MoneyWeek Roundup: Don't pity Bob Diamond
James McKeigue Jul 07, 2012
So Bob Diamond finally went. On Tuesday, the Barclays boss stepped down as public anger grew over the bank’s role in manipulating the key Libor interest rate. Diamond had managed to survive previous scandals, such as the mis-selling of insurance, but this was one gaffe too far on his watch.
Some industry figures have claimed that the public reaction is exaggerated. On Thursday Merryn Somerset Webb disagreed. “It doesn’t make sense to blame one man for everything, but as the CEO of Barclays he has been responsible for a great deal.
“It was heavily involved in the PPI scam. It recently had to pay a huge amount to HMRC for its crummy tax avoidance scheme. Like the other high street banks it provides a pretty awful customer experience riddled with inappropriate cross selling and thievingly low interest rates.” And now there is the matter of its role in the Libor fiasco.
That would be bad enough for any company, says Merryn, but you also have to consider that Barclays gets a lot of help from the public purse.
“It is one of the largest private sector employers the UK (it employs 140,000-odd people) and so it benefits not only from the implicit subsidy that comes simply from being a big bank with the right to create money, but also from all the implicit subsidies of our welfare state.” So “the media and the public have every right to criticise it – and those responsible for it”.
Besides even when you judge Diamond on his no-doubt preferred financial criteria – the ability to make money for his shareholders – he also falls short.
“If you’d invested a pound in the FTSE in 2005 (when Diamond joined the board) and hung on to your dividends you’d now have £1.08, notes a story in today’s Times. If you’d invested it in HSBC you’d have 78p. If you’d invested it in Barclays you’d have 29p. Which is rubbish, really. In the same time period, Diamond has been paid £119m.”
But perhaps his biggest failing has been his inability to read the public mood, says Merryn. “His institution has public elements to it and it is somewhat in debt to the public (those low interest rates that are rebuilding bank balance sheets aren’t doing much for ours). But he has catastrophically failed to judge or perhaps even to care about the public mood.”
So he thoroughly deserves the “hounding”. It might not be nice, but in a crisis like this “you need revulsion before you can get change”.
The post sparked a stream of comments.
There were two main types. One, typified by ‘crazy tony’, disagreed with Merryn and the public reaction. “The media have been hysterical over this. The BBC and Daily Mail coverage has been completely over the top. Bob Diamond would not have a problem if (a) he did not have a comedy name and (b) he was not a paid so much. (c) he had not been brave enough to "fess" up first over LIBOR irregularities.”
But ‘Shinsei1967’ disagreed and couldn’t understand why Jim Mellon and other investors were defending Diamond. “I can't imagine any other sector or businessman that had destroyed shareholder capital (and being paid so much in the process) to such an extent as Barclays being defended by him.”
There were many more comments than can be squeezed in here, so if you haven’t had your say yet, do it here.
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QE is no quick fix for Britain
The other big financial story of the week was the fact that China, the eurozone and Britain all combined to loosen monetary policy on Thursday. Head of the European Central Bank, Mario Draghi, denied that it was a coordinated action, though with the moves coming within an hour of each other it was one heck of a coincidence.
Britain’s decision to create £50bn of liquidity via quantitative easing, takes the total to £375bn. But on Thursday my colleague Phil Oakley explained why even that might not be enough.
The trouble with QE, says Phil, is that “it’s just giving an easy profit opportunity to overstretched banks while destroying the incomes of pensioners by keeping bond yields artificially low”. But the signs are that “the Bank of England will probably stick with this strategy… Inflation is the easiest way out as far as our politicians and policymakers are concerned”. The trouble is “to get the economy out of its debt problem will need money printing on an unprecedented scale. And there’s a strong risk that this could destroy the value of the pound in our pockets”.
What Britain really needs, says Phil, is first to cut its public spending. Then it needs a strong private sector led recovery with plenty of investment in productive assets. Unfortunately that looks unlikely to happen.
“So the Bank will try to pump money into the economy. But so much money will have to be printed that it will light the blue touch paper on inflation. Once rooted in the mindset of consumers, they will spend money more quickly to avoid price rises. This may solve the debt problem, but it would destroy the currency as well. The bond market would probably crack and Pandora’s box will have been well and truly opened.”
So his advice is to look for inflation hedges and he gives some good tips - click on the link above if you haven’t read them already.
My colleague John Stepek outlines some other ideas for protecting your wealth from a slide in sterling in this week’s MoneyWeek magazine cover story. If you're not already a subscriber, get your first three copies free here.
The ECB will start printing soon
Meanwhile, on Thursday, Matthew Partridge analysed the European Central Bank’s decision to cut interest rates to 0.75%, their lowest-ever level.
“The idea here is that this will encourage banks to lend”, says Matthew. “Analysts – and the markets – were sceptical. Spanish bond yields shot up again, and markets fell, undoing a big chunk of the gains seen since the summit-inspired rally.
“And little wonder. After years of inaction following the credit crisis, Europe’s banks remain the most bankrupt in the world. If banks in the UK and the US are still having trouble making loans, you can forget about their Eurozone peers suddenly pumping out cash.
“In short, this isn’t going to work. Sooner or later, if it doesn’t want to see the eurozone collapse entirely, the ECB is going to be pushed to follow the Bank of England and the Federal Reserve into printing money.”
And a bout of serious money printing is going to weaken the euro further, which is good news for some quality European manufacturers, says Matthew. He’s found one firm in particular which should benefit from a weaker single currency.
Lead indicators for Britain's economy
How to bargain hunt in Europe
Matthew’s not the only one who has been bargain hunting in Europe. For True Value newsletter writer, Simon Caufield, the crisis is a natural place to start looking for undervalued firms.
Investors should be careful when looking for true value, warns Simon. Just because something is cheap doesn’t make it a buy. For example, Simon has noticed that stock markets in Italy, Spain and France appear to be undervalued by 50%, 50% and 20% respectively.
“But there was one problem. These valuations were based on a cyclically adjusted price earnings ratio (CAPE). If you remember, CAPE is calculated from current share prices and average earnings over the last ten years, adjusted for inflation. The trouble is that it looks like bank shares may be causing CAPE to exaggerate the opportunity. Consider Italy, for example, and UniCredit, its largest bank. Its share price has crashed 94% since its 2007 high. Yet it still accounts for 8.5% of the FTSE MIB Index.”
“I’ve always considered banks uninvestable because outside analysts can never know the true value of all the complex assets that banks hold on their balance sheets. Don’t get me wrong; you might make a fortune buying beaten-down banks. But you could easily lose everything if they are nationalised because investors won’t support the rights issues needed to recapitalise them. That's why I can't recommend bank shares. And I can't recommend buying the indexes either. Financial stocks make up such a large part of European stock markets. In Italy, for example, it's nearly 30%. If you bought the Spanish, Italian or Greek stock market indexes because they look cheap, you'd be taking a big bet on the banks.”
And what happens if you strip out the banks? Simon used his new stock-screening tool to do just that and found that “shares that show up as cheap are mainly either small companies or heavily indebted, or both. Most quality companies with sound balance sheets, while not expensive, are not huge bargains either”.
Fortunately Simon has found another way to take advantage of the crisis. An investment trust owning high-quality European companies trading at a discount of to net asset value of 25%. I’m not going to give away the tip here – it would hardly fair on his subscribers. However, if you are interested in trying out the True Value newsletter, it’s currently available on a £1 trial. See here for details
Back to basics
We’ve received a lot of feedback saying that many of you want a simple newsletter that focuses on the investment basics that you need to start taking control of your money. An idiot’s guide to investing if you will. Well, we’ve listened and decided to launch just that. Find out more about this free email service here.
Why all the fuss about Target 2?
And before I go, as always, I would like to point you in the direction of MoneyWeek deputy editor Tim Bennett’s video tutorials. Tim’s down-to-earth explanations and trusty whiteboard have become something of a cult hit on YouTube, attracting tens of thousands of visits.
This week he uses his stick men to explain ‘Target 2’ – the payments system at the heart of the European project. As Tim notes, many mainstream commentators are panicking about the huge German tab being racked up by the peripheral states as they scramble for cash. Find out here why Tim thinks they should all calm down.
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Have a great weekend!
• Merryn Somerset Webb
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• Tim Bennett
• James McKeigue
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