Lotteries are weird. And lottery winners are weird (at least this one is). Lots of us pay our money religiously into the scheme every week. The government takes a big share as tax. 'Good causes' takes a big share. The organisers take a big share. Retailers even get a bit (see here for the full breakdown of the UK's National Lottery). What's left is distributed, rather unevenly, to some lucky winners.

Although it could be us, it almost always isn't. Yet, according to the Telegraph, we're delighted when someone near us wins, as if geography has anything at all to do with how winnings are distributed.

Compare our joy over the Cirencester couple to our extreme anger over bank bonuses. There's a severe outbreak of piety going on in the press, as bank bosses fall over themselves to forego bonuses or give them to charity. Even worse, those scoundrels in RBS's investment banking division, that dared to generate a £5.7bn profit, will be taking home bonuses this year. It's not fair!

We have this rabid reaction to bank bonuses, which people seem to interpret as ill-gotten and merely skimmed off the contributions of other people. Never mind that Stephen Hester, boss of RBS, seems to wish he could have retained many of his star performers who have left in the last year, because "they would have increased our profits by about a billion pounds."

The lottery, on the other hand, truly is ill-gotten and skimmed off the contributions of other people. Why tolerate that and not bonuses?

Filed under: Current issues, Politics with tags banks, bonuses, lottery, stephen hester, unfair
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In this curious, emotive article, Patrick Collinson argues that the cash-poor have to pay more for their mortgages, compounding their cash difficulties.

it's easier to get a 90% mortgage today than at any time since the credit crunch began. And here's the bad news: interest rates (from 4.49%) on 90% loans are steep, and if it's a 95% loan you want, the rate can spiral to 7%, equal to 14 times the Bank of England base rate.

Er, isn't that exactly what lenders should be doing... charging more for higher-risk borrowers and less for lower-risk borrowers?

Filed under: Economics, Other blogs with tags guardian, idiots, mortgages, patrick collinson
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Oh dear. Over at CiF, Gordon Brown sees fit to lecture us all on the immorality of markets, largely because Adam Smith, patron saint of free markets, like the duchess and Gordon Brown himself, hails from Kirkcaldy. Here's a little extract:

As we have discovered to our cost, without values to guide them, free markets reduce all relationships to transactions, all motivations to self-interest. So, unbridled and untrammelled, they become the enemy of the good society. The truth is that the virtues that make society flourish – hard work, taking responsibility, being honest, enterprising and fair – come not from market forces but from our hearts.

That's all pretty unsurprising, because free markets aren't trying to deliver morality. They're merely the incredibly simple idea that a willing buyer and a willing seller should be allowed to exchange goods and services for other goods and services (or money).

And it's far from obvious that we do actually have free markets anyway, at least in the conceptual sense. There are things that are simply banned by the state. For example purchasing sex from a prostitute or selling a kidney^*. There are things that the state only lets certain people do, for example flying planes or signing audit reports. There are things that the state regulates, such as working with children or when shops are allowed to open. Then there's the minimum wage, which sets a floor price for certain types of exchange transaction, ensuring that certain exchanges never happen at all. And, as if that wasn't bad enough, there's tax, which skews every single transaction. As this article by Jamie Whyte sets out nicely, I might be prepared to pay someone £10 an hour to work for me; he might be prepared to work for anything more than £9 an hour; but because tax reduces my £10 an hour to below the minimum he is prepared to accept, he will never be employed.

The state is always more powerful than the market, because the state can intervene when voters tell politicians they want them to 'do something'. So if the outcomes aren't to our liking, we get government to fix them. And we do bring morality to the market at times; this is why some people buy Fairtrade products, or boycott Nestle's chocolate (I guess some people still do that?). The ICAEW's excellent Sustainability: the role of accountants outlines the main mechanisms that government can use to bring about changes in market outcomes.

Despite there not really being free markets, somehow 'the free market' gets blamed for all our ills. Apparently 'it' caused the financial crisis. At risk of having a bit of a Thatcher moment here, this is bonkers. How can willing buyers and willing sellers coming together in a (fairly) free market cause a credit crisis? "It's the market, stupid!" seems to be the cop-out catchphrase for politicians and individuals wishing to shirk their responsibility for causing the crisis.

* In this post I'm not advocating body or body-part selling as career options. I wish to be neither buyer or seller in transactions involving these items. But it's a further step to advocate banning buying and/or selling them completely.

Filed under: Ethics, Politics with tags adam smith, free markets, freetrade, gordon brown, guardian, icaew, margaret thatcher, minimum wage, nestle, prostitution
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The Times does a slightly better job analysing Lloyds Banking Group's results than the Beeb did on RBS. The article acknowledges the difficulty in reconciling the government's desire for banks to lend more into the economy and management's duty to run a bank responsibly. Lloyds is erring on the side of responsibility, which will clearly upset the government. But Truett Tate is right - where people and companies have borrowed too much, we should be forcing them to deleverage, not keeping them afloat come what may.

Elsewhere, the report notes an oddity in the results which, I'm afraid, don't paint accounting in a good light. Lloyds made an accounting gain of £6.1 billion on its own debt, a transaction that halved its reported debt. It's worth dwelling on this a while, because it's somewhat arcane. A bank's issued debt is on its own balance sheet as a creditor (i.e. things owed to others). Debt can be listed just like shares can. Where the market deems that listed debt should be downgraded (i.e. they think it's now worth less than before) and the issuing bank (in this case Lloyds) has opted to show its debt at fair value, the market's loss becomes Lloyds's gain. Yes, embarrassing but true - accounting standards sanction a company's poor performance translating into a gain in its results. Astonishing, really.

There's a further oddity too. In relation to RBS, I had said in an earlier post that goodwill is almost always positive. This is because usually acquiring companies have to pay more than the fair value of the recognisable assets they acquire. Due to the exceptional circumstances in which Lloyds acquired HBOS, Lloyds actually paid less. This meant it ended up with a negative figure for goodwill - i.e. goodwill that is actually a credit on the balance sheet rather than a debit. During the year, HBOS's portfolio performed dismally and many of their commercial loans had to be impaired. This is a big part of Lloyds's eyewatering £24 billion of impairments. Because these were out of the HBOS portfolio, Lloyds has reassessed the figure it recognised as negative goodwill on acquisition, and there's a big credit offsetting some of the impairment charge in the accounts. This isn't easy to follow and makes the results tricky to digest.

Finally, the article notes that Lloyds doesn't have an investment bank. Tim Worstall observes that RBS does (and a profitable one it is too). One suggested cure for our banking ills is to separate investment ('casino') banking from the more stodgy retail/commercial stuff. Thanks to HBOS's idiotic bet on the one-way nature of UK property valuations, we can see that that solution isn't the panacea it's made out to be.

Filed under: Current issues with tags banks, goodwill, lloyds banking group, royal bank of scotland, tim worstall, times
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From the uncorrected evidence of the Treasury Select Committee from the beginning of February. Steve Priddy is the ACCA's technical director.

Q3 Chairman: I have in front of me "Helen Brand, CEO of ACA", and now Dr Steve Priddy turns up. Why has she been transformed to you? You are the technical man. Are you here to obfuscate?

Dr Priddy: I am the Technical Director here.

Q4 Chairman: Why is she not here?

Dr Priddy: I do not know. It is her diary.

Chairman: It is not a good way to treat the Select Committee, okay, so take it back to her, and I will look for a nice letter from her. Thank you.

You can watch the whole video if you want to see it for yourself.

Priceless.

Filed under: Entertainment, Politics with tags acca, fail, funny, john mcfall, pwned, steve priddy, treasury committee
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Right here, Richard Murphy has a funny turn and bares his soul. It's a very rich post, and it has some good stuff in it. However for the time being I'll call him on one thing.

He admits he has only limited training in economics and so isn't much of an economist. He then asks us to think of him perhaps as a moral philosopher. As someone who does have a fair amount of training in philosophy, I can tell you - dear reader - that he's even less of a philosopher.

There's a fatal flaw elsewhere in his post where he states it "is obviously not true" that human beings are rational. Yet this doesn't stop Richard Murphy himself from undertaking a priori logic.

It's the hypocrisy that upsets me the most - he believes that we are all frail, useless, weak human beings, yet Richard is somehow immune from his own medicine.

Filed under: Other blogs with tags philosophy, richard murphy
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Via Accountancy Age, the news that companies feel they get better client service where their auditor is not from the Big 4 compared to companies with a Big 4 auditor. There are more details here.

One does wonder, though, why companies subject themselves to lower client service when they could just as easily hire another auditor. The tier of firms just below the Big 4 have geographical reach that's good enough to service many global companies. Some investors have even openly supported this view. So why don't companies make the switch?

Could it be that they're actually not that upset, and just used the survey as an excuse to air their complaints?

Filed under: Auditing, Corporate governance, Current issues with tags accountancy age, big 4, competition and choice, hermes
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Richard trots out his five Rs of tax in an interesting thread where he's sparring with Worstall. These are supposed to spell out the objectives of taxation, and are:

1) Raise revenue;
2) Reprice goods and services in pursuit of social objectives (tobacco, alcohol, carbon emissions etc.);
3) Redistribute income and wealth;
4) Raise representation within the democratic process because tax is the consideration in the social contract between those governed and the government; and to facilitate;
5) Reorganise the economy through fiscal policy.

The first three are pretty uncontroversial, even if you disagree with them for ideological reasons. Yes, the State needs money (#1). Yes, the State sometimes needs to reprice things where market outcomes are inconsistent with what society is prepared to tolerate (#2). Yes, the State will, to some extent, seek to redistribute money from rich to poor and the tax system is a good a way as any to do it (#3). You can argue as to the relative weighting, but these would definitely seem to be three of the axes of the debate.

I'm afraid the fourth one is where it starts to get silly. Tax is not part of the representative process. Tax doesn't buy taxpayers power. States have all the power, and they fairly often use it incredibly poorly. Also, lefty types tend to favour the rights of net tax recipients over net tax payers. I'd like for the fourth R to be right, but it's simply untrue in today's society. We just don't respect taxpayers any more. We've gone way beyond "no taxation without representation" and we now give representation to lots of non-taxpayers who simply aren't bound by the sort of social contract that's envisaged.

And the fifth one is Richard trying to generate some immortality for himself. As far as I can tell, it doesn't add anything that's not already in the first three. And I doubt whether it's even true. When we were obviously heading into a crash from 2005 onwards, did the Government reorganise the economy? Just because it also happens to begin with R, it doesn't mean it's right. Richard is living proof of that, for sure.

I'm with the academic view here, in that there are three goals of taxation - the first three Rs above. Any more simply isn't supported by the evidence.

Filed under: Other blogs, Taxation with tags reuven avi-yonah, richard murphy, tax objectives
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BBC news reports on Royal Bank of Scotland's results this morning as follows:

Royal Bank of Scotland (RBS) has announced losses for 2009 of £3.6bn, after struggling with billions of pounds of bad loans.

The figure is lower than the £5bn loss many experts were expecting and is well below the £24bn it lost in 2008.

The UK taxpayer owns 84% of RBS after the government bailed out the bank at the end of 2008.

RBS is the second major UK bank to report 2009 results, after Barclays announced record profits of £11.6bn.

This is a pretty fat-headed commentary from the Beeb here. There are two kinds of loss at play here, which we'll call cashlike losses and non-cashlike losses. Needless to say, non-cashlike losses are much less 'serious' than cashlike losses.

Non-cashlike losses occur when a business has to write down an asset that it had bought with something other than cash. Usually these occur when a business buys another business with its own shares. Without getting too technical accountingwise, the acquiring business values everything it's paying over (usually a big load of its own highly-valued shares) and everything it can recognise in the acquired company. The difference between the two is called 'goodwill' and is stuck on the group balance sheet of the acquiring company. Why do we always get a balancing number? Because there are usually things that accounting standards don't let you recognise as an asset but which have value, such as acquired research projects, you usually get goodwill in a business purchase, and it's usually a positive number. And fairly often a big one.

Back to RBS. RBS, you'll recall, paid a vast amount for ABN Amro thanks to Sir Fred's frolic. Last year's loss was swelled by a writedown (we call it an 'impairment') of goodwill of £16 billion. It's bad, for sure, but it's not that bad. A lot of it is market downturn, so RBS has finally had to face up to Sir Fred overpaying for ABN Amro, but it did so with its own shares, which were inflated at the time.

The equivalent goodwill impairment figure for 2009 was a mere £363 million. The rest is due to cashlike losses. These are the bad guys. These are assets that the business expected to turn into cash but it has had to devalue. For example, loans that the bank has made to customers or businesses but which will now not be repaid. In 2008, RBS impaired £7.4 billion of loans. Yet in 2009, we learn that RBS impaired nearly £14 billion of loans - almost twice as bad.

The bank did substantially better on its trading activities - £3.8 billion of income compared to a loss of nearly £9 billion in 2008.

But to report all this as "a £3.6bn loss is better than a £24bn loss" is just plain silly.

Filed under: Accounting 101, Current issues with tags banks, bbc, goodwill, impairment, royal bank of scotland
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Richard Murphy tells us gleefully that HSBC retreats on chief’s pay award. He's delighted that HSBC has decided not to increase its chief executive's pay by a third.

HSBC didn't take a penny of stimulus money. So, what it pays its staff is its business, not Murphy's. While one could argue (very weakly, in my view) that HSBC has benefited from the stabilisation afforded by the stimulus, I'm sure a well-run bank like HSBC would rather have had no boom and bust, just like we were promised by Gordon Brown.

Also, let's not forget that wages are taxed more highly than corporate profits. Accordingly the UK will lose tax as a result of this change of heart. Nice one, Richard.

Filed under: Corporate governance, Economics, Taxation with tags banks, deficit, hsbc, idiots, richard murphy
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