Comment: Banking sector has just about run out of rope

By GEORGE KEREVAN
Published on 11/08/2012 00:00

ANOTHER week, another City scandal. Of course Standard Chartered denies deliberately breaking US sanctions against Iran.

There were also accusations on this side of the pond that the New York state regulators are deliberately trying to undermine London’s commercial reputation.

However, that did not stop StanChart’s shares tanking at the prospect the bank could lose its operating
licence, or lose substantial US business (even if found innocent) merely as a result of engaging in a public cat fight with New York.

The City’s response to the continued erosion of its reputation? Why, business as usual.

First, Sir David Walker, a 72-year-old City grandee, was appointed the new chairman of Barclays with a mandate to clean up the bank’s tarnished reputation. A career investment banker, Walker was once talked of as a governor of the Bank of England. His appointment ensures Barclays will get a new chief exec to replace Bob Diamond in double-quick time – a retail banker perhaps? My concern has nothing to do with Walker’s age. My worry is that he is too establishment and too close to government.

True, because Sir David is old school, he should take a tougher line on bonuses than the outgoing chairman, the supine Marcus Agius. But Walker’s appointment suggests Barclays’ board is playing safe. The City believes that if only it sticks to the old verities, everything will revert to normal. It won’t. As the StanChart affair proves, the Americans and Europeans won’t play ball any longer. For proof, consider yesterday’s publication of the first (consultative) stage of the official inquiry into the Libor debacle, from Martin Wheatley, managing director of the Financial Services Authority. In true FSA fashion, Wheatley covers all the options without coming to very much of a conclusion.

Yes, Libor is “unfit for purpose” but introducing drastic changes could be risky. Libor needs to be set on actual market data, rather than on subjective submissions from a few banks. On the other hand, because calculating Libor and its European stable mate, Euribor, involves many currencies and markets, some data is always going to be forecast. Who can do that reliably? Above all, who is going to regulate?

Viviane Reding, the fiesty European commissioner for justice, has initiated moves to ensure all EU states make the rigging of Libor a criminal offence. Ultimately, she wants to Europeanise banking supervision, including the setting of Libor, or its successor.

What is missing from Wheatley’s City musings is any understanding that, because Libor is an international benchmark, the US and European authorities will want permanent involvement in its management. City self-regulation, through the old school tie network, is now redundant.


United flotation makes whole other ball game

DIVINING market logic is never easy. Despite a deluge of bad economic news, share prices have been on the up. My guess is investors are betting on China and US being forced to take drastic action to boost growth.

While investors might bet on Beijing and Washington, they have been less willing to take a punt on the Glazer family and their (re)floating of Manchester United in New York. Last week, the club’s new underwriting bank, Jeffries, said it would price the IPO at as much as $20 a share. This followed a row with Morgan Stanley, which thought the Glazers were over-valuing Manchester United. Morgan Stanley was right.

Yesterday, with few potential takers, the opening share price reduced to $14, shaving some $100 million (£65m) off the expected proceeds, which are to be split between the cash-strapped club and its cash-strapped owners.

And no wonder. The club is not expected to pay dividends any time soon. And with only 10 per cent of shares on the market, who other than a besotted United fan would want a minority stake in a business the Glazers treat as their personal bank.

Is there anything in this story that makes business sense? Yes, if the share price drops to a sane level, ie: well below $10. That would put a sensible valuation on the club of around $1.5 billion, inviting potential bidders. Even then, that would be a far cry from the $240m valuation on Juventus.

Football clubs exist primarily to win matches, not make profits. On the other hand, they are brands that can easily be destroyed.