Don’t bet against Mr Miliband just yet.

Worryingly for the coalition, Ed Miliband is starting to look prime ministerial.

Less a policy wonk, more a future prime minister

Tony Blair called it the most stressful, nerve racking event of his political career. Some see it as unnecessary, at best a distraction, at worst a futile slanging match with no opportunity for real policy discussion. Others reckon its the most fascinating part of British politics, giving the astute viewer an insight into the battle between the prime minister and the leader of the opposition.

Prime Minister’s Questions, or PMQ’s as it is commonly referred to, has always divided opinion. While some may dismiss it as only of interest to those caught up in the Westminster bubble, a poor showing at the dispatch box, on either side of the house, can quickly transcend into fidgeting backbenchers and a lousy press.

So it proved for Mr Miliband. Narrowly elected over his more commanding brother, Mr Miliband managed to sneak through in the leadership contest with backing from the trade unions, despite his brother winning more votes from MPs.

Hence the labour leader has had to face accusations of being in the ‘pocket’ of special interest. Such claims were fully exploited by the Prime Minister, David Cameron, brandishing his opposite number as “Red Ed”.

Struggling to challenge the lucid and elusive Cameron, unable to face down claims of overt backing from unions and an appearance closer to that of policy wonk than prime minister, Labour big wigs and backbenchers alike found themselves wondering if they had ended up with the wrong brother.

What has followed has been nothing short of complete transformation. At the final PMQs before the recess, Ed Miliband embarrassed the coalition, displaying confidence and enjoying his time at the dispatch box. The BBC’s political editor, Nick Robinson, described the performance as “inconceivable a few months ago”.

This should worry the government and excite Labour. The public, up until recently, preferred Labour to the Tories, but Cameron to Miliband, such clear disparities are no longer apparent. Also, the government is dealing with its own internal squabbles. Backbench rebellion over House of Lords reform has exposed Cameron as inept at controlling his own party. The irony will not be lost on Mr Miliband

Yet the Labour leader should tread carefully. Voting for the principle of Lords reform only to vote against “the means by which it could be enacted” was branded as “utterly pathetic” by an unmistakably stirred prime minister.  

Cameron’s words may resonate with the wider public. While attempting to embarrass the government and oppose almost all legislation is part and parcel of the British parliamentary system, indeed, the very structure and formation of the House of Commons encourages it. (The incumbent sits directly opposite, provocatively facing the opposition party) The public are unlikely to thank Mr Miliband for helping to bring down a government at a time when stability is so highly valued. 

Implementing the Vicker's report

Britain’s prosperity and morality are tied up with banking reform

Mansion House, in the heart of the city of London, is located a stone’s throw away from the Bank of England. Together on bank junction, these grandiose Victorian edifices, overlooked by tall glass offices, provide the passing pedestrian with an insight into Britain’s past as banker to the world, and future, as home to global banking.

At least this was the view up until recently. The aftermath of the financial crisis has left banks asking whether it still makes sense to be in Britain, and the British electorate asking whether they still want them there.

At a cross roads in more ways than one

The changing mood was apparent in the chancellor’s annual speech at that historical emblem of capitalism, Mansion house. Instead of congratulating the city, as was common up until 2008, the Chancellor took the speech as an opportunity to describe how risks taken in the capital, “spilled out onto the high street, putting taxpayers at risk”. Osborne went on to advocate the government’s whitepaper on banking reform, largely based on a blueprint put forward by Sir John Vickers, as the solution to grumblings over banks.   

The reaction to the government’s white paper emphasizes the gravity of the reforms. Some argued that they don’t go far enough leaving Britain vulnerable to another crisis; others insisted that they would hamper an already stuttering economy and extinguish the city.

As is often the case in finance, the outcome of policies may not fit well with original predictions. Those calling for investment banking to be ring-fenced seem to follow a sensible logic that we should separate, ‘casinos from retail’. Yet those banks which first ran into trouble, turned out to be in rather dull areas of retail banking. Northern Rock and Bradford and Bingley operated in a world a million miles from collateralised debt obligations and credit default swaps.

The frustrating and frightening truth is that no one is entirely sure what the solution is. Economists talk omnisciently for the implementation of ‘obvious’ reforms. Yet, such calls were not made when it mattered. Furthermore, each crisis is unique, and the regulation of one area often pushes the shady aspects of finance elsewhere, rather than removing it.

Britain is a special case, as the chancellor outlined, the country faces a “British dilemma” where trying to “protect taxpayers and being home to global banks” often runs in contrast to one another. As a country which depends heavily on finance for its prosperity, getting the balance between sensible reforms and satisfying the electorates’ calls for stringent changes, will undoubtedly prove a thankless task.

The implicit subsidy which has allowed unscrupulous bankers to gain large bonuses, while the wider economy flounders, riles the average Brit like nothing else. Banking reform is more than a question of efficiency. Doubts have been raised over the culture and morality of the industry. Cynics reckon increased regulation will merely lead to more box ticking and fat fees for city solicitors.

This may well turn out to be the case, either way, the government should tread carefully. Public opinion is fickle; the chancellor can incur the wrath of the public now and still recover in time for a May 2015 general election. Britain’s role as a hub for banks is more fragile than many realise. While drastic reforms will be a popular move amongst red tops and the general electorate, future historians may well take a dimmer view, seeing draconian reforms as the beginning of the end for London’s status as the hub of global business. 

The problems of being first

Barclay’s LIBOR scandal demonstrates the need for better media management in the finance industry 

No longer in the hot seat

 
Rather than discuss the morality of bankers or the reasons why one shouldn’t rig financial benchmarks; both of which are well documented elsewhere (often in an increasingly angry yet dull manner), this article discusses why the bank, which has proved itself so capable of adapting and profiting in adverse conditions, has failed so miserably in public relations. 

Barclays is one of many banks which have manipulated LIBOR. The tragic irony for Barclays is that had it been the only one fiddling the rate, they might have got away with it. If the other banks had presented honestly how much they were paying to borrow, Barclays’ shenanigans in manipulating borrowing costs would have been viewed as a mere outlier and left out of the average used by the British Bankers Association (BBA) to set LIBOR. 

Equally frustrating for Barclays is the contrast in PR management between themselves and the Bank of England (BoE). Though history may well take a dimmer view; seeing government institutions as often implicit in bad banking behaviour and even sometimes directly culpable; the British public have made up their mind. Scorn for big banks, indifference to the BoE. 

Barclays has suffered from being the first to admit involvement in the scandal. Agreeing to co-operate fully with regulators, before any of it peers, may have struck the bank’s PR team as a boon. It wasn’t. They should have recognised the negative public sentiment towards the industry. Being the first to come out almost always means incurring a disproportionate share of the nation’s wrath. 

Yet for all Barclays’ bad luck, it is difficult to see where the inauspiciousness ends and the ineptitude begins. Steve Gosset, writing in the Harvard Management Communication Letter, reckons once hit with a scandal, you have to “convey empathy”, or in layman’s terms, you have to act like you give a damn.  

For all their experience, CEOs of global companies have often proved themselves surprisingly incapable of doing this. Consider Tony Haywood’s pleas to have his life back after the BP oil spill; muse over Lloyd Blankfein’s comments that he was, “doing God’s work” at Goldman Sachs. 

Both Barclays’ ex-chairman and CEO can be added to this list. The resignation of the group’s chairman was rightly seen as a ploy to shade Mr Diamond from the heat of pubic animosity. The PR team should have thought this through strategically. Rather than being seen as a sacrifice, it was perceived to vindicate calls for Mr Diamond to go. If the chairman was leaving over this, then surely, the man responsible for the investment banking arm, the part of the bank that did the manipulating, should follow? 

Nothing added up, it further damaged the bank’s and its CEO’s reputation, already seen as toxic before the blunder, and ultimately, Mr Diamond’s subsequent resignation proved somewhat inevitable. 

It could be argued that no man has been quite so instrumental to building Barclays global credentials than its now departed CEO. Coming into the firm in the early 90s he masterminded the rise of Bar Cap. 

Not many would dispute Mr Diamond’s credentials as a banker, but as a CEO, he has not paid enough attention to the importance of public image. Mr Hester, boss of a rival firm, RBS, has managed to sculpt himself into an image of a fixer, here to set the wrongs of the credit boom. Understated, firm yet humble with critics, Hester has turned down bonuses and kept himself out of the public sphere. This has won him public indifference, which in the current climate, can be viewed as the highest possible assessment of any banker.  

Empathy and a low profile, Mr Diamond sorely missed. An American from the Investment banking division, the board should have seen it coming. Better to have kept him out of the limelight and making a killing at Bar Cap. 

Barclays is often said to have had a good crisis. Since 2007 it has managed to avoid a potentially disastrous takeover of ABN Amro, something RBS know all about. The bank also managed to make the most of Lehman’s demise, buying the defunct firm’s prime real estate and establishing itself as a global player. These achievements were realised by a combination of good luck and good strategy. Recent events suggest the bank may now be lacking both.  

The rise of the SPAD

Cameron’s calls for a cut in party political advisors may not materialise.

A convenient cover for any SPAD

One would be forgiven for believing that ‘Number 10’, were a living thing. Number 10 believes this, or Number 10 denies that, is a common line. Yet, the house remains merely of bricks and mortar. Those relaying messages to the media, often under the ubiquitous umbrella of ‘Number 10’, are usually SPADs.

Straddling the line between politics and civil administration is a constant and timeless battle for most ministers. All parties of government have shown impatience with the self-protective nature of the civil service. For instance, Harold Wilson, Labour prime minister of the late sixties, appointed “guardians of the manifesto” in an attempt to prevent the apparently Tory leaning civil service from stalling the new government. The modern day SPAD was born.

A SPAD, the acronym refers to a Special Political Advisor; although one would be forgiven for associating it with a rather unappetising and embarrassingly British tinned meat; shapes policy and manages media relations in a way civil servants are either ill prepared to do, or are prevented from doing.

Although SPADs come in all shapes and sizes; from individuals who truly shape government policy such as the now departed Steve Hilton, to the rather large pool of innocuous characters who assist lowly ministers in staying in a job; many tend to be young, ambitious and determined to get into the higher echelons of politics. Some deride this, and the wider role of the SPAD in government. Yet as long as previous SPADs keep popping up in later years as senior political figures, expect many more bright young things to follow this treacherous path to a career in front line politics.

It is tempting to bash SPADs, but consider the difficulties that would arise without them. Civil service neutrality can leave ministers aloof to party politics. This is dangerous for the minister. Also, the 24 hour news cycle means constant scrutiny of government policy, ministers who have busy schedules would be at a loss without the well organised and media savvy SPAD. Media relations, although when done well appear effortless, often require meticulous planning and attention to detail.

Many cite the democratic deficit as a case for SPAD reform. SPADs with access to ministerial work can quite easily inspire jealously amongst backbench MPs. Why not have backbenches act as party political advisors? Yet the office of MP is one of a public face, the special advisor is not. Indeed, when a SPAD does become a public face, it is often a sign of an impending fall from grace à la Adam Smith, the culture secretary’s former advisor.

It is sometimes considered a wonder why anyone would even consider taking on the job. The role is volatile, and often short lived; Duncan Brack, advisor to Chris Huhne, was informed of the termination of his contract via email a mere 5 hours after the former energy secretary’s resignation. SPADs are also poorly paid relative to the amount they shape government policy, or what they could earn outside of it. Nevertheless, for those looking to climb the perfidious political pecking order, the role of SPAD is a tried and tested method.  

Voters are becoming increasingly aware of the power these unelected advisors can wield. The perception of the special advisor remains that of a mysterious figure shaping policy in the shadows. Yet the dilemma between accountability and party loyalty inherent in government inevitably requires such a figure. Do not expect the number of SPADs to drop any time soon. 

Holding the big four to account

A break up of the large accounting  giants  may occur naturally, rather than by legislation.

Too big, too concentrated and unable to spot the emerging problems on financial institutions’ balance sheets. These are some of the accusations levied against the big four accounting firms. Indeed, it strikes many as odd that audit, tax and a range of related consulting services, should be concentrated in a mere four firms. Not least, Michel Barnier, the European Internal Market Commissioner, who has put forward a range of proposals to help reduce the dominance of the big four. These include compulsory rotations, joint audits and more frequent competitive tendering amongst a wider range of accounting firms.

Barnier may be on to something; the average audit tenure of FTSE 100 companies is forty-eight  years, this and the fact that all but one of these firms is audited by the big four, suggests that this industry may be closer to a cosy oligopoly than a competitive market.

The one organisation which doesn’t have its beans counted by the big four, Randgold Resources, is audited by BDO Hayward. BDO and other middle market firms are often considered too small to compete for global audit work. According to BDO’s managing partner, Simon Michaels, “audit is the only industry where five billion revenue and presence in fifty-one countries, is considered too small”

The dominance of the big four is a fairly recent phenomenon. Readers will remember the big five, prior to the collapse of Arthur Anderson, and the big six before that. Yet the consolidation of audit services to a mere four firms was a fairly natural transition. David Tweedie, IASB (International Accounting Standards Board) Chairman, reckons that the number may also expand naturally as China continues to develop its own accounting principles and qualifications.  

Tweedie believes that China’s growth will continue to impact on the market capitalisation of firms globally. Already we see the US market cap shrinking from over half of listed companies to a third globally. This is having some interesting effects on an industry which is often derided as a little dull. Middle market firms are already punching above their weight in China and could well become the Anglo American arms of future Chinese accounting goliaths.

This is buoyed by the fact that accounting firms are run as local partnerships rather than global companies. Each partnership in its respective jurisdiction has limited liability to the rest of the wider global partnership. Auditing firms are closer to networks of independent partnerships rather than large multinationals. This should make it easier for Chinese firms to grow and form links with existing western firms.

Yet there are reservations over Chinese expansion in audit services; hardly unexpected in an industry where prudence and conservatism are at a premium. Some objections smack of protectionism and seem quite hypercritical. For instance, the requirement that Chinese qualifications are taken rather than the ACA or CPA (British and American accounting qualifications respectively) is similar to what many countries have imposed in the past.

Other requirements are more contentious. China wants local partners to dominate local offices by 2017. With a string of recent accounting scandals in China, many see this as premature. Inexperienced local partners could well be more sympathetic to government officials which is unlikely to put shareholders minds at ease.

Coming to an amicable solution is difficult. Ideas such as joint audits make accountants and shareholders equally uncomfortable, yet other remedies to the big four dominance prove either illusive or just as unpalatable.

Regulators should hold back. The emergence of China will bring vitality and competition to the audit industry. However if the big four prove capable of dominating Asia as they have the West, expect more grumbles from regulators.

The rise of GARS

Hedge funds are being pushed out of the alternative asset space

Before 2007, hedge funds raised capital at their discretion. Yet the recession has exposed many funds which appear to have raised returns in the good years by increasing risk rather than by generating the ‘alpha’, i.e. above market returns with the same or less risk, which their glossy marketing brochures purported.

Still, the investment industry is nothing if not adaptable. While the profile of hedge funds may be plummeting, its less racy cousin, the absolute return fund, continues to grow in popularity. Standard Life, a leader in this area, has seen investors scrambling to enter their alternative asset fund known as GARS.

While finance may not have lost its taste for opaque acronyms, institutional investors may be losing their appetite for risk; GARS, which stands for Global Absolute Returns Strategy, claims to offer more consistent and modest returns than its hedge fund competitors. (Though one wouldn’t necessarily infer that from the title).

The rise of absolute return investing presents hedge fund bosses with a headache. Institutional investors have historically looked to hedge funds to provide diversification and a little extra return on the market index. Yet while a few hedge funds recognised and profited from the housing bust and subsequent recession, most missed it and found themselves unable to live up to their alpha aspirations, or even match the benchmark. The few who did profit in the downturn have often proved themselves one trick ponies, incapable of repeating good performance. Consider Paulson & Co.’s miserable returns since the fund made a nice profit shorting bad mortgages.

All this has left institutional investors sceptical if not openly hostile to the prospect of investing in hedge funds; something the more traditional investment management companies have looked to capitalise on. Whereas hedge funds are often distinct entities, absolute return funds can quickly be thrown together in house under the auspices of ‘alternative strategies’. This has resulted in the proliferation of funds from the traditional investment firms looking to get involved in this high fee area. Both Schroder’s and Investec offer rival absolute return funds which match Standard life’s GARS fund both in investment strategy and the absurdity of the funds’ names, the dynamic diversified growth (DDG) fund and the global tactical asset allocation (GTAA) fund respectively.

While the naming of such funds leaves something to be desired, investors have been flocking to them in droves. Some of the main benefits of these funds have been the decent returns, low correlation to equity markets and, and this really sticks in the throat of hedge fund managers, lower fees. Whereas hedge funds typically charge 2 & 20, that is a base fee of 2% of assets regardless of performance and 20% of any returns above the benchmark, Standard Life’s GARS fund charges a flat fee of 0.5%

Investors seem to be waking up to the reality that hedge funds, while at an individual level may outperform the market, have collectively failed to match their respective benchmarks. Investors have been coaxed into investing in such funds by promises of alpha, dud investment consultants and arbitrary performance reporting, and non-reporting for that matter.

Absolute return funds seek to provide investors with equity like returns without the associated risk; yet as something similar was previously promised by the hedge fund industry, investors shouldn’t hold their breath.  

The Future of the Coalition

The removal of property requirements as a barrier to electoral expansion, bestowed upon socialist politicians of the 19^th century a timeless dilemma:  To accept the road of parliamentary action, to use the new electorate to exact pressure on governments and gain concessions. Or stand apart from the inevitable compromises and half measurers of parliamentary democracy and wait for the proletariat revolution.  

The moment of decision came for many when the opportunity to form a government arose. Would accepting a share in government implicate the socialists in repressive policies? In France, Millerand and Briand, socialists of the age, were portrayed as hostages to the manoeuvres of their political opponents. Accusations of betrayal were common. Yet, if one accepts parliamentary procedure, one cannot logically, refuse in the share of power and responsibility when it is offered.

The dilemma cuts across the political spectrum. The decision as to whether to compromise with opponents is as timeless as it is intractable. It is invariably unpopular and unrewarding. And it is as impossible to satisfy both French aristocrats and revolutionaries as it is to mollify the disparate branches of two very different coalition parties.

While neither the Conservatives nor the Liberal Democrats are contemplating revolution, both face the same broad dilemmas but from opposite sides of the political continuum. Clashes of party, personality and political philosophy make the Liberal Democrats volatile bedfellows for the Conservative party.

Yet the higher echelons of the Liberal Democrats can seem remarkably similar to that of the Conservatives, despite the clashes of opinion between them. Consider both Jeremy Hume and David Laws, ex The Economist writer and JP Morgan banker respectively. Perhaps ironically, it is these two men who have fallen from the top of the coalition, illustrating the unpredictability of coalition politics.  

The tiresome marital metaphor is frustratingly apt, both Clegg and Cameron recognise their mutual need for one another in a marriage of necessity. While both men may differ on many a political point, there commitment to deficit reduction and economic recovery means that both find themselves inextricably tied in political wedlock.

It is indeed tempting to cite economic recovery as the defining factor of the coalition. Recovery vindicates the austerity inherent in deficit reduction, whereas recession affirms Labour’s calls for fiscal stimulus. Yet economics is not the science it is sometimes purported to be, arguments for and against the speed of deficit reduction can be supported by seemingly water tight theories and statistics. The coalition points to Hayek, low bond yields and experiences in Germany and Sweden. Labour alludes to Keynes, unemployment and the USA.

The powerful and substantial claims which can be made both for and against an economic policy make it both flexible and therefore adaptable, and most importantly, justifiable. The ease with which international factors can be cited for the misgivings of any economic policy makes pinning the blame for slow recovery on the coalition problematic. It is the unpredictable events which throw up unforeseen dilemmas which will define this coalition; not deficit reduction.

The events which have truly effected this government were far from expected. Consider Dr Cable’s remarks to The Telegraph, the subsequent transfer of power to Mr Hunt, and the ensuing political entanglement. Contemplate Dr Fox’s resignation and its impact on the backbenches. And finally, muse on how a seemingly uncontroversial policy to add more patient choice and doctor budgetary responsibility morphed into a public relations disaster for the conservatives and a defining issue for the liberal democrats.

The circumlocution which entered British political lexicon under Howard Macmillan when asked what could derail his government, “events dear boy, events”, remains the somewhat unsatisfying truth as to where the future of this or indeed any government lies. It is unsatisfactory as it cannot be predicted and therefore explained or anticipated; and yet, the underlying currents which facilitate such events can be recognised and analysed, even if the resulting waves prove unpredictable.

Few political forecasters envisaged the Arab spring, yet most would recognise a young and idle population, an inequitable and autocratic governmental system and Islamic pressures. Equally, with only a few exceptions, economists failed to predict the credit crisis and ensuing recession. However, the complexities and opaqueness of the financial system, coupled with its volatility, makes the occurrence of such events inevitable.

This is as true for politics as it is for demographics and economics. The events which shape the coalition are unpredictable, and therefore fascinating. Yet if one considers the underlying currents impacting on the coalition, it is possible to see how events may unravel.

The very style of Cameron’s leadership, closer to the chairman of a board than that of a ‘hands on’ prime minister, has led to a new style of political operation. Disputes are discussed at the cabinet, and sometimes on the airwaves. Furthermore, ministers have autonomy over their departments; consider the far-reaching and innovative reforms of Mr Gove in education or Mr Duncan-Smith in welfare.

While it is futile to predict events, one can see that the very structure of the coalition has allowed for radical and constant reform. Ministers have had tangible control over their departments without central political interference. This has led to drastic change and substantial reform, although it has also allowed for poor implementation and an eclectic mix of policy agendas.

It is the very nature of coalition government that diverse actors come together. Equally, over the next two years both parties will attempt to differentiate themselves and prepare for the next election.

The underlying currents of this government suggest that we can expect missteps and about turns, erratic policy changes and a lack of coherence. However we can also expect boldness and creativity, an indefatigable reform agenda and genuine compromise. This parliament will continue to be one of the most active, and although the next event can never be predicted, it should be suspected that it is never far away.