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05
Oct 10

The rhinoceros & the cockroach

A tale of tax, exile and bank commissions

Strength is relative, as was proved at my son’s recent sumo wrestling party. The padded, Michelin-man type outfits, over 7 kilos each, were loaded onto the nine year olds. Their momentum was rhinoceros-like when bashing into an opponent. On the other hand, when on their backs on the ground, they were like hapless cockroaches, waving arms and legs frantically but incapable of getting back onto their feet.

The mixture of weakness and strength is similar to that of the UK Banking Commission, which kicked off its year-long investigation of the sector stating that it will consider splitting investment and retail banks, the populist idea favoured by UK Business Secretary Vince Cable and others.

A source, who is extremely close to the Commission, reassured me that the City should not fear this or other destructive results. If the conclusions were too radical, they would be ignored by the government. Still, madcap ideas can be worryingly strong.

And with the Conservative Party conference in full swing, quotes from Chancellor George Osborne’s speech dominate the financial press. Such as his saying that Britain should never again tie “its entire fortunes to the City of London.” No-one can argue with the sense behind those words. However, the so-called rebalancing of the economy is in practice only possible at the margins. I am willing to put money on the City being responsible for substantially the same percentage of GDP five years from now.


HSBC’s outgoing ceo Michael Geoghegan did not help the cause. In a recent speech the ceo of the global bank lashed out at politicians who showed “little understanding” of the role of investment banking in the economy. He sounded condescending when he said that policy decisions needed to be made “using empirical evidence, not value judgements.”

He is going through a time of turmoil, as the top command at the global bank shifts around and he is shifted out. However that is not an excuse for blustering comments which are unhelpful to the financial sector. What it highlights is the need for the investment bankers to communicate to the politicians the value of their contribution to the economy. In essence, the investment bankers need to provide the empirical evidence and not write off the politicians as solely driven by electoral considerations.

The Banking Commission is also set to look at competition in high street banking. This, arguably, poses the greatest risk to Lloyds Bank, which may see a recommendation to cut its market share. Even if this happens, I don’t believe the cut will be large enough to dent the thesis behind my November 9, 2009 blog: And the Winner is…Lloyds.


Vince Cable, said last week that “we can’t be blackmailed by constant threats that they (bankers) will walk away.” He is right.
In many cases, though, it is not blackmail. The FT recently highlighted the huge loss to the exchequer from hedge fund relocations to Switzerland. Meanwhile, two high-flying friends of mine are heading off at Christmas to live in Singapore. London loses their talents, their spending and the fees from sending their many children to private schools. Much as they love London, the disadvantage of a marginal tax rate of 50% compared to 20% in Singapore is self-evident. Let alone the financial and administrative help they will have in setting up a hedge fund. The knock-on effect of their talking negatively about the conditions for living and doing business in London is even more perturbing.

On the subject of tax, over a steak tartare lunch at George in Mayfair, the chairman of a FTSE-250 told me that a number of his staff are moving away from full-time employment into being freelancers. High tax rates mean the security and package of benefits that comes with full-time employment becomes less attractive, while a certain “flexibility” in one’s expenses becomes more so.

It is a classic lesson, one which governments ignore periodically: high tax rates equal fiddling and avoidance from erstwhile law-abiding citizens, as they feel the moral contract between them and the state has been declared void.


To a Pi Capital lunch at the Lanesborough Hotel, where Willem Buiter, the deliciously outspoken former central banker with a somewhat impenetrable Dutch accent, ruled out any chance of Mario Draghi becoming President of the European Central Bank. The best candidate for the job, he said, had two insurmountable black marks against his name. One was having worked for Goldman Sachs. The other was his nationality. Chastising governments for high levels of public debt – a sine qua non of the job specification – would be a difficult job for an Italian, whose country’s debt-laden tradition appears to be as endemic as its pasta.

He also forecast that the next crisis would have its origins in emerging markets, but was rather less precise on what sector, although he appeared to favour property.


There was blood in the sumo wrestling party, as regrettably a boy’s eyebrow split open in one fight. One hopes bloodshed can be kept to a minimum in the City-Government dialogue.

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