Outlook: Federal Reserve chickens out in failing to take bold action

LCH/Clearnet; Public to private; Boeing/BAE
Click to follow
The Independent Online

The quarter point cut announced last night in US short term interest rates seems to me to the worst possible thing the Federal Reserve could have done. The circumstances called for braver action - either a deeper cut, or even more controversially, no cut at all. The former action, possibly combined with a statement of intent to use non conventional measures to combat deflation, might have delivered the fire break against further deterioration the US economy needs. Alternatively, by hijacking the markets the latter course of action would have sent out a confidence boosting message that basically everything is fine and that the American economy will eventually recover under its own steam.

A quarter point is neither one thing nor the other. With interest rates already so low, its impact on demand is likely to prove negligible, while the accompanying statement from the Open Markets Committee was about as confidence inspiring as a wet Sunday afternoon. There were a few crumbs of comfort including the gob-smacking observation that the economy is likely "to improve over time", but very little else to get the economic pulse beating strongly again.

All the Open Markets Committee would say is that the possibility of "an unwelcome substantial fall in inflation", deflation in other words, would remain the predominant concern "for the foreseeable future". The Fed's observation that despite some signs of improvement, the economy had yet to exhibit sustainable growth made particularly gloomy reading.

The Fed is being uncharacteristically cautious in its policy action and by doing so it may be missing a god-given opportunity to revitalise the US economy. All the other ingredients are in place - lower taxes, higher spending, and a weaker dollar. A substantial cut in interest rates might have been the assured coup de main that's really needed.

A series of quarter point cuts lack impact and are no good to anyone. The Fed has suffered a sudden loss of courage, and it seems to me that it has only delayed the point at which it will need to take more dramatic action.

LCH/Clearnet

Trouble is brewing in the arcane world of central counterparty clearance. To the anger of the London Stock Exchange (LSE), and after negotiations stretching over more than a year, The London Clearing House (LCH) has agreed merger terms with its French owned counterpart, Clearnet.

The stock exchange doesn't have a problem with the deal in principle, for the LSE has long preached the benefits of an independent, pan-European central counterparty offering services to trading platforms across the continent.

But in practice, it's hopping mad, for Clearnet is largely owned by its Paris based rival, Euronext. Jean-Francois Theodore, the Euronext chairman, has already outmanoeuvred the LSE once when he outbid it for the London futures exchange, Liffe, and now he seems intent on doing the same with the LCH.

Central counterparty clearing is such an obscure business that even those that use it have difficulty explaining precisely what it is. Here goes anyway. The central counterparty stands between the buyer and seller of securities, acting as buyer to the seller and seller to the buyer. The supposed benefits are that the clearer underwrites the risk of failure to settle, as well as providing anonymity to the buyer and the seller. Crucially, it allows big traders to net off their transactions each day, so that not all of them have to be expensively settled. Not only a useful service, then, but one that has come to be be seen as vital to the efficient operation of exchanges.

The London Stock Exchange claims not to be interested in owning a clearing house outright, unlike its counterparts in Germany and France, but instead supports the idea of a not for profit and wholly independent clearing house that would make its services available to all. As things stand, the LCH largely fits this model. Owned by its users, any surplus it generates is returned to them via rebates.

On merging with Clearnet, LCH becomes a fully fledged commercial operation. Euronext has leant over backwards to try and allay any fears this change might cause. Charges will be capped, and although its own economic interest in the combined company would by 41.5 per cent, it has agreed to limit its voting rights to just 24.9 per cent. This has not satisfied the stock exchange, which says that if the deal goes through, it will be seeking alternative central counterparty arrangements.

M. Theodore thinks the stock exchange's response is pique for being sidelined over Liffe, and there may indeed be an element of that. Yet there is also a genuine difference of view. Since the fiasco of the failed merger with the Deutsche Borse, the LSE has vigorously been arguing the case for competing European exchanges serviced by separate settlement and clearing organisations. Vertically integrated settlement and clearing merely supports local monopoly in share trading platforms, the LSE argues.

LCH.Clearnet is not yet a done deal, and although the LSE's threat to go elsewhere might ring a little hollow - the alternatives of either setting up its own central counter party or using the Deutsche Börse's Clearstream scarcely look any more appealing - it certainly gives pause for thought.

Public to private

The collapse in stock markets has prompted a flood of public to private, bargain hunting takeover bids, yet it has taken only the most shallow of rallies to make them start falling like nine pins. Yesterday it was the turn of David Whelan, chairman of JJB Sports, to say he was withdrawing his £517m bid for the company. The problem wasn't the finance, but that the board couldn't recommend the offer to shareholders. The day before it was McCarthy & Stone. Shareholder opposition may force Permira either to raise its offer for Debenhams or abandon it entirely. In other cases, substantial shareholders have opted to retain their holdings, even though the offer has gone unconditional.

This series of snubs has highlighted a basic flaw with the whole concept of public to private takeover bids. Most private equity approaches fall at the first hurdle, as invariably they are conditional on a satisfactory due diligence. That makes it very easy for boards to say no.

Even assuming they overcome this difficulty, the very fact that private equity is prepared to pay a premium to the market price means the company must in all probability be worth a whole lot more. To accept a private equity bid is therefore an admission of failure by both management and owners. Those still in quoted equities after a three-year bear market might as well hang around for the recovery having already suffered all the pain. For the time being private equity seems to have missed its chance. It should have moved earlier, when everyone was still desperate to sell.

Boeing/BAE

Another visit to London by the chairman of Boeing and another expert display of stonewalling on the subject of a merger with BAE Systems. Yes, says Phil Condit, Boeing is looking at BAE and, yes, it would be interested in a deal if the numbers stacked up. But, no, Boeing is not actively discussing a merger, either with BAE itself or with the British government. It would be a nice deal to do, but not a must deal. Mr Condit would be daft to say otherwise, for any such statement would only put a rocket under BAE's share price. But the regularity with which he now visits these shores to press the flesh says that a deal cannot be that long in coming.

jeremy.warner@independent.co.uk

Comments