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Peston Picks is moving
My blog is dead. Long live the new blog. Or to put it another way, my page - and those of other BBC bloggers - is having a makeover. So if you don't want to read on, and you simply want to read my latest post, click here.
The reason for the change is to bring together more of my output in one place. So on the new page, you'll find many of my TV and radio pieces, and (soon) my tweets.
If I go mad and decide to do other social media, that'll be there too.
Fingers crossed that you like what you see. I can't hope that all of you will love all the changes. And in particular, I am sure some of you will be frustrated that (for cost reasons) there is now a 400 character limit on the comments you can leave.
Please don't let that put you off expressing yourselves. I can't tell you how much I value your opinions and the debate we have.
As for the posts I've written since Picks was launched in January 2007, the best place to find them is here. For future posts, the best URL for me is still bbc.co.uk/robertpeston
HSBC banks on UK
For all HSBC's mutterings that it's fed up with having the UK as its home base - because of the incremental tax it pays here and what it perceives as an anti-bank climate - there is no evidence from today's strategy review that it is growing any cooler on having a big presence in the UK.
In fact, if anything, the opposite is implied by its assessment of where best to allocate its capital and expertise over the coming decade. The UK is categorised by HSBC as a "strategic market", which is HSBC's highest accolade, partly because it has a massive presence in retail banking here and partly because it wants to be "the UK's leading bank for international businesses".
Interestingly, and in spite of the superior growth rates of emerging economies, HSBC expects the UK to still be the sixth largest economy in the world in 2050, only a fraction smaller than Germany, but bigger than Brazil, Mexico and France.
The British economy is expected by HSBC to grow faster than the US, Japan, and France over the coming 40 years - and a bit slower than Germany (but, of course, massively slower than China, India, Brazil, Mexico and Turkey). Some of that British momentum, compared to the eurozone and Japan for example, is presumably due to an expected faster rate of population growth in the UK - which is not universally popular.
But even so, income per capita in the UK in 2050 is predicted to be $49,000, 6.5% below German income per head and almost 20% greater than French per capita income.
For HSBC, the important trends are expected annual growth of world trade of 8.9% in the coming 10 years and the persistence of huge financial imbalances between the saving and exporting nations (China, India, Germany, and so on) and the consuming and borrowing nations (the US and much of Europe).
Interestingly, HSBC expects the UK to be a rare example of a country moving from deficit into surplus, by 2020 (or rather it buys into the analysis of the consultants McKinsey and the World Economic Forum to that effect - although there is a bit of a mystery here, because HSBC attributes the forecast to McKinsey, but it's not in the relevant McKinsey document).
The point, for HSBC, of analysing the world in these terms is that it wants to be the leader in financing those swelling trade flows between emerging economies and developed ones, and also in the related businesses of shipping China's and India's and Taiwan's surplus capital to the US and Europe.
Which means that what it calls Global Banking and Markets (and others call investment banking) together with its Commercial Banking arm will be the focus of future expansion.
That looks rational for one of the world's genuinely global banks. But it is slightly disturbing for the rest of us, perhaps, because the bank is assuming that the leaders of the G20 most powerful economies will fail in their avowed aim of stabilising the global economy by reducing China's funding surplus and America's funding deficit, the imbalances that were a fundamental cause of the great crash of 2007-8.
HSBC's success in that sense seems in part to be predicated on the idea that the global financial economy won't become a much safer place.
Like all sensible businesses, HSBC say it will reallocate capital to where it sees superior growth or where it has substantial market shares. So it will only stay in retail banking in places, like the UK for example, where it is big enough to be a price leader, rather than a follower.
The new chief executive, Stuart Gulliver, recognises that current returns are too low, partly because the bank's running costs are too high. So it plans to reduce annual costs by between $2.5bn and $3.5bn over the next three years - though it hasn't said how.
There is one cost that particularly rankles with HSBC - the special banking levy imposed by the British government. What it finds particularly galling, I am told, is that it pays the levy on uninsured deposits outside the UK, which most would see as a stable form of funding that contributes to the perception of HSBC as being a relatively safe bank.
Given that Treasury said the levy was designed in part to encourage banks to finance themselves in a more prudent way, it is a bit odd that the levy is costing HSBC around £370m this year, almost exactly the same as Royal Bank of Scotland and Barclays, and £110m more than Lloyds, in spite of HSBC's funding arrangements being widely seen to be much more prudent and stable than those of the other UK banks.
It is perhaps understandable therefore that HSBC hopes the Treasury will look again at the structure of the levy. Although - as I've said and elucidated before - HSBC's not-very-veiled threat to leave the UK if the levy isn't reformed doesn't look credible.
What price a Greek haircut?
One of Europe's most influential bankers said to me the other day that he thought it would be a disaster if any of the eurozone's debt-stretched nations imposed a reduction in the value of their respective sovereign borrowings, or - to use the jargon - took a haircut on their debts.
For him, the eurozone approach of muddling through - providing IMF and eurozone loans to those countries that cannot borrow on markets - is the right approach, even if it hasn't actually solved anything for the eurozone in a permanent sense.
It is curious he should take that view, given that the rescues of Greece and Ireland that took place last year are already having to be renegotiated. And the bailout of those countries didn't stop the rot: Portugal is well into the process of obtaining emergency finance from eurozone and IMF.
Wouldn't it be better to cut what Greece - or Portugal or Ireland - owes down to a manageable size, in tandem with the imposed shrinkage of its public sector, to put its public finances back on a basis that is sustainable for the long term?
The markets are saying that's the only way forward. Over the course of a year, the market price of Greek government debt has fallen by more than half, for example. The yield on 10-year Greek government bonds is well over 15%. Which is an unambiguous statement from investors that there is not the faintest chance that they will lend to Greece again, unless and until its debt burden is reduced to a manageable size.
Or to put it another way, markets are presenting a simple choice to eurozone government heads and the IMF: they can continue to lend to Greece for an indefinite period, in the hope that Greece's economic growth will eventually pick up and generate incremental tax revenues, which would allow the Greek government to perhaps start paying down its debts; or they can bite the bullet and put Greece into the equivalent of what the Americans call Chapter 11 bankruptcy protection, to restructure and reduce what Greece owes so that it is consistent with the market price of all that debt.
Now as of this instant, option one looks a bit naive, in that what's happened subsequent to the first bailout of Greece a year ago is that its ratio of debt to GDP has been growing in leaps and bounds to more than 150% of GDP (and for more on the heroic challenges faced by Greece, see reports in the next day or two from Stephanie Flanders, who is in Athens).
So you would have expected my influential banker - who knows a thing or two about the markets - to be in favour of what the markets are saying is inevitable. Surely he should be calling for that most humiliating event for any creditor, a formal admission by Greece that it can't pay what it owes, which goes by the moniker of a haircut, or restructuring, or default?
But Mr Big Banker doesn't think that's the right way forward. His reasoning is that he fears a debt restructuring would weaken many of Europe's banks, such that they would be forced to raise new capital - perhaps from their respective governments. And, for reasons that slightly elude me, he sees that as a worse outcome than leaving Greece trapped in an unbreakably vicious cycle of economic decline.
The odd thing, however, is that the official statistics really don't seem to indicate that a haircut on Greek debt would be Armageddon for Europe's banks.
It would be a disaster for Greece's banks, that's certainly true, given that (according to Bank of England figures) a 50% writedown of Greek sovereign debt would wipe out more than 70% of their equity capital. Or to put it another way, they would be bust and would have to be recapitalised.
But, sooner or later, Greece's banks are going to need strengthening in any case. Fixing Greece's public finances won't fix Greece unless its banks are mended too. So any estimate of the costs of rehabilitating that country will include the price of providing new capital to the banks.
The more relevant question, perhaps, is what a Greek haircut would mean for banks outside Greece.
The latest figures from the Bank for International Settlements, published a few days ago, show that at the end of last year banks outside Greece had lent $146bn to Greek banks, companies and the public sector - down from $171bn three months earlier. And, of this, loans to the public sector (largely holdings of Greek government bonds) were $54bn.
To be clear, this doesn't take account of exposure through derivatives, credit commitments or guarantees. So the world's banks probably have a further $100bn exposure to Greece.
The sums at risk therefore look serious though not - on their own - potentially disastrous for the health of the financial system.
Now as luck would have it, the banks most at risk happen to be those of the eurozone's two largest and strongest economies, Germany and France. The exposure of German banks to Greece is $34bn, including perhaps $20bn of loans to the Greek government, while the exposure of French banks is $57bn, of which again around $20bn is probably sovereign lending
Now because of what some would say is the madness of how the global Basel rules - that measure the strength of banks - are applied, there would be a double whammy for eurozone banks if there were a write-off of Greek sovereign debt.
The banks with Greek sovereign exposure would have to reduce their respective stocks of capital by the amount of the loan loss. And they would have to inflate the size of their balance sheets, because the residual exposure to the Greek government would lose its official (and some would say insane) zero risk weighting. So the fall in the capital ratios of banks with exposure to Greece would be magnified in a painful way.
Of the larger listed banks, only one, the Franco-Belgian group Dexia, looks as though it would be seriously hurt by a Greek debt writedown. According to Morgan Stanley, Dexia has 4.9bn euros of exposure to Greek sovereign debt, equivalent to more than half the value of its equity capital. Dexia would be significantly weakened by a 50% Greek haircut.
Next at risk, according to Morgan Stanley, would be Commerzbank of Germany, with €3bn of Greek sovereign debt, equivalent to 15% of its capital. Meanwhile BNP Paribas and Credit Agricole of France, Erste of Austria, KBC of Belgium and Deutsche Bank of Germany all have meaningful though not devastating exposures.
Less visible is the Greek exposure of Germany's state backed landesbanks - which regulators tell me is considerable. But if they were to incur large losses on it, Germany could afford to recapitalise them.
So what is going on? Why are eurozone governments so wary of a restructuring or haircut of Greek sovereign debt, given that banks in the round won't be killed by the consequential hit?
There seem to be three reasons.
First, in Germany, it is apparently politically more acceptable to provide rescue finance to Greece directly than to rescue German banks that foolishly and greedily bought Greek debt for its relatively high yield.
Second, a Greek debt restructuring would be a severe blow to eurozone pride in the strength of the currency union.
Third, a Greek haircut might be the thin end of a large wedge. If it created a precedent for haircuts in Portugal and Ireland, the losses for the eurozone's banks would begin to look serious. But again, if there were just a trio of national debt haircuts, if the rot were to stop with Ireland and Portugal, eurozone governments could afford to shore up and recapitalise their banks.
That said, what the eurozone could not afford - or so regulators fear - would be haircut contagion to the likes of Spain and Italy.
But Spain and Italy are looking in better shape. Spain, for example, is taking steps to strengthen its second tier banks and its banks in general have become less dependent on funding from the European central bank (which is a proxy for their perceived weakness).
So here, I think, will be what will determine whether Greece gets its haircut in the next two or three months: if eurozone governments come to believe that Spain is well past the moment of maximum risk of financial crisis, there will be a bold restructuring of Greek debt.
But, to use that awful footballing expression, if they do go for a Greek debt haircut or writedown, it will be squeaky bum time in government buildings all over Europe.
The big PPI lesson for banks
The big lesson for the banks from today's decision by the British Bankers Association not to appeal against the high court ruling on Payment Protection Insurance is - funnily enough - very similar to the big lesson from the Great Crash of 2007-8.
In the case of PPI, much of what the banks have now acknowledged to be mis-selling seemed consistent with rules laid down by the regulator, the Financial Services Authority, in its handbook and its source book on the selling of insurance.
But the FSA argued that following the letter of these rules was a necessary but not sufficient guarantee that the banks were behaving property. The FSA argued that the big banks should have been more mindful of its over-arching principles, notably the imperative of paying due regard to the interests of customers and treating them fairly.
The banks appear to have been so seduced by the apparently huge profits available from insuring personal loans, mortgages and credit card debt that they pushed the insurance to all manner of unsuitable customers (the self-employed who could never make a claim for being made redundant, or those with pre-existing health conditions, that would invalidate claims, to name just two common examples).
"It is very difficult to justify how we behaved" said one senior banker. "You can't imagine supermarkets treating their customers in the way we treated ours. I know my colleagues think that so long as we followed what was in the FSA's handbook, we shouldn't be blamed. But my view is that we forgot the cardinal rule, which is that we're there to serve customers, not to shove something down their throats which they don't need".
This departure from the very basics of retailing is costing the banks very dearly indeed. Last week Lloyds - the market leader in PPI and the first of the big banks to say it would provide comprehensive restitution - said that the settlement would lead to a £3.2bn expense.
Today, Barclays has quantified the compensation and related costs at £1bn. There will be a similar charge for Royal Bank of Scotland. And HSBC has just said it is setting aside £274m to meet these costs.
In total for all the big banks, the costs are heading towards £6bn or so - and that's to ignore the compensation bill for hundreds of smaller firms which joined in the PPI mis-selling frenzy.
Now what's striking is that the PPI debacle shares strong cultural characteristics with the behaviour that took many of the world's banks to the brink of bankruptcy less than three years ago. During the boom years before the crisis of 2007-8, you won't need telling that banks lent and invested recklessly - to subprime borrowers, to commercial property, to each other, through off-balance sheet vehicles, in the form of "structured" products which delivered the illusion of quality (inter alia).
And much of this reckless lending and investing took advantage of the global Basel rules that give the official regulators' view of how much risk the banks were taking - and, as we now know, were catastrophically wrong.
But - many bankers belatedly concede - banks should have known better than to make their judgments on how to lend on the basis of the regulators' rules. They should have done what other commercial businesses do, which was to lend and invest on the basis of what would be sustainable and prudent for the long term.
Gaming or playing the Basel rules, and forgetting commercial common sense, led to disaster. It meant that Royal Bank of Scotland, in the autumn of 2008, looked like a sound bank as measured by the Basel rules, when to all intents and purposes it was bust.
Of course it is reasonable to blame the regulators for framing the rules badly. But many would say that the banks were more at fault for mindlessly running their businesses on the basis of what the rules allowed.
So what's the big lesson of both PPI and the 2007-8 crash? Well, it is probably that banks need to base everything they do on what is good for customers, shareholders and creditors in a fundamental sense - and not on what the rules allow them to do.
PS Apart from the banks, another group of firms - the claims management firms - look set to be burned by the banks' decision to chuck in the towel and pay compensation to 2.75m or so individuals who were mis-sold PPI insurance.
The banks will now set up operations to speedily process claims for compensation. So they would argue that there is no point in their customers using the services of claims management firms, because in doing so those customers would not gain any additional compensation but would have to pay commission to the claims handler.
RBS opposes internal firewalls
Although Royal Bank of Scotland is back in loss on a so-called statutory basis, having made the tiniest of profits in the final three months of last year, that doesn't really tell the story of what has been going on at this semi-nationalised bank.
But, as is par for the course with big, complex universal banks, these numbers do almost as much to obscure as to enlighten.
They are, for example, heavily influenced by changes in the valuation of debt sold by Royal Bank of Scotland to investors and of credit insurance bought from taxpayers in the form of the Asset Protection Scheme.
There was a loss of not far off £1bn on these items. Now it's moot whether it really enhances our understanding of Royal Bank of Scotland's performance that the value of these contracts - which can't be broken at a moment's notice - have moved against RBS.
More important, I think, is that operating profits of RBS's retail and commercial operations are almost a fifth better than a year ago at £1.9bn, though a little bit lower than in the fourth quarter of 2010.
The trend at RBS's global banking and markets business - what most would call its investment banking arm - was more volatile. Operating profits were £1.1bn in the latest period, double what was generated in the final quarter of 2010, but a third less than the bumper first three months of last year.
For the bank as a whole, the charge for debts going bad seems to be on an unambiguously declining trend, from £2.7bn in the first quarter of 2010, to £2.1bn in the final quarter of last year, and just under £2bn in the latest quarterly figures.
As for other important measures, RBS is succeeding in widening the gap between what it charges for credit and what it has to pay to borrow (good for shareholders, not always welcomed by customers) - and overheads appear to be under control.
So there is progress towards re-establishing RBS as thriving, growing business, which could prosper without the benefit of exceptional support from taxpayers - although that progress goes by fits and starts rather than in one giant leap (witness, as with Lloyds, a big increase in losses on lending to the troubled Irish economy).
What will perhaps spark some controversy is that the provision of credit to small businesses fell 7%. And, once again, RBS puts this down to a weakness of demand rather than a lack of any determination on its part to supply - but that doesn't enlighten on whether it's the unattractive borrowing terms on offer that puts off some potential business borrowers.
Also RBS has gone on the record for the first time with its opposition to the proposal from the Independent Banking Commission that internal firewalls should be erected inside giant banks such as RBS.
RBS says that the Independent Banking Commission's recommendation that universal banks like it should erect internal firewalls, or should put their retail and investment banking operations into separate insulated subsidiaries, are "likely to add to bank costs - impacting both customers and shareholders -without the safety gains that the broader Basel process is delivering" (the Basel process is the global negotiations on strengthening banks).
It is also striking that RBS signals that it isn't overjoyed at the unilateral decision made yesterday by Lloyds to chuck in the towel in the banks' legal battle against the regulators' judgement that they should make comprehensive restitution to those mis-sold PPI loan insurance. The banks says: "a decision on appeal of the court case...has not yet been made as it relates to important other issues of retrospective regulation".
As I've mentioned before, if RBS follows Lloyds's lead and offers a comprehensive PPI settlement, that would probably cost the bank a bit more than £1bn, about a third of the cost to Lloyds.
And if we're in the business of comparing the two partly nationalised mega banks, Lloyds and RBS, both still look some way from being in a fit state to see taxpayers' huge stakes privatised at a profit to all of us.
However if Lloyds entered the reporting season looking as though it was nearer to privatisation than RBS, their respective latest results probably show RBS inching forward a bit in that journey and Lloyds perhaps retreating slightly.
Lloyds to settle PPI claims
Lloyds has decided not to use the courts any further to contest the decision of the regulator, the Financial Service Authority, that it should pay restitution to customers who were mis-sold PPI loan insurance.
This will be welcomed by thousands of Lloyds customers, although it will be very expensive for Lloyds - which is making a provision of £3.2bn to cover the likely costs.
That £3.2bn charge means Lloyds is back in loss, to the tune of £3.5bn on a statutory or official basis.
My post from last night explains much of the background to this.
Ignoring one-offs, on what Lloyds calls a combined business basis, Lloyds remained in profit, to the tune of £284m, for the first three months of the year - although this was well down on the £1.1bn made in the equivalent period of last year.
There was also a charge of £1.1bn to cover the expected cost of Irish loans going bad. This was £500m more than expected.
The reason for the higher than anticipated Irish lending loss is that the new chief executive Antonio Horsa-Orsorio decided to factor in a further possible fall of 10% in Irish commercial property prices.
Other striking characteristics of these figures for the first quarter of the year is that net lending to small businesses rose, bucking the national trend, and overall income was down from £6bn to £5.2bn.
What stands out however is Lloyds' decision to settle with PPI claimants.
It was a unilateral decision, but will put pressure on the other banks to do the same.
The size of Lloyds charge implies that the big British banks will in total take a £9bn hit to settle PPI claims, with Royal Bank of Scotland, the second most exposed, perhaps taking a £2bn hit.
Update 09:21: For taxpayers, it is good news that Lloyds has been weaning itself off loans and loan guarantees provided by us.
So in the first three months of the year, there was a further reduction of £26bn of funding for Lloyds in effect provided by the state.
Which means that Lloyds' residual dependence on de facto loans from us is £70bn - with £26bn of this still owed to the Bank of England's Special Liquidity Scheme and £44bn of debt guaranteed by the Treasury (under the Credit Guarantee Scheme) still needing to be repaid.
Barring a meltdown in wholesale markets, Lloyds should be free of exceptional taxpayer funding support by the target of 2012.
By contrast, the timetable for privatising taxpayers' 41% stake in Lloyds is yet to be decided - although today's decision by the new chief executive to face up to the mistakes of the past (the PPI and Irish losses) should make privatisation easier.
The next milestone for Lloyds on the road away from state ownership and influence will be the announcement in June of Mr Horta-Orsorio's new strategy for the group.
Update 09:54: Royal Bank of Scotland will not make a decision till next week on whether to join Lloyds in agreeing to settle PPI cases.
It had the second biggest share of the PPI market, with around 20%, compared with 35% for Lloyds.
My banking sources are surprised by the magnitude of the PPI charge taken by Lloyds. It was significantly bigger than they had expected.
They would expect RBS to eventually take a PPI hit of around £1bn (as I mentioned in a post last month) rather than the £2bn implied by Lloyds' PPI provision.
That said, it is highly unlikely that RBS will quantify the potential PPI damage when it announces its first quarter results tomorrow.
On RBS's imminent results, I would expect it still to be in the red at the statutory level, including - for example - a debit from a market valuation of credit insurance provided to RBS by taxpayers under the Asset Protection Scheme.
But at the operating level it will be in profit. And RBS's general insurance operations should be back in the black (some would say 'at last') - which matters, because RBS is committed to dispose of these well-known insurance activities, probably by floating them on the stock market.
Lloyds: Back in the red?
It's the first results tomorrow for Lloyds new chief executive, Antonio Horta-Orsorio - and I wouldn't be at all surprised if, in the time-honoured fashion of new brooms, he announces substantial losses on ventures that had already gone a bit wrong for his predecessors.
In particular, I would expect him to announce further significant writedowns on £20bn odd of outstanding loans to the troubled Irish economy - after last year's impairment charge of £4.3bn on Irish lending.
Also, he may well make a provision of well over £1bn to cover potential payouts to thousands of purchasers of PPI loan insurance.
This would follow last month's comprehensive defeat in the courts of Britain's leading banks, which had challenged the decision of the regulator, the Financial Services Authority, that they should pay compensation for mis-selling of the credit insurance.
If Lloyds were to incur such a big loss on its past sales of PPI policies, that of course would be seen as a very good thing by those who believe that Lloyds mis-sold to them - because it would imply that Lloyds would be ceasing its legal battle (with the other banks) to avoid making comprehensive restitution.
Anyway, the Irish and PPI debits together could well run to many billions of pounds - which would be enough to put Lloyds into losses overall for the first three months of the year, and possibly for the first six months too.
That would be embarrassing for Lloyds, though not for Mr Horta-Orsorio, who can't be held responsible for decisions made before his time.
Remember that Lloyds made a big thing last year of being back in the black, following its humungous losses in 2008 and 2009 of £6.7bn and £6.3bn respectively.
Anyway, if I'm right, and if Lloyds takes a chunky hit from Ireland and PPI, it would represent a setback to the recovery of a bank 41% owned by taxpayers - but it wouldn't impair the health of the bank in a fundamental way.
That said, it would pose a very particular question for the non-executives of Lloyds - which is why they chose to award a £1.45m bonus to the bank's retiring chief executive, Eric Daniels, earlier this year.
Four billionaires at Glencore
I can't recall a flotation like it, in terms of the sheer number of executives emerging as wealthy beyond most people's wildest dreams or expectations - not even the conversion of Goldman Sachs into a public company or the listing of Google.
When Glencore publishes its full flotation prospectus later this morning, it will show that there are four billionaires working for the world's leading commodities, minerals and energy trader.
These are led by the chief executive Ivan Glasenberg, who will be shown to be worth around $10bn.
But it is the quartet of billionaires, plus many others worth more than $100m each, and hundreds who are millionaires, that makes Glencore quite extraordinary.
Now all the top executives are saying they won't sell any of their shares for five years at least - that they won't use the flotation to cash in. As for Glasenberg, he's pledging not to sell even a single share till he steps down as chief executive.
Even so, the stock market listing converts their stakes into currency. These are not paupers.
Is there a price for them of this remarkable valuation of their respective Glencore holdings?
Well their company is already receiving vastly more public scrutiny - for it's environmental record and tax practices, for example - than it did as a pretty secretive private company over the last 20 years or so.
It won't like all this attention - such as claims in this morning's Daily Mail of how Glencore's copper mining operations in Zambia are doing too little for that country.
And it certainly didn't enjoy the furore sparked by remarks of the new chairman, Simon Murray, about how women's desire to have babies prevents them rising to then top in business.
But some of you might feel that whatever embarrassment is caused to Glencore's bosses will be softened by all that personal wealth.
Update 16:44: Oh dear. There’s another billionaire at Glencore I somehow missed.
The prospectus – which is longer than Proust, and racier than Proust in parts – shows that the chief executive, Ivan Glasenberg is worth just under $10bn.
Also, two of his lieutenants are each worth around $3.7bn, one other has a $3.2bn holding and the fifth in this billionaire quintet has a $2.8bn stake.
The poor finance director, Steven Kalmin, is worth a mere $610m.
As the FT points out, each one of these has a holding worth more than what the famous (some would use a less flattering epithet) founder of Glencore, Marc Rich, pocketed when he sold the business to management less than 20 years ago.
Is the Treasury understating pension liabilities?
Belatedly, I've got round to looking at the Treasury's recent decision to change how it calculates the necessary contributions that have to be made to cover the future costs of unfunded public service pensions.
My interest was sparked by a letter sent to the chancellor by 23 pension experts, organised by the consultant John Ralfe. They argue that the Treasury has made a mistake in its choice of a new so-called discount rate.
If you think this is tedious abstruse stuff that has no relevance to you, think again. The aggregate public-sector net liability for pensions is so huge - perhaps £1 trillion - that it matters to all of us as taxpayers, especially those likely to be paying tax in 10 and 20 years time, that the government has a reliable and accurate valuation of pension promises.
Pensions represent, to coin the phrase, a massive off-balance-sheet debt. And as we've all learned to our cost from the financial crisis of 2007-8, it is a bad idea to carry on blithely pretending off-balance-sheet liabilities don't exist.
So what is this blessed discount rate? Well in the private sector it can be seen as the number used to translate into today's money a commitment to pay £650 a week pension (for example) for 30 years or so to a retired employee (till he or she dies), so that we can see whether there's enough money in the pension fund to pay that employee (and all the other employees) during his or her long retirement.
The point of the discount rate is to assess whether there's enough money in the pension fund - or whether it needs to be topped up.
Which is all very well, except that for most of the public sector, there are no funds or pots of money to pay for future pensions. Most of the pension promises are unfunded, payable out of employees' current contributions and out of general taxation.
That said, since public sector workers are increasingly expected to make a contribution to the costs of their own pensions, it would presumably be sensible for that contribution to be set at a level that is rationally related to the value of promised pensions.
So what is the best way of measuring the cost today of new pension promises?
Well the government has decided to "discount" those promises by the rate at which the economy is expected to grow.
Now there is some logic to that: the growth rate of the economy should determine the growth rate of tax revenues; and the growth rate of tax revenues will have a direct bearing on whether future pension promises will bankrupt us all or not.
But here's the thing. Any private sector chief executive might well be sent to prison if he or she decided to use the equivalent discount rate for a company, which would be the expected growth rate of that company's revenues or profits.
The reason is that although it might be possible to remove subjectivity (or in a worst case, manipulation) from any long-term forecast of the growth of GDP or of a company's turnover, it is not possible to remove considerable uncertainty.
To illustrate, the Treasury has chosen a GDP growth rate of 3% per annum as the discount rate for public sector pensions, which is considerably above the rate at which the UK economy has grown for years or indeed may grow for many years.
If we were growing at 3%, we would in practice be less worried about the off-balance-sheet liabilities of public-sector pensions, because the on-balance-sheet debt of the government would not be growing at an unsustainably fast rate.
To put it another way, in choosing its view of the long term growth rate of GDP as the discount rate, the Treasury is arguably understating the burden of future pensions to a considerable extent.
So what discount rate do companies use?
Well they are obliged to discount the liabilities at the yield or interest rate on AA rated corporate bonds.
Which may not be ideal, but has some advantages: there is a market price for AA corporate bonds, so the yield or discount rate is difficult to manipulate by unscrupulous employers; and it tells the company how much money would need to be in the pension pot, on the basis that all the money were invested in relatively safe investments (AA corporate bonds).
Now Ralfe and his chums believe that the discount rate for public sector promises should be the yield on long-term index linked gilts (gilts are bonds or debts of the British government) - partly because this too has a difficult-to-manipulate market price and because an index-linked government bond is a very similar liability to a public sector pension promise (both are protected against inflation, both are in effect debts of the government).
They point out that gilt interest and principal payments are paid out of future tax revenues, just as future pensions are. So if the value today of future pensions should be discounted at the GDP rate, that's how index linked gilts should be value on the government's balance sheet - which would be bonkers.
Anyway, if you've read this far (and many congratulations to you if you have), you may take the view that it would not be rational to impose a tougher discount rate on the government than on private-sector companies - which is what Ralfe et al seem to want, in that the yield on index linked gilts will always be lower than the yield on AA corporate bonds (because HMG, even with all its debts, is deemed to be more creditworthy than any British business).
But for a government and for a chancellor who have made it a badge of honour to bring transparency and prudence to public-sector finances, prospective GDP growth does look a slightly rum discount rate for valuing those enormous pension liabilities.
Aircraft carrier costs to rise by at least a billion (again)
The cost of Britain's controversial new aircraft carriers is set to rise by at least £1bn, and perhaps almost £2bn, as a result of the government's decision taken last October to make them compatible with different aircraft than those originally envisaged.
One defence industry veteran said the final bill was bound to be nearer £10bn, though a government official insisted that was way over the top.
The Ministry of Defence and the Treasury believe that total final costs could be nearer £6bn, if only one of the carriers is reconfigured to take the preferred version of America's Joint Strike Fighter aircraft.
An MoD official said no final decision had been taken on whether the first carrier to be built, the Queen Elizabeth, or the second carrier, the Prince of Wales, or both would be reconfigured.
He said it would probably be the case that changing the design specification for the Prince of Wales would be the cheapest option. But if that happened, it is not clear when - if ever - the Queen Elizabeth, due to enter service in 2019, would actually be able to accommodate jets (as opposed to helicopters).
Whatever happens, the increase in the bill will be substantial - and is only regarded by the Treasury as affordable because the increment is likely to be incurred later than 2014/15, when the expenditure constraints put in place by the Chancellor's spending review come to an end.
The Treasury is adamant that the MoD will receive no leeway to increase spending before then.
An MoD spokesman sent me the following statement late last night:
"The conversion of the Queen Elizabeth Class...will allow us to operate the carrier variant of the Joint Strike Fighter that carries a greater payload, has a longer range and is cheaper to purchase. This will give our new carriers, which will be in service for 50 years, greater capability and interoperability with our allies. Final costs are yet to be agreed and detailed work is ongoing. We expect to take firm decisions in late 2012."
The disclosure of the rise in costs is bound to reopen the debate about whether the UK really needs new carriers, especially since the UK will be without any aircraft carrier till 2019, following the decision to decommission Ark Royal.
The latest increase in likely expenditure on the enormous carriers - which are almost the size of three football pitches - stems from the decision of the Ministry of Defence in October to change the design one or both of them so that they can be used by the carrier version of America's Joint Strike Fighter.
This would mean they have to be fitted with catapults and traps - or "cats and traps" - rather than ramps.
The likely final cost will depend on whether the cats and traps are cheaper traditional steam devices, or newer-technology electromagnetic ones - and also whether the cats and traps are fitted to both carriers or just one.
Industry and government sources tell me that even if the MoD goes for the cheaper option, and even if the cats and traps are fitted to only one carrier, the additional bill will still be of the order of £1bn.
The hope however would be that in the longer term savings could be achieved because the maintenance costs of the more conventional Joint Strike Fighter should be lower.
One of the reasons the refit could be relatively more expensive is that for one of the carriers, HMS Queen Elizabeth, there would have to be a retrofit - because so much work has already been done on it.
"Retrofitting is always very pricey" said a senior defence executive.
The carrier project has been beset by controversy and cost increases.
In June 2009, I disclosed that the carrier costs had soared by more than £1bn as a result of a decision taken by the previous government to delay their entry into service.
Then last October the government, in its Strategic Defence and Security Review, came close to cancelling one or both carriers.
In the end, it committed to build both, but with the strange caveat that it might end up using only one of them. This was the reason given by the Prime Minister David Cameron in the Commons for building both:
"They [the previous government] signed contracts so we were left in a situation where even cancelling the second carrier would actually cost more than to build it; I have this in written confirmation from BAE Systems".
However in a memo to the House of Commons Public Accounts Committee (PAC), the Ministry of Defence estimated that cancelling both contracts would have saved £2bn and cancelling just one would have saved £1bn.
The MoD told MPs that "as the cancellation costs would have had immediate effect, the costs in the short term would have been significantly higher than proceeding with both carriers as planned; nearly £1bn more in financial year 2011/12 if both carriers had been cancelled".
The MoD was also concerned that cancelling the carriers would have undermined British capability and know-how in the manufacture of complex warships.
The carriers, called Queen Elizabeth Class Aircraft Carriers, are being built by the Aircraft Carrier Alliance, whose members are the UK defence giant BAE systems, the British engineering group Babcock, and Thales of France. The Ministry of Defence is also described as both a member of the Alliance and a customer.
Update 15:06:It has been pointed out to me, by what you might term a grizzled sea dog, that the UK does still possess two ships that can take aircraft. They are HMS Illustrious and HMS Ocean (which is a commando carrier with a flat top).
However they can't accommodate jet airplanes, only helicopters - so for veteran sailor it was a terrible error for the government to scrap the illustrious Harrier jumpjet.
He also takes the view, which I've heard from many other military personnel, that it would be bonkers to convert only one of the new carriers to take the carrier version of the Joint Strike Fighter - because if that were to happen, one of the carriers would be an enormous white elephant, and the other would not be able to provide a service for 100% of the time (it would need periodic servicing).
That said, the cost of retro-fitting the first carrier being built now and also redesigning the other one would certainly be nudging £2bn, maybe more.
He believes there is powerful strategic logic to building two new huge ships able to handle jets.
The problem for David Cameron is that he may find it hard to make the strategic case, since last autumn he justified building the two on the basis that it would not save any money to cancel one - which is not the most positive case for what turns out to be a very substantial public investment that anyone has ever advanced.
The corporate story behind GDP challenge
A clutch of big company results today illustrate the big economic trends in the UK and the world - and also say something about what the UK economy needs if its insipid recovery is to become something a bit stronger.
First the good news.
If we had a few more ARMs in this country, we would be agonising less about the imperative of "rebalancing" the structure of our wealth-creation away from financial services and the City.
That said, we'd need an incredible number of ARMs to make a dent in the high unemployment figures, because ARM simply licences its technology to the likes of Apple and LG, which put the chips into their devices. Or to put it another way, ARM's success is in exploiting the grey matter of a few boffins: it manufactures nothing.
Now part of the drag on Britain's recovery is the burden of debt on households and the impact of rising commodity prices on consumers' spending power.
You can see some of that in the first half figures of Associated British Foods, which points out that world sugar prices are at a 30-year high and that there has been a sugar shortage in Europe. ABF's sugar, grocery and agriculture profits were up substantially (sugar by 27%).
ABF's Primark chain of shops, whose prices tend to be the lowest on the high street, seems to have benefited from shoppers desire to trade down and economise, since underlying or like-for-like sales rose 3%. But although that looks okay compared with competitors, it was half the rate of last year's increase.
A further manifestation of all that borrowing in the euphoric years, before the bubble burst in 2007-8, is another set of uninspiring financial results from Heathrow and Stansted airports, and their holding company, BAA (SP) limited.
The losses of the two London airports increased 8% to £211.5m and net debt in BAA (SP) was flat at a substantial £9.9bn. Net debt at the next corporate level up, BAA (SH) plc was a chunky £10.4bn, against a regulated asset base of £13bn (which moved in the right direction by 2.7%).
BAA was acquired by the Spanish group Ferrovial and partners at the height of the debt-fuelled buyout boom of 2006 - and although BAA would argue that operational performance has improved, there is a question about when if ever the owners will ever see a return on their enormous investment.
The fundamental BP story is that the risks and costs of extracting energy are on a secular rising trend - for which we all pay a price.
Last but never least is Barclays and its figures for the first quarter of 2011 - which show top line income lower than the first quarter of last year and below the last quarter of last year. As for profits, they were up a bit or down a bit, depending on what view you take of whether changes in the notional value of Barclays' own borrowings should be included.
The unambiguous trend is a sharp reduction in the charge of debts and investments going bad - which was 39% lower compared with a year ago and 33% down on a three-month comparison.
As for lending, loans to retail customers rose by just under £1bn to £229bn since the end of 2010 - which is neither here nor there for a bank of Barclays' size. And the overall value of Barclays' loans and investments, on a risk-weighted basis, fell 1.5% over 12 months to £392bn.
For Barclays and other big western banks, it's no longer about growing their balance sheets, about lending more and more. Their long term recovery requires deleveraging, shrinking, which is the corollary of the perceived need for western consumers and governments to pay down their respective debts.
Here's the painful part: we may need banks to become smaller, but we all suffer if in the process they starve job-creating businesses of vital finance.
Those who fear the worst won't be reassured by figures just released by the British Bankers Association (BBA), which show that net lending to non-financial businesses by banks fell £3.2bn in March.
The BBA blames weak demand from companies. And although Barclays and the other banks have promised the Treasury, in their Project Merlin agreement, that they will meet the credit needs of the economy, my electronic postbag indicates that there remains quite a gap between their perception of deserving borrowers and yours.
Update 11:15: As some of you have pointed out, ARM saw its profits increase to £51m not £51bn, as I originally said, whilst losses at the two London airports increased to £211.5m, not £211.5bn. Sorry for my brainstorm. I've probably been dealing in billions a little too often recently - due to the magnitude of our recent financial crisis.
Oligarch says will sell to BP at right price
My colleague Tanya Beckett has conducted a rare and fascinating interview with Viktor Vekselberg, one of the billionaire oligarchs who co-own TNK-BP with BP - and who have fallen out with BP over BP's desire to form a business relationship with Rosneft, Russia's largest energy group, which would involve BP and Rosneft taking stakes in each other.
Because of the tensions that have arisen with AAR, the group that represents the oligarchs, BP in collaboration with Rosneft would dearly love to buy AAR's half share in TNK-BP. But their offer of $27bn for 50% of TNK-BP, which values the whole of TNK-BP at $54bn, was rejected earlier this month.
All may not be lost for BP, however. Mr Vekselberg suggests that a sale is possible. He tells Tanya Beckett:
"Of course it can be happen, for sure. If it will be [an] interesting proposal for us according to our understanding of (the) valuation of this company, of course we can accept. So far we have not received this."
So what would be an "interesting" valuation of TNK-BP? Well those close to the oligarchs say that they value TNK-BP at more than $70bn.
It's not clear BP and Rosneft are prepared to pay as much that. The difficulty for BP is that if it fails to reach an accommodation with Mr Vekselberg and his colleagues on price, then it will be stuck in a difficult place - because BP will have been publicly humiliated by the failure to consummate the Rosneft deal and will somehow have to rebuild relations with AAR in order to continue to extract billions of dollars in dividends from TNK-BP.
BP's partnership with AAR is in tatters, as Mr Vekselberg makes clear, in emotive terms, because of AAR's conviction, upheld in arbitration proceedings, that BP's proposed deal with Rosneft breached its contract with AAR:
"The picture is really simple. TNK-BP was created eight years ago, 2003. It was created like [a] joint venture between Russian shareholders and BP, huge global player... The company grew very active; it's now one of the best companies - not just Russian but internationally, because we have investment outside Russia...
And really I personally was surprised, I was surprised why BP decided to do something which [was] not according to our shareholders agreement. I am not surprised why BP would like to do this but I am surprised why they did it without any consulting or even just like, just inform us about that (sic). I was very upset, I am still upset even now".
Mr Vekselberg says he is "not so interested in money". The billionaire
adds: "I have enough money, for my life, for my family, for all that".
But "we are businessmen, we are not ideological or something", so of course a sale to BP and Rosneft "can happen".
So what would occur if BP and Rosneft were to make him several billion dollars richer? "I am already very upset" he says "but I will [be] double upset if I have to decide to sell. It's because I dedicated for this company almost like 15 years".
These remarks by Mr Vekselberg are a sign that the impasse over the purchase by BP and Rosneft of AAR's stake in TNK-BP can be overcome.
It offers hope to BP, perhaps for the first time, that it may be able to buy AAR out of the joint venture by the time of the May 16 extended deadline set by Rosneft.
But here's the question? Is the price that Mr Vekselberg and his fellow billionaires will accept one that BP's owners will see as acceptable?
Some of them are already dubious about the terms of the new partnership it wants to form with Rosneft. At a time when BP remains financially stretched by the costs of the disaster in the Gulf of Mexico, BP's shareholders won't want it to further enrich Mr Vekselberg more than is strictly necessary.
For more on the Vekselberg interview, see Russia Business Report.
PPI and banks: Must pay, will pay?
You might have noticed that my mind (and body) have been away from the day job. But I am so gobsmacked by the comprehensive defeat of the banks in the PPI case that my fingers felt compelled to tap on smartphone keys.
What probably matters most is that the judge has ruled against the banks on all important issues.
And two really mattered: first that the Financial Services Authority's principles governing the behaviour of financial firms are a proper basis for compensation awards; and that FSA rules based on those principles are necessary but not sufficient for judging whether financial firms engaged in mis-selling.
Frankly if the banks had succeeded in proving otherwise, it would have been utterly disastrous for the whole system of consumer protection in the UK, both the existing system and the new one being erected by the government.
As it turns out, it is the implications of today's ruling for the banks that are serious.
Unless they appeal (and I will come back to that question) they face having to make compensation payments of around £4bn to around two and a half million people (around a quarter of all PPI policies were allegedly mis-sold).
The damage is greatest for the two banks in which we as taxpayers have big stakes, Lloyds and Royal Bank of Scotland (which is just dandy for all of us) - largely because they have the largest shares of the retail banking market.
Lloyds faces the biggest bill: both it and RBS look as though they will have to pay compensation in excess of £1bn each.
That Lloyds and RBS appear to have done the most mis-selling in this instance will be seen by some as further evidence that their particularly powerful positions in retail banking is bad for the welfare of consumers - it will be taken as strengthening the argument of the Independent Commission on Banking that reinforcing competition is a priority (see my recent posts Banking Commission wants firewall around retail banking and Banking Commission: Retail banking must be ring-fenced).
The tab for Barclays and HSBC will also be pretty steep - some hundreds of millions of pounds each.
Given that few lawyers in my acquaintance rated the banks' chances of winning the case terribly highly, it is slightly odd that they used the courts to minimise or delay making restitution - especially at a time when they are not exactly the most popular institutions in the UK.
It is even more curious that they have fought and fought to limit their liability in the light of the two main examples of mis-selling identified by the FSA.
First there were all those refusals to make payouts under the loan insurance plans to those who had a pre-existing medical condition - when it is clear that relevant customers had no idea that pre-existing medical conditions were grounds for non-payment.
Second, it is a logical absurdity that the policies should have been sold by the banks to the self-employed, given that is impossible for a self-employed person to be made redundant.
So what next? Well the banks could make those two and a half million victims of mis-selling wait another couple of years to be made whole by appealing to the Supreme Court.
Or they could take the view that the prospects of winning in any court are too slim to outweigh the potential for further damage to their respective public images from being seen to defy an unambiguous legal judgement that they let down millions of their customers.
Unless of course they regard their reputations as so impaired that there's nothing left to lose from prevarication.
Could Germany afford Irish, Greek and Portuguese default?
The Western world remains where it has been for some time, delicately poised between anaemic recovery and a shock that could tip us back into economic contraction.
Perhaps the most conspicuous manifestation of the instability is that investors can't make up their minds whether the greater risk comes from surging inflation that stems largely from China's irrepressible growth or the deflationary impact of the unsustainable burden of debt on peripheral and not-so-peripheral eurozone (and other) economies.
And whence do investors flee when it all looks scary and uncertain, especially when there's a heightened probability of specie debasement - to gold, of course.
Unsurprisingly, with the German finance minister, Wolfgang Schauble, implying that a writedown of Greece's sovereign obligations is an option, and with consumer inflation in China hitting 5.4% in March, there has been a flight to the putative safety of precious metal: the gold price hit a new record of $1,480.50 per ounce for June delivery yesterday and could well break through $1,500 within days (say the analysts). Silver is hitting 30-year highs.
In a way, if a sovereign borrower were to turn €100bn of debts (for example) into an obligation to repay 70bn euros, that would be a form of inflation - it has the same economic impact, a degradation of value, for the lender. But it is a localised inflation; only the specific creditors suffer directly (though there may be all sorts of spillover damage for others).
And only this morning there was another blow to the perceived value of a chunk of euro-denominated sovereign obligations. Moody's has downgraded Irish government debt to one level above junk - which is the equivalent of a bookmaker lengthening the odds the on that country's ability to avoid controlled or uncontrolled default.
Some would say that the Irish government has made a start in writing down debt, with the disclosure by the Irish finance minister Michael Noonan yesterday that he would want to impose up to 6bn euros of losses on holders of so-called subordinated loans to Irish banks.
But I suppose the big story in the eurozone, following the decision by the European Central Bank to raise interest rates, is that the region's excessive government and bank debts are more likely to be cut down to manageable size by a restructuring - writedowns of the amount owed - than by generalised inflation that erodes the real value of the principal.
The decision of the ECB to raise rates has to be seen as a policy decision that - in a worst case - a sovereign default by an Ireland, or Greece or Portugal would be less harmful than endemic inflation.
But is that right? How much damage would be wreaked if Greece or Ireland or Portugal attempted to reduce the nominal amount they owe to levels they felt they could afford?
Let's push to one side the reputational and economic costs to those countries - which are quite big things to ignore, by the way - and simply look at the damage to external creditors from a debt write down.
And I am also going to ignore the difference between a planned, consensual reduction in sums owed - a restructuring that takes place with the blessing of the rest of the eurozone and the International Monetary Fund - and a unilateral declaration of de facto bankruptcy by a Greece, Ireland or Portugal (although the shock value of the latter could have much graver consequences for the health of the financial system).
So the first question is how much of the impaired debt is held by institutions and investors that could not afford to take the losses.
Now I hope it isn't naive to assume that pension funds, insurance companies, hedge funds and central banks that hold Greek, or Irish or Portuguese debt can cope with losses generated by a debt restructuring.
The reason for mild optimism in that sense is that those who finance investments made by pension funds and insurers - that's you and me by the way - can't get their money out quickly or easily. We simply have to grin and bear the losses to the value of our savings, when the stewards of our savings make lousy investment decisions.
As for hedge funds, when they make bad bets, they can suffer devastating withdrawals of finance by their investors, as and when the returns generated swing from positive to negative. But so long as those hedge funds haven't borrowed too much, so long as they are not too leveraged - and most aren't these days - the impact on the financial system shouldn't be significant.
Finally, if the European Central Bank - for example - ends up incurring big losses on its substantial holdings of Greek, Portuguese and Irish debt, it can always be recapitalised by solvent eurozone nations, notably by Germany and France.
However this is to ignore the node of fragility in the financial system, the faultline - which is the banking industry.
In the financial system's network of interconnecting assets and liabilities, it is the banks as a cluster that always have the potential to amplify the impact of debt writedowns, in a way that can wreak wider havoc.
That's built into their main function, as maturity transformers. Since banks' creditors can always demand their money back at whim, but banks can't retrieve their loans from their creditors (homeowners, businesses, governments), bank losses above the norm can be painful both for banks and for the rest of us.
Any event that undermines confidence in the safety of money lent to banks, will - in a best case - make it more difficult for a bank to borrow and lend, and will, in the worst case, tip the bank into insolvency.
Which, of course, is what we saw on a global systemic scale from the summer of 2007 to the end of 2008. That's when creditors to banks became increasingly anxious about potential losses faced by banks from a great range of loans and investments, starting with US sub-prime.
So what we need to know is whether the banking system could afford losses generated by Greek, Irish and Portuguese defaults.
And to assess this, we need to know how much overseas banks have lent to the governments of these countries and also - probably - to the banks of these countries, in that recent painful experience has told us that bank liabilities become sovereign liabilities, when the going gets tough.
According to the latest published analysis by the Bank for International Settlements (the central bankers'central bank), the total exposure of overseas banks to the governments and banks of Greece, Portugal and Ireland is "just" $362.2bn, or £224bn,
Now let's make the heroic guess that a rational writedown of this debt to a sustainable level would see a third of it written off - which would generate $121bn (£75bn) of losses for banks outside the countries concerned.
If those loans were spread relatively evenly between banks around the world, losses on that scale would be a headache, but nothing worse.
But this tainted cookie doesn't crumble quite like that. Just under a third of the relevant exposure to public sector and banks of the three debt-challenged states, some $118bn, sits on the balance sheets of German banks, according to the BIS.
For all the formidable strength of the German economy, the balance sheets of Germany's banks are by no means the strongest in the world. German banks would not be able to shrug off $39bn or £24bn of potential losses on Portuguese, Irish and Greek loans as a matter of little consequence.
This suggests that it is in the German national interest to help Portugal, Ireland and Greece avoid default.
If you are a Greek, Portuguese or Irish citizen this might bring on something of a wry smile - because you would probably be aware that the more punitive of the bailout terms imposed by the eurozone on these countries (or about to be imposed in Portugal's case) is the expression of a German desire to spank reckless borrowers.
But as I have mentioned here before, reckless lending can be the moral (or immoral) equivalent of reckless borrowing. And German banks were not models of Lutheran prudence in that regard.
If punitive bailout terms make it more likely that Ireland, Greece or Portugal will eventually default, you might wonder whether there has been an element of masochism in the German government's negotiating position.
Browne not going to Glencore
Yes you read the headline correctly.
And, of course, if you think I look like a plonker, that's fair enough.
Here is what happened.
Glencore's announcement that it plans to list on the London and Hong Kong stock exchanges said this:
"Glencore has made its decision regarding the new chairman and is in the final stages of making the appointment, which will be communicated shortly".
I was told by impeccable sources that the chosen candidate was Lord Browne. And that is definitely the case.
However those "final stages of making the appointment" were not the formality that I and my sources believed.
When it came to the final talks between Lord Browne and Glencore, there was a disagreement about governance issues.
Anyway, Glencore came to the view that Browne wasn't quite right for it. My sense is that Lord Browne was more of a stickler for detail than this entrepreneurial company felt comfortable with.
So what on earth happens now?
Well Glencore can't float without a chairman.
Before Lord Browne became the preferred candidate, Simon Murray - the Hong Kong business leader - was the favourite to take the job.
Does he still want the job? Does Glencore want him?
I don't know, but I will endeavour to find out.
It's all a cracking corporate soap opera. But probably not the ideal curtain-raiser for the biggest flotation the London market has ever seen.
Update 15:15: Glencore has now appointed Simon Murray, former managing director of the Asian giant Hutchison Whampoa, as its chairman.
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