Bank of England alerts watchdog over market rigging fears

Traders may have tried to rig price paid for government bonds in a quantitative easing auction, Treasury committee hears

The City watchdog is investigating the possibility that traders tried to rig the price that the Bank of England paid for government bonds in a quantitative easing auction, it emerged on Tuesday.

Paul Fisher, the Bank of England's executive director for markets, revealed in testimony to the Treasury select committee that the Bank had refused to buy one particular government bond – known as a gilt – at one of its regular "reverse auctions" in October 2011, because it feared there had been an attempt to manipulate the market.

"The auction went ahead, but we didn't allocate any purchases to one particular bond that was being offered to us, whose price had gone up very substantially in the market that morning, against the run of the market." He added that the Bank had been sufficiently concerned to refer the case to the Financial Services Authority – which was succeeded in April by the new regulator, the Financial Conduct Authority. News of the investigation follows a series of high-profile scandals over shady practices in the City.

Bank of England refused to buy one particular government bond over concerns there had been an attempt to manipulate the market.Three brokers have been charged over allegations of rigging the key interest rate Libor, while the FCA is also studying claims that energy trading firms sought to rig the wholesale gas market.

Fisher said there had also been several other occasions when the Bank had been sufficiently concerned about the behaviour of certain traders in the market to demand an explanation from them.

Andrea Leadsom, the Conservative MP whose questioning prompted Fisher to reveal the investigation, said it would be, "an ultimate irony, not to mention a public outrage," if bankers had tried to fix a process that was partly aimed at stabilising the financial system. Fisher agreed that, "if that was what they were doing, it would be thoroughly reprehensible".

Since QE was launched in March 2009, the Bank of England has bought a total of £375bn-worth of gilts, using electronically-created money, through so-called "reverse auctions", where bondholders such as banks compete with each other to sell their bonds to Threadneedle Street.

The FCA made no comment, but MPs are expected to press the regulator's chief executive Martin Wheatley about the investigation when he appears before the committee in the autumn, if no public announcement has been made by then about the outcome.

Fisher appeared before the committee – with Robert Stheeman, the chief executive of the government's Debt Management Office – to discuss the merits and challenges of QE. Fisher conceded that extricating the Bank from the unprecedented policy would be "the biggest challenge we will have had for 50 or 60 years". But he reinforced market expectations that such a change was some way off.

News on Tuesday that inflation had risen to its highest rate in more than a year posed further challenges for the Bank as it considers whether to extend QE in the face of a fragile economy. Official data showed inflation hit 2.9% in June, less than the 3.1% level that would have forced the governor Mark Carney to write an explanatory open letter to the chancellor, George Osborne. But with wage growth at just 1.3%, the rise in the cost of living means pay continues to fall in real terms.

The TUC said that Britain's workers are suffering the most protracted squeeze on their incomes since the long depression of the 1870s. Its calculations based on Bank of England data suggest real wages have now fallen for 40 months. The only time they fell for a longer was from 1875 to 1878.

The TUC's general secretary Frances O'Grady said the rise was "further bad news for households and the wider economy".

Article Source : http://www.guardian.co.uk

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Gulf Keystone Petroleum shareholder hits out at bosses

M&G Recovery Fund criticised corporate governance at oil explorer days after former Glencore chief became chairman

One of the largest shareholders in Gulf Keystone Petroleum (GKP) has slammed the oil firm for its poor corporate governance and "excessive" executive pay.

The move by M&G Recovery Fund, which owns 5.1% of the company, comes days after the Kurdistan oil explorer attempted to quell criticisms by splitting the roles of chairman and chief executive for the first time, with Simon Murray, the colourful former chairman of commodity group Glencore, appointed as chairman.

However, M&G said: "The £7.4bn M&G Recovery Fund wishes to improve corporate governance at GKP by effecting the appointment of independent directors to its board. The fund also expects a strengthened board to review the current level of directors' remuneration, which we consider excessive – for example, we note the payment to the chief executive [Todd Kozel] of $13.6m (£9.1m), plus $9.1m deferred cash, in respect of 2012 when the company [lost] $80m."

M&G is supported by another top backer, Capital Group, which told the Sunday Times: "Kozel needs adult supervision. This company needs to be run for the shareholders, not the management."

Simon Murray was recently appointed as chairman of GKPA spokesman for Gulf Keystone said: "This is a business that has not missed a beat operationally: 18 wells drilled, 18 discoveries … The company is looking for best-in-class independent non-executive directors in the immediate term and possibly another thereafter."

The comment about independence is thought to be a reference to Jeremy Asher, one of four potential non-executives proposed by M&G who has previously been GKP's deputy chairman. When asked about the firm's objections to the three other names – two of whom have worked at BP – a company insider said: "I think we can do better."

Shareholders will have the opportunity to vote on the new directors at the annual meeting on 25 July, when they also have a chance to oust two existing non-executives.

Gulf Keystone's prize asset is an oil field in the Kurdistan region of northern Iraq. A long-running dispute over payments for oil and a legal challenge to ownership of its oilfields have weighed on the shares, which have fallen 24% over the past 12 months.

Article Source : http://www.guardian.co.uk

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Central bankers face fight to keep bond markets calm

Carney & Bernanke have to project gloom that satisfies markets without deterring businesses investing and consumers spending

For the next few weeks and months, Europe's central bankers will be arming themselves for yet another battle with the bond markets. After a brief period of calm following the Spanish debt crisis last year, interrupted only briefly by Cyprus flirting with bankruptcy, the bond markets are tense, poised for a seismic economic jolt.

The situation is complicated, undemocratic you might say, as the world's largest pension funds and sovereign wealth funds vie with each other to maximise their returns safe in the knowledge that only a few people at the heart of the financial system have a clue what they are doing.

One month they pile into sovereign bonds, the next they turn to stock markets. Driven by fear and greed, they swim the international money markets like sharks scenting a profitable kill.

Mark Carney, the Bank of England's new governor, was being sniffed by the markets for a sign of weakness or indecision within hours of his arrival last week.

Four days into his five-year tenure and he took the plunge into giving forward guidance to the markets. The guidance said: "There will be no shocks. We intend to maintain ultra low interest rates for some time", or words to that effect. Mario Draghi, his counterpart at the European Central Bank, took the same step just 90 minutes later, promising an "extended period" of record-low rates.

The problem faced by both men is that much of the bond markets is focused on the US where some major investors believe an end to ultra low rates is inevitable sooner rather than later.

Already, some of the biggest investment funds that populate the bond markets are wrestling with the prospect of the Federal Reserve not only pushing up interest rates within a couple of years, but also bringing its $1 trillion (£670bn) a year bond buying programme to a halt before next summer. After years of feeding on cheap dollars, the party might be over.

And if the US pulls back, there could be negative effects to inflation, commodity prices and the real economy.

The Fed's QE spree, which is set at $85bn a month, makes it one of the biggest bond buyers on the planet. Mostly, it buys US government bonds and in so doing effectively underwrites the Obama administration's growing debt pile.

Until a couple of months ago the only worry among bond investors was how the Fed's purchases pushed up the price of the remaining bonds left for sale. A higher demand for US Treasuries sent returns, known as the yield, spiralling down and encouraged many investors, often against their better judgment, to put their funds into US, UK and European stock markets.

Bank of England's news governor, Mark Carney, like his counterparts at the Federal Reserve and the European Central Bank, has a tough balancing act to master. The huge recovery in the FTSE 100 during the first half of this year can partly be attributed to a share-buying frenzy with money previously locked up in the bond market.

Such was the rise in the stock market that Fed boss Ben Bernanke has now hinted he might start to slow QE. Not switch it off, just slow the pace of growth.

Pimco, one of the biggest bond fund managers, promptly experienced a huge outflow. Its boss, Bill Gross, wrote last week, seemingly with his head in his hands, that panicky investors were blinded by the smoke from recent battles to the long term outcome of the war.

He pointed to the Fed's high tolerance of inflation. Just as the Bank of England has allowed inflation to yo-yo and peak at 5%, so the Fed is happy for its core inflation rate of around 1% to increase to beyond its 2% target, something Gross said would make inflation irrelevant as a guide to behaviour for many years. Then he talked about the likelihood of a dramatic fall in unemployment to the 6.5% level Bernanke has targeted. This target, he believes is also many years away.

"Fed [0.25% interest rate] will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth," he said.

Far from endorsing the Fed, he is even gloomier, saying that short bursts of goods news on the housing market or car buying belie the problems all western economies face of growing health and care costs, competition from Asia that drives down wages and a constant technological drive that is de-skilling important white-collar industries from architecture to the media.

"The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, 'Mr Chairman are you serious?'" Growth will be negatively influenced, Gross added.

Carney faces a similar problem to Bernanke. He needs to convince the bond markets that a decent run of car sales and a booming housing market in the south east of England does not make for a surging economy. And yet he won't want to sound so gloomy that he deters businesses from investing and consumers from spending.

There are many economists, mostly on the monetarist wing, who believe the underlying state of the economy is sound, and with the good times are so close we need to calm things down with higher rates.

So every time Carney sounds even modestly upbeat he will find himself stinging his audience with a bit of gloom.

Can he maintain this balancing act? As we have seen in the last few weeks, Bernanke only needed to allow the corners of his mouth to lift a little, to allow a slight smile, and the bond markets took flight.

The answer must be that central bankers can maintain their balance if they just keep recycling the same message every month for the next few years. Fund managers will, no doubt, read too much into one speech versus another and send demand rocketing, or the reverse, only for the status quo to reassert itself, which is great if you are a mortgage holder or have high debts. Low interest rates for longer is your saviour.

But the bond markets never lose. They will turn away and seek returns elsewhere, sniffing weakness in developing world countries or obscure stock markets. These investments could turn into nasty bubbles and crash, which means people – governments and small investors – getting hurt.

Article Source : http://www.guardian.co.uk

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