A slightly balding, overweight middle aged man today pledged £8.30 to Ellandi blog’s favourite good cause, Charity is Makes You Feel Better Than Tax.  The utterly unremarkable father of two declared “It’s good to give something back to the little people, like for example the people next door haven’t even got Sky HD. It’s good for social cohesion.”

Hardly worthy of note even in this little read corner of the interweb.

All things being equal, why does a multi-millionaire (who is about to pocket £300m) giving £100,000 to charity warrant fawning front page news in this evening’s Standard? (It’s rhetorical)

http://www.thisislondon.co.uk/standard/article-23859556-the-dispossessed-city-stars-pound-100000-donation-to-help-everyone-live-a-little-better.do

I would happily bet every penny of tax I have ever saved by using clever accountants (I have never claimed not to be a hypocrite), that Pierre spends far more monthly on clever accountants than he as just given to charity.

Oh, and don’t forget, donations are tax deductible.

I am sure I’m not the only one who feels like we are living in a period of phoney war?

The ConDems have done the best to convey a feeling of impending doom; that plague and pestilence will follow this Autumn’s spending review, but every week my rubbish gets collected, the dead are still getting buried, I am not blogging by candlelight.

At the moment there seems little chance of a return to the industrial strife of the late 70’s.

But surely cuts promised on this unprecedented scale, potentially leading to 650,00 - 1,500,000 job losses (depending on who you believe), will see us descend into Greek style anarchy; although even the most militant members of the RMT would probably pull back from actually barbecuing a few bankers?

I don’t doubt it’s going to be difficult, but I can guarantee that it won’t be as bad as when I was a child and it’s all thanks to Mrs T.  Of course, I hear you say, the trade union reforms neutered the proletariat’s ability organise labour effectively; there will thankfully be no return to The Flying Pickets (and their close part harmony acapella). This is undoubtedly true, to an extent, and Willie Walsh can point you in the direction of some good lawyers if you don’t believe me.

However it is a more fundamental and dare I say it deliberate policy that may prove to be the opium of the masses.

Have you ever wondered why such a disproportionate number of Anglo-Saxons own their own homes?

The seeds of this policy were sown in 1930’s America in the aftermath of the Great Depression, as a matter of public policy home ownership was encouraged and to facilitate this two large public backed mortgage corporations Fannie Mae and Freddie Mac were established (which to be fair in itself didn’t play out very well 65 years later).

Terribly generous dontcha think?

Not when you consider that mass home ownership, as public policy, was only encouraged once it was realised that PEOPLE WITH MORTGAGES DO NOT STRIKE (as much), for fear of losing their homes.  You can perhaps now see why Norman Tebbit et al. were so keen to see so many low paid, labour voting, public sector workers buy their own slice of heaven on council estates up and down the land.

Now we have gorged ourselves of a trillion pounds of mortgage debt when push comes to shove workers willingness and ability to man the barricades will be suitably curtailed.

For most of my adult life I had assumed that stagflation was the process by which everyone of your friends stag do’s had to be more lavish and excessive than the last; 10 years ago paintballing in Shropshire would suffice, now it’s a long weekend in Ibiza/Vegas/etc…..

Unfortunately for UK plc then, like often, I was wrong; stagflation is persistent inflation in an a recessionary environment.

But we’re not in recession, I hear you say; fair enough, but 0.2% growth is pretty anaemic even by the standards of one of Queen Victorias children and with the Eurozone, our biggest trading partner heading down the pan, we’re not free from the woods yet.

And inflation? Merv seems pretty relaxed in his latest letter to his new best friend Chancellor Clegborne.  Having said that this is the seventh time in two years that he has had to write such a letter, so much for inflation being a “temporary” phenomena.  But, who am I,  a jumped up retail agent, to judge?

Well I would hope if it was my job to judge I would make slightly a better fist of it.  Exactly a year ago the BoE forecast that “temporary” inflation would have passed and that it would have reduced to 0.70%.  So they only underestimated “temporary” inflation by a factor of 500%.

One thing is very clear, for a property industry that has been “juiced” by practically free money; if “temporary” inflation is unexpectedly this high in another twelve months, interest rates will be a lot higher.

Is not actually the question I am often asked, but “Why do you bother?”  is.

The corporate answer is that when we set up our blog, Morgan and I wanted to to have a forum to interact with our various partners in a dynamic manner which would lead to an evolving discourse on property and related matters.

A practical answer is that it is a really cheap way of updating our website, on a regular basis, without having to pay Underscore every time we do it.

The real reason is that I am a megalomaniac, narcissist, who thinks that just because my inane ramblings are on the web, it makes me feel important.  I managed to con my business partner into agreeing with this because, despite being a wizz with spreadsheets, he has no idea about computers or indeed most things invented last couple of decades.

And on all three counts it actually works; people do read it before meeting us to have something to talk about, it costs us nothing and I have saved a fortune in therapy (although Morgan still struggles with even an iPhone).

However an obvious problem is that when you put your thoughts “out there” on record, for ever, it’s very easy for people to remind you when you are frequently proved incorrect by subsequent events.  A recent example being my prediction that a hung parliament would lead to financial armageddon; it’s nice to think that Ken Clarke now agrees with me, however the fact that 10 year bond yields are back below 4.00% probably means that we are both wrong.  There again, even a broken clock tells the right time twice a day.

In my defence, who could have predicted that Greece would make our fiscal incontinence look like the financial rectitude of a parsimonious Scottish ministers son (surely some mistake with this analogy too)?

A final apology to Nick Prew of Nomura, who I thought in the depths of the crash was being ludicrously bullish on property shares (see “Prew on Prozac”), although it is now worth noting that he has now gone all grizzly.

And in respect of the megolmania, I might need real therapy if we win the Newcomer of the Year award tonight…..

We live in strange days.

The most left wing American president in my lifetime lurches so for to the left that he declares open warfare on the banks; the reaction from our labour government is appeasement, George Osborne agrees to join in the crusade unconditionally.

You would have thought that British politicians would have learnt recent lessons about declaring unswerving support for our American friends when they get all jingoistic, but plus ca change, as the cheese eating surrender monkeys would say…..

No one knows the details that these hostilities will take;  but it won’t be the shock and awe of our bonus tax, rather, it seems, more the returning of the lucrative pastures of “prop trading” to hedge funds and private equity that had been annexed with the overthrow of Glass Steagall Act in 1999.

But there is always the danger of the law of unintended consequences, or to overdo the military analogy, collateral damage.  Although, what is “prop” trading?  Put simply it is using the bank’s cash to bet alongside, or even against, the activities of it’s customers.  But it’s never that simple, General Volcker’s surgical strike at casino capitalism, could also nuke quite legitimate activities that are needed now more than ever to work through all of this bad debt.

For example, if a bank is banned from private equity participation, how does it undertake and manage a stake acquired through a debt for equity swap?  Where does this leave a bank who wants to take non-performing property loans onto it’s own balance sheet?  If that is not “prop” trading what is?

I am sure the next government will think these issues through before sending the boys over the top, but their biggest enemy could be the two banks it already largely owns.

It seems that my blog following the PBR was spot on. The Treasury is struggling to define who is a banker and, thus, who are the lucky punters that get to pay a bit more tax to HMRC.

Dylan Lobo on Citywire has a good article talking through the issues.

http://www.citywire.co.uk/personal/-/news/money-property-and-tax/

In a nutshell if you do the following you are allegedly a banker:

“* Those accepting deposits (in other words providing current accounts and deposit accounts to retail customers).

* Those dealing in investment as a principal (in other words trading in derivatives, bonds, commodities etc. on their own account).

* Those dealing in investments as an agent (in other words trading in the above types of investments as behalf of clients), or arranging deals in investments.

* Those safeguarding and administering investments on behalf of clients.

* Regulated mortgage contracts (in other words carrying out retail mortgage lending).”

That should just about cover anyone working in Financial Services or doing anything that involves money, so in today’s London economy - just about everyone.

HMRC has noted this may not be workable? So will publish more guidelines in January, which is great given that many bonuses are paid in December. I am told many firms have or are suspending payments until they have this clarity. In the meantime a cloud will hangover the largest tax generating sector in our economy and the City as a financial centre. This may sound over dramatic but I am already told it is impacting investment and spending on high value goods, just what is needed in a recession.

I am still not against the idea of the tax but surely fiscal policy has to be well though through and not be so transparent as to only be effective in tabloid headlines. This is what happens when the politicians are allowed to make decisions rather than the mandarins - see any old repeat of Yes, Minister. Where is Humphrey?

Alistair Darling’s pre-budget report was never going to please people as he had a series of very tough decisions that has to be made - tax more and spend less. His contribution to the festive cheer was a bit more banker bashing, which always seems to please to populous, and a 2% reduction in the Bingo levy.

So, where a bank bonus pool is credited with more than £25k for any one employee it will be subject to a one off 50% windfall tax.

He justified this by saying that every UK bank had benefited weather directly or indirectly from government support and that taxing the bonus pool may encourage banks to re-build their core capital rather than paying away profits in remuneration. It is difficult to argue with either of these points.

However, this policy does raise a series of other issues that are far less clear cut and may result in Mr Darling’s policy being significantly undermined.

Firstly, who is a banker? Anyone who works for a UK registered bank would seem like a good definition. But I doubt it is so simple. There are banks of every size, colour and creed. Some banks simply operate a retail franchises, taking savings and making personal loans, others only provide advisory services or specialist products and then there are the large banks that do almost everything either directly or through a plethora of subsidiaries.

Many of these organisations could probably argue that they are not banks in the sense that they did not lend large amounts of money to poor credits or invest in toxic securities. For that matters many of them don’t even carry out the basic acts of taking deposits and lending money. If you are an M&A adviser or a tax specialist at a boutique bank that does not lend money are you a banker? Equally if these people are deemed to be bankers, then surely those that provide similar services from within accountancy firms or specialist consultancies must also be classified as bankers? What about the people who sell insurance at Direct Line, surely they are in the insurance business, well actually they are part of the RBS group, so are they bankers?

Given that the Treasury rarely thinks through these things before they are announced I doubt there is a definition as yet. Maybe they will just put a question on the tax return - are you a banker?

Secondly, will this tax work? I doubt it, there will be means around this surcharge. It only applies until the 5th April 2010 so banks may opt to pay people in the next tax year. Alternatively, banks may only pay a £25k bonus but might make available interest free loans to be repaid from next years inflated bonus (the tax is a one off so should not apply in 2011,) employees will get shares or options in lieu of bonuses or may have contracts moved to offshore service companies, with Goldman paying UK staff in the USA or Deutsche paying staff through Germany or the Channel Islands. There will already be an army of top brains looking for ways around this soon to be legislation and I am sure they will find a way, at least for the top banker who are the ones that a) carry most responsibility for the crisis but b) can afford the tax structuring advise to avoid tax.

This process will be helped by the fact that the effective tax rate for bonuses is now 70%+. People will generally accept a marginally higher tax rate but if a £100k bonus is now worth less than £30k by the time it reaches your pocket then that will prompt bankers (or most other people if they were in the same situation) to look at ways around this situation.  

Mr Darling estimates the new banker bonus tax will raise £500m. I bet it will be far less in reality but then again this is not about the money it is about moral values. I agree entirely that we should not reward those who almost created a systemic collapse of the financial system but the truth of the matter is that finance is so interwoven with every part of western society that it is impossible to accurately attribute blame on an individual basis.

I fully accept that in my banking career I contributed to the almighty debt fuelled asset bubble but I will now escape any tax penalty, whilst there are others who work at banks but contributed nothing to the credit crisis who will be taxed. Mr Darling had to take a stand and he is right to do so - it is a shame that he does not have sufficient sophisticated tools at his disposal to create a tax regime that will achieve the objectives that are so well supported by the British people.

At least we can all benefit equally from the reduction in tax on Bingo. Housey?

Anyone who has read the Ellandi blog will know that I am pretty left of centre for a property chap, heck I’ll even admit to the fact that I was actually a card carrying member of the Labour Party until well into my 30’s.

Which is why I really must explain why I am voting Tory next May.

Ah, the 50% tax rate I hear you say?

Nope.

To be fair earning £150k next year is something to aspire to.

It’s more the case of being terrified what a hung parliament would do to the UK in these difficult times and according to The Independent (see more proof of my pinko-lefty credentials), this is almost a dead cert.

Tuen Draaisma of Morgan Stanley has a fear for next year that “The UK becomes the first of the G10 to have a major fiscal crisis as elections lead to a hung parliament”.

Why would a hung parliament be such a bad thing?

I’ve often thought that Proportional Representation would lead to a nice ineffectual government stripped of dogma; after all decades of coalitions don’t seem to have held Germany back?

The difference, of course, being that the Germans are not fiscally incontinent, have credibility in respect of keeping on top of inflation and don’t rely on the rest of the world to fund its deficits.

Despite still being in recession, the rest of the world hasn’t punished the UK too badly.  They have even let us get away with a fairly blatant spot of competitive devaluation, which has certainly beggared the shopkeepers of the RoI that neighbour the border with North.  However “the markets” tolerance of this is built on the premise that after the election, one of the main parties will cut the crap and get on with a seriously painful bit of tax raising and service cutting to get somewhere near a sustainable level of borrowing.

In the event of a hung parliament, or worryingly even the anticipation of a hung parliament, where every painful decision will be fought over tooth and nail or even avoided, UK plc will lose any credibility that it has overseas.  What happens then?

-The pound tanks (even further)

-We loose our AAA rating, bond rates shoot up; we can no longer sustain our massive debt

-Inflation rockets due to the increased cost of raw material imports

-Interest rates are ratcheted up to curb inflation

-Plague, pestilence, famine……..

You get the picture?

Basically Iceland without the free hot showers and Bjork.

So I am going to vote Conservative for the first time this June.  Having said that though, I am not sure how effectual this will be given that I live in Lambeth.

Maybe PR is not such a bad thing?

For most of my adult life any mention of PE, brought back the horrors of Physical Education classes of my youth, in particular a lesson in 1977 after my mother had packed me off to primary school without my kit.  Having to do a class of musical movement in purple paisley M & S “Y-fronts”, with green tubing, has scarred me forever and I will never forgive her.

The current problems in the world of Private Equity are more complex, but no less serious.

A recent article in The Independent was one of the first to highlight the seeming reluctance of some banks to engage with major equity players for fear that the buyers might have the temerity to be better at managing out distressed situations than them and might actually make some money!!!

To highlight a bout of insanity that could only be true of an effectively nationalized organization, it references the recent sale of Insight to New York Mellon.  HBoS (nearly 50% owned by you and me), allegedly, sold it at a discount of £15m to the best price bid by a respected PE player, in case they “make huge profit”.  Am I missing something, but surely NYM will now make a “huge profit” plus a gratuitous £15m!!!

If this is true, the only losers are the beleaguered HBoS shareholders and the even more beleaguered UK tax payers.

Now PE does have serious structural issues, returns on previous funds may have been illusory, driven by leverage rather than stock picking or asset management, and even worse than that the industry has billions of pounds to invest, sometimes with no real idea of how to get to their desired returns.

Let me explain:

-On the back of Fund I, which made phenomenal returns up to 2005, Gear Lots Over Value Everything (GLOVE) Investment Management looked to raise second fund.
-GLOVE II closed in 2006 with £500m of equity pledges.  It promised its funders a return of 12%, but charges a 2% asset management fee and 30% of the profit over the priority return.  It promised to invest the money within three years and return it within five or six.
-Very excitedly GLOVE announce that they have £2.5bn (geared) to invest, however to make money themselves GLOVE need invest in opportunities that offer a >20% return and this is based on being able to get 80% gearing.

Unfortunately the world as we know it shortly thereafter came to an end.  In 2008 GLOVE looked very clever (if you ignore the returns on Fund I) and couldn’t wait to buy loads of distressed kit, but like a surfer on The Serpentine, for them the wave never came and now funds and cash buyers have stoked up the prime market to a level which they couldn’t justify, even if they could gear at 80%.

But the clock is ticking , they really need to get that money away shortly or the chance to earn lots of lolly in management fees will have passed, does GLOVE:

a) Spend the money anyway as they otherwise won’t get paid and hope the market continues to go up

b) Hand the cash back to prove what jolly good eggs they are; as long as they can have it back at a later date

c) Swallow some pride and buy more secondary assets

d) Explain to their investors that there are fantastic opportunities out there, but in this new environment an 8% hurdle rate is more appropriate and that would give them a chance to compete in the market with target returns of, say 15%

e) Engage in some serious PR, drop all mention of “distress” or “opportunity” from their marketing material and look to cosy up in joint ventures

Clearly a combination of the most pragmatic routes would allow them to engage with banks as credible counter parties with realistic return criteria.

It’s one of the many interesting conundrums for next year, after all no one wants to be left shivering at the side of a cold assembly hall being called “Skinny Sick Coloured Pants.”

I can assure you.

At the danger of being stoned to death the next time I go into a bar in Mayfair, or getting banned from even more dinner parties in South West London, can I state a few facts, as I see them:

A housing market that rises much in excess of average earnings is bad for economic mobility, social cohesion and acts as a tax by the old on the young.  Trying to explain to my dad this week, admittedly after a couple of pints of Guinness, that the fact that my younger brother cannot buy a decent home for his young family is a direct consequence of my parents sitting on a huge “unearned” gain on their house did not go down nearly as well as the beer had been.

Yes the news that prices are now growing again at 6.00% pa is a bad thing.

Unfortunately, residential capital values bear no relation to rental values, a fact that will strangle at birth the concept of residential REITS far more effectively than governmental lack of interest.  Which is shame as they would solve a number of the above problems.

But our collective mania when it comes to bricks and mortar will be near impossible to shake, the most obvious solution, a capital gains tax on primary residences, would never get any government elected.  So we’ll continue to swing from boom to bust; canny investors will make a packet, poor ones will bring down banks and the man on the Clapham Omnibus will feel fine as long as the value of his primarily, and many cases sole, investment keeps up with the Jones.

And I no longer have to worry about my brother.

I’ve been cut out of the will.