Warburg's reputation could be badly dented
COMMENT: `Whether this was a case of premeditated price manipulation, or whether it is capable of a more generous interpretation, remains to be seen. The broader point of principle is whether securities houses should be allowed to hedge their positions at all ahead of such transactions'
Thursday 13 March 1997
The episode bears some repeating. Every week Warburg's executes anything up to 30 big programme trades, where big lines of stock are bought and traded out to the market, and it bids for a lot more. Last October it won the contract to sell off about pounds 300m of shares which were being disposed of as part of the liquidation of the Kleinwort Benson European Privatisation Trust (Kepit). Clients generally accept that the bank be allowed to hedge its position ahead of executing the trade. On this occasion, however, the hedging was so obvious that it alerted the market to what was about to happen.
Foul, yelled Kepit's financial advisers Merrill Lynch, which accused Warburg's of deliberately smashing the prices down to its own advantage. Whether this was actually a case of premeditated price manipulation, or whether it is capable of a more generous interpretation, remains to be seen. This is one of the key questions the SFA is attempting to address. Whatever the case, there are shades of the old "contracts for differences" row here. The broader point of principle is whether securities houses should be allowed hedge their positions at all ahead of such large-scale transactions.
In time-honoured fashion, Warburg's has moved to pre-empt whatever the SFA may do or say. Two traders have gone and the client, though not compensated, was eventually given the sort of favourable prices he might have expected all along.
In other words, everyone's happy. Or are they? The statement accompanying Warburg's results yesterday refers in terms to the bank's "active involvement in block trading, utilising our capital strength and distribution capability in service of our clients". Whatever the SFA's eventual findings on the Kepit incident, Warburg cannot emerge well. Whichever way you read it, no client is going to do business with a company it believes might disadvantage its interests.
The fact that this happens the whole time in markets, that practice of this sort is endemic among securities firms, doesn't really lessen the damage. Many people are going to look at the bumper profits and bonuses now being earned in the City and think "now we know why".
How many times before have we heard ICL, the once mighty computer giant, talk of new beginnings and successful transformations? It is only a slight exaggeration to say that ICL has had more upheavals than British Leyland, British Steel, British Shipbuilding and all the other corporate rescue cases put together.
"ICL now has no factories left," the latest man in the hot seat, Keith Todd, proudly announced yesterday as he outlined yet another new dawn as a services, software and consulting organisation. This is a far cry from the 1960s when the UK's entire computer manufacturing capacity was pushed into a merger under the ambitious title of International Computers Limited by the then minister for technology, Tony Benn. For the following two decades ICL became the very embodiment of the British disease - weak directionless management, poor marketing, under-investment and tangential technology and product.
The takeover by Fujitsu in 1990 was supposed to change all this, giving ICL the long-term commitment it had so obviously lacked in the past. But the reality has been more of the same traditional British fudge. Sir Peter Bonfield managed to generate a reputation as the company's saviour. Yet just months after he went off to run British Telecom ICL was in the throws of another huge internal restructuring drive.
Selling off the hardware business, the latest big idea, has so far done little to answer the basic question: just what is ICL meant to be about? Mr Todd clearly has grand hopes for the Internet revolution. "We intend to be a leader in the new world," he says. Well possibly, but is ICL really any better placed to succeed in this brave new world than its many up- and-coming rivals. The restructuring last year has done nothing to boost ICL's profitability.
For ICL, that long sought after stock market float is always three years away. Yes, there would be a stock market quote before the turn of the century, Mr Todd insisted. The last time ICL said there was a three-year time horizon on its float was - er - about three years ago. The odds are that Mr Todd, or his successor, will still be vainly waiting well into the next millennium.
In two years' time the dastardly bureaucrats in Brussels plan to do away with one of the few remaining pleasures available to red-blooded, red-skinned Englishmen - their inalienable right to stock up with duty- free booze and fags on the way back home from holiday in some sun-drenched continental location.
Not surprisingly, the Duty Free Confederation, a motley crew of airport, ferry and airline operators, drinks companies and duty-free shops, are not very keen on the idea. Now they have hired their own consultants, National Economic Research Associates, sent them away with their spread sheets and economic impact models and come up with the startling finding that the abolition of duty-free, far from boosting Government receipts, will result in a net loss to the Exchequer of pounds 18m a year.
According to the research, the increased duty and tax yielded through abolition will be more than offset by lower corporation and income taxes as travellers alter their spending habits, retailers lose sales and employees lose their jobs. Abolishing perks is never popular. But duty-free is a perk available only to the overseas traveller and a perk, moreover, directed mainly at the Brits - we account for a quarter of all duty-free sales a year.
If the Duty Free Confederation is concerned about loss of tax revenues and jobs then it would be far better employed campaigning for a lowering of duty paid. The duty on a pint of beer is five times higher here than in France. Correcting that imbalance to a modest extent would boost sales, preserve jobs and, at a pinch, might even be tax positive, quite apart from reducing the temptation to go booze cruising across the Channel.
The trouble is that the Duty Free Confederation will never lobby for such a tax harmonisation because it is not in the interests of its members who benefit massively and disproportionately from the current duty-free arrangements. The Duty Free Confederation will continue to bang the drum right up to 30 June 1999 but it should be resisted. Why should other taxpayers continue to subsidise the fares of European air and sea travellers in this way?
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