Rough justice or a legitimate City prosecution?

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The Independent Online

In his time, Sir Michael Richardson was one of the best connected and most accomplished City practitioners in the business. He was a deal maker par excellence, one of privatisation's chief engineers, a gossip and a charmer, a friend of Margaret Thatcher, and he helped lead three of the City's most powerful firms ­ Cazenove, NM Rothschild and Smith New Court ­ through some of their most glorious years. That a career as distinguished as this one should end on such a dismal note ­ hounded out of the City and told he is neither fit nor proper ever to work in the financial services industry again ­ is a terrible shame, whatever your views on the rights and wrongs of the judgment.

The language of the Financial Services Authority's ruling doesn't pull its punches. Sir Michael, it says, acted in reckless disregard of warnings, he failed to appreciate and ignored the risk that his letters might lead to fraud or money laundering, he failed to verify the accuracy of what he was signing, he ignored the instructions of his superiors, he failed to use his own organisation's well-established new business compliance procedures, and so on and so forth. It's hard to imagine a more damning indictment, or a more humiliating end to a once brilliant career.

Sir Michael may be down and out, but he still has numerous friends and supporters in the City, and they were out in force yesterday to defend him. Even prior to publication of yesterday's ruling, he had already had favourable editorials written in two national newspapers and one regional, and you would indeed need a heart of stone not to feel some sympathy for his predicament. There is no question of Sir Michael intending to lend support to a fraud. To his friends, his only crime was to do what City practitioners have done down the ages, and that is to write supportive letters of reference in the hope that the favour might one day be repaid with a fee.

Sir Michael realises he made a big error in not acting by the book, but, at the age of 76, he belongs to a generation that neither expected to do things in that way nor thought it the best way of winning business. His defence is similar to the one people use when caught speeding: haven't the police got better things to do with their time than pursue minor offenders like me? Where was the FSA when the policyholders of Equitable Life and Independent Insurance needed it most? Prosecuting Sir Michael Richardson for trying to drum up some business is certainly one way of looking at it.

Unfortunately for Sir Michael, a regulator's job is meant to be disciplinary as well as preventative. The FSA's presumed failings in the Equitable Life and Independent Insurance debacles are nothing to do with its parallel role of ensuring compliance and prosecuting a breach of it. The facts of Sir Michael's case speak for themselves. He wrote letters of reference for a financier of questionable reputation giving the impression of access to hundreds of millions of pounds worth of credit. He did so, moreover, after a verbal warning from counsel for NatWest that the bank's name was not to be used in connection with the financier. US lawyers had also complained that some of his previous letters had been used for the alleged purpose of "advance fee fraud". And yet still he persisted. In the circumstances, Sir Michael might count himself lucky not to be prosecuted for being an accessory before the fact.

It can readily be seen that whatever else Sir Michael is guilty of, crass stupidity figures high on the list. But did the FSA really have to be so brutal in its punishment and does that punishment really fit the crime? Sir Michael is like the pensioner who carries on driving long after he has become a danger to others. He might have retired gracefully years ago, but he has carried on and the FSA has had to rule that he should now be forcibly removed. People are entitled to make up their own minds on the fairness of it all.

Investment bubbles

To many it may look a bit late to be analysing the internet bubble and pointing out how similar it was to all previous technology-driven investment bubbles. Either you made money out of the great TMT investment boom or, more likely, you lost it, but in any case the lessons of history may after the event seem largely irrelevant.

We are, however, still living with its consequences and, as Dr Sandy Nairn, the chief investment officer of the Scottish Widows Investment Partnership, eloquently explains in a special Intelligent Investor report on the phenomenon*, the parallels with past bubbles are too striking to ignore.

In the report, Dr Nairn revisits the introduction of 10 different "transforming" technologies across two centuries from railways to electric light and crude oil, and from the automobile and the telephone to the computer and the internet. In all cases he finds the investment phenomenon that accompanied them to be remarkably similar. The key findings are that the vast majority of investors fail to capture the gains that are in theory available from the introduction of new technologies and that the great bulk of companies that attract capital to exploit the technology fail to deliver the high returns expected.

Perhaps of most significance, because we are in that particular phase now, is that all market bubbles end in an oversupply of capital and are followed by periods of retrenchment, recession and restructuring which wipes out most of the companies that have been set up to exploit the new technology. They either go bust or they get consolidated and taken over for a fraction of the capital invested in them.

There are other similarities, too, between the technology-driven bubbles of the past and the one just gone. One is that the dangers of investing in speculative bubbles are invariably pointed out by the quality press at the time, but that it is encouraged by new media and by the spivier elements of the press.

Unfortunately, in a mania the latter hold more sway. The warnings are ignored as investors fall prey to fashion and the promotional activities of those seeking to take advantage of the bubble conditions. Another commonality is that conventional valuation techniques are abandoned when they can no longer justify stock prices. At this stage, new, spurious techniques are invented.

The post-bubble phase of fraud and scandal has yet to manifest itself fully but, if history is any guide, it is only a matter of time. Like a receding tide, the present downturn will expose a flotilla of corporate wrecks much more substantial than the ones already poking their masts above the waves.

So are there ever any winners? As it happens there are, but the companies that consistently enjoy high returns from new technologies tend to be those that establish some kind of monopoly position, either through patent or other form of legal protection. Alexander Graham Bell, the inventor of the telephone, was extraordinarily aggressive in protecting his patents and his companies were highly successful. A modern parallel is Microsoft.

However, for everyone else the prognosis is much more gloomy. It is not yet clear how bad the fallout from the latest technology bubble might be, but there is every reason to believe an extremely serious overallocation of capital took place, which will take several years to work its way out of the system. As Dr Nairn points out, the time to buy back into these sectors is the time when the assets are marked down to a level where an economic return can at last be earned. For most technology stocks, that point has not yet been reached.

Beyond the Internet Bubble, by Dr Sandy Nairn. investorpub@aol.com

j.warner@independent.co.uk

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