This is Money Blog

Will Tesco buy Northern Rock and why would it?

Will Tesco buy Northern Rock? A report in today’s Times claims the supermarket giant has expressed ‘provisional interest in buying the bank’.

There's nothing really in the report backing up the story, so essentially it's a rumour, although a Treasury source is there giving a steer on offloading the Rock.

But it would certainly make sense for Tesco to nab itself a bigger slice of the UK banking pie, as it is pushing hard to expand its bank having bought out RBS’ 50% share of joint venture Tesco Personal Finance.

But will this latest report turn out to just be another 'Northern Rock to be bought' red herring?

There have already been plenty of rumours circulating about bidders for the collapsed bank, taken into state control last year after months spent trying to find a buyer. The list of those, along with Tesco, who reckon they could make a go of the bank includes Sir Richard Branson and private equity groups.

But, if no one wanted the bank enough to take it over at a knock down price as it floundered early last year, why would they want it now?

Well, the Government is pretty much a distressed seller, it is strapped for cash and would dearly love to be able to turn around and say 'we made a success of the Northern Rock rescue' before the next election. This theoretically means a canny buyer could potentially name the price and conditions.

The problems our big banks still face is that they got too clever for their own good and rushed gung ho either into investment arms that they believed could never fail, or ramping up their mortgage books on foundations made of sand. But strip away these problems and retail banking is a highly profitable industry.

In April, Tesco revealed record profits of £3.13bn profits: to make this cash it has to run a colossal global retailing organisation.

In January 2007, before everything went catastrophically wrong for it, Northern Rock announced profits of £588m: it was just a UK-based mortgage lender.

Obviously, you would hope, Tesco wouldn’t be pursuing the madcap money market strategy that led to Northern Rock’s collapse, and it shouldn’t need to. It has increased the amount of savings deposits it holds from £2.5bn in mid-October 2008 to £4.5bn this spring, has struck a new insurance deal, and is priming itself for a launch into the mortgage market that should pick up steam as the housing market recovers and interest rates rise.

So that’s why Tesco could want Northern Rock, and why Virgin could too and others also reckon they could make a go of it. The UK banking sector is hamstrung by bad debts, taxpayer investment and a lack of trust, so there are potentially very rich pickings for any fresh blood entering the market.

The only problem is that surely the one lesson to learn from the crisis has been that banks mustn’t be too big to fail. And does a bank owned by the country’s biggest supermarket and retailer not also fall into that too big to fail pot?

- Simon Lambert, assistant editor, This is Money

- How Tesco and Virgin can be the new giants of banking

- Video: Supermarket banking - will it work?

Mandelson: The champion of laid-off bank workers

Looking askance of the Mansion House while commuting home yesterday, one might have mistaken it for some kind of upmarket brothel: a trickle of tuxedoed gentlemen scuttered through its side-entrance from their cars, heads low, no loitering at the entrance for fear of being seen.

But no, it was the annual British Bankers’ Association dinner, where the armies of lower-paid banking riff-raff strolling home in the sweltering heat – some of them Lloyds workers laid off today - found an unlikely champion in the form of Lord Mandelson, while their bosses quaffed wine, steak and raspberry crumble, but didn't tuck into humble pie.

The mood inside was jovial, with the outside world blocked off by gilt and neo-classical decoration. The head of the BBA, Angela Knight, looking resplendent in dramatic evening grown, remarked to the crème de la crème of the banking industry and the odd journalist that, since the room contained two of the most reviled professions in the industry, perhaps she should ask along some estate agents next year.

Cue some hearty hurrahs, followed by her argument that if UK banks have to hold larger amounts of money in their coffers to buffer themselves against a crisis, then other countries should have to do the same.

There needs to be better supervision in the financial services industry, she added, but there was still the habitual passing of the buck: it wasn’t just banks that lent people too much money that caused a crisis, there was the Government and the regulator, the Financial Services Authority, each of which had a hand in it all as well.

After grace had been said, which involved asking the good Lord for confidence to return to the banking industry, it took the figure of the business secretary, Lord Mandelson, to answer the prayers of thousands of laid-off bank workers by giving a tacit rebuke to their betters.

He said: ‘I want to acknowledge the thousands of workers in the banking and finance sector who have lost their jobs over the last year. Most of whom didn't have large pensions to look forward to.’

This from a man who has more titles than perhaps anyone in the room, a once stalwart champion of the City’s bonus culture. The heresy of it all.

He added: ‘We are convinced that the status quo ante is not an option. The Financial Services Authority and the European Union are both going to get a new rulebook. Things are going to change.’

Applause, desert, then back to the parlour for drinks. Glasses chink, a joke or two does the rounds. Elsewhere in the city, the families of bank tellers wonder how the year will end.

Alan O'Sullivan, This is Money

The new career booster: Work for nothing

How not offering to work for free can have a harmful effect on your job security...

The world's first stock market-listed voluntary organisation, otherwise known as the airline British Airways, asked its staff to work a month for free in a crass attempt to bolster the company's financial strength.

 In all, 800 BA workers - with cabin crew on an average £29,000 - have agreed to work unpaid for a monthand another 6,200 will take a pay cut. Some 1,400 more will switch to part-time. In all, £10m will be saved.

  At first glance the high response is surprising (I was even more surprised by a pollon our site found that 35% of readers would work for nothing) but in reality, these 'volunteers' are saving not only their company but their careers. Can you imagine if, in the next wave of redundancies, the management attempted to get rid of any worker who had bravely stepped forward before to work for nothing. As a journalist, I'd run a story on such an injustice.

The real injustice, of course, is that it heaps pressure on those who had the temerity to expect to get paid for going work.

The plan was crass but it was successful, financially but not morally. Expect to see the same at a plc near you soon.

- Andrew Oxlade, Editor, This is Money

• www.twitter.com/aoxlade

 

Trading glossary - or how many words are there for price war?

This just dropped in from the guys at Blue Oar Securities.

''How many words,' they ask, ...'are there for ‘price war’?

''Dynamic pricing’, for example, presumably implies reducing (very seldom increasing) prices to see whether one’s customers or competitors react and ‘testing market elasticities’ usually implies the same.   ‘Re-positioning the offer’ means cutting prices and ‘investing in market’ share usually means the same. 

'With this in mind, when referring to trading, we would suggest the following translations could be useful:
 
'‘Strongly ahead’ = more than 0.5% above
‘Ahead’ = between 0% and 0.5% above
‘In line’ = less than 2% below
‘Flat’ and ‘broadly in line’ = around 2% down
‘Somewhat below’ = more than 2% down
‘Mixed’, ‘challenging’, ‘sub-optimal’ and ‘fast-moving’ = bad
‘Developing’ and ‘strategic’ = loss-making
‘Long-term strategic’ = chronically loss-making
‘Investment’ (in the P&L) = a loss
‘Long term investment’ = hopeless loss
‘Confident’, ‘believe’ and ‘consider’ = hope
‘Tough’, ‘difficult’, ‘uncertain’ & ‘challenging’ = awful.'

Any more? Drop your suggestions in the comments box.

Related

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The profit-mirage behind bank bonuses

Today the Treasury Select Committee warns that the bank bonus culture is still 'flourishing'. The industry could argue that the bankers who have skillfully protected their banks from the need for direct taxpayer bailouts should be richly rewarded.

I don't agree. I agree with the Nobel Award-winning economist Paul Krugman (right). His column in the New York Times last month reflected a growing irritation that I felt...

'You might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But... Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

'I’m not just talking about the $600bn or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.'

His point is that all parts of the banking industry have benefited from taxpayer assistance of one sort or another. And it's similar for other countries. In the UK, for instance, we have the Special Liquidity Scheme, a line of heavily subsidised credit that has been accessed by 32 banks and building societies, according to the Bank of England. It's just one of a handful of schemes launched by the BoE [more explained here].

Yes, I understand that improving credit was necessary. But when banks borrow cheap public money and make bumper profits - taxpayer-subsidised profits - is it right to use those profits to justify bonuses?

This profit-mirage also delays the inevitable restructuring and reordering of the banks. Most people who live within commuting distance of the City will have noticed, on a personal level, the vast pay disparity between bank workers and those in the comparable jobs of other industries.  As Krugman says: 'From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.'

This normality will return. Some bankers recognise it, but there's still a chance to churn more bumper 'profits' and bonuses in the meantime.

- Andrew Oxlade, Editor, This is Money 

>> Poll: Should bank bonuses be banned?

Will the recession be W-shaped?

Welcome to the W-shaped recession. After some hefty debate last year over whether the recession would be U, V, or even L-shaped, a new contender is ready to gain more attention.

The beauty of it is that it currently manages to match both the optimists' green shoots and the pessimists' gloomy warnings.
 
Before the banking crisis, economists were debating a number of scenarios:

The V-shaped recession: short and shallow - a swift plunge followed by a bounce back

A U-shaped recession: longer a deeper - a dive down to the doldrums and then recovery

An L-Shaped recession: Not good (note the lack of a recovery) - a plunge then a long period of stagnation

Each of these letters still has their backers, with some switching between letters and others hedging their bets.

The W shaped recession has been lurking around the edges for a while, but was thrown into the mix again by George Buckley, chief UK economist at Deutsche Bank, who suggested the economy may grow again by June.

He warned though: 'The big risk is you could see a W-shaped recession. We could see policymakers taking back some of the easing too quickly.'

The W shape would essentially mean that green shoots being spotted are just that, but these would then be wiped out (perhaps by a late frost) and growth will fall again before recovering.

And if you think about it, the W has its merits. The juddering halt the global economy was brought to came courtesy of the exceptional event that was the banking crisis. Meanwhile, the internet age has enabled companies around the world to hit the big red button to startling effect, bringing a rapid decline in output and big job losses.

The kitchen sink approach to easing the banking crisis has seen a huge amount of money thrown at the money markets around the world, which is filtering through to the economy, and output is increasing again to meet demand after destocking and a collapse in industrial production.

Added into the mix is that those who have kept their jobs have not seen much economic pain and having done a few months of saving, they are now going out and spending again, albeit cautiously, and possibly even thinking about buying a house at 20% off two years ago.

All of this is giving momentum to a blip that will provide the little peak in the middle of the W, before things take a turn for the worst again, as unemployment, pay freezes and banks feeling the pain of bad mortgage and commercial loans kicks in.

It makes sense, so are people convinced? Well the W is still very much a small time contender, with bulls pushing for a V, the more cautious a U and the doommongers a very long L.

Oh and just to make things slightly more complicated, here's another thrown into the mix courtesy of Merrill Lynch: the slightly tilted square root recession.

In a European investment research note, Holger Schmieding, head of developed Europe economics, says: 'The 'square root' scenario is becoming quite popular, with a sharp initial recovery followed by a levelling off halfway down the road.'

So that's a v with a long tail, showing dive in GDP, recovery and then semi-stagnation, or a modest loss of momentum as Merrill Lynch prefers.

There you go, letter based recessions. Hours of fun (for some), but you can bet the overall picture is bound to be an O, with boom and bust rolling around in a vicious circle.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

The cat sat on the FT

I've always been sceptical that there is any point taking any notice of share-tippers or stock-pickers. They might be able to pick winners in a booming market - but then so can anyone. When the cat's among the pigeons though, you may as well stick a pin in the paper - or a cat.

Six months ago, in the aftermath of the stock market crash, our colleagues at the Evening Standard launched an experiment to see what would be the most gainful home for your hard-earned cash: beneath the mattress, a 6.8% savings bond, shares picked by them, shares picked by a stockbroker, or shares picked by the office cat.

The cat has emerged victorious.

Its feline nose for fundamental values chose a portfolio that has seen a 14.1% gain: Jeremy Batstone-Carr of Charles Stanley managed growth of 6.4%, which isn't bad considering the FTSE 100 dropped 6.3%.

Mr Batstone-Carr, however, took it all in good humour, and the chaps at the Standard let him keep both his surnames - as you can read in Simon English's column here.

- Adrian Lowery, Assistant editor, This is Money

When will interest rates rise again? Ask a child

It’s a fairly safe bet that interest rates will be kept on hold at 0.5% by the Bank of England tomorrow – but when will the base rate rise again?

This is the million dollar question for those trying to make the most of their savings, or decide on a fixed or tracker rate mortgage.

The problem with forecasting what will happen is that no-one really has the faintest idea. Sure, there are plenty of economic forecasts out there, but commentators can’t even reach a consensus on whether deflation or inflation is the real risk.

The world’s governments have thrown so much money and effort at the problem, in a scattergun fashion, and its difficult to know whether it’s actually working or whether we’re about to end straight back in the hole we are trying to dig our way out of.

So what should you do? Voraciously read economic research, work out your own cunning interest rate predictor, flip a coin?

My suggestion would be ask a child. Try and explain the current situation to them simply and carefully and see what they say. You won’t get an answer. They’ll point out the whole situation is bonkers and eventually get bored. (If they don’t they will probably grow up to be an economist, so I’d be wary of any answers).

That solution will then remind you that in the current economic madness you might as well just make a choice and stick by it and not berate yourself when you get it wrong.

Alternatively, you could look at what a whole bunch of people who don’t really know what is going to happen are staking their cash on.

Spread betting firm Spreadex says its punters think we could be looking at very low rates until at least December 2010. It allows investors to bet on future Libor quotes and there is so little movement in future prices that some are heading as far as the end of next year for their bets – and still only predicting between 2.7% and 2.8%, compared to 1.4% now.

Libor measures the rates at which banks lend to each other, and while it doesn’t necessarily move in line with the base rate this indicates betting types in the City, don’t reckon rates are rising by much anytime soon.

Personally, I reckon we might start to see rises from the current 0.5% base rate at the end of the year and be back up to 2% to 3% by the end of next year, which if Libor returns to its normal relationship with the base rate means Spreadex’s punters almost agree with me.

But then I’m neither an economist or a child, so I wouldn’t recommend listening to me either.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

Is Obama the economic magician for the ultimate con trick?

Where did all the money go? This is a question that has been posed more than a few times since the financial world crashed down around our ears.

The short answer is that it was never really there. Money is a big confidence trick, in the sense that physical money makes up only a fraction of it, and the rest is mainly the theoretical value of many other things.

Unfortunately, confidence has been something that is in short supply in recent times and this week sees 20 of the world’s leaders descend on London (and its baying mob) to try and re-inflate the globe’s self esteem.

But are any of them the magician that can pull off the trick?

There are a few jostling for the wand who think they are the ones to put things right.

Gordon Brown reckons he’s the man, but despite his grandstanding he doesn’t appear to instil much confidence in anyone.

Lining up against him are the French and German tag team of Nicolas Sarkozy and Angela Merckel. A pair worth watching if you like knockabout Anglo-American bashing but they fall short on the entertainment factor, despite Mr Sarkozy’s lovely assistant Carla Bruni.

Hovering in the wings and playing their own game are the powers of the future, China and Russia. But with their global recognition levels unlikely to trouble David Beckham, neither Chinese president Hu Jintao or Russia’s Prime Minister Dmitry Medvedev are unlikely to save the world.

A supporting cast has made efforts to steal the limelight, with a recent highlight in some top-class US and UK bashing by Luiz Inacio Lula de Silva, of Brazil. But while showing revolutionary promise and Brazilian flair he’s still too low profile for world hero status.

And that leaves us with one man (and his dark suited entourage of half of North America) - President Barack Obama. If ever there was a man who could pull off the economic rabbit out of the hat it is someone who can utter the words the audacity of hope without sounding entirely daft.

We can throw trillions at the problem and argue about tighter regulation, bank bonuses, bailouts and fairer worlds until we are blue in the face, but none of it will work until the audience believes the magic will work.

It’s the ultimate confidence trick and in the absence of anyone else with star quality it looks like Mr Obama will have to have a bash. We should wish him good luck, he’ll need it.

- Simon Lambert, assistant editor, This is Money

ps. There's been a lot written about where the money has gone, but for a more detailed (and better) explanation than my short answer of 'it wasn't there' read this feature by Aida Edemariam from the Guardian.

- G20: Obama's in no position to boss anyone around
- Would female investors have done better?

Barclays secret memos make interesting reading

Those secretive memos at the heart of the High Court wrangle between the Guardian newspaper and Barclays this week over the latter’s alleged tax avoidance sure make interesting reading.

As you may have heard by now, Barclays has managed to gag the Guardian over the publication of alleged internal memos posted on the newspaper’s website on Monday. These detail how the opaque structured capital markets division of the bank allegedly carried out all kinds of financial hocus pocus to allow it to escape paying millions in tax.

The paper argued it was in the public interest to detail how a bank indirectly relying on state support is allegedly jumping through all kinds of hoops to get out of its tax obligations. The bank said the documents are confidential.

Unfortunately, the paper lost a High Court challenge against an injunction yesterday, which means they cannot publish the memos. But this only prevents UK publications and websites from publishing the information, not quick-witted offshore ones. As they were available on the Guardian website for a couple of hours on Monday, 127 people got the chance to read them.   

Some posted their findings online abroad – and they remain there for those of you with the inclination to track them down.

The memos are a symphony of creative complexity. Diagrams of onshore companies fuse with lines threading the journey of billions of pounds past national and tax boundaries, like the flight path of migratory birds – or an air assault. The filenames are strangely appropriate for the courtroom war raging over the past week – Project this and Project that – reminiscent of some Second World War battle.

However, these are far from a blunt instrument of war; they are an intricate, fascinating insight into how 'brilliant minds' can always find their way around an obstacle, no matter how insurmountable.

The documents might not be a Barclays’ product but regardless, they are testament to a - some might say misdirected - ingenuity.

Some of them discuss tax avoidance measures, spelled out in a hodge-podge of Caymans companies, partnerships and subsidiaries created and linked with an inventiveness that borders on awe-inspiring.

But should the author of the documents vilified for their actions? After all, they are just doing the best they can for presumably very wealthy investors and customers. Surely, if this carry-on is a reflection of actual practice, it is the gamekeeper, in the form of HM Revenue & Customers, who should be criticised for allowing the poachers to run rings around it?

Then again, HMRC recently advertised for a tax expert with an annual salary of £45,000. Banks like Barclays pay tax specialists rather more, I suspect. The talent gap is one that won’t be bridged any point soon.

One thing is for sure: the taxman has his work cut out for him if he is going to even try to contend with his counterparts in the City.

As long as there are whistleblowers and websites willing to listen to them, then maybe, just maybe, he can keep up with the learning curve.