The meat scandal shows all that is rotten about our free marketeers

This is a crisis not only for environment secretary, Owen Paterson, but for the whole Conservative party

• 
• • Will Hutton
  • The Observer, Sunday 17 February 2013

A laboratory worker tests beef lasagne. Photograph: Pascal Lauener/Reuters

The collapse of a belief system paralyses and terrifies in equal measure. Certainties are exploded. A reliable compass for action suddenly becomes inoperable. Everything you once thought solid vaporises.

Owen Paterson, secretary of state for the environment, food and rural affairs, is living through such a nightmare and is utterly lost. All his once confident beliefs are being shredded. As the horsemeat saga unfolds, it becomes more obvious by the day that those Thatcherite verities – that the market is unalloyed magic, that business must always be unshackled from "wealth-destroying" regulation, that the state must be shrunk, that the EU is a needless collectivist project from which Britain must urgently declare independence – are wrong.

Indeed, to save his career and his party's sinking reputation, he has to reverse his position on every one. The only question is whether he is sufficiently adroit to make the change.

Paterson is one of the Tories who joyfully shared the scorched earth months of the summer of 2010 when war was declared on quangos and the bloated, as they saw it, "Brownian" state. The Food Standards Agency was a natural candidate for dismemberment. Of course an integrated agency inspecting, advising and enforcing food safety and hygiene should be broken up. As an effective regulator, it was disliked by "wealth-generating" supermarkets and food companies. Its 1,700 inspectors were agents of the state terrifying honest-to-God entrepreneurs with unannounced spot checks and enforced "gold-plated" food labelling. Regulation should be "light touch".

No Tory would say that now, not even Paterson, one of the less sharp knives in the political drawer. He runs the ministry that took over the FSA's inspecting function at the same time as it was reeling from massive budget cuts, which he also joyfully cheered on. He finds himself with no answer to the charge that his hollowed-out department, a gutted FSA with 800 fewer inspectors and eviscerated local government were and are incapable of ensuring public health.

Paterson, beneath the ideological bluster, is as innocent about business as Bambi. Even the most callow observer could predict that with the wholesale slaughter of horses across the continent as recession hit the racing industry – horsemeat production jumped by 52% in 2012 – some was bound to enter the pan-European network of abattoirs, just-in-time buying, industrial refrigeration units, food brokers and giant supermarkets that deliver British and European consumers their food.

Meanwhile, the budgets of some local government food sampling units have been slashed by 70%. A Tesco beef burger containing 29% horsemeat was an accident waiting to happen. Of course it was the Food Safety Authority of Ireland rather than the FSA that blew the whistle. Businesses owned by footloose "tourist" shareholders whose sole purpose is profit maximisation in transactional markets have an embedded propensity to degrade. Consumers and suppliers alike become no more than anonymised numbers to be exploited to hit the next quarter's profit target.

The large supermarkets have said little or nothing, which Number 10 deplores. There is nothing they can say. They have lobbied for the world in which we now live. An alternative world – in which consumers were genuinely served and where it is understood that suppliers need adequate profit margins in the supermarkets' interests as much as the suppliers' own – has to be created by stakeholders, including by government. There is a codependency between state, society, business and business supply chains, anathema to Paterson with his undeviating obeisance to the virtues of a "private sector" free from such "burdens".

What the Paterson worldview has never understood is that effective regulation is a source of competitive advantage. If Britain had a tough Food Standards Agency, it would become a gold standard for food quality, labelling and hygiene. British supermarkets and food companies could become known for their quality at home and abroad, rather as "over-regulated" German car companies are, rather than first suspects when something dodgy is going on. Capitalism does not organise itself to deliver best outcomes, whatever rightwing American thinktanks might claim. There has to be careful thought, law and regulation about the obligations that accompany incorporation and ownership, how supply chains are organised and how companies are managed and financed. Otherwise disaster awaits.

And there are other bitter implications for Paterson. Geography means that Britain is inevitably part of the European food supply chain. Our efforts at better regulation – and of catching wrongdoers – have to be matched by others for everyone's sake, exactly what the EU was set up to do and is now doing. The hypocrisy of passionate Eurosceptic Owen Paterson flying to the Hague urgently to meet Europol, saying afterwards: "It's increasingly clear the case reaches right across Europe. Europol is the right organisation to co-ordinate efforts to uncover all wrongdoing and bring criminals to justice" and urging all European governments to share information with it, should not be lost on anyone. Europol holds powers from which Eurosceptic Tories, led by Paterson, urgently want an opt-out, but not in the middle of a first-order food safety and hygiene crisis.

That everything Paterson believes in is so wrong is not just a crisis for him – it is a crisis for his party and for Britain's centre-right media whose prejudices makes thinking straight in the Tory party impossible. A great country cannot be governed by politicians whose instincts and policies are at such odds with reality, so betraying the people, economy and society they govern. The horsemeat crisis is not confined to our food chain. It reveals the existential crisis in contemporary Conservatism. British democracy needs a functioning, fit for purpose party of the centre-right.

Instead, it has Owen Paterson and today's Tories.

Hedge funds betting millions against Britain's high street

Hedge funds are betting there will be blood on the high-street this Christmas as Britain’s retail stocks dominate a list of big short positions that has been published for the first time.

The secretive financiers have bet millions of pounds that companies including WH Smith, Home Retail Group, Ocado, Sainsbury, Tesco and Dixons will fall in value, according to a list published under new rules by the Financial Services Authority (FSA).

Lansdowne Partners, one of London’s best known hedge funds, has short sold 0.63pc of the value of Tesco - a £163m bet that the supermarket’s shares will fall. The Mayfair-based group has a 2.51pc short position in WM Morrisons, worth £159.8m.

GMT Capital, an American group, has built up a 3.56pc short position in Carpetright - which is worth just £16.3m but is the third biggest position of the list relative to the size of the company.

Barrington Wilshire, another US fund, has a bet against Mothercare worth £8.24m or 3.18pc of the company’s market value. Two hedge funds have revealed big short positions in Marks & Spencer, whose shares rose 1.18pc yesterday despite revealing a 10pc slide in profits.

Jim Chanos, the famed US short-seller who runs Kynikos Associates, has a 2.52pc short position in Asos, the online fashion retailer. 

The biggest short position by percentage of market value is Greenlight Capital’s bet against Daily Mail & General Trust. The fund manager David Einhorn has built up a short position of 4.4pc of the company worth £80.7m.

But in terms of monetary value, Glencore has attracted among the biggest bearish bets. Och Ziff has a 0.82pc short stake worth £202m in the mining giant which is trying to merge with Xstrata. Elliot Management has a 0.71pc short stake in Glencore worth £175m.

The list, which is the most comprehensive view of bearish bets ever seen, follows the introduction of European rules that came into force on November 1. Under the regulations, all short positions worth more than 0.2pc of a company’s market capitalisation have to be revealed to the regulator. Positions of more than 0.5pc of the market value have to be published.

Hedge fund managers, who prove their worth by making money in markets that go down as well as up, are concerned that the disclosures could hamper their efforts.

Experts in London, where more than 80pc of Europe’s hedge funds are based, argue that short selling improves efficiencies in the markets. But European politicians have held the opaque trading practises responsible for volatility in the markets.

On Tuesday, fund managers said the rules unfairly penalise independent funds while allowing the big investment houses to keep their short positions secret.

Tim Steer, a fund manager at Artemis, said: “Under the rules, managers have to disclose a net short position so big asset management groups can hide their short positions because somewhere they will have a fund that has long-only positions which cancel them out. Pure hedge funds are being penalised because their short positions could antagonise companies.” Investment houses that have hedge funds as well as long-only funds are absent from the list, including Blackrock, JP Morgan Cazenove and Jupiter Asset Management.

Investment Banking - An organised Scam masquerading as a Business

Let's end this rotten culture that only rewards rogues

The Barclays rate-rigging scandal has once again exposed a world where men and women with little skill and no moral compass can become very rich very fast

• 
• • Will Hutton
  • guardian.co.uk, Saturday 30 June 2012 21.00 BST

Barclays boss Bob Diamond. Photograph: Dylan Martinez/Reuters

 

Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of " light touch" regulation earlier and if the Serious Fraud Office's budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism.

The £290m fine on Barclays for rigging the interest rates in the inter-bank market is a defining moment. Not just for Barclays but for every bank with which it colluded. Barclays had the wit to come clean first – the first of many banks to suffer political and moral opprobrium for illicitly inflating its profits. It was also trying to protect itself from "reputational damage" – not wanting other banks' assessment of its creditworthiness to become public .

In the light of what we now know, that seems laughable. But between autumn 2007 and spring 2009, Barclays was fighting for its life as an independent bank. Had the news surfaced that other banks harboured such doubts about its credit standing, Barclays might have ended up being owned by the British taxpayer like RBS and Lloyds.

As the FSA reports, senior treasurers and the corporate affairs department were both keenly aware of those risks and anxious they should be averted. It beggars belief that the top of Barclays did not know what measures it had to take to pull through. It had to lie about the rates it was paying to borrow money.

This came easily because the practice had become habitual. The London interbank offer rate is set each day at 11am in all the key currencies lent and borrowed in London. Each major bank submits the interest rate it is paying to the British Bankers' Association and the average becomes the benchmark rate for most of the world's loans and financial contracts. For example, there are some $554tn worth of so-called interest rate derivative contracts whose price is linked to Libor – manufactured products whose alleged purpose is to hedge the risk of unexpected interest rate changes in a world of floating exchange rates and free capital movements.

In fact, there is no way that these instruments can insure against system-wide movements. Some bank has to lose by being the sucker paying out, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer. Derivatives should rather be seen as economically purposeless constructs whose ease of manipulation in opaque markets makes the investment banks rich – while the rest of us take our chances.

Over the past few years, more and more light has been thrown on how banks profit by trading on their own account in so-called "proprietary trading" – dealing in derivatives, while another part of the bank makes a market for buyers and sellers in those self-same products. First of all, they can take positions on a vast scale because they are enormous banks with their deposits effectively guaranteed by the taxpayer. Next, they rig the benchmark interest rate on which the price of many derivatives are based, made easier still because so many derivatives are custom-made. This means that deep non-manipulable markets are hard to construct; it's also easier for derivatives to aid and abet tax avoidance. And lastly, as Goldman Sachs' "Fabulous" Fabrice Tourre revealed, the banks actively manage both the buyers and sellers. Thus they know which way the prices are likely to move from hour to hour.

Managements have little incentive to manage such a business because their own extravagant bonuses depend on its success. Even if they were minded to insist on proper behaviour, so much of the action takes place over hours and even minutes – hence they have to give phenomenal discretion to the teams running the trading desks. Managers cannot possibly monitor their real-time positions or second guess why they have been taken – the reason why rogue traders can lose banks billions, as one recently did at JP Morgan in London.

Much has been said about the rotten culture in investment banking – now from both the prime minister and the governor of the Bank of England. But the regulators, the British government and bank managements – all genuflecting to the wisdom of the age that free markets make no mistakes – allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.

A rotten culture does not emerge from thin air. It emerges from structures that encourage rotten behaviour – and Britain, following the false gods that free markets and financial services were its economic future, created such structures big time, cheered along by a cross-party alliance that extended from Boris Johnson to Gordon Brown. Now is a decisive moment for both the City and the economy. The City's reputation is at rock bottom. Meanwhile the economy acutely needs a financial system that backs wealth-generating innovation. We need a determined root and branch reform of British finance to restore international trust, develop the national economy and to bring an end to the mis-selling scandals. In RBS's case, the bank was even unable to discharge for a week its basic function – allowing its customers to transact financial business.

A start has been made with the promised implementation of the Vickers commission's recommendations to ringfence investment banking from commercial banking. The ringfence, weakened by George Osborne under intense pressure from the banks, should be strengthened to produce a de facto separation. In particular, "prop" trading desks should operate as fully separate units with their own boards, balance sheets and capital. The measures should be rolled out as soon as they become law rather than delayed until 2019.

That is only a start. The banks and the British Bankers' Association can no longer be allowed to set Libor: this task must now be done by the Financial Conduct Authority that is to succeed the FSA. London must also fall into line with international practice and require all derivative trades in the over-the-counter market to post appropriate collateral. London can no longer be the wild west of international finance where American and European law can be flouted. I would go further and require all financial instruments to be traded in organised exchanges.

There is also the question of ownership: shareholders exercised far too little influence over bank managements. Worse, their short-termist behaviour encouraged banks to look for sky-high fast returns to keep them happy. The Ownership Commission ( which I chaired) argued for the creation of new ownership mutuals that pooled the voting rights of institutional shareholders. This would both anchor ownership to set more reasonable profit expectations, and give owners real muscle in a dialogue with managements.

Banks need such better, engaged ownership – and fast. The British government, owning RBS and Lloyds, should give a lead in what it expects from banks. In particular, it should take a lead on remuneration.

In my fair pay review for the government, I argued that private sector executives should put a proportion of their pay at risk to be earned back by doing their job properly; only then should they be eligible for an equivalent bonus. There would be no question of Bob Diamond trying to win brownie points by giving up his bonus. Under earnback it would be automatically forfeited.

The Financial Services Authority has begun to show how regulation could work: five years ago it would never have launched such a bold and revealing inquiry. George Osborne is breaking it up just when it should be backed and reinforced.

The £14m cut in the Serious Fraud Office's budget since 2008 should be restored in full. There should be arrests, trials and imprisonment. And there should be an independent Leveson-style inquiry into investment banking and the causes of the financial crisis.

So far, there has only been the whitewash report in 2009, co-chaired by Sir Win Bischoff and Alistair Darling, arguing that as little as possible should be done to regulate the City. It was a disgrace.
As far as possible, the underlying causes of the over-inflated size of finance should be addressed. If there were less exchange and interest rate volatility, there would be less underlying demand for instruments to protect against it. This is, of course, the case for a system of managed exchange rates and a European single currency.

Instead of deifying floating exchange rates as the magic bullet for all economic ills – the default position of the British economic establishment across the political spectrum — floating rates should be seen as another driver of our over-inflated financial sector.

Britain needs to rebalance and develop its economy – and it needs to start by reforming finance. This could be the moment the process begins, laying the basis for a remoralisation of our economy and a new industrial revolution. But it means confronting the biggest lobby of them all – big finance. Any takers?