Martin Vander Weyer’s Any Other Business
No sooner do I confess (6 March) to having dabbled in the dark art of off-balance-sheet finance, than along comes an official report into the 2008 collapse of Lehman Brothers, the Wall Street firm led by the monstrous Dick Fuld, that reveals the mother of all financial disappearing tricks. This was a series of transactions codenamed ‘Repo 105’, under the advice of the eminent City law firm Linklaters and without demur from Lehman’s auditors Ernst & Young, designed to exploit a disparity between US and UK law that allowed $50 billion of Lehman liabilities to pretend they weren’t there.
The unfolding Lehman saga, as told by the US court-appointed examiner Anton Valukas, confirms my view that some of the firms exposed by the banking crisis were not just ill-managed — they were not real businesses at all. By ‘real businesses’, I mean enterprises that are disciplined, law-abiding and fundamentally concerned with the task of providing, for a competitive price, a product or service that does what it says on the tin; I mean businesses that are tough when they need to be but nurture their customer relationships, treat staff decently, and thrive on concepts such as ‘continuous improvement’ and ‘shareholder value’. I don’t mean businesses that habitually disguise or miscalculate the risks that they take, while designing their accounting systems in such a way as to justify maximum short-term rewards for executives at the expense of shareholders, clients, counterparties and the reputation of their market as a whole.
The first failed non-business fitting this description was Bear Stearns, a firm dominated by foul-mouthed gamblers who hung a sign saying ‘Let’s make nothing but money’ over their trading floor and seemed neither to know nor care how much trouble Bear was in when the crunch came. William D. Cohan’s excellent House of Cards tells their story, and investigative authors will now compete to turn Mr Valukas’s 2,200-page report into a similar bestseller. ‘Repo 105’ offers itself as an eye-catching title — and if it sounds a bit like an air-crash disaster movie, you can instantly see where that metaphor might go: arrogant, poker-playing pilots who fail to notice the storm ahead, incompetent bureaucrats in the control tower, and an autopilot (as in my all-time favourite of the genre, Airplane!) that turns out to be an inflatable dummy.
Old-school bank manager
Sir Brian Pitman, who died last week, ran a real business by anyone’s definition, the Lloyds Bank that he shaped into the most formidable competitor on the British high street. When I called on him in his heyday in his panelled Lombard Street office, I found a big, bald, no-nonsense bank manager of the old school, sitting in a old-fashioned wing chair — and what struck me was his plainness of language, delivered with a trace of a native Gloucestershire accent. He said simple things like, ‘I’d rather be a leader in a few markets than a minor participant in many.’ His strategy of doing domestic banking well, while shunning the glamour of owning an investment bank or making acquisitions abroad, was deeply unfashionable at the time. He pioneered the concept of ‘constructive shrinkage’, which meant genuinely reducing the size of his balance sheet, rather than faking it like Lehmans. But it all paid off handsomely in terms of shareholder value, which was the essential focus of every decision he took in 15 years as chief executive and four more as chairman.
Readers may recall an article here in October 2008 by Neil Collins, titled ‘Farewell to the bank that did Dull’ — lamenting the demise, consequent upon the disastrous forced merger with HBOS, of the mighty flow of Lloyds’ dividends that had been Pitman’s legacy. But it was not dullness of vision that drove Pitman: his view that ‘global’ banking was not worth the candle was formed by painful experience of Latin American lending in the 1970s, from which Lloyds took a decade to recover. And his concentration on shareholder value was adopted from outside banking altogether, since few of his rivals applied any such discipline: it came from studying the performance of consumer-products giants such as Coca-Cola and Kellogg. Brian Pitman may not have been the kindliest of old-school bank managers — he was as brutal with delinquent customers as he was with underachieving managers — but clarity and straightness of purpose, qualities too often missing in his profession today, made him a titan.
Local disgrace
My Council Tax statement for the coming year has just arrived, so yours probably has too. In North Yorkshire, the overall annual increase is a modest-sounding 2.4 per cent. But on truffling through my filing cabinet and exercising my calculator, I discover that since I bought my house 20 years ago, the amount demanded, adjusted for inflation, has almost quadrupled. Since Labour came to power, the real increase is still more than 60 per cent, and within that, my contribution to the county police authority has multiplied two and a half times. Why? Services are no better in any respect than they were 20 years ago, and the police presence has shrunk to the point at which my best chance of spotting a North Yorkshire constable is in an ancient episode of Heartbeat on ITV3. This 20-year explosion of unproductive, unexplained local taxes is a disgrace of modern government to match any disgrace of the bankers.
Piste report
I’ve just been to Méribel in the French Alps to watch some of my younger, fitter friends take part in the ‘Coeur Blanc’, a sponsored challenge which involves taking all 52 lifts in the resort, and skiing roughly the equiv-alent of two descents of Everest, within a single day. This year, 60 participants raised £250,000 for the Melanoma Focus charity: they included teams from UBS, Rothschilds, the law firm Freshfields and the accountants PricewaterhouseCooper, plus a selection of other City professionals. Naturally, such a gathering of financial muscle led to concern about issues of transparency and compliance. Would the lawyers and accountants devise loopholes to disguise underperformance? Would the bankers report themselves well ahead at the halfway stage, only to miscalculate wildly and ski off a precipice? But everyone finished without mishap, and credit-card-sized digital ski-passes kept a precise record of each team’s movements, making cheating impossible. It’s a pity they didn’t have a system like that on Lehman Brothers’ trading floor.
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