Friday 23 January 2009

Readers' letters of the day

From The FT:

Sir, It is indeed a paradox that the Church feels the need for professional investment advice (Letters, January 21), since this is the one area where even an atheist might well believe that decisions are best left in the hands of God.

Investment at random for a large fund offers full diversification, has very low costs and protects against the sort of expert knowledge and skill which led professionals to invest with Bernard Madoff.

M.R. Weale, London, UK


And, from The Metro:

I believe the bonuses being paid to Northern Rock staff are a good idea. They are necessary to recruit, retain and motivate the right calibre of staff to ensure that NR is profitable and can therefore repay the loans made by taxpayers.

PS I'm not a NR employee.

J Fisher, Hertfordshire, UK.


A Times article puts this in perspective - gross bonuses approx. £9 million, post-tax cost approx £5 million; "The payments were being made because the bank had more than met its target of repaying 25 per cent of the £26.9 billion lent to it last year by the Government, a Rock spokeswoman said. In fact, £15.4 billion had been repaid." Paying out £5 million in return for speeding up repayments to the tune of £9 billion seems like a good deal to me. I suppose it would be nice if there were some sort of cap so that the bonuses do not unduly reward the senior people who created the mess in the first place, but hey.

13 comments:

Anonymous said...

OK. Now, when do I get a bonus for saving their fucking jobs in the first place?

Mark Wadsworth said...

TA, the alternative was to let NR and so on go bankrupt and have 'administrators' charge tens or hundreds of millions for sorting it out rather badly.

Our bonus, as taxpayers, is that NR have 'overpaid' by £9 billion so far - the bonuses are barely 0.05% of that.

Anonymous said...

MW

Since the government would have been the major creditor in an orderly administration/winding-up of NR (having guaranteed the depositors and thus standing in their place) there was no need to appoint a liquidator on the usual excessive fee (of, what, 10% of assets recovered and 5% of assets distributed). In principle, a winding-up was never going to be a difficult job.

The assets could have been sold on day 1 to another bank and the depositors repaid on day 2 with the government making up the difference (if necessary). The staff would have been laid off on day 3 and the directors would have been served with writs on day 4. A slight exaggeration no doubt but paying staff a bonus to do what they're already paid to do is ridiculous. And if they're not paid a bonus, where do they go? To all of the other employers in Newcastle desperate to take them on? Don't make me laugh.

Mark Wadsworth said...

U, that's more or less what I recommended back in September 2007. It still needs staff to administer the routine stuff, though - whether they work for NR or whether the business is transferred lock, stock and barrel to another bank is neither here nor there.

Anonymous said...

Mark,

But couldn't you say that about Enron, Woolworths and others?

I'm less concerned with the cost, than that creative destruction of businesses happens and that the good grow and survive.

Woolworths, Crock or my little software business, the rules should apply to all. If I fuck up and train myself in the wrong technology for next year, the government doesn't offer to keep the VAT man paid, or to pay for new courses - I'm expected to just deal with it.

Mark Wadsworth said...

TA, of course.

I have always said the government should design a tax system so that as few businesses as possible fail (i.e. get rid of VAT and Employer's NI) BUT if they do fail, then no business should ever be bailed out. I am comfortable with the idea of welfare payments to individuals but not to businesses.

Lola said...

The first letter about the church is intriguing.

It is true that actively managed portfolios only very very occasionally outperform the index, or rather give a greater return over time that the whole market would. Whereas a passive fund seeking to simply capture market rates of return is perfectly adequate, always cheaper and over time almost always gives a better return than an actively managed fund.

Now, clearly it is Wrong for the church to support Mammon. It really should not be helping bankers and money managers speculate on the future and the futures of others. But creating wealth is honourable, as the Good Samaritan teaches us. Let us assume that the GS created some wealth - rather than stole it. In other words wealth creation helps all of us, whoever does it. But to create wealth we needs pools of free capital available to entrepreneurs to invest (notice that - invest, not speculate) on their endeavours. So owning equities (not bonds as they are debt) should be seen as an ethical activity in itself. Hence the C of E could well profit itself by investing its wealth (a lot of which it did steal!!) in passive funds. This would do several things. It provides capital to drive more wealth creation which is the surest way to reduce poverty. The wealth is not handled by speculators and ne'er do wells like madoff, it will perform better over time than any active manager and as passive is cheap it will do all this a low cost.

Job done.

Anonymous said...

MW

And you were right in September 2007. But even in this benighted industry there are such things as economies of scale, are there not? Even so, it's the bonuses that stick in the craw. NR staff are lucky to have a job and lucky that, instead of a bonus, their wages aren't cut by at least 10% (which, incidentally, should happen over the whole public sector).

Mark Wadsworth said...

U, of course! They can sack the whole mortgage selling team and the senior management, but they still need people to do the routine stuff.

Anonymous said...

Lola

"So owning equities (not bonds as they are debt) should be seen as an ethical activity in itself"

How very islamic!

But, seriously, what is investment but "speculation"? I'm not talking speculation which is akin to gambling I grant you, but spending money in the (presumably) well-founded belief that the enterprise in which you invest will return more than you put in. There's a spectrum of acceptability here and, frankly, out-and-out speculators (at the non CofE end) provide liquidity to the market - if nothing else. Just because Madoff is a crook (or so it is alleged) doesn't mean that "speculation" might not be just as honourable and moral a way to earn a living as dressing up in funny clothes and making dubious statements of debateable "truth" every Sunday.

Mark Wadsworth said...

L, amen to that. But you have to distinguish between actually "investing in businesses" which is subscribing for new shares, and just buying shares second hand off somebody else.

Lola said...

Umbongo. Speculationa nd investing are very different things. I personally hold the economists view that a speculator is a valuable person who takes the slack out of markets, but he tends to deal in the win/lose arena.

An investor is someone who will take a longer view of his capital. He does not seek to get out more than he puts in. He seeks a good return on his investment and the best confidence he can have as to security of capital. The return he seeks is the one with which he is comfortable and which rewards him with the appropriate premium over the risk free return, which in normal times in with sound government is government bonds. If he takes no active part in running the money he can buy the market or it's constituent markets (small companies stocks, value companies stocks etc etc) and seek merely to capture the market rates of return.

MW. No, you don't. All equity investment is investment in business, IPO or not. It is investment.

The real beauty of this is that it does for Marx. Marx wanted the people to own the means of production. Well, universal investment through collective investment schemes does just that. As to Faiths, they can and should keep the markets outside their temples, but they can empower their congregations by recycling their wealth back to business as investment.

Be a mensch. Buy equities.

Anonymous said...

Ah, the irony of a bank nationalised by socialists paying bonues to executives who, in their reposession policy, were more ruthless than the other city "fat cats" the Left despises.