DMG faces tough battle to pick up the pieces

COMMENT: `Like the scheme for victims of pensions mis-selling, it promises to be horrendously complicated to administer, since no two clients are likely to have bought or sold at the same moment'

Imro, the fund management regulator, is in the final stages of locking into place the compensation scheme for Deutsche Morgan Grenfell's unit trusts customers, and a deeply painful experience it will be for the company too. Quite how painful is to be announced next week. Imro's ambitious young chief executive, Philip Thorpe, is going to make it as painful as he reasonably can.

Like the scheme for victims of pensions mis-selling, it promises to be horrendously complicated to administer, since no two clients are likely to have bought or sold at the same moment. The real argument, however, is over the benchmark to be used for measuring the way investors were disadvantaged by Peter Young's antics.

What would his European funds have been worth at any given moment if he had not gone off the rails? Would the value have mirrored the best Morgan Grenfell fund, the best fund in the entire European sector, or an average sector performance?

Some pretty robust words are thought to have been exchanged during negotiations between Imro and DMG, though it will, of course, all be presented as an amicable agreement between the two. With the very real threat hanging over its head of loss of registration as a unit trust manager, or worse, the loss of its authorisation as a fund manager of any variety, and the certainty of a pounds 1m plus fine, DMG really has little option other than to toe the line, even if it argues over the detail.

Once the benchmark investment fund is chosen, then the difference between its value and the actual price at which the Morgan units traded will be used to assess what individual investors lost. This tally would have to include both those who sold out early and those who held on to the bitter end.

The total cost to DMG could approach pounds 200m. The group pumped another pounds 180m into the funds to buy their flakier investments at Mr Young's inflated valuations. A substantial part of that will have been lost. So Deutsche Bank could be looking at a final tally of several hundred million, or approaching half the Barings losses last year. The size of the damage is one thing. The more interesting question, perhaps (for Morgan Grenfell is no longer an independent company), is how Deutsche Bank's Frankfurt headquarters is going to react to it.

So far, head office has stuck by Michael Dobson, Morgan Grenfell's chief executive. This is a bank that carefully cultivates an air of consensus and unruffled calm. The word crisis just doesn't figure in the bank's vocabulary. But action is occasionally taken, though you would be excused for not noticing it - witness the gentle way in which Hilmar Kopper, the present chairman, is to be moved upstairs to the supervisory board just a little early, to make way for Rolf Breuer. Mr Kopper was at the helm during a series of debacles, culminating in the unit trust scandal.

What this means for Mr Dobson is anyone's guess, but it is hard to put a positive interpretation on it. Mr Dobson fought hard and successfully in Frankfurt two years ago for a high degree of independence for the investment banking subsidiary. The embarrassing scale of the losses in London must surely diminish his influence and credibility. In the fullness of time he'll be gently eased out to quieter pastures, even if he is not dumped altogether.

It's time to invest in political rhetoric

The wonderfully named Machine Tool Technologies Association has been complaining about poor levels of investment in British industry for longer than most of us care to remember. In the old days the Association confined its remarks to the engineering industry. In conjunction with Oxford Economic Forecasting, it has now come up with a more comprehensive diagnosis and a pretty unhappy one it is too. Particularly damning is the finding that the level of capital per worker (value of tools and technology) is higher in Taiwan than in Britain.

As we approach the election, investment becomes more and more of a political issue. Labour claims that a weak investment record means the economy no longer has the capacity to grow without inflation. The Government meanwhile insists that if you look at the numbers the right way, there is nothing wrong with the British performance. The Chancellor, Kenneth Clarke, goes further to claim that the economy has been so utterly transformed by the policies of the last 17 years that the sustainable rate of growth is now sharply higher. Sounds familiar? Yes, we are at that stage of the economic cycle again.

In truth, both parties are right up to a point. Investment has been so feeble during this recovery that it is hard to take seriously the undiluted Clarke rhetoric. To believe that British industry has been miraculously transformed into a hot bed of entrepreneurial spirit and investment success is to surrender to fiction.

But there have been some very real improvements which can fairly be attributed to Government policy. The privatisation of British Telecom and liberalisation of the telecommunications market has arguably been the most successful episode in industrial policy since the war. In the hi-tech telecoms industry Britain has stolen a march on its competitor countries. Investment has been high, and the quality of the infrastructure has pulled ahead of that of many other industrial economies.

Here, then, is an example of how liberalisation of markets has led to a quite spectacular improvement in investment and service. In other areas of the economy deregulation and privatisation seems to have met with less success. Solutions are thin on the ground and it is indeed hard to see what else policy-makers could do to encourage higher levels of investment. It may well be that in the end the Government is right. All it can really hope to do is provided a sound economic backdrop for business and hope that business takes advantage of it. Capital allowances, for which industrialists traditionally plead, tend to make only a marginal difference to levels of capital spending, usually just subsidising investment that would have taken place anyway.

If the British problem is a more deep-seated one, rooted in the culture of traditional manufacturing industry, the Government would do better to claim partial success for its radical deregulation agenda rather than pretending that there is no problem at all.

The tendency to surrender worsens

Early surrender of pension and life assurance policies seems to be as much a problem now as it ever was, judging by figures issued yesterday by the Personal Investment Authority. On pensions, the situation actually seems to be getting worse. This is quite an indictment, both of the industry and its regulators. The pension mis-selling and other lesser scandals seem to have done nothing to curtail the industry's penchant for selling its customers wholly inappropriate products.

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