The second cryptic twister.

Two days ago, we learned how top investment bankers at Lloyds Banking Group “earn” bonuses out of losses (or rather negative profits). Now we hear that RBS paid its investment bankers £1.3bn after it made £1bn in profit in 2009 and not the reported £5.7bn. This is because £4.7bn of the bank’s worst losses were transferred to a “non-core” division. Two other things to clock are that:-

• 100 of the investment bankers received more that £1m each
• Chief executive Stephen Hester justified the bonus to the parliamentary select committee on the basis of staff retention. Michael Reuther, head of corporates and markets division of Commerzbank the large German bank said that his bank would still be able to attract and retain staff. Commerzbank is not paying any bonuses.

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An early candidate.

An early candidate.

An early candidate has emerged for the 2010 Business & Finance Awards (see main website for 2009 top ten.) A new category may be added “Most cryptic twister.”

Sir Win Bischoff chairman of Lloyds Banking Group has explained that “You set performance criteria in light of what it will be. The “X” may be a minus. You are grading people not by absolute numbers but on a relative basis.”

The state-backed bank made £6.3bn “minus” profit in the year to end December 09 and if he had not foregone it, the chief executive’s bonus would have been £2.25m.

The remuneration rules for Lloyds Bank are worth a second look. “Half the incentive is based on the stretching budget relating to profit before tax and economic profit.” So, one assumes that the definition of profit (and in complete defiance of all the technical tutorials on my website) can include “negative” profit and we are left whimsically guessing at what the other half of the incentive package is based on.

Who remembers Watergate, the explanations of Bill Clinton and the “unknown unknowns” of Donald Runsfeld?

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From Chelsea to Yorkshire via losses.

From Chelsea to Yorkshire via losses.

All of you that laboured through my credit crunch diary (Oct 08 to Oct 09) will recall, I lambasted the Chelsea Building Society on several fronts that I will not bore you with repeating. The chickens (or perhaps better the dogs and turkeys) duly came home to roost. The recorded loss for 2009 is £27.1m before tax as it was hit by a £41m mortgage fraud. This monumental figure was exceeded only by its provision in the previous year of £44.3m against the Icelandic bank.

The “mutual” solution is to merge with a rather larger society, namely Yorkshire, that incurred mortgage bad debts of £59m in 2009 and causing an overall loss before tax of £12.5m. As I mentioned before, Chelsea isn’t actually in Chelsea so let’s hope Yorkshire is actually in that first-class county that has always enjoyed a reputation for looking after its own. One of my Chelsea rants was about executive remuneration but this was not in the investment banking league. On the other hand, investment bankers made money.

Rank the fruit machine.

Rank the fruit machine.

Rank Group the quoted casino and bingo hall operator and with a leisure industry pedigree longest than most, has turned the post-smoking ban corner. In the year to December 2009, it turned loss into profit, reduced its debt burden and equally important, brought new products to the market including a more upmarket casino brand “G” and a more whizzy late-night form of bingo with music for the youngsters. Maybe a slug of those youngsters who have neglected Luminar that in turn led the boss Steve Thomas to call it a day. Furthermore, Rank expect to get back from HMRC about £35m in recovery of overpaid VAT.

Non of this interests me as much as a bald statistic thrown up by Rank’s annual report. The group operate 991 “club” fruit machines that now pay a jackpot of £500. Anyone who has read my book Violets will have enjoyed my tale of travelling the UK buying up routes of club machines for Bell-Fruit and explaining why. Club fruit machines are magic to operate. You could find the best ones in Bolton and Dundee but in this dreariest of UK winters, why not do a spot of research to prove the international case for this fact. I recommend Las Vegas and the club world of Sydney.

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Out Of Character.

Out of character.

If he was a brinkman by nature, one could perhaps come to terms with it. The sort of man that can take an exceptional risk with confidence in a super future benefit. The sort that willingly puts his home on the line as security for borrowings.

But Gordon Brown is just not that man. He gives the impression rather of nervous twitchiness and remember that all the women in his life were named Prudence. So the latest UK debt figures are doubly frightening: as if he does not understand or if he does fears no consequence, no personal assets at stake. Secondly, a democracy is supposed to throw light on such blindness. But there is no effective reining in, no group of people capable or willing to appreciate the obvious. Namely that the UK is rapidly going bust.

January is a good month for national finances. Income tax, corporation tax and capital gains tax peak due to the six monthly instalment not least from the self-employed. But this time (2010) there was actually a shortfall in public finance with net borrowings of £4.3bn. This was £9.6bn more than net borrowings in January 09 – itself hardly a successful financial month. Britain’s national debt now stands at £848.5bn or 59.9% of annual GDP.

On the bad news, gilts rose to a 15-month high yield of 4.1%. Just think, that is eight times the bank rate! On currencies, the pound dropped against the dollar and (note this) also the euro despite the eurozone woes.

Economists currently disagree on the timing of public expenditure cuts. But, as Boris Johnson has proved in London, reduced spend and loss of service are not mutually exclusive. He has cut spend by increased efficiency and productivity, leaving front line services untouched. We need a change and fast.

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Capital versus revenue cost.

Capital versus revenue cost.

I would like to have a little bet with anyone interested that given the reduction in the capital expenditure allocated from the Exchequer for public services, some accounting engineering is going on. After all, what is deemed a “capital” cost and what a “revenue” cost is down to definition. All capital is revenue eventually, it is merely a question of deferment via the mechanism of depreciation/amortisation.

If I ran an educational establishment (where capital spending is reportedly being cut back) I would ask my money man to think of ways to re-classify some categories of hitherto capital cost and/or start changing our behaviour. We might, for example, think of things like fixtures and fittings and furniture and office equipment and raise the floor amount at which “capital” arises. We might also rent/lease (short term) equipment previously bought in. We might outsource more stuff. Someone just said that local government needs to be more enterprising, probably not with this in mind.

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Job vacancy

Wanted: An old fashioned type hero

Qualification: Not brain-washed

Compensation package: a small girl’s life

China’s next big export?

China’s next big export?

No nation has had more written about it over the past eighteen months (certainly in my case) than China. The world’s greatest creditor nation and sustainer, if not causer, of the West’s consumer binge.

Now stand back for the next major export. This one will bug you even more.

Prof Xiao, the head of China’s National Antibiotic Resistance Investigation Network has said, “In Chinese hospitals our data shows that 60% of inpatients are being prescribed antibiotics compared with the World Health Organisation guidelines of 30%.” It is reported that although China’s state food and drug administration bans the sale of antibiotics without a prescription, such drugs are easily available over the counter (source Daily Telegraph). Three out of five chemists agreed to sell antibiotics after a cursory consultation with the “patient” who complained of a sore throat. At one outlet a pharmacist handed over a course of the second-generation antibiotic, Cefuroxime Axetil, with minimal hesitation. Asked if the sale could get her into trouble, she said that the pharmacy would get a doctor to write the prescription later to cover its sales records.

Scientists say that the reckless use of antibiotics in the health system and agricultural production is creating an explosion of drug-resistant super bugs that risk global health and there is a frightening rise in bacteria such as MRSA spreadable quickly via international air travel and food sourcing. A new strain of MRSA has already been found in Chinese pigs imported into Hong Kong. The source was confirmed as Guangzhou where many of the pigs are farmed.

You could stop buying Chinese goods for a while. Try stopping this export.

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