Breathtaking incompetence is spelt out
Tuesday 04 April 1995
Just about everything that has been suspected about the disaster since the weekend of the collapse seems to have actually happened, and more. The villain of the piece, Nick Leeson, popularly painted as a devious high-roller who had been making a fortune for the bank, could not have made money on the scale he was claiming, even during the good times last year. Barings need not have pampered him after all.
We know he was a rogue trader, because Eddie George, the Governor of the Bank of England, told us so at the press conference called to explain why the Barings rescue failed. But that first weekend, bankers involved in the rescue attempt actually found it hard to grasp the other dimension of the story, which was the awful quality of Barings' management.
It was as if people were grappling for a more rational explanation than the one that was staring them in the face, which was that something very stupid indeed had been allowed to happen, in the face of a series of warnings that should have been heeded.
Barings made no attempt to reconcile the positions Mr Leeson was taking, to question the margin calls or to seek explanations about his imaginary clients.
There was a complete failure by management to follow through on information it was given and - as the documents we report today demonstrate - key recommendations last summer, that would have prevented the losses, were ignored. How deep will ING, the new owner of Barings, have to dig in the organisation before it really finds sound management?
SBC shows where reform is needed
Swiss Bank Corporation unintentionally performed a public service through its dealings in electricity shares during Trafalgar House's bid for Northern Electric. By building up large positions through its market-making arm, the bank focused the attention of listed companies on an area of the securities market that is overdue for reform.
The issue is the ease with which strategically important stakes can be built in companies while hiding behind dealing privileges to avoid disclosure, which is calculated to give any chief executive of a takeover target a bout of nerves. The stakes can be passed on intact at the drop of a hat to potential predators.
SBC's use of derivatives in these particular transactions caused even greater controversy, as it showed how a bidding company can build up a substantial interest in its target by means of instruments that substitute for purchasing the underlying shares - and avoid the obligation to disclose under the Companies Act.
This is not the first time an attempt has been made to overhaul the system, which was set up at the time of Big Bang in 1986. But effective rearguard actions by market-makers, always a powerful force in the Stock Exchange's governance, have succeeded in blocking radical change. Yesterday the exchange left little doubt that the market-makers at last face curbs.
Old style jobbers and the market-makers that replaced them in 1986 needed some protection from full disclosure, because if too much was given away their rivals might guess their positions and bid against them.The world has moved on, and those privileges now cover a far wider-reaching and more sophisticated range of activities, mixing both cash and derivatives. The market-makers themselves are for the most part owned by vast integrated securities houses and banks.
Tougher disclosure rules will further complicate the future of an already beleaguered profession. The Office of Fair Trading has its competition sights on other market-making privileges, which it says must be abolished. The upshot will be to squeeze profitability, probably hastening the rise of the more automatic order-driven dealing system, matching sellers and buyers, that is common in other international financial centres.
Cable revolution tests investors' appetites
The buzz on Nynex CableComms, the latest of the UK cable companies to proceed towards flotation, proves how difficult it is to judge the sector on traditional measures. Its promoters talk of cash flow, not earnings; of the next decade not just the next few years. They take their cue from the experience overseas, particularly in the US, when it comes to valuing the company; yet, the UK competitive environment is fractured and fluid.
It may be time to take a long step back, to treat the sector less like "the bio-tech play of the 1990s" and more like any other market place, albeit one with some peculiar characteristics.
On this measure, there is certainly room for circumspection. The companies are not profitable, and won't be for some time. That is not unreasonable, of course - cable in the UK is a start-up.
But it is hard to know what the revenue stream will be, so far off in the future, not least because the products the cable companies carry may spill over from television programming and data and voice telephony to all manner of high-tech, interactive services that are but a gleam in a technologist's eye.
Investors might look at a few variables when comparing the publicly quoted cable companies. Among the three revenue streams (business telephony, residential telephony and cable TV), each company has set a different strategy. For example, General Cable is weighted toward the business market; Nynex promises discounts compared to BT in order to attract residential customers.
Some companies have large, contiguous franchise areas; others have bits and pieces here and there. Nynex, probably rightly, makes much of its Manchester-area licences, where it can provide a regional telephone and cable network all on its own.
Finally, good management is as important as strong finances and quick network building. Cable companies need to be responsive to customers, on the lookout for additional products and ready to invest to keep abreast of new technology.
They certainly should be capable of making money for their investors.
But three flotations on the trot is a real test of investor appetite. Moreover, TeleWest, the first to be floated, is now trading 12p below its offer price.
Not all the operators will make the right decisions, control costs carefully and remain poised to enter emerging product markets. Each should be looked at carefully, not as a "hot stock" but on fundamentals.
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