Jeremy Warner's Outlook: Citi's Prince not dancing, but limping

Barclays prepares to fold its tent on ABN; Taxing the non-doms – what a good idea
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The Independent Online

Just a few months back, Chuck Prince, chief executive of Citigroup, professed himself to be "still dancing" despite the looming crisis in credit markets. Now he's fallen over and broken his ankle. Whacking great write-offs in respect of both the sub-prime meltdown and the private equity finance which Mr Prince thought so recently worth dancing about have reduced his third-quarter profits by 60 per cent.

The damage at UBS, the Swiss-based investment banking and wealth management group, is even worse. Deep write-downs in connection with exposure to the sub-prime crisis and the downturn in fixed income more generally have caused the bank to plunge into losses for the third quarter. Yet despite the damage, both share prices actually rose yesterday, the reasoning being that if this is as bad as it gets, then perhaps it is not so bad after all.

UBS sacked its then chief executive, Peter Wuffli, little more than two months ago, so the new man in the hot seat, Marcel Rohner, has every incentive to make the kitchen sink exercise announced yesterday as vicious as possible. Everything would have been thrown into the pot in an effort to give Mr Rohner as clean a slate as possible from which to rebuild.

Mr Prince appears to have been equally brutal in his assessment of the damage. Both banks are expected to bounce back a bit in the fourth quarter, assuming the US doesn't plunge, as feared, into recession. The upshot is that profits for the year as a whole are unlikely to be down by more than 10-15 per cent, and perhaps even less. Everyone forgets that the first half was the most profitable ever for banks of this type.

Perhaps more worrying is the outlook for next year, where earnings forecasts for the banking sector as a whole are being trimmed by a similar order of magnitude. If there is a recession, then, with more dramatically affected impairment charges, things are going to look much worse.

Even so, for the major players to have emerged from such a serious crisis with earnings still big enough to invite headlines about profiteering bankers is quite an achievement. As the markets correctly surmised yesterday, the worst of it may already be in share prices.

Barclays prepares to fold its tent on ABN

John Varley, the chief executive of Barclays, must surely have believed his boat was coming in when in late July he announced that China Development Bank and the Singapore sovereign wealth fund Temasek were buying into Barclays stock. The effect was to put a rocket under the share price, causing the value of Barclays' all-stock offer for ABN Amro to soar. For a brief moment there, it looked as if Mr Varley might have outmanoeuvred the rival Royal Bank of Scotland-led consortium.

If he had been two months earlier, that might have been the way things worked out, but then the credit crunch hit, the Barclays share price headed south and a yawning gap opened up between the value of the Barclays bid and the largely cash offer from RBS. So near, and yet so far. Assuming Brussels doesn't unexpectedly throw a spanner in the works, Mr Varley will on Thursday fold his tent, collect his ¿200m (£140m) break-fee and retreat to a safe distance.

It is plainly better that Barclays swallows its pride, admits defeat and tries something else than attempts some value-destructive act of machismo. Even so, the sense of disappointment is palpable. Much of the last year has been spent waging a battle which has now been lost. The only satisfaction for Mr Varley is that he may have forced RBS's Sir Fred Goodwin to overpay.

As ever in circumstances like these, the question is what next? The China Development Bank link-up offers potentially quite profitable alternatives. According to analysis by JP Morgan Cazenove, the association might eventually add an extra £500m a year to profits.

Barclays may have missed its opportunity to become a truly global bank on a par with HSBC and Citigroup, but, even in banking, big is not necessarily best. HSBC's global approach to banking has recently come in for attack from activist investors. This column for one backed the Barclays strategy in bidding for ABN, but who knows, Mr Varley may have had a lucky escape.

Taxing the non-doms – what a good idea

Delegates to the Conservative Party conference in Blackpool must be wondering whether they are in the right place. Ah yes, promised reductions in inheritance tax and stamp duty. For the blue-rinse brigade, this is just what the doctor ordered. But tax the super-rich to pay for it?

In 10 years of power, this is something Labour hasn't dared to do, for fear of driving the wealth creators from our shores, and with them, the economic prosperity they are supposed to bring. The excuse often proffered – that it is hard to design an effective way of taxing these people – is just a lot of stuff and nonsense. Left has become right and right now seems to be left – what's going on here? You can quarrel with the way the Tories are proposing to do it, but in principle the idea of taxing the so-called "non-doms" is politically astute. For a start, they are a potentially rich source of income for the Exchequer. By taxing each of them a flat rate of £25,000 a year, the Tories reckon they will raise as much as £3.5bn.

It offends people's sense of social justice that foreigners who live in Britain yet earn their money overseas should escape tax altogether. It also creates an Alice in Wonderland state of affairs where rich foreigners can reside and work here tax-free but rich Brits have to become non-resident to get the same tax treatment and therefore can only be in the country for 90 days a year.

The sense of injustice is especially acute with non-doms – mainly financiers – who cosmetically construct their affairs so that the money is earned offshore. In today's connected, globalised environment it is possible to realise your profit more or less anywhere in the world. Where the transaction takes place is for many an entirely artificial distinction.

Rightly or wrongly, the perception is that the burden of rising levels of taxation has fallen on the middle classes, with Labour's friends among the super-rich escaping scot-free. Two areas of taxation where the charge holds particularly true are the abolition of the tax credit on dividends, which has hit pensions, and inheritance tax, where growing numbers are falling into the tax net because of rising house prices.

For Labour Party traditionalists, the Government's refusal to address privileged tax treatment for the non-doms, and actually to have created it for private equity partners, is a betrayal of purpose.

The calculation ministers make in allowing these apparent anomalies is that it is better to have the super-rich in the country and paying no tax than not here at all or paying it somewhere else. Those of us who aspire to a half-way decent London house yet find ourselves priced out of the market by foreign money sometimes struggle to identify with such pragmatic thinking, but by and large it is true that wealth creates its own wealth, which in turn means more tax revenue for the Government.

Are the Tories right in believing that they might be able to tax the wealthy just a little without driving them away? Almost certainly, though obviously there is a danger that anything they do is the thin end of the wedge. Once taxed for just a little, the temptation is to tax for more.

Not that George Osborne's surprise will turn the Tories' electoral fortunes. Alongside the relatively sensible, the Conservatives still have an unnerving tendency to knee-jerk policy on the hoof – witness the completely pointless suggestion that the Governor of the Bank of England should only be allowed to serve one term.

For years Labour has stolen the Tories' clothes. Now ministers are getting a dose of their own medicine. The Lib Dems are already committed to taxing non-doms. Only Labour continues to defend the indefensible.

j.warner@independent.co.uk

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