Jeremy Warner's Outlook: Blood on the boardroom carpet avoided as M&S opts for Lord Burns as chairman

Bad vibes but no meltdown yet - Safeway: legal action pending?
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The Independent Online

An honourable solution that will allow everyone to withdraw from the fight with their heads held high, or a messy fudge which will only confuse the chain of command at Marks & Spencer and hinder the high street retailer's return to health? As compromises go, this wasn't a bad one. Paul Myners, the existing but "interim" chairman wants to stay on at least for as long as it takes to find out whether his choice of Stuart Rose as chief executive can vindicate his rejection of Philip Green's £4 a share bid.

An honourable solution that will allow everyone to withdraw from the fight with their heads held high, or a messy fudge which will only confuse the chain of command at Marks & Spencer and hinder the high street retailer's return to health? As compromises go, this wasn't a bad one. Paul Myners, the existing but "interim" chairman wants to stay on at least for as long as it takes to find out whether his choice of Stuart Rose as chief executive can vindicate his rejection of Philip Green's £4 a share bid.

Kevin Lomax, the senior independent non-executive director at M&S, favoured a change of command in the belief that Mr Myners is too close to Mr Rose to know whether he is doing a decent job or not, and in any case would be quite incapable of making an unemotional decision should Mr Rose fail. The fact that Mr Myners and Mr Lomax can't stand each other has hardly helped matters.

The solution is to bring in Lord Burns, widely regarded as a wise and safe pair of hands, as chairman-designate while allowing Mr Myners to stay on until July next year. By this stage we'll know whether the Rose strategy is working or not. He's promised to start showing some sales growth by early next year, though of course he can always plead events should the consumer downturn thwart him.

Yet by having both a chairman and a chairman-designate, Mr Rose in effect becomes answerable to both of them, and if there is any disagreement whatsoever, it is likely to prove disastrous.

As a former permanent secretary at the Treasury, Lord Burns is presumably well used to and adept at playing the consummate diplomat. Unfortunately, a company in crisis is a more difficult environment to assume this role than one in which all is harmony and progress.

The scope for disagreement at M&S is considerable right now, the more so as there has already been a humdinger of a row over whether Lord Burns should be appointed in the first place, with the chief executive siding strongly with Mr Myners. Loyalties have already been sworn. Lord Burns' appointment may only have delayed the final battle, rather than defused it.

Mr own view was that Msrrs Myners and Rose should have been given their head, at least until it became obvious they were failing. Admittedly, the signs are not encouraging, but then everyone is suffering on the high street right now, and the truth is that they've had nowhere near long enough to prove themselves.

One of the objections to Mr Myners was that as chairman of Guardian Media Group alongside M&S, he had too much on his plate to be able adequately to address the huge task of turning M&S around. For some reason there is no such concern with Lord "six jobs" Burns, chairman of Welsh Water and Abbey National, non-executive director of Pearson, British Land, etc, etc, etc.

Bad vibes but no meltdown yet

Like a developing case of flu, there is a growing sense of unease and suspected ill-health in hedge fund land. Something is wrong, yet nobody can say quite what, who's exposed and how serious it might be. Is it as bad as Long-Term Capital Management (LTCM), where the Federal Reserve had to organise a rescue for fear that any collapse would cause multiple bankruptcies across the capital markets, or is this no more than a small number of minor players losing their shirts and a few bad months for everyone else?

At this stage it seems more of the latter than the former. Quite a few US funds seem to have got badly burned buying debt in General Motors and then supposedly hedging the position by selling shares in the same company. Everyone knew or guessed that General Motors debt was about to be rated junk by the credit rating agencies and the downgrade was therefore assumed to be already in the price. However, these announcements invariably have a pronounced negative effect on the share price, for the company is then bound to be pressurised to raise more equity.

For some reason, traders had failed to realise that a downgrade to junk would force many debt holders that are only allowed to hold investment grade bonds to dump their positions, thus causing the price to collapse. At the same time, the corporate raider, Kirk Kirkorian, unexpectedly popped up with a tender offer for 9 per cent of the equity, causing the shares to go sharply higher.

The fact that so many hedge funds appear to have been caught short on such a high risk trade tells us virtually nothing about whether capital markets are about to be consumed by some all embracing systemic crisis. In fact this seems rather unlikely. All the evidence is that hedge funds are less highly geared today than they were at the the time of LTCM.

What it does tell us is that there are an awful lot of stupid traders out there, who in their desperation to earn their fee are taking some high risk bets. This in itself can be dangerous and is quite at odds with what the original purpose of hedge funds was meant to be. Wall Street investment bankers sometimes call the phenomenon that has befallen hedge funds "reaching for yield". As decent rates of return become harder to find, traders become oblivious to risk and throw caution to the wind in their search for money making opportunities.

Many of the founding principles of hedge funds, which as their name implies are meant to generate decent returns by hedging investors against loss, have been forgotten in the reach for yield.

The very success of the hedge fund industry has attracted an army of chancers, a process encouraged by a number of the big investment banks who are only too willing for a price to provide the budding hedge fund manager with premises, capital raising services and dealing facilities. The fees too - typically 2 per cent of funds under management and 20 per cent of any upside - are quite out of proportion to anything charged in traditional investment management.

The result is a hedge fund bubble, in which an ever greater weight of money pursues the same prey, creating some obvious distortions in capital markets and a generally lower rate of return for all concerned. There are still some outstanding hedge fund managers out there, but across the piste, hedge funds as an asset class are little more than high risk building society accounts - poor return for quite a high chance of losing your shirt.

Eventually, the deluge of johnny-come-lately money now flowing into the hedge fund industry will realise its mistake. This can either happen slowly and rationally, allowing for the industry to be cleansed of some of its wilder elements, or because of some humongous scandal. There's still time for it to be the former.

Safeway: legal action pending?

When a takeover goes wrong, the last refuge of the scoundrel is to turn round and blame the advisers. This hasn't happened quite yet with Morrisons Supermarkets' acquisition of Safeway, yet in his darker moments, there's no doubt in Sir Ken Morrison's mind who is most at fault for the calamity of the Safeway acquisition. He wanted to do it, yes, and still believes it was a wholly necessary response to the growing power of the big national chains, but would he have acted had he known quite how bad things were at Safeway?

Curiously, there was never a full due diligence conducted by Morrisons on Safeway, but there was some sort of a vetting exercise which perhaps should have thrown up the fact that four weeks before the merger went through a new accounting system was introduced. This was billed by Safeway executives as just an upgrade, but it has assumed a far greater significance in the eyes of Sir Ken and his colleagues, who see it as symptomatic of a lack of financial controls and adequate financial reporting at Safeway. Could Sir Ken sue for this oversight? If Robert Perelman, the US billionaire, can get $604m out of Morgan Stanley for misrepresenting the financial health of Sunbeam, a company everyone knew was bust, at the time he bought it, then anything's possible.

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