Draw Breath

Bethany McLean in her landmark article on Enron in 2001:

“Enron is a big black box,” gripes another analyst. Without having access to each and every one of Enron’s contracts and its minute-by-minute activities, there isn’t any way to independently answer critical questions about the company. For instance, many Wall Streeters believe that the current volatility in gas and power markets is boosting Enron’s profits, but there is no way to know for sure. “The ability to develop a somewhat predictable model of this business for the future is mostly an exercise in futility,” wrote Bear Stearns analyst Robert Winters in a recent report. To some observers, Enron resembles a Wall Street firm. Indeed, people commonly refer to the company as “the Goldman Sachs of energy trading.”

Now, Bethany McLean on Goldman Sachs in 2009:

Despite the public financial statements Goldman files every quarter, no outsider can tell how the firm really makes its money. You cannot see into “the black box” of the trading empire. Blankfein says that only about 10 percent of Goldman’s profits come from purely proprietary trades, but there is no way any outsider can confirm that independently.

McLean didn’t know that the black box obscured illegality (if it did) when she wrote about Enron in 2001 and, just as with McLean, I’m not at all, not even in a blogishly snide/oblique way, suggesting that Goldman is engaged in illegal activities. That wasn’t McLean’s point in 2001 (since at that stage no outsiders were aware of the extent of Enron’s problems) and it isn’t her point now. The problem is that financial institutions have come to a point where profits accrue from necessarily – and probably willfully – complicated vehicles. These vehicles, at least during the boom, were designed in part to avoid regulatory oversight.

So here’s the key political battle surrounding moves towards any new ‘macro-prudential’ regulatory regime: how to do global capitalism but in a manner that’s legible to regulators? In other words, the moves towards global regulation will involve regulators demanding that financial knowledge be constructed on their terms, not those of bankers. It doesn’t matter that the black box model involved bankers replacing knowledge with swagger: they will argue that obscurity and complexity are vehicles for efficiency and competitive advantage. In a rational world you’d think that investors would be inclined to perform proper oversight and argue against this outlook but they have historically been very poor at doing this kind of thing. They prefer to reap profits from trading shares and securities when they banks etc do well and litigate when they do badly. So the argument should lean towards ending black boxes. Any bets on regulators winning the argument?

There’s a strangely sloppy piece of editing in an article by John Murray Brown and Sophia Grene in today’s FT that begins incorrectly with the claim that “the Irish government has passed legislation to make it easier for hedge funds based in the Cayman Islands and other tax havens to move to Dublin.” Well, as Brown writes in paragraph three, the Irish government certainly will introduce legislation to this effect in the 2010 Finance Bill, but it hasn’t done so yet.

Update: As John points out in the comments, I was wrong about that: easier company migration is provided for in the Companies (Miscellaneous Provisions) Bill 2009, s.3(j) I think from a quick peek. Thanks John!

Still the rest of the piece is quite good, obliquely pointing to the challenge that the Irish face with this sort of initiative. The problem is that the IFSC has traditionally been marketed as a low regulatory price alternative to London, both in terms of taxes and in terms of regulatory costs. The key has been to keep Dublin’s regulatory regime a little lighter in touch than London’s, thus presumably attracting more footloose business to Ireland. It’s sounds good but it’s a risky approach. Make the regime too blasé and you end up tainting everyone who trades in your area with your reputation for being the “Wild West of European capitalism.” Make the regime too tough and you run the risk of international capital heading off to find a more amenable government.

And indeed this is the problem with Ireland’s undoubted success in attracting hedge fund ‘business’ to the country. On the one hand you don’t want to blind yourself so much that you attract too many Madoffs. At the same time you can’t gift yourself the gift of 20:20 regulatory vision if you want to nab business from the Brits. Ireland is attractive because, as an EU member, it doesn’t quite have the sulpheric smell of true a offshore haven. But it has to behave as much like one as it dare in order to compete. And there’s no reason on earth that the other EU members, particularly the UK, would like this.

So let’s just exercise a degree of scepticism about Irish plans in this area. You can be Michael Douglas or you can be Martin Sheen but you’re rarely allowed to be both.

I joined Simon McGarr’s show the Papal Nuncio the door Facebook campaign last night. No matter how Brian Cowen tries to fudge it, the Vatican has been a disgrace on child abuse from beginning to end. I agree that the primary responsibility for abuse lies within Ireland. The abuse took place in an atmosphere where the state had ceded total power over children to an unaccountable group (which, by the way, places Ireland in the sad and grubby tradition of Eastern Bloc countries when it comes to childcare). But that doesn’t mean that responsibility can’t be identified elsewhere too, especially when the Church, from top to bottom, actively pursued a policy of favouring their reputations and incomes over any consideration of child welfare.

Actually, that’s not fair to people who care about reputations. My sense is that the Church didn’t at all feel that its reputation was threatened. In order to fear for your reputation you must first be cogniscent of the shameful nature of your act. I haven’t seen any evidence that the senior figures in the church felt an ounce of guilt when they moved priests on to pastures new (well, until they were caught). So let’s call the Bishops’ cover-up an attempt to maintain a self-regulatory regime in order to maximise the rents accruing from the running of Ireland’s welfare system and in order to maintain a grip on the polity so they could continue to shape the state towards their own benefit. Strange how their ideological ends tended to coincide with their own profits.

Anyway, back to the Nuncio. I think it’s important to recognise that in booting the Papal Nuncio out, as well as expressing displeasure over his attitude towards the investigation into abuse, we would also be rethinking the character of the Church and of religion in Irish law. The Catholic Church, in deed or in claim, is more like a multinational company than a state and – what’s more – it seems to regard the trappings of statehood as little more than a convenient corporate veil, to be trotted out in response to any threat that local liabilities might drag head office into the fray.

As things stand, the Church is an organisation whose members have a primary duty to a sovereign state and who work for that state. But, for what it’s worth, the Vatican state’s territory is quite a bit smaller, if prettier, than the office space occupied by the Microsoft Campus in Redmond. The organisation is run as a global enterprise. The only trappings of statehood that are applied are those relating to diplomacy: as a state the Vatican is essentially a free-standing Foreign Office that only represents itself. Maintaining the fiction that the Irish Church is an arm of a state or is subject to that state’s rule is like saying that a clump of bog oak is a forest. It’s high time we stopped treating the Vatican like a state and started treating it more like we do McDonalds: if they want to operate here then they should be subject both to whatever level of regulation and taxation we deem appropriate. If people want to pursue their religious predilictions through the church that’s fine. But that doesn’t mean that the Irish state has to pretend that the Catholic Church’s executives are really diplomats, heads of state or what have you. If we Irish state inquiries seek information it should be forthcoming through policing channels. If the Vatican doesn’t like that, it can withdraw its representatives and cease trading in Ireland.

Let’s end the fiction and completely withdraw all diplomatic recognition from the Vatican. Or rather, oh to be from a country where that happened.

Update: Via Pete Baker, I see that Fintan O’Toole hits on a similar point. Far better put of course.

I’m skipping through this paper (h/t Baseline Scenario) this evening (in between finishing more appropriately weekendish books) and am very much enjoying it. Check out the two charts on page 24 if you want to get an insight into what’s gone wrong with global capitalism in the last three decades. Anyway, I love this quote from the intro:

As in the Middle Ages, perceived risks from lending to the state are larger than to some corporations. The price of default insurance is higher for some G7 governments than for McDonalds or the Campbell Soup Company. Yet there is one key difference between the situation today and that in the Middle Ages. Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks.

I’m always a fan of Chekov’s blog (yes: I’m reading far far more than I’m writing!), but I am at times perplexed by his politics. I’m with him on the scepticism about nationalism in all its hues, but I’m confused about the manner in which he picks fights with his nationalist opponents. There is a huge gap between his more reflective comments on unionism and, in terms of political strategy, his comments on the Union. Compare for instance his considered and interesting post here with this strange, albeit short, post here.¹

I’m in a grouchy mood today, so I’ll focus on the kvetch.

Read more…

Thanks to Robert Goddard I just noticed that the Programme for Government contains a commitment to “put the principles of the Combined Code of Corporate Governance (see also trusty old Wikipedia) on a legislative footing for all banks, public companies and state-sponsored bodies,” specifically with regard to the following:

• Board composition and independence
• Segregation of CEO and Chair
• Clear definition of executive and non-executive responsibilities
• Audit committee composition, independence, role and function
• Responsibilities and composition of board committees
• Segregation of committee chairs
• Risk management
• Selection of non-executive directors
• Sanctions for non-compliance

The combined code is the listing code for the London Stock exchange and has, for better or worse become a de facto best practice manual for business governance in the private, voluntary and public sectors. Based on a series of reports, themselves largely responses to problems identified during crises and scandals, the code is designed to prevent tyrannical bosses from running companies as their personal fiefdoms. So it sets up boards to be tough in their scrutiny and institutional investors to be active in their oversight. Companies don’t have to comply with its stipulations, but if they don’t they have to explain why they don’t (and explaining rather than complying is not necessarily consequence-free, as Stuart Rose of M&S has discovered).

But this is interesting in itself: how precisely will the code be introduced into statute? Presumably the ‘or explain’ bit will disappear and companies will simply have to comply. Also, this will lead, that I can see, to a far greater shakeup of Irish company law than the current bill envisages. Whereas the current bill doesn’t go as far as the British 2006 Companies Act in bringing directors’ duties into statute (see the British section on duties here and the proposed Irish section here), the Programme for Government proposals will go much much further, including stipulating that non-executive directors will have difference duties (in addition?) to those of executive directors.

So what to make of this? Well, I’m in a cynical mood so I’ll call this a political gesture that’ll never see the light of day.

I don’t for a minute expect that we’ll see legislation enacted along these lines: Ireland seems repeatedly to push itself to the edge of even slightly diverging from having a cut-price British corporate governance system and then draws back. This is what happened with the ill-fated Directors’ Compliance Statement,  which started life, in the Companies (Auditing and Accounting) Act 2003 as a version of the American SOX section 404. It never happened: having been introduced into law, the Compliance Statement was subject to a lobbying campaign from the Institute of Chartered Accountants in Ireland and others on the grounds that it would make doing business in Ireland too expensive, was bounced to the Company Law Review group by the minister, the CLRG asked – get this – IBEC and the ICAI how much they thought it would cost businesses and they said ‘ooh, loads,’ so it got watered down into essentially a statement of whether directors think they are doing enough to keep an eye on the company’s liabilities rather than a test of whether or not they are. When you hear anyone suggesting ramping up oversight vis-a-vis Irish businesses, this is the context you should place it in: well-organised and, er, well-connected business lobbies plus terror at the highly plausible idea that businesses might just pack up and go somewhere where regulatory costs are lower and political compliance is higher.

P.S. Alan McDonnell in the Sunday Business Post has an interesting piece on the combined code section in the Programme for Government but I get the feeling that, while he’s right (there’s no point in expecting enforcement of corporate governance along the combined codes lines without active institutional investors) I’m not sure that he’s hit on the most pertinent point.

We’re twelve hours into the collapse of the viaduct on the Dublin-Belfast line but nobody has yet stated the obvious. Isn’t this obviously a major step in a campaign to keep the Irish people patriotic? Next that damned motorway. It’s what Dev would have wanted.

OK, so apart from being glad that the Atlantic Ocean continues to expand, I do have one question about the healthcare reform ‘debate’ (if you could call it that) in the US. Why is the business community not lobbying like mad for universal state healthcare? I’m sure I’m missing something and would love to know what it is.

After all, it strikes me that, at least at the high end, American health insurance tends to be covered by American businesses, universities and the like. Why don’t they want to offload some of their costs to the state?

I assume that small businesses currently don’t provide healthcare insurance at all, so they are concerned at being taxed to provide a public plan, but why aren’t larger businesses lobbying in favour? Maybe American society never cottoned on to the flip side of Offe’s paradox: that welfare states are good for capitalism because they regulate societies through times of crisis.  But why aren’t did business never make the calculation to nationalise these particular costs?

Answers in a postcard-shaped  comments box please. I have a sneaking suspicion that a good answer would be longer than this question.

I suppose that this article in the Belfast Tele is getting in first where a lot of the week’s papers are going to follow. A good day for the FTSE and good results for the banks might mean the end of the banking crisis.

Not at all.

In the UK this is the end of the credit crunch wave of the banking crisis. The next wave, I’d guess at year’s end, will come when all those newly unemployed people run out of money and default on enormous credit card (also here), mortgage and sundry other debts. In other words, the financial banking crisis may be coming to a close, but the retail banking crisis is yet to kick in.

I’ve spent the last few months combining my time between reading critical theorists on finance and reading financial theorists on finance, both of which I find strangely entertaining and interesting. I have an empty empty life.

Anyway, reading Andrew Leyshon and Nigel Thrift’s ‘The Capitalisation of Almost Everything’ (published in Theory Culture & Society in 2007, but a pdf draft is here) I came across this very interesting point. Leyshon and Thrift are interested in countering arguments that financialised capitalism is pure speculation. Rather, it is connected to predictions about more or less definite income streams (from mortgages, rents, PFI contracts etc), all of which can be bundled up and sold on as what used to be thought of as low-risk bonds.

Part of the article is devoted to Northern Rock and its switch from building society to aggressive mortgage retailer. As with everyone else in the mortgage game in recent years, Northern Rocks’ business model was based on the debt-as-revenue model involving borrowing in the wholesale banking market in order to sell mortgages that could be repackaged and sold on as bonds. Anyway, this is where sponsorship of Newcastle United came in:

The change in the business model of the bank, from marketing for depositors to fund its mortgages, to marketing for investors to buy its securities, was symbolized by Northern Rock’s sponsorship of the English Premier League football club, Newcastle United, which advertises the bank’s logo on the chest of the team’s strip. This sponsorship was designed not to link the organization to the area in which both it and the football team are based, but rather to raise the profile of the bank’s brand in Asia – where Premier League football is keenly followed – because the financial markets of that region are where it sold a large proportion of its securitized mortgage bonds, which are based on the monthly repayments of UK home-owners.