August 28th, 2010

Living the high life

[Editorial Note: This article was written in June 2010 but has not previously been published in its entirety. An edited version was published in The Sunday Times on June 27th, 2010]

Directors of an aviation business that went bust owing HBOS £113 million in September 2007 were allowed to buy the business back from administrators Price Waterhouse Coopers for an initial consideration of just £7.

A few months later they paid an additional £49,999 but were unable to pay the additional €10m they were supposed to pay by February 2008 to secure ownership of the most profitable subsidiary, a Germany-based maintenance company.

The administrative receivership enabled directors of Corporate Jet Services to avoid paying millions of pounds to unsecured creditors, including airplane lessors and Her Majesty’s Revenue & Customs. HBOS was forgiving, writing off £60m of CJS’s outstanding overdraft of £81m in March 2008.

Directors who benefited from the deal include David Mills, who had a close relationship with HBOS. As chairman of Quayside Corporate Services, he either advised or sat on the boards of scores of the bank’s “mid market, high risk” corporate clients, many of which went bust between March and October 2007.

Other directors who participated in the phoenixing included Robin Southwell, chief executive of defense and aviation group EADS UK and a close business associate of Mills, and Tony Shakesby, a former PwC accountant.

In early 2007, HBOS asked PwC – the ‘big four’ accountancy firm that is defending charges that it “facilitated” the alleged $2bn Baugur fraud – to investigate CJS.

PWC’s review, completed in May 2007, confirmed that CJS was insolvent and recommended administration. PwC administrators David Chubb and Michael Jervis decided against auctioning CJS’s assets – which included several airplanes and part shares in luxury ‘yachts’ Powder Monkey and Invictus – on the open market.

Instead, they put CJS into administration on September 26, 2007 selling the business to Quest Aviation Services the same day.

In a report to creditors Chubb and Jervis said they did this since the company “insufficient funds to support the trading subsidiaries for a prolonged marketing campaign, which would also have been detrimental to customer confidence in the chartered and regional airline businesses of Club and Euromanx.”

Quest was an off-the-shelf company created by the directors who had caused CJS to collapse under the weight of unserviceable debts – Mills, Southwell, Shakesby and Dave Jackson (who formerly ran a CJS subsidiary). Using it, they were able to acquire the CJS assets virtually debt free. Each owned a 25% stake in Quest.

Despite its failure to stump up the €10m needed to secure ownership of CJS’s German subsidiary, 328 Support Services GmBH, based at the former Dornier aircraft factory at Oberpfaffenhofen in Bavaria, Quest continues to run the company on a day-to-day basis.

Asked whether PWC and Lloyds had exempted Quest from making the payment, Quest chief executive Dave Jackson said: “Terms of consideration continue to be implemented.”

In a statement PwC said: “The transaction was completed, and deferred consideration is still being received.”

Southwell said that, at the time of CJS’s 2007 demise, “I would have been happy to have fallen on my sword but I was asked to stay on in order to provide some continuity”.

“The easy way out would have been to write it [CJS] off but instead PwC and the bank chose to grind it through to the next level, and drive it forward in the anticipation of getting some of its money back.”

Mills, Southwell and Shakesby built Corporate Jet Services into a debt-laden aviation mini-conglomerate on the back of deals funded by generous loans from HBOS, led by the bank’s disgraced former head of corporate Peter Cummings.

It was loss-making throughout its five year life and made estimated losses of £21m in the year to December 2006. By the time of its collapse, the Southampton-based aviation group owed HBOS a reported £113m. Within that was an overdraft of more than £60m, despite an official limit of only£800,000.

In the period 2002-07 CJS acquired a number of smaller aviation businesses including Club 328 (formerly Bookajet, a provider of private jets to celebrities including footballer David Beckham) and the Isle of Man-based scheduled carrier Euromanx.

After the CJS administration, Isle of Man-based Euromanx was allowed to limp along for seven months with the support of the Manx government. It collapsed in May 2008, with the loss of 70 jobs and leaving some 40,000 passengers who had made bookings out of pocket. The Isle of Man government lost £1.5m as a consequence of the Ronaldsway-based airline’s demise.

Further details of the CJS administration are expected to come to light as a consequence of the compulsory liquidation of the business, approved in the High Court on November 25, 2009.

The petition for the winding up of CJS came from an unsecured creditor, Guernsey-based Corporate Aircraft Leasing Ltd (Call), which half-owned by HBOS and half-owned by Channel Islands-based Exxtor Aviation Group. Call is understood to be owed £324,000 by CJS in unpaid leasing fees.

Lloyds insiders said that Truett Tate, who last year earned £1.8m as Lloyds’ head of wholesale business,  is “hopping mad” that, even though it is half-owned by the bank, Call was allowed to push for and secure the liquidation of CJS.

One insider said: “Heads are going to roll [inside Lloyds] because of this. The big bosses are demanding to know how this was allowed to happen.”

Elliot Green, of Slough-based accountants and solicitors Oury Clark, was appointed as CJS’s liquidator on March 1. A forensic liquidator, he has a reputation as a “bulldog” who leaves no stone unturned in pursuit of creditors’ cash.

Green has a track record of using litigation to ensure that creditors retrieve their cash. He is understood to be reviewing the 2007 CJS administration to establish whether or not CJS creditors were defrauded.

Green would not comment on the specific case. However commenting generally about compulsory liquidations on LinkedIn, he says:

“When defrauded by serial debtors who have engaged in transactions to defeat creditors, I will engage the transactional avoidance provisions in the insolvency legislation to return money to creditors.”

The CJS liquidation is expected to shed some light on systemic irregularities within HBOS’s corporate department, which are currently being investigated by an enforcement team from the FSA.

The regulator wants to establish why the bank forced some 50 customer firms to use the services of Mill’s self-styled turnaround consultancy, Quayside Corporate Services. An FSA spokesman declined to comment. A spokesman for Lloyds Banking Group said: “We cannot comment on individual circumstances.”

At the time of its collapse, CJS’s main subsidiaries were Club 328, which provided private jets for celebrities, maintenance group Jet Engineering Technical Support (Jets), Isle of Man-based carrier Euromanx, and some of the German assets of Avcraft Aerospace.

• An edited version of this article was published in The Sunday Times on June 27th, 2010

August 27th, 2010

Mills might now have more time for yachting in the Med

The founder and owner of Quayside Corporate Services — a self-styled turnaround consultancy that was pivotal to the Bank of Scotland Reading scandal – has lately been stepping down from a surprising number of boards.

In June David Mills, 53, quit the board of Cardiff-based revolving credit company Clode Group Holdings, as well the boards of subsidiaries Clode Retail Finance, Clode Holdings, Clode Funding, Medi-Fi, DMA Finance and V-12 Holdings.

Intriguingly auditors PriceWaterhouseCoopers slapped a “going concern” health warning on Clode Retail Holdings in inaugural financial statements for the new holding company.

In accounts for the four months ended March 31, 2009, PWC said there was no certainty Clode could survive the next 12 months owing to uncertainty over its ability to renegotiate its borrowing facilities. As at March 2009, the company said it had net debts of £41.45m, the bulk of which is understood to be owed to HBOS/Lloyds Banking Group. The auditors said:

“This indicates the existence of a material uncertainty which may cast doubt about the group’s and the company’s ability to continue as a going concern.”

In the four months to March 31 2009, Clode Group Holdings and its subsidies paid £85,640 to Mills in “directors and consultancy fees” (=£21,410 per month). The company also paid service and rental charges of £34,000 (=£8,500 per month) to Red Flower Property, a business 42%-owned by Mills. Clode also paid a “rental deposit” of £124,550 to Red Flower and the accounts stated that Clode is owed £125,000 by Red Flower Property.

Other companies from which Mills has recently resigned include the Aim-listed surveillance specialist Petards Group PLC. He left its board at the time of a capital reorganization on June 24, 2010.

He has also resigned from the board of international business risk consultancy Greymans (now in liquidation, according to Companies House) on December 31, 2009. Intriguingly Mills only joined the board of the Theale-based company in July 2009. Mills also left the board of Creditworks UK on June 28th, 2010.

Hmmm. All very intriguing.

The only companies on whose boards Mills remains a director are The Sandstone Organisation, Core Enterprise Management, Mint Partners, Knightingale Investments, Monkey Puzzle Developments, Red Flower Property, S&D Realisations (in administration) and Cop Realisations (in administration).

Mills may also remain as a director of Quest Aviation Services, which was permitted by HBOS and administrators PWC to acquire the assets of bust aviation group Corporate Jet Services, where Mills was also a director, for a derisory sum in September 2007.

Mills’s exact role at Quest — whose directors include Robin Southwell, Tony Shakesby and Dave Jackson — remains unclear. It appears that he was a Quest director in 2008, though the role was not recorded at Companies House.

CJS is now the subject of a compulsory liquidation, with insolvency practitioner Elliot Green, a partner in Oury Clark, poring over the details of a September 2007 administration organized by PwC which was surprisingly forgiving to a failed management team and potentially unfair to major creditors including Guernsey-based plane leasing company CALL Aircraft Leasing.

On David Mills’ page on the FSA Register website, the “disciplinary history” section remains a blank canvas. Bizarrely, given he stepped down two months ago, Mills is still recorded as an active director of Clode Retail Finance on the same website.  As usual, the FSA is remarkably on the ball.

With more time on his hands, one wonders if Mills will be spending more time messing about in boats (such as the one pictured above, or perhaps a similar vessel called the Powder Monkey) in the Mediterranean?

August 20th, 2010

The Camp for Climate Action, which was set up on parkland behind the Royal Bank of Scotland’s world headquarters at Gogarburn in Edinburgh on Wednesday night, is deploying spectacular tactics to make what in my view is a valid point.

The campers, including my nephew, wrongfooted the police and RBS security by arriving a day earlier than expected. So far the campers’ protest against the bank’s continuing support for environmentally-destructive industries, including Canadian tar sands projects (pictured above), is proceeding peacefully and well.

In Herald article published today, climate camp spokeswoman Ruth McTernan explained what the campers are about:

“It’s been a dramatic start to what will be a week full of workshops, sustainable living and direct action against RBS’s crimes against the climate. We’re in a beautiful location here at Gogarburn. People should come down, have a cup of tea and check out what’s going on for themselves.”

I’ll soon be doing just that to assess the mood, and am looking forward to seeing how Monday’s “day of mass action” — in which the climate campers will try to shut down RBS’s Gogarburn world headquarters — goes.

There are people in Edinburgh and elsewhere who resent the climate camp, dismissing the protestors as a bunch of misdirected middle-class students and wastrels with too much time on their hands, or accusing them of being hypocritical since they too are consuming fossil fuels, burning propane gas, using mobile-phones and laptops etc.

There also seems to be a degree of resentment about the cost of the police presence around the camp. Read the comments on this recent Camp for Climate Action blog post to get a flavour. However much of this sniping and knitpicking misses the bigger picture.

I admire the climate campers for having the balls to challenge the (almost certainly unsustainable) economic and environmental status quo – and believe they have probably picked a good target in RBS. As well as becoming the world’s biggest purveyor of subprime-infected timebombs (CDOs etc) under chief executive Sir Fred Goodwin, the bank also became the world’s leading funders of fossil fuels and carbon-intensive industries including Albertan tar sands. If nothing else the campers are doing alot to raise awareness of such issues, even inside the bank itself.

A 2009 report titled Royal Bank of Sustainability written by Nick Silver, a senior honorary visiting fellow at Cass Business School and  fellow of the Institute of Economic Affairs, concluded by saying:-

“There is a clear case for UK Financial Investments to engage actively with the board and management of RBS to ensure effective consideration and analysis of environmental, social and corporate governance issues. UKFI should pursue higher standards than industry good practice because it is representing the wider interests of taxpayers, and defending the credibility of government policy and its own UK Low Carbon Transition Plan.”

A more recent report titled A Bank for the Future: Maximising public investment in a low carbon economy, written by former PWC consultant James Leaton and tax economist Howard Reed, also called for a radical rethink of government policy in this area.

“The UK can’t afford another meltdown, yet short-term, high risk, carbon-intensive investments are still business as usual for the banks. The government must reform RBS into a Green Investment Bank (GIB) and provide a low carbon policy framework to create a sustainable economy.”

I have consistently believed that, after taking control of 83% RBS’s equity in October 2008, the UK government had a once-in-a-lifetime opportunity to “tame” RBS, and force through radical behavioural and structural changes to make this bank more sustainable. However, Gordon Brown’s government did nothing of the sort.

Instead they created UKFI, a quasi-commercial buffer between the Treasury and the bank. As I’ve said in earlier blog posts, UKFI is the most absentee of “absentee landlords”. Basically, it has no interest in policing or refocusing what RBS does.

All it is interested in is: (1) Short-term profits growth (2) Short-term share price performance and (3) The swift reprivatization of RBS.

As long as the bank achieves these goals, UKFI doesn’t seem to give a damn how they are achieved. Astonishingly, UKFI, and by extension the UK government, is pursuing the same flawed and unsustainble thinking that led to the global financial crisis in the first place!

I suspect the bank’s recent claim that it is a “strong supporter” of renewables projects is “greenwash”. Of the $15 billion raised for the energy sector by RBS, through underwriting of debt and equity, since its October 2008 bailout, only $83m has gone into renewable energy projects – that’s less than one per cent. See this blog from the San Fransisco-based environmental charity, Rainforest Action Network, for more.

NOTE (added 8.30am on Monday August 23rd). While I don’t fully subscribe to the climate campers’ “dark green” views, I support their right to express them and protest as spectacularly as they choose (Brendan O’Neill made a similar point in Spiked in 2007). However, I do not condone mindless vandalism or any violence.

• To read my recent report on the warped priorities and environmental naivete of RBS’s effective parent group, UK Financial Investments (UKFI), led by chief executive Robin Budenberg, click here

August 12th, 2010

If, in our western capitalist economies, we think of profit-hunting banks as being like a pride of lions hunting, non-financial industry is comparable to lionesses who often do the actual work. The banks are the males who spend all day lazing in the sun, but get the first pickings of any kill, and all of the second helpings if they want too.

This (more or less) is how Robert McDowell, the Edinburgh-based banking consultant and author, begins his latest, somewhat disturbing, blog post on what the future holds for banks and whether regulators will ever be able to rein in their excesses.

I urge anyone who is interested in the future of banking and financial regulation to read the full blog post — originally titled “Regulators’ Get Tough But Will They Change Banks’ Profiteering” and published on both Robert’s Banking on Economics blog, and on the Asymptotix blog. Above all else, the piece demonstrates why Barack Obama’s much trumpeted Dodd-Frank-Act is bound to fail.

Here are some (unannotated) excerpts:-

The Fed’s supervision manuals are a groaning bookcase-worth written by legislators for other attorneys into a jungle of verbiage impenetrable except by the most intrepid legalistic risk experts, geeks, nerds like myself and my colleagues ….

There is also the question of insider lending, and for every $ of incestuous lending how many $ are to ‘outsiders’ with over-close connections that negate standard pricing and risk assessment, a commonplace issue in property development lending, as everyone in the property industry knows well — the type of matters that brought down Anglo Irish Bank and fatally wounded many others? …

It took 80 pages of explanatory material before summarising what US Fed supervisors must first do before anything else when risk auditing a financial services firm: “Consider whether the financial-contract activities are closely related to the basic business of banking; that is, taking deposits, making and funding loans, providing services to customers, and operating at a profit for shareholders without taking undue risks.” ….

Lifting the carpet to check what’s underneath, begs some questions, mostly about how risk-taking could be hidden among layers of risk aggregations and how these risks are more exposed when disaggregating?

It seems to me that the real risk measures are those that understand the external financial markets and macroeconomic context factors, because riskiness is rarely obvious in a balance sheet however detailed only by looking at it in the context of itself.

… and something was surely hugely amiss in profit-accounting by the financial sector reliant on booking unrealised profits that were unsustainable.

Regulators before the credit crunch paid little attention to the increase in the amount of mortgage-backed securities on banks’ books. Now, bankers complain that regulators are putting pressure on them to be much more pessimistic in stress tests about their ability to respond to economic shocks. What they are complaining about is that regulators are edemanding more detailed realism. None of the stress tests and results show a capacity to reproduce the events of the recent past, for example, and that should be the first test of the realism of forecasting models ….

If any bank can show me that it has macro-models that can roughly emulate the events of the the shocks of the past four years I will buy its shares and its bonds.

August 7th, 2010

In an interview with the Sunday Telegraph (which is different from the video interview above) Eric Daniels, chief executive of Lloyds Banking Group, has at last started to talk some sense.

Daniels told the Torygraph’s Damian Reece that Lloyds TSB did us all a tremendous favour by taking over HBOS in September 2008. The not-so-quiet American said:

“I think we did the country a great service [buying HBOS] by not costing the taxpayer a bomb.”

I’m not sure how well this will go down with Lloyds TSB shareholders, who got shafted as a result of the Lloyds board’s surprising generosity to the UK government, however the claim is undoubtedly true. Indeed it is one of the few reliable things I’ve heard Daniels say since the deal was announced.

Daniels’ insistence that HBOS will eventually come to seen as a good deal — “Why am I not apologising about HBOS? Because I believe this will turn out to be a very, very good deal” — is far less credible.

A great many skeletons are going to rattle their way out of HBOS’s closet in coming months, including the fallout from the Bank of Scotland Reading scandal, a matter that is finally being investigated by the FSA under section 168 of the Financial Services and Markets Act 2000, and by other authorities.

Daniels, 59, also seemed sorely deluded in his belief that he an enduring government guarantee that the anti-competitive Lloyds Banking Group will never be broken up by the government.

The Lloyds boss seems to think that, in exchange for taking HBOS off its hands, the UK government provided Lloyds with a guarantee that the merged entity would be immune to competition law in perpetuity. The claim has already been challenged by the UK business secretary, Vince Cable, who told Reece:

“I’m not aware of any such reassurance. If Lloyds has it in writing, I would like to see it. That would change the framework we’re operating under. It’s never been raised with me, either by Lloyds Bank or anyone.

“This needs clarifying. My position is that the Banking Commission will operate from a clean sheet of paper and produce a set of proposals to make a safer banking system and provide maximum competition. If Daniels says he has an agreement, he’s got to produce some evidence.”

• To read the Telegraph article in full click here

August 7th, 2010

Do the world’s leading banks have a firm handle on the true value of their assets, risk exposure (including the likelihood of their borrowers defaulting), solvency, liquidity and capital strength? And even if they do have such information at their fingertips, are they accurately communicating it into the public domain for the benefit of regulators and shareholders?

Such questions ought to be top-of-mind for any politician or regulator who is seeking to re-regulate the banking sector in the wake of the global financial crisis. They are also questions which—depending on the answers—might cast doubt on the legitimacy of the recent European “stress tests” designed to confirm the capital strength of 91 European banks and their ability to survive another downturn.

The onset of the credit crisis, after which many investors began to doubt the accuracy of the audited accounts of developed world banks, prompted me to start exploring such matters. My suspicion that the answers to the questions might be “no”, “no”, “no” and “no” has intensified in recent weeks; it was reinforced by a recent article in The Economist.

The article, headlined “Computer says no” and published on July 24th, quoted an anonymous ex-RBS source as saying:

“The reality was you could never be certain anything was correct … Reported numbers for the bank’s exposure were regularly billions of dollars adrift of reality. Finding the source of the error was hard.”

This is astonishing. If true, it suggests that under former chief executive Sir Fred Goodwin, RBS’s internal management systems had been allowed to atrophy to the extent they had become incapable of channeling accurate information to those at the top; and that scope for inaccuracies in the bank’s accounts—audited by ‘big four’ accountancy firm Deloitte—must have been immense.

The anonymous quote corroborates the findings of some research I’ve been doing into RBS for a planned BBC documentary. A number of former RBS executives and advisers have told me that Goodwin was so obsessed with cost-cutting and empire-building that he refused to invest in the sort of internal IT systems that would have permitted timely and accurate data to flow around the bank.

The Economist article points out that the problem is by no means limited to RBS. Indeed it claims that it is common to most of the world’s leading banks, and says that it stems from the fact many are still use the original mainframe computers that they first installed in the 1960s(!)

The article adds that “over the years more and more systems have been slapped on”. Most leading banks have grown by acquisition, giving rise to a veritable palimpsest of systems, accounting methodologies and approaches to risk valuation.

Another problem is that, even if the banks did have access to 100% reliable internal data, few would be inclined to communicate this to their regulators or investors. It seems that very few banks have overcome their pre-credit crisis addiction to obfuscation and fudge – even though these precipitated the crisis.

A case in point is whether Lloyds Banking Group is being entirely honest about the value of the labyrinthine portfolio assembled by Peter Cummings, the ex-head of corporate lending at HBOS.

Bankers’ continuing desire to drift in a sea of inexactitude became clear in early July, when lobbyists for the US banking sector launched an email and web campaign aimed at seeing off any extension of mark-to-market (“fair value”) accounting rules. The change, proposed by the Financial Accounting Standards Board would force leading American financial groups such as Citigroup and Wells Fargo to write down billions of dollars of assets.

The American Bankers Association fears that the FASB’s proposed extension of fair value accounting to all financial instruments, including loans, as opposed just to securities might make otherwise “strong” banks look as though they are under-capitalized. Plus ça change!

• This article was published on QFINANCE on July 28th, 2010

August 5th, 2010

I just found Antonio Garcia-Martinez’s blog which, perhaps better than anything else I’ve read, enscapsulates the corrosive internal culture at  New York-based investment bank Goldman Sachs.

In 2005 Garcia-Martinez was studying for a physics PhD at the University of California, Berkley when he was tempted to Wall Street by the prospect of filthy lucre. He accepted a job as a “quant” at the investment bank Goldman Sachs. However it wasn’t long before he recognised the hollowness of the role he had been assigned and became seriously disenchanted with Wall Street’s money-centric culture.

As the Huffington Post says, the title of Garcia-Martinez’s blog post — “Why founding a three-person startup with zero revenue is better than working for Goldman Sachs” — pretty much says it all.

In one passage Garcia-Martinez describes how the bank subtly enslaves its employees:-

Wall Street is even simpler than religion. Your entire worth as a human is defined by one number: the compensation number your boss tells you at the end of the year. See, pay on Wall Street works as follows: your base salary is actually quite modest, but your ‘bonus’ is where the real money is. That bonus is completely discretionary, and can vary anywhere from zero to a manifold multiple of your base salary.

So, come mid-December, everyone on the desk lines up outside the partner’s office, like the communion line at Christmas Mass, and awaits their little crumb off the big Wall Street table. An entire year’s worth of blood, sweat, and tears comes down to that one moment. And the entire New York economy marches to the beat of that bonus drum.

Without that number though, your privileged place in the New York hierarchy goes away. Gone is the house in the East Hamptons. Gone is the $2mm duplex on the Upper West Side. Gone is your kid’s $25K/year pre-school.

And that’s why Wall Street has that roach motel property: people check in, but rarely check out. By the time you’ve been through a couple of bonus cycles and seen that wad of cash hit your bank account in mid-January, you can’t imagine a life without it. And that’s exactly how the senior management at the Wall Street banks like it.

If Wall Street investment bankers were dogs, they would flaunt their expensive collars and leashes as marks of status, not realizing their true purpose.

Garcia-Martinez also describes some of the bizarre goings on of a Wall Street trading floor:-

Once, after a particularly competitive round of Friday afternoon push-ups and id bingo, a memo went out to the entire floor about office decorum. It basically boiled down to a reminder about how betting was prohibited on the trading floor. It reminded me of that classic scene in Dr. Strangelove when George C. Scott gets into a wrestling match with the Russian ambassador inside the control room at the Pentagon, and is sternly told, “Gentlemen, you can’t fight in here. This is the war room!”

• For  more on Goldman Sachs click here

July 29th, 2010

Am I alone in finding the “For the journey” television commercials for Lloyds TSB nauseating in the extreme? I would dislike these ads whichever brand they were for but the fact they’re for Lloyds — a brand which like BP’s has become rather toxic of late — makes me want to puke on the carpet every time they come on telly.

The “For the journey” ads were first aired in happier times for Lloyds. They debuted on television on February 4th, 2007 — long before Lloyds went off the rails with its HBOS acquisition. But the ads have continued to be used by the Gresham Street-based institution, even after the HBOS deal was completed in January 2009.

The animated campaign features members of a long-nosed family going on a train-ride through various stages of their lives. The ad characterizes Lloyds as a powerful locomotive, pulling its passengers (customers) wherever they want to get in life, a caring bank that will stand by them through thick and thin.

The ads are vomit-inducing because of the gaping chasm between this faux integrity and the reality of Lloyds Banking Group’s behaviour today. Far from being a cuddly group that is eager to help its customers, Lloyds is now more of a pariah, seemingly incapable of lending money at a reasonable rate or treating its customers fairly, despite billions of pounds worth of government bail-outs.

If the group does announce it has returned to profitability in the first half of 2010 when it announces results on Wednesday, it’s worth remembering how this supposedly respectable financial performance was achieved and what sort of institution Lloyds Banking Group really is. This is the bank that:

1. Pays its own executives including chief executive Eric Daniels obscene amounts for failure.
2. Arbitrarily closes down business customers, seemingly on a whim. In recent months many loyal business customers have had their overdrafts called in — without any notice whatsoever. The effect on unemployment is fairly predictable.
3. Is dishonest with its own staff, particularly  over the numbers who will lose their jobs as a result of the disastrous HBOS deal.
4. Remains in denial about the serial expropriation of mid-sized corporate customers’ assets by HBOS affiliates, something which is now being investigated by the enforcement team from the FSA and other UK authorities.
5. Unfairly writes off billions of pounds of debt racked up by favoured entrepreneurs such as Sir David Murray, chairman of Murray International Holdings and, unbelievably, Core Enterprise Management’s David Mills, whilst hounding minor defaulters out of their homes.
6. Rarely admits to mistakes or compensates its victims. Indeed, its own executives have been known to perjure themselves in court in order to achieve some of the above.
7. Deceives ordinary savers through short-lived interest rate offers.

I could go on, but I you probably get the picture. Overall, this institution has become much more of a sinister brake-van to the UK economy than a powerful locomotive.

For the record, the “For the Journey” creative strategy was developed by Lloyds TSB’s former marketing director Nigel Gilbert together with the advertising agency Rainey Kelly Campbell Roalfe/Y&R. The ads feature an intensely irritating soundtrack from Aussie composer Elena Kats-Chernin and a voiceover by Julie Walters (who really ought to know better!). After early accusations of pointlessness, the ads were defended by M Consulting .

Astonishingly this near bankrupt “zombie bank” which must overcome a number of significant challenges if it is even to survive until 2012 (including refinancing £165bn of ’soft loans’ from the government, at a time when few sane private investors have much desire to lend it money), is channelling £80m into the London Olympics via a deal agreed in March 2007.

If you have any thoughts on Lloyds’s “For the Journey” ad campaign,  or the behaviour of Lloyds Banking Group more generally, I’d be grateful if you could leave a comment in the comments box below.

• Bank of England governor Mervyn King yesterday lambasted banks, including Lloyds, for their appalling treatment of business customers. King, speaking to the Treasury Select Committee accused lenders of riding roughshod over longstanding business relationships by firing off computer-generated letters to clients demanding higher payments…
• For more detail on Lloyds Banking Group’s behaviour since the HBOS acquisition — and why the ads should be stopped (which might be easier now the bank’s communications director Shane O’Riordain has left) — click here and here.

July 28th, 2010

The Scots hedge fund manager Hugh Hendry has lately become something of a media darling thanks to his sheer outspoken-ness. But he also puts his clients’ money where his mouth is, often making them handsome returns, and has some genuinely interesting things to say about the outlook for the global economy.

Hendry founded Eclectica with some fellow refugees from Odey Asset Management in 2005. According to a recent profile piece published in the New York Times, he is a throwback to the 1970s and 1980s, to the heyday of George Soros’s Quantum Fund, when hedge fund managers were free-thinkers who dared to make big macroeconomic bets.

Among Hendry’s current batch of big ideas are that the euro is doomed, that China is headed for a spectacular fall, and that President Barack Obama will fail. On the latter point he memorably told the New York Times:

“If there was a way to short Obama, I would.”

Like Jim Chanos, president and founder of US hedge fund manager Kynikos Associates, Hendry believes a crisis is looming for the Middle Kingdom. He likens the country to the Starbucks chain of coffee shops: very good at rapid growth but less good at capitalizing on that. The main issue, says Hendry, is the country’s massive credit bubble and that lending has been channelled into unproductive projects.

He told Bloomberg in June that China’s 13.6 trillion yuan ($2 trillion) of new lending since January 2009 eclipses the economies of South Korea, Taiwan and Hong Kong combined and is “unprecedented in 400 years of economic history.”

Eclectica’s economic commentary from May 2010 included pictures of Chairman Mao and lyrics from the band Gorillaz. However the overall message was that Hendry sees hyperinflation ahead, as Western nations struggle to pay off their massive debts via “worthless fiat currency”. However, for this to occur, he argues that we first need to experience a significant deflationary event.

Along with his co-fund manager Espen Baardsen, a former goalkeeper with Tottenham Hotspur, Hendry is devising ways to bet on a Chinese collapse. One is to buy options on some 20 companies in international markets that will profit from “a dramatic collapse” of China’s growth, he told Bloomberg in May.

Eclectica correctly predicted that Greece’s financial travails would harm the market for German bonds. But the hedge fund manager lost money betting on European sovereign debt in the first quarter of 2009.

Hendry has made some memorable appearances on television. In February 2010 he appeared on BBC Two’s Newsnight alongside Professor Joseph Stiglitz. In a debate about the future of the euro, Hendry cheekily interrupted the Nobel laureate saying: “Hello, can I tell you about the real world?”

He went on to slam Greece as “a cheats’ charter… [which had built up] an unsustainable debt burden” and that the only solution was “forgiveness” of its debt in the shape of a “haircut”, or a default or national bankruptcy.

The episode became a minor  YouTube hit with some 71,000 viewings so far. Nothing compared to the likes of Susan Boyle’s first outing on Britain’s Got Talent (45 million) viewings and Skye-born stunt cyclist Danny MacAskill’s 19 million. But still an impressive number for anything as immaterial as economics.

• To read this entire post on QFINANCE click here
• To see Hugh Hendry’s take on the accountancy profession, watch this short clip from the BBC’s The Bottom Line click here

July 21st, 2010

In this White House video, President Barack Obama’s administration seeks to sell the recently enacted Dodd-Frank Act to the nation, arguing that it provides “accountability for Wall Street” and “protection for you.” To me however this film — which I found thanks to Paul Murphy, who posted it on the FT Alphaville blogging site — is a classic example of government propaganda.

I tend to agree with one of FT Alphaville’s  commenters, “Texan”. He writes: “What a joke. I like how it boils down one of the most complicated economic crisis in a century down to banks making speculative bets on housing. Banks deserve their share of the blame, but so do the politicians and regulators that propagated the “every American is entitled to a house” mentality.”