Also from the same Treasury Committee report, this time on pp16-17 (emphasis added):

If investors are to assess properly the level of risk they are prepared to take, they need clear and impartial information about the companies in which they invest. Company audits should provide such material, but as we concluded in our Report on Banking Crisis: reforming corporate governance and pay in the City, the current audit process results in "tunnel vision", where the big picture that shareholders want to see is lost in a sea of detail and regulatory disclosures. The recent revelations about Lehman’s use of Repo 105 illustrates the extent to which audit reports can seemingly omit crucial information. We call for progress on our earlier recommendations, to ensure that audit reports are an effective tool for investors.

The Treasury Committee is complaining that the Lehmans audit report omitted information that investors might have found useful. While that may be true, don't you think that's a matter for the PCAOB, the body which writes auditing standards governing the audits of US-listed entities, rather than a UK committee of parliamentarians? Doesn't the Treasury Committee have enough to worry about without going all extra-territorial on us?

Filed under: Auditing, Politics with tags audit reports, lehman, pcaob, repo 105, treasury committee
16141 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fcurious-treasury-committee-comment-on-audit-reports%2FCurious+Treasury+Committee+comment+on+audit+reports2010-03-31+13%3A15%3A28Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1614

From the recently-published Treasury Committee report Too important to fail–too important to ignore, on page 13 (emphasis added):

A robust banking system must include a high level of protection for the retail depositor. Investors and wholesale depositors must price the risk, as the majority of consumers are in no position to undertake due diligence on the banks with which they hold deposits. It is noteworthy that audit reports are for investors rather than depositors. But an explicit provision of a guarantee on all deposits, without limit, is a step too far. There will be trade-offs even in deciding which limit is suitable, and whatever limit is chosen, there must be clarity about the limit of depositor protection. This will require constant consumer education and clear information within all financial institutions.

This basically says that Alistair Darling was wrong to guarantee all deposits. At the time, people were moving their money to the riskiest, highest interest rate accounts because they didn't perceive there to be any risk. When they looked like losing their money, they squealed. And when push came to shove, Darling buckled and underwrote their risk-taking.

In the future, these deposit rate tarts need to know that they can take bigger risks but it will be them, not the system (and therefore the rest of us) who will carry the financial downside.

Filed under: Current issues, Politics with tags alistair darling, financial services compensation scheme, pwned, treasury committee
16021 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Ftreasury-committee-bitchslaps-alistair-darling%2FTreasury+Committee+bitchslaps+Alistair+Darling2010-03-31+13%3A05%3A11Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1602

Following on from this morning's post, here's something from Accountancy Age on shareholders getting all the downside and none of the upside.

Northern Rock's former shareholders are not entitled to any compensation for their stake in the troubled bank, valuation experts from BDO have said.

Andrew Caldwell, valuations expert at the firm was told to treat the troubled bank as if it was not a going concern and already in administration in calculating how much the bank was worth after stripping out the government's £25bn rescue package.

So the government gets to deduct its rescue package, and there's nothing left for the shareholders. That's completely the opposite of "The upside belongs to shareholders. The down side is public."

Filed under: Current issues, Other blogs with tags banks, idiots, northern rock, pwned, richard murphy
1597No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fmore-shareholder-upside%2FMore+shareholder+upside2010-03-31+12%3A46%3A48Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1597

The ICAEW has published an update to its guide to private equity. Called, inspiringly, Private equity demystified – An explanatory guide, it aims to provide "an objective, up to date explanation of private equity, recognising that for public scrutiny to be effective it must be conducted on an informed basis."

The preface observes, rather forlornly, that

It remains the case that media coverage of private equity and some public commentary have frequently displayed a poor understanding of how private equity operates, yet these sources are frequently relied upon as fact. This guide provides an objective explanation of private equity, recognising that for public scrutiny to be effective it must be conducted on an informed basis.

I suspect that this won't do very much to improve the quality of media reporting on hedge funds and private equity. While the hedge fund industry now has a better profile, in the form of Hugh Hendry, media coverage seems compelled to descend into childish "they're rich so they must be bad" taunts. And although Poul Rasmussen was badly duffed up by Hendry on Newsnight and Boris Johnson has come out in support, the EU's temporary halt in increasing regulation on both sectors is likely to prove only temporary. This is ironic, seeing as neither hedge funds nor private equity had anything to do with the crisis. Such is politics.

Filed under: Capital markets, Institutes, Regulation with tags boris johnson, hedge funds, hugh hendry, icaew, newsnight, poul rasmussen, private equity
15871 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Feverything-you-always-wanted-to-know-about-private-equity-but-were-too-afraid-to-ask%2FEverything+you+always+wanted+to+know+about+private+equity+but+were+too+afraid+to+ask2010-03-31+12%3A29%3A33Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1587

Via ACCANews, we find the following gem in The Independent:

Andrew Haldane, the Bank's executive director for financial stability, said that taking into account the permanent damage done to the productive potential of nations across the world, as well as the immediate costs of supporting the banks and the recession, there is an output loss equivalent to between $60trn and $200trn for the world economy and between £1.8trn and £7.4trn for the UK.

He put the hidden cost to the taxpayer of the implicit support offered to the big UK banks at more than £50bn.

The crummy journalists at the Indie have found the screechiest possible headline to accompany this story. "Credit crisis cost the nation £7trn, says Bank of England," they exclaim. As the excerpt above makes it clear, this isn't what Haldane is saying at all.

He's claiming that the loss in economic output from where we are now to where the Bank of England thinks we would have been is somewhere between £1trn and £7trn. Because newspapers love to sensationalise, the Indie has picked the highest point of the range as representative of the range.

And nobody had to write a cheque for £7trn. This was an opportunity cost - something we never did because events got in our way. This isn't the same as having to hand over cash for something. For the cost to be real, you'd have to believe that the credit crunch unfairly tripped us up on the never-ending path to ever higher and greater consumption. I don't accept this at all. For me, the credit crunch was merely the event which triggered the correction to get our economy back on a more sustainable footing. I don't believe even the £1trn figure claimed by the Bank. This mean-reversion was always going to happen. It just happened when it did because of the credit crunch, so it's a fallacy to blame the credit crunch for the entire output gap.

Filed under: Economics, Other blogs with tags acca, andrew haldane, bank of england, deficit, independent
15801 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fthe-7trn-crisis%2FThe+%C2%A37trn+crisis%3F2010-03-31+12%3A02%3A34Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1580

The Chartered Institute of Taxation (CIOT) is calling for the planned restriction on pensions relief for 50% taxpayers to be abandoned.

I agree. While it may make some people, especially vindictive left-wingers, feel gooey inside to "get one over" the highest earners, there will be terrible costs associated with this short term, mean-spirited proposal.

Firstly, employers now have to grapple with fiendish levels of complexity just to work out what they're supposed to do. The government thought they were being terribly clever by withdrawing the personal allowance and introducing a 50% rate for highest earners, and must have applauded their ingenuity for keeping one step ahead of possible pensions-related tax avoidance schemes. Yet according to the CIOT, the government believes this will cost businesses £1bn in setup costs in the first year.

Even worse, senior managers at companies may decide to give up on pensions altogether, now that it no longer makes sense for them to be in the company's plan. This may be a further incentive to 'level down', or move to the government's stingy NEST proposals instead of existing (probably more generous) plans. NEST, unlike earlier government promises, now seems set to have high charges to accompany its tiny level of contributions. You would struggle to design a worse scheme to avert poverty in retirement.

Worst of all, there's simply no need for any change. The government introduced sweeping changes to pensions a few years back on what was called A Day. Among other changes, this introduced a lifetime limit, or the maximum amount that any individual can have within their personal pension pot. Amounts above this are subject to swingeing levels of tax. The lifetime limit acts as a natural ceiling on pensions-related tax avoidance. Once exceeded for an individual, the scheme simply won't work any more.

Sure, this would mean some individuals doing rather better than under relief-restriction. But given that the hidden costs of relief-restriction will land on ordinary workers with a vengeance, we must accept this as a price worth paying. Can we hope that the Conservatives, if they win, will take this up as part of a simplifying agenda?

Filed under: Politics, Taxation with tags a day, ciot, conservatives, lifetime limit, pensions, tax avoidance
15731 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fpensions-relief-restriction-a-terrible-idea%2FPensions+relief+restriction+a+terrible+idea2010-03-31+10%3A24%3A27Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1573

It's become commonplace, almost sloppily so, to claim that the banking crisis has privatised profits but socialised losses. Ritchie is one of those trundling out that point of view today.

The peoiple of Ireland are discovering, as have the people of Iceland before them, the reality of limited liability. The upside belongs to shareholders. The down side is public.

The upside belongs to shareholders? I suspect former shareholders of Northern Rock might want to challenge that. They saw the bank completely nationalised - they lost everything. The upside on Northern Rock, if any, now belongs to the public.

Shareholders in Lloyds Banking Group who bought in at 800p a share in 2002 probably don't feel that they benefited from the upside, even with dividends taken into account. Similarly with RBS. In both cases, their interests have been diluted by rights issues and, worse, the government is threatening to force them to make bad loans.

The upside in this sorry tale has been borne by those who overextended themselves and have not been forced to pay it back. Traditionally, they would have been forced to face the music. Now they've been bailed out and, with the currency devalued, have seen their debts reduced too.

With politicians' rhetoric about banks having to pay back every last penny of stimulus, it's unclear that the public will lose out either.

The biggest winners from the crisis are left-wing nutjobs who have seen their half-baked proposals for a new economy given an audience they simply don't deserve. Given that the root of the problem was bad asset allocation, how on earth can a Green New Deal, which will shovel taxpayers' money by the bucketload into ill-conceived, unprofitable ventures, possibly be the answer? We will all be the poorer for it.

Filed under: Current issues, Economics with tags banks, deficit, green new deal, idiots, lloyds banking group, nef, northern rock, richard murphy, royal bank of scotland
15583 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fwho-gained-from-the-crisis%2FWho+gained+from+the+crisis%3F2010-03-31+09%3A28%3A21Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1558

I know. I’m well aware of the whispering campaign against me from big business, vested interests in academia and more besides. The Old Boy network - or maybe the New Money network, likes to have things all its own way.

Ritchie thinks we're all being paid to get him.

Much to my disappointment, I'm currently aware of no such arrangement. Should any special interest group wish to pay me to do what I'm already clearly willing to do for nowt, please get in touch. I'll do it for whatever you pay Worstall.

Filed under: Entertainment with tags idiots, paranoia, richard murphy
15562 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fchristie-malry-for-hire%2FChristie+Malry+for+hire2010-03-31+08%3A49%3A26Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1556

Richard Murphy notes that the SEC has written to several financial services companies to enquire whether they were using transactions like Repo 105.

This is actually very bad news for Ritchie. His article on Repo 105, as you'll recall, argued that Lehmans was trying to undertake GAAP arbitrage between UK GAAP and US GAAP. So the fact that the SEC seems to believe it didn't fly under US GAAP on top of the FSA's comment that it didn't work under UK GAAP either is a comprehensive torpedoing of Ritchie's theory.

Better luck next time, Ritchie!

Filed under: Accounting, Other blogs with tags fail, fsa, idiots, lehman, pwned, repo 105, richard murphy, sec
15421 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fritchie-double-takes-repo-105%2FRitchie+double-takes+Repo+1052010-03-30+21%3A28%3A47Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1542

The ICAEW Tax Faculty takes a pop at the proposals to restrict the tax benefit on childcare vouchers to the basic rate tax.

At the heart of their complaint is their view that it's all just too complicated. They have suggested simpler solutions to achieve the stated objective of targeting these reliefs away from higher rate taxpayers.

This isn't a nerdy, technical gripe. This is a very serious issue, and one that sadly seems to need to be made in responses to almost every HMRC consultation. HMRC often transcribes tax policy into legislation in a baffling and unnecessarily complex way. The burden of this falls to employers and ordinary people to sort out.

Take tax credits. The tax credits system as originally drafted required individuals to inform HMRC every time there was a change in their income. They had mere days to let HMRC know. Which daft civil servant thought it would be a good idea to force our nation's poorest families, many of whom are totally unequipped to meet this onerous standard, to file what is - in effect - a tax return and maintain proper financial records to ensure compliance? It's madness.

The childcare vouchers problem is similar. There is a much simpler way to implement the policy. Yet HMRC has stumbled into a much more complex and onerous formulation. Does this reflect a lack of commercial experience among HMRC legal teams? Are they overworked or simply unsympathetic to the consequences of their legislation?

Whatever the cause, it's not good enough. We accept that the political process may deliver outcomes with which we do not personally agree. But we will not tolerate bad tax law as a result of shoddy legislative processes.

Filed under: Regulation, Taxation with tags childcare vouchers, complexity, hmrc, icaew, red tape, tax credits
15332 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F03%2Fchildcare-vouchers-bad-tax-law%2FChildcare+vouchers+-+bad+tax+law2010-03-30+21%3A00%3A17Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D1533