, than run the risk of another calamitous collapse.