http://www.tinyurl.com/moacdo

Here are guidelines for institutional investors dated July 1999:

http://www.ivis.co.uk/InterpretationAndApplication.aspx

“Institutional shareholders support share incentive schemes which genuinely align the interests of participating directors and senior executives with the interests of long-term shareholders.”

The problem is that an insurance salesman will flog an endowment policy as a “long-term” investment, and in that context “long-term” means 10 years minimum and more likely 25 years; but in the context of “long-term incentive plans” for directors and senior executives, “long-term” may mean only 3 years.

And as the directors and senior executives of the insurance company would prefer to have that second definition of “long-term” applying to their own incentive plans, they’re unlikely to object if it applies to the directors and senior executives of all the companies in which the insurance company has shares.

It seems fundamental that if directors and senior executives are going to be rewarded on the basis of the success of the company, than that should be its success during bad economic times as well as good, and that means that their incentive plans should run for a period which is significantly longer than the typical economic cycle.

If a company goes bust during the downturn, significant financial pain should be inflicted on those who mismanaged it during the upturn and left it in a vulnerable position – even if they’d left the company while the going was still good.

Of course that wouldn’t apply to companies deliberately set up with a limited life to exploit a temporary opportunity, but Northern Rock, RBS etc weren’t in that category.

I noticed today that the Ernst and Young Item Club are predicting a very weak recovery next year, with the main reason for the gloomy outlook being the fact that banks are still not lending enough to boost the economy. “It seems unlikely that they will be able to meet the demand for credit”, they said. The Club also predicted that UK interest rates will be kept at their current level of 0.5% well into next year. The two are linked. Low interest rates REDUCE the supply of credit. After all, if a bank is only going to make a tiny profit on a loan, and of course they take a risk in making any loan, the risk/ reward ratio for the bank in making the loan is poor. So in the current situation, where the economy is constrained mostly by low supply of credit, low interest rates will reduce the money supply and slow down the recovery. The people who are running our economic policy (and the policy in the US too) are demonstrating that they don’t even understand the most basic price mechanism in a free economy.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5852797/UKFI-lines-up-banks-to-help-in-Lloyds-and-RBS-sale.html

On the terms indicated in the article these would be a completely safe and incredibly attractive one-way bet for investors – three years later in the worst case scenario they’d get their money back with interest, while if the economy recovered they’d get shares worth potentially far more than their original investment.

Eg, the government bought the RBS shares at 50.5p, and to recover the taxpayers’ money used for those purchases it might price the convertible bonds slightly higher; but in the spring of 2007 those shares were trading at over £7, and three years hence they could be worth several pounds – which could give the investors a return of up to 100% pa compound.

All the risk would be borne by taxpayers – ie, if the share price hadn’t recovered above the bond price, the government would have to repay the £70 billion it got from selling the bonds, and be left holding the shares – while the potentially massive benefits would accrue to the investors.

And billions of public money have been used to bail out these banks.

So in my view the convertible bonds should be made directly available to the general public, rather than being restricted to institutional investors.

It would be a simple matter for National Savings to offer tax-exempt “Bail Out Bonds”, guaranteed to pay on maturity either the original capital plus interest, or a sum equivalent to the market value of the bank shares, whichever was the higher.

Making such bonds available to small savers would give many of those who were hit with extra taxes to bail out these banks the chance to recoup some of their losses, and could help to promote the savings culture that we’ll need for the future.

I’m also not sure that the answer is increased public spending on infrastructure. According to the BBC, the price for slab steel has fallen from more than $1000 last year to less than $300 now. A few more “schools ‘n’ ‘ospitals” aren’t going to materially affect that. The answer really is an economic recovery, and since the government seems to have no clue how to help bring this about, we may see much more of this until the next election sweeps them aside.

Well it doesn’t & I think the conservatives could usefully hammer in the last nail of a mass socialist movement by pointing out that a Labour government’s support of banks rather than manufacturing & willingness to subsidise windmeill but not mines shows where the class base of Labour’s ruling political class is placed. However that we did the wrong thing over banks is not a good argument for doing the wrong thing over manufacturing. If we want to help manufacturing & we certainly should, we should not subsidise the losers but provide an unencumbered playing field for all. In particular the steel industry depends on cheep power which we can certainly produce by aloowing free market nuclear rather than demanding the customer pays through the nose to subsidise windmills. We should also get rid of most of the H&S rubbish which, rather than saving lives, actually kills far more though cutting GNP. On top of that we should cut corporation tax – the single most economically damaging tax there is because rather than slicing fat, or even muscle, it drains the financial jugular of industry.