China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Gorman calls Facebook investors ‘naive’

Posted on 31 May 2012 by

James Gorman, Morgan Stanley chief executive, dismissed outrage over Facebook’s botched initial public offering, calling investors who had expected immediate gains “naïve” for having “bought it under the wrong pretences”.

The remarks by Mr Gorman addressing Morgan Stanley’s role as lead underwriter came in a CNBC television interview on the day that Facebook enjoyed its best session since it started trading two weeks ago.

    The share price rebounded from new lows to end 5 per cent higher on a wave of buying in the last minutes of trading. The stock closed at $29.60, after 13m shares changed hands in the final 10 minutes.

    Nevertheless, Facebook has broken previous records for dollar value lost on a new flotation two weeks after its initial offering, with some $23bn, or 22.1 per cent, wiped from its $104bn original pricing, according to Dealogic.

    Its poor performance has already put pressure on other internet companies such as Zynga and Yelp and drawn criticism and regulatory scrutiny to Morgan Stanley as the lead underwriter on the offer.

    Facebook raised $16bn on May 17, after Morgan Stanley and Facebook decided to raise the offerings’ price range and the number of shares available. Those decisions have been widely cited for the subsequent slide in the stock.

    Speaking for the first time publicly about the offering, Mr Gorman defended the decision to expand the size of the deal, saying that “we had unprecedented retail demand” and “people calling in from every part of the country”. He confirmed that 26 per cent of the shares were placed in the hands of individual investors.

    He said traders should not have expected the immediate “pop” that smaller internet IPOs have enjoyed and any that did “were both naïve and bought it under the wrong pretences”.

    Mr Gorman also pinned blame on Nasdaq for sowing “confusion” on Facebook’s first day of trading due to a trading systems glitch which meant that some traders did not know for several hours whether their trades had been honoured.

    Pressure on Morgan Stanley could abate if Facebook’s stock rallies further. Mr Gorman alluded to this hope, saying, “Give this a little bit of time … We’re only on day eight here.”

    Mr Gorman also said he was “confident” that Morgan Stanley followed acceptable procedures when communicating to investors Facebook forecasts of slower growth, made just days before the IPO. The question of whether only selected clients received the information has drawn regulatory scrutiny, from the state of Massachusetts and the Financial Industry Regulatory Authority.

    Scott Sweet, senior managing partner at IPO Boutique, an investor advisory, said: “Anything that makes it seem as though it wasn’t that bad is wrong. This does not happen with deals like this. This happens with fourth-tier underwriters.”

    Egypt bank defends graft-charge executives

    Posted on 31 May 2012 by

    EFG-Hermes, the Cairo-based investment bank, said on Thursday that it stood by its two chief executives who have been charged with insider trading in a case which also involves the two sons of Hosni Mubarak, the ousted Egyptian president.

    Hassan Heikal and Yasser El Mallawany have been named in an investigation into the 2007 sale of Al Watany Bank of Egypt, a listed company, to the National Bank of Kuwait.

      EFG-Hermes, the Middle East’s leading investment bank, said that it affirmed “the soundness of its legal position” and that of its two executives.

      “The company confirms that no advantage or personal benefit accrued to the two executives and that they were not involved in any transactions or share dealing on their own behalf in relation to Al Watany Bank,” said a statement by EFG-Hermes.

      It said it would take all necessary legal action to “defend its position in this matter”.

      Prosecutors cited in Egyptian state media said Alaa and Gamal Mubarak, along with the bank’s two chief executives and a former CEO, had been charged with corrupt stock exchange dealings worth more than $400m in connection with the sale of Al Watany Bank.

      Gamal Mubarak owns an 18 per cent stake in EFG’s private equity subsidiary which he acquired in 1997 before he became involved in Egyptian politics. The younger son of the toppled dictator, he was widely considered his heir apparent for most of the last 10 years.

      A court is due to rule on Saturday on separate corruption charges against the brothers and their father. At the same hearing the court will also hand down its much-anticipated verdict on complicity to murder charges against the former president in relation to the killing of hundreds of demonstrators during last year’s uprising.

      Hani Sarieledin, a lawyer for EFG, told the Financial Times that the bank’s private equity subsidiary managed the Horus Fund II which held a 10 per cent stake in Al Watany before its sale to Kuwait National Bank.

      He said Gamal Mubarak was not an investor in Horus and neither was EFG, which earned management fees and a percentage on capital gains.

      Mr Sarieldin said Horus was among investors holding 46 per cent of Al Watany who signed a marketing agreement with EFG-Hermes in December 2006 to find a buyer for the bank.

      The charges, he explained, arose from their non-disclosure of the intention to sell until March 2007 when they received letters of intent from prospective buyers.

      But Mr Sarieldin said there was no breach of the law or of capital market regulations.

      “They were not obliged to disclose anything until they had a potential buyer,” he said. “In fact, because the bank’s global depository receipts are traded in London, they were given legal advice by an international law firm not to disclose because it would be considered price manipulation.”

      The timing of the new charges against the Mubarak brothers, just a few days before the court ruling, has provoked speculation that the country’s military rulers are sending a message that they intend to maintain a tough stance on the family of the former president irrespective of the result in the other case.

      Ahmed Shafiq, a former member of the military, is one of two finalists who will contest the second round of the presidential election on June 16. Many Egyptians have expressed fears that if he is elected he might pardon the Mubaraks if they are convicted. Some observers say the latest moves against his sons are meant to signal that such an outcome is unlikely.

      Gulf bank raises stakes in Plus contest

      Posted on 31 May 2012 by

      A bidding war has emerged over Plus Stock Exchange, after Gulf Merchant Bank of Dubai said it would seek to derail the sale of the UK’s ailing third-tier market to Icap, the FTSE 100 interdealer broker.

      GMB declined to disclose the terms of its offer on Thursday but said it was “substantially in excess of that announced by Icap”.

        People close to Plus and Icap reacted with surprise to the announcement. They said Plus’s board had entered an exclusive agreement with Icap, meaning it could enter into talks with another group only if shareholders rejected that bid.

        A circular issued to Plus shareholders on Thursday said that the exchange would be wound up if the Icap takeover were to break down.

        Plus Markets Group, the parent company of Plus SX, put itself up for sale in February after a string of annual losses but said two weeks ago that it expected to close after failing to find a buyer. However, two days later Icap said it would buy the exchange for a nominal sum in a deal that would allow the cash remaining in Plus Markets Group to be returned to shareholders.

        GMB was in talks on a purchase of Plus until last month but walked away when it could not secure irrevocable undertakings of support for its bid from shareholders, said a person close to the matter.

        The acquisition of Plus SX would give Icap its licence as a recognised investment exchange, saving it the time and expense of applying for a licence of its own. The licence would enable Icap to comply with the regulators’ drive to force over-the-counter derivatives, one of its core broking segments, on to exchanges.

        However, a person close to Icap said the acquisition was “not a big strategic deal” for the company. “No one should expect Icap to turn itself inside out for this one”. The person questioned whether the Financial Services Authority would agree to a takeover of Plus SX by GMB.

        However, GMB said it had “remained in close contact with the FSA throughout this process … and at no stage has the FSA indicated that it has any difficulty with GMB being a potential acquirer of the recognised investment exchange licence currently held by [Plus SX]”.

        Both Icap and GMB have signalled their intention to keep Plus SX as a market for smaller UK companies. However, the possibility of the agreement with Icap breaking down amid the bidding war means renewed uncertainty for about 150 companies that remain quoted on the index

        Plus, Icap and the FSA declined to comment.

        Paraguay to establish first futures market

        Posted on 31 May 2012 by

        Paraguay is establishing its first futures market and expects to begin trading a foreign exchange contract within eight months, according to the Argentine clearing house which is helping establish the exchange.

        Argentina Clearing SA, the clearing house for Rofex, Argentina’s main market for trading dollar futures, and Primary, a leading service provider for exchanges and brokerages, have been working with BVPASA, Paraguay’s stock market, since 2006 and provide the electronic trading platform and settlement and clearing services.

          Under the new deal, which has been in preparation for two years, the two Argentine companies will help BVPASA launch a futures contract trading the dollar against the guaraní, the local currency.

          A forex futures contract was chosen as the first product because “foreign exchange volatility is very high [in Paraguay]”, Ignacio Miles, president of Argentina Clearing and a board member of Primary, told Trading Room. “In eight months we think we’ll start operating.”

          The contract will be similar to that traded on Rofex, but adapted to meet Paraguayan regulations, he said.

          Argentina Clearing will also help BVPASA establish a clearing house for clearing and settlement within the Paraguayan bourse, he added.

          Success with the dollar futures contract is expected to spawn other products, possibly in soya, of which Paraguay is the world’s fourth-largest exporter, or “some cattle product” as Paraguay is also the world’s 10th largest beef producer.

          However, those are likely to need more time since Paraguay has been hit by a brutal drought, which has slashed soya harvest expectations this year to around 4m tonnes, one of its lowest levels ever, from a historic high of 8.6m in the 2010-11 season. The country has also suffered an outbreak of foot-and-mouth disease which has paralysed exports.

          Though Paraguay remains one of the poorest countries in South America, its economy has had some spurts of fast growth. It expanded by 15.3 per cent in 2010, slowed to 3.8 per cent in 2011, and is expected to contract by 1.5 per cent this year in part because of the drought, but the International Monetary Fund forecasts a rebound to 8.5 per cent growth in 2013.

          The dollar-guaraní contract will initially be limited to residents and only traded through brokerages, but Mr Miles said “there is plenty of appetite”.

          “We expect to trade $200m a year, or 200,000 contracts, in the first two years. We’re being cautious. Hopefully we’ll exceed that,” he said. Rofex, by contrast, trades $60bn a year, or some 250,000 contracts a day, he said.

          MATBa, Argentina’s other futures market, in March signed a deal with the Montevideo stock exchange to launch Uruguay’s first stock market.

          Brazil’s Bovespa in April announced a partnership with Chile to launch a fully fledged derivatives market there, which would just leave Bolivia in the south of the continent with no futures trading.

          “Bolivia is, of course, a market that interests us, in commodities,” said Mr Miles.

          Did light touch tax become soft touch?

          Posted on 31 May 2012 by

          David Hartnett©Sarah lee

          David Hartnett, who instigated several cross-border agreements aimed at catching tax evaders

          On a clear October day, a small crowd of protestors gathered outside the imposing Portland stone headquarters of HM Revenue & Customs. The demonstrators had marched from the Occupy London site outside St Paul’s Cathedral to wave placards and denounce the UK’s top tax official. “We have had enough of your dodgy deals,” yelled one. “You have got to go.”

          The target of their anger was Dave Hartnett, the permanent secretary for tax. An energetic 61-year-old with an untidy thatch of greying hair and an ebullient, occasionally bruising manner, Mr Hartnett has become the most controversial Revenue chief that Britain has ever seen.

          To critics, he is the most wined-and-dined civil servant in Whitehall whose alleged sweetheart deals with big business cost Britain billions of pounds of tax. Mr Hartnett’s role in encouraging “far too cosy a relationship between HMRC and large companies” was cited in a scathing report by Parliament in December. Though slammed as inaccurate by HMRC, Margaret Hodge the MP who led the investigation hailed it as a “damning indictment”.

            HMRCClick to enlarge

            The accusations hit a raw nerve. Allegations that powerful tax-dodging companies enjoyed preferential treatment, though unproven, chimed with a growing resentment against tax injustice at a time of austerity and rising unemployment. “It’s a moral argument,” said Molly Solomons, a 26-year-old charity worker who took part in the October demonstration after public spending cuts cost her mother her university job and threatened her autistic brother’s disability allowance. “It’s wrong to smash our society into a million pieces while rich individuals and big business are lining their pockets by avoiding tax.”

            For insiders, the question is quite different. They do not doubt Mr Hartnett’s integrity or dedication. Their puzzle is why this brilliant, if idiosyncratic, veteran allowed himself to dominate the department with few checks and balances, leaving him ill-prepared for public scrutiny of his dealings with big companies.

            The spotlight will again fall on him on June 14 when Sir Andrew Park, a retired High Court judge known for his punctilious attention to detail, is due to issue a report to the National Audit Office on the “reasonableness” of five of the largest recent settlements between the tax department and big business. UK Uncut, a grass roots pressure group that organised the October demonstration, is set to have a day in court the same week as it tries to overturn one of those deals.

            Mr Hartnett declined to discuss the cases under review but he spoke to the Financial Times about his tenure and approach to tax.

            The ramifications of this row stretch beyond Britain. At the root of the allegations swirling around Mr Hartnett’s dealings with business lies his deliberate decision to seek a closer, less combative relationship between big companies and tax authorities. This calculated effort to put transparency and trust at the heart of tax administration – officially known as the “enhanced relationship” – has spread across much the world since 2008. Mr Hartnett played a pivotal role in its promotion, according to Jeffrey Owens, until recently the top tax official at the Organisation for Economic Co-operation and Development. “Dave was very much at the forefront of pushing the concept”.

            Pugnacious reputation

            Protesters in London demand the resignation of Dave Hartnett©Getty

            Mr Hartnett’s influence partly stems from his expertise. He stands out among his peers for his in-depth knowledge of tax, according to Mr Owens. “It is increasingly rare that the top person is a tax lawyer. It is a very political role. Dave is a rare commissioner who combines technical knowledge, strong management skills and good knowledge of how tax fits into the policy framework.”

            His technical expertise also made him a powerful figure at HMRC. He stunned MPs in October with his blunt assertion that he was the only Commissioner with “deep tax knowledge”, laying bare the department’s limited ability to conduct reviews of controversial tax cases at the highest level. This ability to find his way through the labyrinth of tax law was honed over a 35-year career in the tax authority. The one-time Classics student from Birmingham University joined in 1976 and entered a graduate training course at the Inland Revenue, as it was then called, where he was required to learn tax cases by rote. “For a while, tax seemed a lot less stimulating than Cicero’s speeches or letters,” he said in a recent interview.

            Mr Harnett pursued his first job with vigour. As a fresh and energetic investigator, he could take a combative approach to reluctant taxpayers and, on occasion, his superiors. George Gill, a colleague from that time, recalls him taking up the cudgels with head office on behalf of a small businessman grappling with an indefensible tax rule. “He blew his top when the official there showed no flexibility and offered no solution to the problem,” Mr Gill said.

            His pugnacious reputation grew as he had worked his way up to the top, joining the nine-member Board of the Inland Revenue in 2000. Graham Aaronson, a leading QC who acted for multinationals in numerous cases, said he grew to admire Mr Hartnett though in his early years, “he was regarded as very confrontational: he was the hard man”.

            Vodafone dispute


            The litmus test of the UK tax authority’s changing relationship with business was a long-running dispute with Vodafone over its record-breaking £112bn acquisition of Mannesmann, a German conglomerate in 2000.

            The UK-based telecoms group, having financed the deal out of Luxembourg, argued the acquisition had no impact on its British tax bill. HM Revenue & Customs disagreed, pointing to rules that allowed it to tax profits earned in low-tax jurisdictions. Vodafone’s riposte was that UK rules were trumped by European law – arising from the 1957 Treaty of Rome – that allowed companies in one country to set up subsidiaries in another.

            The two sides battled for nine years before the courts, which in 2009 ruled HMRC could investigate the Luxembourg subsidiary. Six months later, the two sides were in negotiations. In June 2010, Vodafone announced it would pay £1.25bn, the largest settlement in HMRC’s history but less than half the £3.1bn set aside in the company’s accounts for the dispute.

            Detractors claimed Vodafone had been let off the hook by as much as £8bn, based on rough estimates of Vodafone’s Luxembourg accounts. But tax experts have called that number wholly unrealistic since it does not take account of factors such as write-downs in Mannesmann’s value or the tax implications of the Treaty of Rome.

            Even so, two features of the settlement stand out. Vodafone told shareholders the tax payments span five years – an unusual concession from the authority. Moreover, it was agreed the tax was levied when dividends were paid by the offshore subsidiary so Vodafone would pay no interest.

            The concessions reflected Mr Hartnett’s fear of defeat if the case went to court, according to a person close to the case. If Vodafone had won, it would not only have scuppered HMRC’s claim; it would have set a disastrous precedent.

            The key question was whether Vodafone’s Luxembourg operation amounted to “genuine economic activity” – a phrase used in a landmark European court case in 2006 on a similar issue. Vodafone, which stopped building up a provision after the favourable 2006 judgement, maintains that its Luxembourg office, now employing more than 200 people, was always a genuine finance subsidiary.

            A retired High Court judge is to publish in June a review of the “reasonableness” of this and four other recent settlements. Critics say, no matter his findings, there was a shortcoming in the Vodafone deal. The Commissioners who signed off the deal also negotiated it. That and the constraints of taxpayer confidentiality left the UK tax authority struggling to prove the propriety of the settlement.

            By that time, relations between business and the Revenue had badly frayed. Companies, egged on by a new breed of highly aggressive advisers, were embracing artificial avoidance schemes as never before. The Treasury responded by closing loopholes and cracking down on tax planning. It amounted to “a constant feeling of paranoia” said Philip Gillett, then head of tax for ICI, the chemicals group.

            In 2001 Gordon Brown, then Chancellor, asked Mr Hartnett to conduct a review of links with business. The conclusions heralded a big change in the Inland Revenue’s dealings with large companies. “It became clear that business wanted certainty and better understanding. It wanted more trust,” Mr Hartnett recalled recently.

            He proposed a more mature relationship, based on risk assessment and a proportionate response from the Revenue. It was an attractive message for tax directors, recalled ICI’s Mr Gillett: “We started talking to each other and stopped playing games.” It also appealed to Gordon Brown, who in 2005 told the CBI, the business lobby group, that trust was the basis of the “correct modern model” for regulating financial services and administering tax. By offering “not just a light touch but a limited touch”, the government would focus attention where it should.

            This light touch regime was coupled with another of Mr Hartnett’s innovations dubbed the “tax on the boardroom agenda”. This initiative aimed to persuade the chairmen of large companies to consider tax risks as part of their approach to corporate governance. Mr Hartnett embarked on a series of lunches and other meetings with top business leaders to urge them to pluck tax out of the obscurity of the tax department and into the boardroom, where it could be seen through the lens of corporate social responsibility.

            Those meetings came to haunt him. They were characterised as a meals-for-deals strategy last October by MPs who in public hearings attacked Mr Hartnett for accepting 107 such free breakfasts, lunches and dinners over two years. In a meeting of the Public Accounts Committee, Ms Hodge, a Labour MP, said: “Had I, as a minister, done that with organisations I was doing business with, I would have been on the front of the Daily Mail and pushed out of my job.”

            Some tax professionals who reviewed the tax authority’s hospitality register accused Mr Hartnett of focusing on too small a group of top law and accountancy advisers. James Bullock, a partner of Pinsent Masons, a law firm, said there had been “a growing sense of unease amongst the profession and corporate taxpayers that Dave Hartnett was becoming to close to the ‘Big Four’ accountants and some law firms”.

            Businesses and former colleagues – as well as Mr Hartnett – insist it is absurd to suggest the lunches had any impact on disputes. Paul Morton, head of group tax at Reed Elsevier, the publishing group, said the dinners and informal engagements tended to be “very technical professional discussions” that helped officials develop a better understanding of business. John Bartlett, head of tax at BP, the oil company, said the initiative was “incredibly successful in getting this ethical approach to tax into British boardrooms”. Pat Ellingsworth, former head of tax at Shell, said: “I do think it enhances revenues because it puts pressure on taxpayers to be more conscientious. The publicity at board level is strong and inhibiting.”

            The exhortations were tacitly backed by threats as the authority ramped up its information gathering on companies’ avoidance schemes. The tax authority was receiving new information on cross-border tax shelters. An initiative known as the joint international tax shelter information centre was set up in 2004 by Mr Hartnett and his counterparts in the US, Canada and Australia and helped launch a crackdown on international arbitrage.

            But the coup de grâce were disclosure rules that Mr Hartnett introduced in 2004. This idea, partly inspired by new rules in the US, forced taxpayers and advisers to give the UK tax authority early tip-offs about avoidance schemes they wanted to market. It proved a game changer. Hundreds of audacious schemes came to light and were swiftly blocked. Tax avoidance, Mr Hartnett told advisers in 2005, was set to become “not worthwhile”.

            Problems within tax authority

            Mr Hartnett’s star rose. When Paul Gray, the Revenue’s chairman, departed after the 2007 loss of computer discs containing the child benefit records of every family in Britain, Mr Hartnett stepped up to acting chairman. His personality and management skills helped hold the badly rattled department together, according to colleagues, and in 2008 he was appointed permanent secretary for tax, with a salary of around £160,000 a year.

            But big problems were emerging within the tax authority. Morale among staff in the organisation was plummeting. In stark contrast to the rapid growth in other departments, the workforce in the tax office was forced to shrink by nearly a third in the second half of the decade. The government extracted deep cost savings with a merger of tax departments in 2005: the Inland Revenue, which collected income and corporate tax, and Customs & Excise, responsible for value added tax and customs duties. Some inspectors felt outgunned by the ranks of adept lawyers and accountants acting for companies and other big taxpayers.

            The idea that HMRC undertakes sweetheart deals is just plain bizarre to me

            – Will Morris, CBI tax committee

            A clash of cultures loomed within the newly formed HMRC as it set out to amalgamate teams and traditions. The Inland Revenue, known for its gentlemanly ethos, saw shades of grey in a dispute; Customs officials were more confrontational. “In Customs we had zero tolerance for avoidance; the Revenue was always trying to do deals”, said a former Customs official who was close to Mr Hartnett.

            The politicians favoured the Inland Revenue’s style. Chris Wales, Gordon Brown’s principal adviser on tax, said his political team had hoped the merger would “draw Customs closer to the ethos the Revenue had. I think it’s fair to say Customs was much more aggressive, which didn’t mean Revenue couldn’t be very firm. Generally I felt it had better judgement on when to push a case than Customs.”

            I think he [Hartnett] got caught up with his success and became complacent

            – Former colleague

            The tough approach won out in 2005 over an avoidance scheme used by a slew of banks to ease tax bills on employees’ bonuses. The hardliners dug in their heels, resisting a compromise offer from the banks to pay 33 per cent of the outstanding bill. They were rewarded with a decisive victory when all the banks, with the notable exception of Goldman Sachs, caved in and paid their national insurance contribution bills in full. But HMRC waived the interest on the late payments, sowing the seeds of the hugely damaging row that broke when Mr Hartnett settled the Goldman case five years later.

            This victory spurred HMRC to codify a new “litigation and settlement strategy” in 2007. If the case was weak, it should be dropped. If it was strong, it should be fought to the bitter end. The long-standing practice of offering package deals – under which the taxpayer would agree to pay out on some disputes if others were dropped – was banned.

            It was an effective deterrent but also a recipe for intransigence. By 2010 a backlog of cases was estimated to be between 10 and 20 man years of work, according to Ernst & Young. Companies complained that the delays over disputes was souring an otherwise much-improved relationship. One business, quoted in a survey by Norton Rose, a law firm, accused the Revenue of acting in an “irrational, irritating and bullying way”.

            Even Mr Hartnett conceded the strategy had its flaws. In an interview with the in the summer of 2010, he said: “I think we got it [the litigation and settlement strategy] a bit wrong in the way we explained it to our people. They thought it was a great sword of justice. Sometimes some of our people outside the large business service are too tough in the way they seek to use the LSS [litigation and settlement strategy]. There are examples of people being too rigid about it.”

            That summer, as a new coalition government came to power, the policy was subtly changed. Litigation became a last resort, particularly for small cases that were clogging up the system. Long-running disputes were settled. Money flowed into the Treasury’s depleted coffers. In July 2010, Ernst & Young told clients that a “more flexible environment” created an opportunity to “agree a more acceptable settlement than had previously been available.”

            Even though the overwhelming majority of disputes had always ended in negotiated settlements, the new, more collaborative approach was a difficult message to get across. For the disenchanted, Mr Hartnett’s long-standing willingness to get personally involved in deals was also disturbing. A former colleague said: “The trouble with Dave is he could never stop being a tax inspector and never stop meddling with things. He meddled in stuff he shouldn’t have meddled with.”

            One former colleague recalls being so angered by Mr Hartnett’s interventions that he was barely on speaking terms, although with hindsight he concedes they were justified. Another former colleague defended Mr Hartnett’s instinct to resolve disputes. “Some inspectors are guilty of wishful things. Dave has a good nose. He is saying to them ‘dream on’. On occasion you do need someone more senior to force them to take a more realistic view. “

            “The sort of people employed in the Revenue are very good technically but they do not have a practical feel,” a lawyer who has closely watched the Revenue said. “That is what Dave has in buckets. He gets exasperated when they take a narrow view of things.”

            Bad relations

            Tensions over Mr Hartnett’s role in disputes came to a head soon after he invited the New York-based global head of tax of Goldman Sachs to fly over for a meeting in November 2010 that aimed to resolve several long-standing disagreements, including the dispute over national insurance contributions that the bank had refused to settle in 2005.

            Dave was very much at the forefront

            – Jeffrey Owens, OECD, on efforts by the Revenue to improve links with business

            The meeting had another goal, according to a source close to the matter. A few weeks earlier, Chancellor George Osborne had voiced outrage that only a handful of banks had signed up to a code of conduct promising not to undertake aggressive avoidance. He set a deadline of the end of November 2010 for the largest 15 banks to sign. One aim of the meeting was to persuade Goldman – the last of the 15 to agree – to sign.

            Relations between the two sides were bad. In the national insurance dispute, Goldman had spent five years “raking every conceivable point in the Tribunal” and putting up a ‘stooge’ witness” according to an internal HMRC memo. HMRC had also dug in its heels, displaying what a tribunal judge in 2009 described as “blustering intransigence”.

            Mr Hartnett told MPs at the recent hearing that he went to the meeting, accompanied by two colleagues who dealt with the bank’s tax affairs, “to make the relationship work” and did not consult with lawyers beforehand. When MPs questioned why he and his colleagues made a deal with Goldman that waived interest on the late payment – a figure the National Audit Office estimated to be between £5m and £8m – he gave few details.

            Mr Hartnett said he believed at the time that there was a “legal impediment” to collecting the interest. Citing taxpayer confidentiality, he refused to tell MPs the nature of the legal impediment, stoking their anger and suspicion.

            The UK tax authority had a history of problems in collecting national insurance debts. Ray McCann, now a director at Pinsent Masons, a law firm, headed up a special effort in 2003 and 2004 to enforce payments when he was at the tax authority. “The Revenue has a chequered history on taking the necessary action to ensure national insurance claims are protected from the expiry of time limits. The rules are very complicated”, he said.

            The tax authority in 2003 issued hundreds of county court claims to banks and others over avoidance schemes. But it was too late to collect the interest that accrued on the debt for at least some of the banks involved in the 2005 settlement, according to two people involved in the matter. That prompted a policy decision to waive the interest charge for all the banks. Mr Hartnett told Parliament that the 2005 settlement, which he oversaw, explained why he had mistakenly believed there was a legal impediment to collecting interest from Goldman.

            One middle-ranking member of staff sounded an alarm about the Goldman deal after he read about it in the minutes of an internal lawyers’ meeting.

            In one of several letters to MPs and the National Audit Office in early 2011, Osita Mba, an Oxford-trained lawyer working for HMRC, revealed details of the Goldman case, which he alleged suggested “potential criminal offences such as fraud by abuse of office, misconduct in public office and cheating the Revenue”.

            Mr Mba complained that the NAO initially refused to investigate his complaints. He sent the same letters to Parliament’s Public Accounts Committee and sparked a firestorm.

            Mr Hartnett’s senior colleagues are vocal that they do not believe rules were bent to secure these deals. Graham Black, president of the union that represents senior tax officials, said neither he nor any of Mr Hartnett’s long-time colleagues saw the tax official as less than even-handed in his dealings. “I have absolutely no doubt about Dave Hartnett’s integrity and have not met people who have.”

            This view is shared by tax directors. Will Morris, chairman of the CBI tax committee, said: “The idea that HMRC undertakes sweetheart deals is just plain bizarre to me. Anyone who has dealt with HMRC and in particular Dave Hartnett knows they hold most of the cards. They are not a soft touch.”

            Billions recouped

            Some tax professionals think those accusing Mr Hartnett of favouritism have focused on the wrong target, pointing instead to pioneering deals he struck with Liechtenstein and Switzerland. These agreements, designed to recoup billions of pounds from wealthy users of secretive tax havens in return for lenient penalties or anonymity are praised by many advisers as pragmatic but viewed by some as unprincipled.

            The accords lend insight to Mr Hartnett’s negotiating style when working with other national tax authorities. Oupa Magashula, commissioner of the South African Revenue Service, has a close relationship with HMRC and said Mr Hartnett’s approach to investigating and information sharing was “done in his estimable style of searching for a common or mutual benefit”. It was offered, he said, “in a spirit of true partnership often way beyond standards expected in law or international treaties”.

            The trouble with Dave is he could never stop  . . . meddling with things

            – Former colleague

            Mr Hartnett championed greater cooperation and capacity building throughout Africa, he says. He also travelled widely, giving public speeches about how to organise tax collection. “Dave Hartnett has left an indelible mark in Africa”, he said.

            In the US, too, there is praise. Don Korb, who was IRS chief counsel between 2004 and 2009, and now works for Sullivan & Cromwell law firm in Washington swapped ideas with Mr Hartnett on many occasions in his term. “Dave is certainly a cutting edge thinker in the world of tax administration”, he said.

            But when Mr Hartnett retires this summer, accolades like these are likely to be drowned out by recriminations. Anthony Thomas, until recently president of the Chartered Institute of Taxation think tank, said Mr Harnett has been publicly pilloried. “Rather than being remembered as a dedicated public servant with deep tax knowledge who acted with honourable intent, he will be remembered as the man who allegedly did deals with Goldman Sachs and Vodafone”.

            A former colleague who has admired Mr Hartnett for much of his career said the damage to his reputation can can be traced to the same characteristics that made him great. “Where have things gone wrong? I think he got caught up with his success and became complacent. He should have seen the warning signs and pulled back from hands-on involvement and strengthened governance” he said.

            “He was an inspirational figure. He was the tax man’s tax man. But he probably didn’t look in the rear-view mirror.”

            TPG and US Airways look at American tie-up

            Posted on 31 May 2012 by

            Private equity group TPG and US Airways are in talks over a joint bid for AMR Corp, the parent company of American Airlines, according to people familiar with the situation.

            American, the third-largest US carrier, filed for bankruptcy protection in November citing untenable labour costs. For US Airways, the fifth-largest carrier, working with TPG would add financial heft and an investment group with experience in the airline industry.

              The talks are at an early stage, any deal would be stuck once American exited the bankruptcy procedure and a possible partnership is just one of several options under consideration, according to people familiar with the situation.

              The private equity group would be interested in a deal that provided the opportunity for operational improvement, rather than just straight financing, according to those people.

              Rick Schifter, a managing partner at TPG, previously sat on the board of US Airways and David Bonderman, a TPG co-founder, is an experienced airline investor. He has been chairman of Ryanair for 15 years, even though TPG no longer has a stake in the European budget airline.

              TPG declined to comment. US Airways did not immediately respond to requests for comment.

              AMR filed for bankruptcy protection in an attempt to reduce its debt burden and squeeze costs after losing ground to rivals for more than a decade after American shunned bankruptcy in the early 2000s and sat out the wave of consolidation that followed.

              Under bankruptcy rules, AMR’s management has an 18-month “exclusive period” in which the company can determine its own plan of reorganisation and can bat away proposals from third parties.

              After that period, or once AMR has filed its standalone plan with the court, creditors can propose alternatives, possibly in conjunction with potential buyers.

              AMR said that it had agreed with creditors that it would develop potential consolidation scenarios, but that “this agreement does not in any way suggest that a transaction of any kind or with any particular party will be pursued.”

              Industry experts said they also expected United Continental and Delta Air Lines to look at the possibility of bidding for AMR. However, any bid would be subject to intense antitrust scrutiny after a series of mergers that has left the industry highly consolidated.

              US Airways, the smallest of the US’s national carriers, has long been considered a logical merger partner for AMR and has been public in its support of further airline consolidation. AMR has previously dismissed talk of a tie-up while the company is still in bankruptcy.

              The potential tie-up between TPG and US Airways was first reported by Reuters.

              TPG has been known for investing in airlines since the private equity group took a stake in Continental Airlines in 1993, helping to turn the company round and making significant profits in a sector better known for destroying the capital of optimistic investors.

              Commission barks up the wrong tree

              Posted on 31 May 2012 by

              Just like a teacher with her less disciplined pupils, the European Commission has handed out its reports to the 12 EU countries it believes are guilty of macroeconomic imbalances. These documents – which will be discussed at the next European Council – include recommendations that, if not acted upon, could lead to the imposition of financial sanctions.

              In principle, the decision to look at indicators that go beyond the fiscal position of the individual member states is welcome. The crisis was a product of private as well as public sector imbalances and it is only by recognising the importance of both that the eurozone can hope to find a way out of the woods.

                But in spite of this encouraging step, the commission has failed to show it fully understands that imbalances are a two-way problem. Too large current account surpluses are as damaging as excessive deficits. And yet, when the commission chose which countries to single out for further analysis, it used criteria that are skewed against the countries in deficit.

                As a result, for all the impressive paperwork produced, the reports say little about one of the eurozone’s main problems: Germany’s large current account surplus. This was – some would say unsurprisingly – just below the 6 per cent limit that is considered worthy of attention.

                Having ignored the real elephant in the room, the commission could then concentrate on Brussels’ all-time favourite – the fiscal state of individual countries. But even here, the analysis presented is not fully convincing.

                Take the case of France. The commission seems determined to enforce the deficit target agreed for 2013. But this is barking up the wrong tree. France’s priority should be to draw a medium-term plan of fiscal consolidation and structural reforms, not to rush through a set of immediate austerity measures that risk choking off its already struggling economy.

                To be fair, Olli Rehn, the EU’s economic affairs commissioner, opened the door to an extension of the 2013 deficit target for Spain, provided it presents a credible plan of fiscal consolidation. But while politically and economically wise, this move was somewhat overdue.

                The message the commission is sending about Spain shows it can be sensible when assessing the problems of the eurozone. But until it is willing at least to identify all of the currency bloc’s problems, it will do little to help to find a meaningful and long-lasting solution to the crisis.

                More of the same won’t end stupidity

                Posted on 31 May 2012 by

                Several weeks after rumours surfaced of a “London whale” taking huge positions, JPMorgan Chase announced it had suffered a $2bn loss on hedging activity that its chief executive Jamie Dimon rightly called “sloppy” and “stupid”. Within days, the $2bn loss was rumoured to have grown much larger, although the bank has not disclosed details.

                The US Securities and Exchange Commission and, more oddly, the FBI are investigating the situation. Certainly the SEC has reason to check the bank’s disclosures, but hopefully neither losing money nor stupidity have become crimes.

                  People have already seized on the incident to call for more regulation, including a tougher “Volcker rule”. Others will no doubt say this shows regulators lack resources to police the system. Maybe when we know the facts we will conclude there are things that can be done better. But “ready, shoot, aim” shouldn’t be our approach. The public deserves better than saddling the economy with rules to pretend we are doing something if those rules won’t work.

                  A simpler and more effective approach would be a “whale rule” requiring immediate public disclosure – say, within 48 hours – of any whale positions. Positions in US Treasuries should be excluded, but otherwise a linked trading strategy involving a gross position greater than $25bn, perhaps – or even $50bn – would be subject to a public reporting requirement.

                  Without drowning the market in details of smaller positions (which should remain confidential), a whale rule would give the market details of enormous trades by regulated banks. We do something similar for personal securities trading by officers, directors or 100 per cent holders of listed companies. They have two days to disclose purchases or sales to the SEC.

                  This should guarantee that CEOs, regulators and investors are aware of huge bets. Not only would investors find out things they should know but the state would not have to hire people to implement more rules.

                  The Office of the Comptroller of the Currency and the Federal Reserve already have legions of staff posted permanently in the nation’s largest banks with authority to halt any practice they deem “unsafe and unsound”. If the supervisors didn’t react to JPMorgan’s whale, there is little reason to believe that giving the same people more rules to enforce would help.

                  If government supervisors did try to control things and the bank defeated their efforts, that would be a more persuasive case for stronger rules. But first we need to lift the secrecy surrounding what the supervisors knew and when they knew it. Accountability should be a discipline among regulators, not just among the regulated.

                  The dangers of over-regulation are apparent from one of the most sweeping increases of regulatory costs and burdens in the Dodd-Frank act. This provision gives the Fed authority to examine and supervise “systemically important financial institutions” (SIFIs) outside the banking system. Though well-intended, this step is likely to prove very costly because it can smother companies under supervisory blankets that will degrade their flexibility and competitiveness.

                  If the Fed couldn’t stop the London whale inside a bank it knows intimately, what reason is there to think it will do any better spotting, let alone controlling, the risks at General Electric, Fidelity or whatever other companies are ultimately determined to be SIFIs?

                  Are the costs of increased bureaucracy and moral hazard that Dodd-Frank will cause outside the banking system really justified by more protection for the public? If not, we would gain as much from scrapping the regulation of SIFIs and simply asking banks to hold more capital, be more liquid and diversify more so they can cope whatever happens to a supposed SIFI.

                  Risk-taking is essential to our economy and inherent to capital markets. Large institutions such as JPMorgan make very large profits and must be expected occasionally to have very large losses. JPMorgan’s capital reserves are there to absorb losses on loans or on transactions, and to some extent that is normal. While it never hurts for the SEC to take a quiet look at a company’s disclosures, large trading losses are not necessarily cause for criminal investigations or a public circus.

                  The writer is chairman of Breeden Capital Management and was the Securities and Exchange Commission chairman from 1989 to 1993

                  Spain faces extra risk to funding costs

                  Posted on 31 May 2012 by

                  As Spain’s debt crisis deepens, investors are warily eyeing a trigger that could send yields on the country’s sovereign debt into bailout territory.

                  The number to watch is the difference between Spanish 10-year yields and that of a basket of triple-A rated European debt. If the premium demanded to hold Spanish government bonds stays at more than 450 basis points – it has been trading above that since Monday – the situation facing Madrid could deteriorate.

                    The reason is LCH.Clearnet, Europe’s dominant clearing house. At that level, LCH could decide to impose additional margin requirements on banks using Spain’s government debt as collateral to secure short-term funding in repurchase – or “repo” – deals. Such a move risks aggravating the liquidity issues affecting Spanish lenders.

                    LCH is expected by analysts to raise the margin payment, or extra deposit, it demands, possibly in days. It typically imposes an additional margin requirement of 15 per cent when the yield spread rises above 450bp. On Thursday Spain was trading at 470bp.

                    Past margin increases on Irish and Portuguese debt unnerved bond markets, exacerbating problems at the sovereign level, and helped push Dublin towards a rescue. Some banks sold government bonds in an effort to raise more cash to meet the margin requirements, driving yields even higher. With Portugal and Ireland, LCH raised margins within five days of the spread rising above 450bp.

                    “Spanish banks’ funding costs through repo are on the verge of increasing,

                    possibly very sharply. That’s important, not least because it would increase reliance on European Central Bank or other sources of eurozone funding,” says Don Smith, an economist at ICAP.

                    Margin increases for Portugal and Ireland had at times made the cost of repo funding for their domestic banks “eye-wateringly expensive”, he says.

                    Eurozone banks faced a liquidity crunch at the end of last year when the sovereign debt crisis hit public bond markets. A €1tn-plus injection by the ECB into the euro area’s banking system plugged the funding gap for hundreds of banks across Europe, with lenders in Spain and Italy using a chunk of the three-year money to buy government bonds. But as the impact of the ECB’s money has worn off and worries about Spain have grown, sovereign bond yields have jumped.

                    Spanish banks are finding it difficult to raise money in public bond markets at affordable levels as investors demand higher returns to compensate for additional risk. Yields on Spanish 10-year government bonds have risen sharply, taking them this week almost to euro-era highs hit last autumn. A rise to 7 per cent, from Thursday’s 6.56 per cent, is seen as unsustainable.

                    LCH says the yield spread is one of many factors it considers when determining whether to increase margin required for European government bonds and that it is constantly evaluating margin cover.

                    While a material increase has typically involved a payment of up to about

                    15 per cent of a transaction as an indemnity against the risk of default, additional costs would be incurred should individual banks see their credit rating fall below a minimum BBB.

                    That is a real risk. Policy makers and analysts are concerned about Madrid’s ability to meet economic targets and address problems in banks which lent heavily in the country’s property boom and are now sitting on a mountain of bad debts. Many have already suffered rating downgrades, and plans to inject billions into Bankia via the state bank bailout fund have met with a tepid response.

                    Some analysts have suggested the fact Spanish lenders had been heavy users of the ECB’s three-year loan programme may mean they had become less dependent on accessing short-term markets. The European repo market was estimated to be worth about €6tn at the end of 2011, with at least a third cleared by central counterparties.

                    Richard Comotto, senior visiting fellow at the ICMA Centre at Reading University, says the use of clearing houses to process repos offered a lifeline for Spanish banks, enabling them to access term funds in a way that would have become almost impossible. “It’s kept the term market open,” he says.

                    He adds that, while he expected LCH to be more cautious in raising margins in Spanish sovereign debt after seeing the impact on bank funding in Ireland and Portugal: “There would be no mileage in getting it wrong.”

                    Insurers face clash of rules

                    Posted on 31 May 2012 by

                    Regulation is changing the equation for European insurers operating in the US.

                    At least one disposal is certain: the European Commission has ordered Dutch group ING to offload its insurance and investment management business in the US – along with that in other regions – as a condition for receiving state aid during the financial crisis.

                      Regulatory concerns could also push Europeans to sell their US operations in a less direct manner, say analysts.

                      The capital-intensive nature of many US life assurance products make American operations obvious disposal candidates for European groups whose regulatory capital positions are a potential problem.

                      They include Aviva, whose incoming chairman and interim chief executive John McFarlane acknowledged last month that the UK insurer needs to improve its capital position “materially”.

                      Yet with US life companies trading at a discount of about 10 per cent to their book value, analysts say few European insurers will be in a hurry to sell the assets.

                      Prudential paid only 46 per cent of European embedded value – an insurance-specific measure – for Swiss Re’s closed US business.

                      Still, new rules threaten to bring matters to a head.

                      Brussels is in the process of deciding which countries it deems to have an “equivalent” regulatory system to Solvency II, the capital requirements regime due to take effect at the start of 2014.

                      Unless a country is deemed equivalent, EU-based insurers’ overseas operations would have to comply with Solvency II as well as local rules.

                      Kevin McCarty, president of the National Association of Insurance Commissioners, indicated last month that US regulators had no intention of becoming equivalent.