Investment, ownership & responsibility

As I have written about in previous posts (http://waldorfswords.blogspot.com/2008/09/accountability-and-responsibility.html), the ownership of ordinary stock in a publicly listed company is not simply a silent investment. Investment in the stock, or equity, of a PLC intrinsicly represents a partial ownership of the company and so, a responsibility to direct the stewardship and management of the company in a profitable direction that also sits easy with their own moral and philosophical ideals. The idea that equity owners can complain about poor management and stewardship of a company after it falls to its knees is, frankly, obnoxious. If you don't understand what a company does, don't buy its stock. If you don't understand the strategy of a company's executive board, don't buy the stock. If you own stock and don't agree with the way its executives are running the company, sell the stock. Buying or holding the stock of a company, implicitly suggests that you agree with the executive board's strategy and completely understand what the company does. If you then find the company goes bankrupt, you have no one else to moan to, except yourself.

The various steps taken by the fiscal policy makers in the major economic regions around the world to enact their respective strategies have been notable by their subtle differences of substance and delivery. Smaller countries like Ireland, Spain, and Greece, have managed to swiftly exceed expectations and so, relieve a lot of panic and doubt. Larger countries like the US and the UK have obviously taken slightly longer however, the basic level of leadership across these countries has varied greatly.

Brian Cowen and, in the shadows, Charlie McCreevy, have probably shown themselves to be the boldest and bravest by announcing a full and unconditional government guarantee of indiginous Irish banks' deposits and dated debt. Hank Paulson has constructed an insightful solution to restoring mutual confidence amongst US banks by creating a garbage truck for the toxic assets that are currently taining US bank balance sheets. However, he has been held back by a congress, led by Nancy Pelosi, which failed to recognise its responsibility to make difficult decisions that are in the best interests of the country at large however negatively it may affect their immediate popularity. The delay in mobilising this bailout has caused it to become a disappointment for the markets. This delay and expectation mis-management has been overshadowed however, by Gordon Brown's procrastination over the UK solution. The agonising wait, inevitable leak, and subsequent delay of the UK bank bailout would never result in anything but disappointment. Wednesday's luke warm reaction to Brown's plan was as predictable as it was painful. It was even less surprising that it needed a follow-up global rate-cut extravaganza to steady the ship.

Various parts of the media have hailed the UK solution as Brown's finest moment and, there is no doubt that it is nothing if not bold and ambitious. However, the main objective of the plan has been flagged by both Darling and Brown as a recapitalisation of the UK banks' balance sheets as well as the re-establishment of confidence in their participation in money market activities for all other participants so that, they can revert to funding their operations at previous competitive levels. These goals may well end up being achieved but, a fundamental aspect of this plan completely undermines the first objective of this plan. By sliding in at preference share level in seniority on the UK banks' balance sheets, the UK government have given themselves first call on any potential dividends and, on the total assets in general. The fundamental concept of a company's equity price is as an expression of expected future cash flows, or dividends. If any potential dividends are hoovered up by preference shareholders (eg UK govt) first, this massively devalues the ordinary stock. Slotting themselves in at preference share level on the UK banks' balance sheet has effectively eliminated any motivation for the average investor to be an ordinary stockholder of these companies and so, diminished their ability to raise anymore equity capital. Which, in turn, reduces their ability to recapitalise.

By simply blanket guaranteeing its indigenous banks' debt and deposits, the Irish government has immediately stabilised the Irish banks' credit worthiness and so, unlocked a staggering amount of funding from third parties within the money markets (and outside Ireland) while, still retaining the option to invest the taxpayers' hard cash in their equity. They have yet to write a cheque to any of the banks while Gordon has already committed over £75bn of taxpayers money. The Irish guarantee has ensured that foreign money has flocked to fund the Irish banking system while, Gordon has already committed the UK taxpayer to massive equity interests in the UK banking sector. The former has successfully manipulated global capital markets while the latter has regressed UK society back to socialist fundamentals of the pre-Thatcher government.

Meanwhile, on mainland Europe, German industrial production rises by 3.4% in September from the previous year and France continues to tow the europhile party-line. Merkel and Sarkozy continue to blame blase Anglo-US attitudes to leverage while Trichet seemed hellbent on ignoring everything expect soon-to-be-extinct inflation. The thinly veiled strategy of tailoring European fiscal policy to suit the German economy has backfired spectacularly. Trichet's merciless insistence to ignore the faltering Irish, Spanish, Italian, and Greek economies by maintaining European base rates at 4.75% has completely eliminated any credibility he may have ever enjoyed. Today's rate cut, in tandem with the Fed, BOE and others can only have been agreed to under duress from someone like Bernanke. Ridiculously removed from reality perhaps but, Mervyn King has managed to say nothing on behalf of the BOE to the market over the past two weeks. Outstanding!

Bottom line is that Europe and the UK, has found itself seriously lacking in the leadership department. A slightly flawed but, well meaning, and speedy, effort will outperform a slightly flawed, poorly executed and delayed plan every time. Expectation management is the key to effective fiscal policy formulation. Disappoint and you will be sunk.

WnG