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Jul 16, 2009

IASB sticks to its fair value guns

LONDON, July 15 (Reuters) –David Tweedie, chairman of the International Accounting Standards Board, has responded to demands that he revise the controversial standard on financial instruments by strengthening controversial “mark to market” accounting. He should be careful he does not derail progress towards global accounting standards in the process.

The existing standard, IAS39, allows banks and insurers to classify financial instruments and measure impairment in many ways. Tweedie wants just two measurement bases – amortised cost and fair value -  and one impairment method for amortised cost.

Jul 16, 2009

Walker puts politics into banking

LONDON, July 16 (Reuters) – As befits a former senior civil servant, David Walker has produced a review of governance of British financial institutions that is acutely tuned to political sensitivities. His proposals would make banks more bureaucratic and more regulated, while bankers’ pay will be more open. In short, they will be treated more like the arms of the state that they have become.
Bankers will groan at the 39 draft recommendations for improving their performance, but they have received, one way and another, 1.3 trillion pounds of taxpayer support, or over 20,000 pounds for every man, woman and child in the land.
This alone justifies Walker’s proposals of a more intrusive and prescriptive approach to pay, even though he admits that pay was the least of the many causes of the financial crisis.
Less emotive, but more important, are his proposals on boards and shareholders, whom he clearly feels are the unspoken villains of the piece. Chairmen would become serious figures in financial institutions, responsible for holding dominant chief executives to account. With the enhanced scope of this role, it is unlikely they could do much else, even to chair another (non bank) company.
Non-executives, too, should expect the job to become part-time employment, with training, support and external advice. This would mean the end of the politically-correct drive towards diversity. Conveniently for him, Walker says he has no interest in such agendas. He prefers to push for proper risk committees, taking a view on the macroeconomic environment as described, for example, in Bank of England reports,.
Walker is scathing about shareholders, whom he views as complicit at best and responsible, at worst, for the excesses of the boom- as he asks, who demanded all those share buybacks? He wants fund managers to commit to “principles of stewardship”, with a requirement to “engage” with managers at the companies they own.
He’d also like to see a change in board culture, whatever that may mean. This, like his other proposals, sounds sensible, but is mostly wishful thinking. That there is something rotten in the way we do banking in the early 21st century is beyond doubt, but this report, however well-meaning, doesn’t take us any nearer to curing the disease.

Jul 13, 2009

A friend Friends can do without

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 13 (Reuters) – Clive Cowdery’s approach to Friends Provident <FP.L> is so absurd that the real puzzle is why he thought it necessary to tell the world about it in the first place.
A cynic might suggest that the outside shareholders who put up 600 million pounds to back his Resolution <RSL.L> half a year ago are getting restive at the lack of action, and that this is Cowdery’s signal that he’s on the case.
It may not help much. Within minutes of Resolution’s formal announcement, his proposal for a share swap was elegantly swatted aside by  Adrian Montague, the Friends chairman.
Perhaps Cowdery hopes Friends’ shareholders will remember how he delivered a 28 percent annual return from “old” Resolution, which was taken over by Hugh Osmond’s rival Pearl group after a complicated, multiway, bid battle two years ago.
Perhaps he reckons that shareholders are so disillusioned after two previous, much higher, merger/takeover opportunities in the past couple of years were bungled.
Whatever, this offer of a paper swap shouldn’t trouble the scorer. Friends shares are friendless, at around 53 percent of embedded value (a measure of the present value of future business in life companies), according to analysts at Keefe, Bruyette & Woods, compared to 80 percent and 90 percent levels elsewhere in the industry.
Yet Cowdery’s success lay in buying closed life books that nobody else wanted, and turning them into attractive assets under management. Running a live life office is much harder.
Now Cowdery only has cash (little of which he’s offering to Friends shareholders) so there are no other books with which to merge: Friends would stay subscale, and is losing market share. Furthermore, he is proposing that 10 percent of the upside from the deal would flow to his own management partnership.
In Montague and newish chief executive, Trevor Matthews, Friends’ 750,000 shareholders can hope for better things. Montague sold British Energy dearly to the French. Matthews, formerly boss at Standard Life’s UK and Ireland operations, has cut costs and got Friends’ back onto the “panel” of insurers offered by consulting actuaries.
Many of Friends’ shareholders are also policyholders who acquired shares when the then mutual, founded by the Quakers, listed eight years ago. Their interests may not rank quite so high on Cowdery’s list of priorities.

Jul 10, 2009

COLUMN –Investors return to hedge funds: Margaret Doyle

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 10 (Reuters) – If fear and greed are the motivating forces in financial markets, then greed appears to be in the lead again. Hedge funds had a torrid 2008 – losing money, barring withdrawals, displaying abysmal due diligence and even shutting down – despite the industry’s promise of “absolute return”. However, figures released by Eurekahedge show that investors are returning to the industry.
There are plenty of reasons to stay away. There is an old joke that a hedge fund is a remuneration scheme masquerading as an asset class. One of the few things that the industry has in common, across a multiplicity of investment strategies and styles, is its proclivity for hefty fees.
The industry has always defended “two and twenty”– 2 percent management fee and 20 percent of the annual return above a certain threshold – on the grounds that supe rsmart hedgies would outperform their rivals at dull long-only fund managers. Moreover, because the industry focused on “alpha” – the industry jargon for returns that are uncorrelated to market returns (“beta”) – the idea was that hedge funds would deliver “absolute” (rather than relative) returns. They might not beat, or even meet, market returns in the good years, but they would not lose it in the bad years.
2008 put paid to that theory. Moreover investors discovered that many of the previous excess returns were derived from excess leverage rather than super smarts. Worse, when investors tried to redeem their depleted capital, many funds invoked the small print to gate their funds.
The coup de grace was (or ought to have been) the revelation that several of those who invested with the fraudster, Bernie Madoff, were funds of hedge funds which had been charging a further layer of fees, supposedly to do due diligence.
In some ways, the investing environment is getting worse: regulators around the world are bearing down on the industry in a way they never did before and credit has dried up.
This tale of woe ought, at the very least, prompt those re-investing in hedge funds to demand better terms. Some distressed hedge funds have already refunded or reduced fees. In addition to smaller fees, investors ought to be clearer on when and on what terms they can get their money out.
Unfortunately, the signs are that healthy hedge funds are making few or no concessions on fees. For example, Man Group, Britain’s biggest listed hedge fund, reported that its gross margin on private investors remained “robust” in the year to the end of march, slipping slightly to 4.33 percent, and remains strong. Yet retail inflows exceeded outflows in the quarter to the end of June.
With investors’ memories this short, perhaps it should not surprise us that fund managers hold fast to their fees.

Jul 9, 2009

COLUMN – Swiss guard bank secrecy: Margaret Doyle

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 9 (Reuters) – The Americans are on a fishing trip. The fish they are after are big: 52,000 of their fattest fellow citizens, and they have invited the Swiss to land them. Understandably, the Swiss are not keen to haul in the net and hand over the source of much of their income.

The US demand that UBS <UBSN.VX> <UBS.N> disclose the names of 52,000 American citizens suspected of tax evasion has galvanised the Swiss government into threatening to bar the bank from doing anything of the sort.

Jul 8, 2009

COLUMN –One cheer for Darling’s reform: Margaret Doyle

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 8 (Reuters) – Alastair Darling has ignored the first rule of holes: if you’re in one, stop digging. He could have produced a few motherhood-and-apple pie reforms of the banking system, to give the impression of activity. Instead, he has dug in, proposing an upgrade of Britain’s failed “tripartite” system of regulation.

No one expected him to admit as much, but the arrangement that split responsibility between the Treasury, the Bank of England and the Financial Services Authority (FSA), was doomed from the start.

Jun 3, 2009

Candover prices in disaster

Shares in Candover Investments appear to be pricing in Armageddon.The shares are trading at around 200p, against a net asset value of 1026p at the end of December.

Candover share price 2008 to June 3, 2009

The shares had a bit of a shock yesterday, thanks to the Financial Times. That reminded investors about covenants on the 198 million pounds worth of bonds outstanding- they restrict debt to 40 percent of the net assets. Journalist Martin Arnold also said that French investment house, Eurazeo, is no longer interested in buying the group of any of its portfolio companies.

    • About Margaret

      "Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council."
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