City has nothing to fear from monetary union
Wednesday 04 September 1996
Now there is no doubt that a major league row is going on behind the scenes between the likely "ins" and the "outs" about access to this system. The two most committed ins, Germany and France, want the outs to pay more for using Target (the system's acronym) than the ins. They also want the European Central Bank to charge the outs more for the provision of short- term liquidity in the euro. The likely outs, led by Britain, argue that this is discriminatory and against both the spirit and the letter of the Treaty of Rome. Plainly, this is an issue of some importance, otherwise the Bank of England would not be in there arguing about it at single currency meetings being held under the umbrella of the European Monetary Institute.
But its significance is actually more political than commercial. The ins have taken the view that anyone not wholly with them is against them and they are determined to penalise these wayward souls on every available front. This is but one of them. Exaggeration? Just a little, but not much. The "them and us" mentality seems to permeate every aspect of negotiations about monetary union.
With Target, there is also a subtext. By disadvantaging London, there's just a chance, German and French policymakers believe, that financial markets might start gravitating to Frankfurt and Paris. This is what Mr Cassidy is talking about when he warns about the threat to jobs in the City. In practice, however, it is highly unlikely that a marginal difference in the cost of settlement is going significantly to alter London's competitive position. Alternative methods of providing adequate liquidity will be found. Indeed, because London will not be obliged to meet the stringent capital requirements of the ins, there may actually be some advantage in being out.
The City is an ingenious place. It is no accident that the main market in bund futures is in London, when logically it ought to be in Frankfurt, for London is where the traders are and like to live, this is where the systems and infrastructure exist, and this as a consequence is where it is done best.
The City has always thrived because it is out rather than in. It has a thousand year tradition of loyalty to none but itself. And that is also why, once the great bandwagon of monetary union starts rolling down the runway proper, sterling will become as much an irrelevance for the City as it is for the rest of Europe - an exotic little inflation-prone currency. The City has survived and prospered on events far more traumatic than the arrival of the euro. For the City at least, Monetary Union is not much of an issue at all.
A blow to the reputation of Finsbury Square
This time it isn't possible to blame rogue traders in far away places. This time there is no fraud, in the generally accepted sense of the word, for senior managers to excuse themselves with. And this time, unlike the recent Jardine Fleming case where the financial damage was limited to just pounds 12m, we are talking about a very substantial hole in the accounts of what are supposed to be bullet-proof unit and investment trusts.
It would be hard to imagine a more damaging blow to the reputation of Morgan Grenfell Asset Management, and the City's investment management community more generally, than the events unfolding round at Finsbury Circus.
Peter Young was an apparently able and highly ambitious young fund manager, trained in the London tradition for the highest standards of integrity and diligence. We don't know the full story yet, but it seems almost unbelievable that in his search for performance he could have breached his trading limits in the manner now suspected. More extraordinary still is that he could have done so without his superiors noticing.
The damage here is much more than one of embarrassment. Morgan Grenfell, and more particularly its parent, Deutsche Bank, are going to have to compensate investors in the three trusts for anything up to pounds 150m. It scarcely needs saying that staff can kiss goodbye to their bonuses not just for this year, but probably next as well. The questions come thick and fast. How could Mr Young's search for performance have allowed him so to stray into such an array of companies of such obviously questionable quality?
Even accepting that he thought many of his unquoted investments were in companies about to come to market, how could he have so clearly breached established rules and practice on investing in untraded securities? More seriously, what were the failures in control and supervision that allowed him to do so? It is already clear that the buck cannot stop with Mr Young. Other heads must roll.
If there is a lesson in this miserable affair, it is the old one - that organisations which encourage the development of powerful egos and star employees only have themselves to blame when things go wrong. The irony is that Morgan Grenfell, which has fallen victim to this trait once before, on that occasion on its corporate finance side, should not have learnt it. The Guinness affair is still, after all, less than 10 years old. The set and the cast are different, but the play seems to be essentially the same - an out of control star employee.
Stagecoach ride will surely end in tears
With his casual dress code, Celtic origins and pillaging instincts, Brian Souter, probably went down a storm over an acquavit or two with the Nordic folk at Swebus.Yesterday, as the Stagecoach chairman added Swebus to his ever-expanding empire, he was all praise for the Swedes. Why, he might even arrange a Viking landing party to run things here as Swebus employs fewer staff per bus than even Stagecoach.
This presumably explains why Mr Souter is paying top dollar for the company. The price tag, including debt, of pounds 232m looks pretty fancy for a business with taxable profits of less than pounds 10m. Swebus is but one more staging post along the way to his goal of quadrupling turnover to pounds 2bn. This, and last month's still more ambitious pounds 825m acquisition of the train leasing company Porterbrook, are being financed with an avalanche of Stagecoach paper and extended borrowing facilities.
And yet, the markets haven't even blinked, marking the share price up relentlessly. Stagecoach trades on a multiple of 27.5 times earnings, which is absurd for a bus operator. Shareholders may be enjoying the ride for now. But experience tells us that such helter-skelter expansion will surely end in tears.
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