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Thursday, 12 December 2013

Wage rises outpaced by inflation for fifth year running, official data shows

The average pay rise improved to 2.2% – from 1.5% a year earlier – but still failed to match inflation at 2.4%
Wage rises failed to keep pace with inflation for a fifth successive year, according to official figures that show a recovery in pay in the year to April 2013.

Average pay rises jumped to 2.2% from the previous year's total of 1.5%, but the recovery still left workers worse off after prices rose by an average 2.4%.

Much of the rise in wages was distorted by City bankers and other well-paid staff delaying salary rises and bonus payments to take advantage of the cut in the top rate of tax from 50p to 45p in the £1.

The decision of people earning more than £150,000 to wait for a change in the tax rate before taking some of their pay could account for much of the failure of average pay to recover during 2012.

The Office for National Statistics said median average annual earnings before tax for full-time employees, where workers were in the same job for at least a year, was £27,000. This was an increase of 2.1% compared with £26,500 in the year ending 5 April 2012.

Median gross annual earnings for men were £29,300, up 1.9% from 2012, and for women were £23,600, up 2.2%. But despite the higher pay rises for women, the pay gap between women and men widened from 9.5% to 10%.

More women work in part-time jobs than men and much of the recovery in employment until the spring this year was in part-time work, probably leading to a lower gross figure. Low pay remains a feature of British working life, according to the figures.

The ONS found there were 203,000 jobs held by over-21s with pay less than the national minimum wage, in breach of low pay rules.

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JP Morgan facing $2bn fine for involvement in Madoff ponzi scheme

Bank tentatively agreed to pay $2bn to settle allegations it failed to inform US authorities of the jailed fraudsters suspicious activity

JP Morgan Chase, the biggest bank in the US, is facing another multi-billion dollar fine, this time deriving from its involvement with notorious Ponzi scheme fraudster Bernard Madoff.

The bank has tentatively agreed to pay $2bn to settle allegations it failed to inform US authorities of the jailed fraudsters suspicious activity, according to people familiar with negotiations. A settlement deal with the Justice Department could come as early as next week. The bank declined to comment.

Madoff was arrested at his Manhattan penthouse five years ago this week after his $20bn scam came to light. JP Morgan was his bank for two decades and the US authorities suspect it continued to service his business even as it suspected something was wrong.

The fraudster himself predicted the bank would one day face a big fine. In a 2011 interview with the Financial Times he said: “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement.” He claimed: “There were people at the bank who knew what was going on,” an assertion that JP Morgan has consistently claimed is false.

According to court papers filed by Irving Picard, the trustee charged with recouping losses for Madoff’s victims, the bank had grave doubts about Madoff 18 months before his scam unwound. The documents quote one banker claiming Madoff’s “Oz-like signals” were difficult to ignore.

The filings also quote a June 2007 email from a senior JP Morgan banker warning colleagues that another banker “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”

The bank filed a “suspicious activity” report with UK authorities in 2008 but did not take a similar step in the US.

JP Morgan has always denied wrongdoing and disputes Picard’s findings but this week chief executive Jamie Dimon signalled that a deal was in the offing and suggested it was easier for the bank to settle than to fight its corner in court. “You read about Madoff in the paper the other day. We have to get some of these things behind us so we can do our job,” he told a conference in New York on Wednesday, first reported by the Financial Times.

According to a report in the New York Times on Thursday, the settlement would include a so-called deferred-prosecution agreement. Such an agreement would list all of JP Morgan’s alleged criminal wrongdoings but stop short of an indictment as long as the bank acknowledges wrongdoing and pays the fines.

The agreement would be the second time in a month that JP Morgan has been forced to acknowledge wrongdoing. On November 19 the bank paid a record $13bn to settle charges that it routinely bundled poor quality home loans into securities that were billed as high-quality to investors. That settlement too required the bank to own up to wrongdoing, something Wall Street has fought against for fear of triggering more shareholder lawsuits.

If the fine comes before Christmas it will cap an annus horribilis for JP Morgan. Alongside the $13bn fine for its involvement in the subprime loan scandal, JP Morgan has:

paid $4.5bn in November to settle allegations it has mis-sold mortgage bonds to pension funds and other institutional investors;
paid $920m in September to settle US investigations into the “London Whale” trading scandal;
in the same month, paid another $390m in refunds and $80m in settlement for billing credit card customers for identity theft protection they did not receive;
paid $410m in penalties and repayments in July related to alleged manipulation of California and midwest electricity markets;

Investors, however, have largely discounted the historic scandals and the bank’s share price is currently close to a year high.

George Osborne announces fresh attack on welfare budget

In challenge to Labour, chancellor tells MPs billions will need to be shaved from welfare to avoid deeper departmental cuts

A fresh attack on Britain's welfare budget was announced by George Osborne as he told MPs he would prefer to cut benefits than slash the size of the state to its smallest since the 1940s.

In a calculated challenge to Labour in the runup to the next election, the chancellor said many more billions would need to be shaved from welfare to avoid deeper cuts in spending by Whitehall departments.

"Welfare spending can't be excluded from the difficult decisions," the chancellor told a hearing of the Treasury select committee into last week's autumn statement. This showed that the government's plan to balance its books by 2018-19 would require an acceleration in the cuts to departmental budgets from 2.3% in the current parliament to 3.7% between 2016 and 2019.

The Office for Budget Responsibility, charged with forecasting the economy and the public finances for the Treasury, said that would leave day-to-day spending by government at its smallest share of national output at least since modern records began in 1948. On current plans, cuts to government departmental budgets will be 8% by the end of the current financial year and reach 20% by 2018-19.

"That assumption is based on an erroneous assumption about what the political system would do," Osborne said as he announced that next year's budget would be held on 19 March. "On current plans that is what it shows, but the next government will want to undertake further reductions in the welfare budget. If it does that you don't reach the 1948 number."

The chancellor sees welfare as one of the defining political issues at the next election in 2015, and believes his hardline approach will create difficulties for the Labour opposition.

While refusing to put a precise number on the size of the welfare cuts, Osborne accepted they would run into "many billions" of pounds. The Institute for Fiscal Studies (IFS), the UK's leading thinktank on government spending, has said welfare cuts or tax increases totalling £12bn will be needed to avoid a stepping-up of the cuts to government departments.

Osborne said he agreed with the IFS analysis, adding that politicians had to be honest with the public. The chancellor said his priority was to protect spending on education and science. "We shouldn't be cutting these things because we are not prepared to deal with the welfare budget.

"I don't think all the savings need and should be made within the departments. I think we should make a balanced judgment about where government spends its money and, yes, we have got to make difficult decisions to save money further in Whitehall but we should accompany that with savings in the welfare budget."

In a two-hour appearance in front of backbench MPs, Osborne made it clear that he would call time on the government's Help to Buy subsidies for house purchases after three years and denied that the scheme was helping to create a bubble in the property market.

The committee's chairman, Andrew Tyrie, asked the chancellor to respond to allegations that he was "adding vodka to the punch bowl just as the party gets going" by giving state-backed guarantees for the first 20% of home loans up to a value of £600,000.

But Osborne said the Bank of England's new Financial Policy Committee had been given the powers to "take the punch bowl away" if the recent recovery in the property market threatened to get out of hand.

"The early evidence from Help to Buy is that three quarters of those taken out are not living in London and the south-east," said the chancellor. "The average house purchase that they have been looking for is £160,000 – that's below the national average. In other words, it is dealing with exactly the families we want it to help."

Challenged over falling living standards in the current parliament, Osborne blamed the "calamity" of 2008-09, when the UK suffered its "worst recession in modern history and the biggest banking crisis in its entire history".

Although figures from the Office for National Statistics show that inflation has continued to erode living standards since the recession ended in 2009, Osborne said: "The country is poorer as a result of what happened in 2008-09."

Meanwhile the new head of sovereign debt ratings at Fitch said the agency would not be in a hurry to upgrade Britain's debt rating to the coveted AAA.

In an interview James McCormack said the economic rebound this year had been "a pleasant surprise for everyone" but settling questions over its sustainability enough to win back the top-notch rating was "going to take some time".

House price rises realise bubble fears, says economist

Economics professor says three-quarters of properties in the UK are overvalued, as Zoopla reports property price growth across the country

The average UK home has seen its value rise by £10,329 over the past year, or by £28.30 a day, according to figures from property search engine Zoopla.

This follows research from a leading economics professor that around three-quarters of properties in the UK are overvalued, with a 93% probability that London is already in the grip of a house price "bubble".

"The results raise the risk – although not the certainty – that house prices will fall," said professor James Mitchell, the head of economic modelling and forecasting at Warwick Business School. "But a bubble it appears to be, and we should all – householders, business people and policymakers alike – be alert to this risk."

After London, Wales was the most likely region to be in the middle of a house price bubble with an 83% probability, followed by the north-west at 80%. Only Northern Ireland, Scotland and the east of England do not have over-inflated house prices, according to Mitchell's research, which is based on house price and salary data from the UK's largest mortgage lender the Halifax.

The city that experienced the greatest increase in value over the past year was Newcastle, according to Zoopla's figures, where prices have surged by 10.1% or £16,712. This defies the assumption that the capital sees the largest percentage rises, where average values rose by 10%, or £46,398, to £510,457.

Other cities in the north in the top 10 include Barnsley, Glasgow, Dundee, Aberdeen and York, with rises of more than 6.5% during 2013. The worst performing city was Rotherham where properties fell by 0.1%.

In England overall, semi-detached houses have seen the biggest increase in value, up 6.42%. .

Lawrence Hall from Zoopla said: "This year saw a host of new government initiatives that are now helping the property market to gain stability and set the foundations for a sustainable recovery. As a result, 2013 has witnessed property price growth across most of the country and particularly at the entry level of the market.

"With confidence in the market increasing, 2014 could see further price growth as transaction levels pick up, construction continues and more property comes to the market."

The news comes after concerns were raised by the Royal Institution for Chartered Surveyors about the pace of rising property values. It called on the Bank of England to restrict house price rises to 5% annually amid fears that the market is overheating.

However, Capital Economics said the level of demand, which is stoking the price boom, may ease in 2014 if it becomes clear that large numbers of buyers hoping to access the government's Help to Buy scheme are failing affordability tests.

Judge boosts Bernie Ecclestone hopes in F1 bribery trial

Starement by Mr Justice Newey could be a blow to German media rights firm Constantin Medien, which claims that Ecclestone undervalued Formula One in selling it to CVC

Bernie Ecclestone's chances of winning a $140m (£85m) high court trial were boosted when the judge cast doubt on allegations that the Formula One boss paid a $44m bribe to undervalue the motor racing series.

The case has been brought by a German media rights firm Constantin Medien and concerns the sale of Formula One in 2006, by a consortium of banks and Ecclestone's Bambino family trust, to the private equity firm CVC.

The German media company claims Ecclestone undervalued Formula One in the CVC deal and that he colluded with the German banker Gerhard Gribkowsky – who was jailed last year for eight and a half years for accepting a $44m payment – to keep control of the sport. Ecclestone denies wrongdoing.

Gribkowsky was an employee of the German bank BayernLB, which was Formula One's single largest shareholder. Constantin claims that Mr Ecclestone and Bambino paid a $44m bribe to Gribkowsky, then Bayern LB's chief risk officer, so that he would agree to sell the bank's stake to CVC. Last year a German court jailed Gribkowsky for receiving the alleged bribe and in May Ecclestone was charged by German authorities with paying it.

Constantin's lawsuit alleges that CVC was Mr Ecclestone's preferred bidder as it had agreed to retain him as chief executive, whereas a rival consortium of banks had considered firing him in the event of a takeover. CVC paid a total of $2bn for Formula One with BayernLB getting $814m. Constantin says it lost out because it had an agreement with BayernLB which entitled it to 10% of the proceeds if the bank's stake had sold for more than $1.1bn.

Constantin claims that other bidders would have paid more if the alleged bribe had not been paid to sell to CVC. However, in court this week Mr Justice Newey said: "I have to say I find the idea of a bribe being paid to get rid of the banks more plausible than the idea of a bribe being paid to undertake an arrangement under which shares were sold at an undervalue."

It could be a big blow for Constantin as it needs Newey to rule that the stake was undervalued in order to win its $140.4m damages claim against Ecclestone, Gribkowsky, Bambino and its former legal adviser.

"A key question, were I to decide there has been a bribe, would be whether Mr Ecclestone thought that the shares were being sold at an undervalue or possibly might have been sold at an undervalue," said Newey, adding that "a lot depends on exactly how Mr Ecclestone gets to his figure of two billion".

To answer the question, Philip Marshall QC, for Constantin, referred to evidence given in November by Ecclestone. He said CVC initially offered a total of $1bn for F1: "That's the figure I think I said to Gerhard and he said he needed it to be double that," Ecclestone told the court last month. When asked by Marshall whether he thought that $2bn properly reflected Formula One's value Ecclestone said: "I don't know. I didn't value the company. I've no idea. I didn't own any shares so I didn't have to worry about that."

In response to Marshall's reference of Ecclestone's testimony, Newey said: "I am not sure that helps you … you have to show that Mr Ecclestone realised it might have been sold at a wrong price and approvingly accepted the risk."

Newey's position on the valuation reflects his comments on the first day of the trial in October when he prevented Marshall from putting on the record details of the German charges against Ecclestone. "It is not as if you would agree with a number of the arguments put forward in the indictment," he said. "It would be fatal to your case, wouldn't it, what they say about the purchase price?"

Referring to this, Robert Miles QC, acting for Ecclestone, told the court that following the sale to CVC, BayernLB's former chairman Werner Schmidt said "we were given the opportunity to get out of the shareholding with extremely high proceeds.

Miles also read out evidence from Kurt Faltlhauser, the deputy chairman of BayernLB's supervisory board, who said it was "very satisfied with the purchase price of Formula One shares which were, at the time, already heavily written down in the bank's balance sheet."Ecclestone and Bambino deny paying a bribe and say that Gribkowsky threatened to make false allegations about Ecclestone's tax affairs if the money had not been paid. The trial comes to a close on Friday with judgment expected in early 2014.

Wednesday, 11 December 2013

FirstGroup rejects plan to sell Greyhound coaches and school buses

Shareholder Sandell Asset Management had argued selling US business would cut debts and boost share price

Bus and train company FirstGroup has dismissed a plan from one of its biggest shareholders to sell one of its US businesses to pay down debt.

Sandell Asset Management, a hedge fund with a 3.1% stake in FirstGroup, had urged the board to sell its Greyhound coach business and school bus division, arguing this would cut debts and boost the group's languishing share price.

In a statement on Wednesday, First Group rebuffed Sandell's proposal, saying it contained "a number of structural flaws and inaccuracies".

"The board of FirstGroup notes the recent press speculation and confirms that it has received a proposal from Sandell Asset Management," it said. "The board is open to all means of enhancing long-term value and welcomes the views of the group's shareholders. The group has engaged with Sandell several times, reviewed their proposal in detail and believes that it is not compelling and contains a number of structural flaws and inaccuracies."

FirstGroup has been struggling with almost £2bn in debts since 2007 when it bought US-based Laidlaw, the owner of Greyhound coaches and yellow school buses. The acquisition was part of an ambitious expansion programme that has seen the Aberdeen-based company go far beyond its origins in Grampian municipal buses to become one of the world's biggest transport companies with 120,000 employees. But its growth plans were derailed last year when the UK government revoked a decision to award it the lucrative contract to run the west coast mainline rail franchise between London and Scotland, following a botched bidding process.

In May the group tapped shareholders for £615m and cancelled its dividend, causing its share price to drop 30% in one day.

Hedge fund boss Tom Sandell argued that selling off the American assets would deliver "a 50% upside to shareholders" and allow FirstGroup to shake off its "historic poor performance" by focusing on its UK bus and rail business. FirstGroup's shares rose over 4% on Wednesday to 120p, after the board said it was sticking to its turnaround plan set out in May that would "deliver superior value for shareholders compared to alternatives that were considered in detail earlier this year, and which remain under review". The next review is slated for FirstGroup's capital markets day on 23 January, when its new chairman is in post. The transport group last week appointed Aviva chairman John McFarlane to take charge in the boardroom, ending a six-month search after Martin Gilbert ended his 27-year reign in May. McFarlane, who joined the board last week, becomes FirstGroup chairman on 1 January. FirstGroup's chief executive, Tim O'Toole, has argued First Group are making progress on their turnaround plan: last month the company reported pre-tax losses had narrowed to £8m in the six months to the end of September, compared with a £20.6m loss in 2012.

Gerald Khoo at Liberum Capital said FirstGroup would be better off holding onto Greyhound for now: "We struggle to see how a strategy of large scale disposals creates value. Selling underperforming assets when they are cyclically depressed is unlikely to realise more value than restructuring them and seeking an exit at a better point in the cycle, if appropriate."

Wall Street facing tighter scrutiny as regulators move on Volcker rule

Rule, going to vote Tuesday, aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis

Wall Street is facing tighter scrutiny of its trading activities after US regulators moved on Tuesday to impose stricter rules on the types of trades banks can make following the financial crisis.

The long-delayed “Volcker rule” is aimed at curbing high-risk trading on Wall Street of the kind blamed for triggering the worst financial crisis in living memory. But the rule hit yet another hurdle Tuesday – snow storms closed much of Washington and some staff at the top five US financial regulators looked set to vote on the rule from home.

Five years after the financial crisis, the Volcker rule has become the most controversial element of the Dodd-Frank Act, the largest overhaul of the financial system since the Great Depression.

Many details of the 71-page rule, preceded by about 900 pages of explanatory text, are still to be finalised. But according to those who have seen the final draft, it appears the new legislation will impose tougher requirements in some areas than the banks had first expected.

The rule, named after former Federal Reserve chairman Paul Volcker, aims to crack down on so-called proprietary trading – betting on financial markets for banks' own gain. The rule aims to separate everyday banking from the kinds of high-risk trading that caused the financial crisis.

The rule would curb the number of risks banks can take so that they do not exceed "the reasonably expected near-term demands of customers", the regulators said.

The rule will also tackle so-called portfolio hedging, a practice that was supposed to allow banks to offset risks with investments in other portfolios but which critics charge has been used by Wall Street to hide risky speculative bets. Under the new rule banks will be required to identify the exact risk that is being hedged.

According to the executive summary issued by the US Federal Reserve, Volcker would also prohibit “any banking entity from acquiring or retaining an ownership interest in, or having certain relationships with, a hedge fund or private equity fund,” with some exceptions. It would also require banks to establish an internal compliance programme “designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.”

While the Volcker rule was drawn up in the wake of the financial crisis, it was given fresh impetus last year after JP Morgan Chase’s $6bn losses on the so-called “London whale” trades. The bank contended at the time that the huge risky bets being made in London were meant to hedge risks being taken elsewhere.

Wall Street’s lobbyists have won some key concessions. Some securities linked to foreign sovereign debt – money owned by foreign governments – will be exempt. There will also be exceptions for banks’ market-making desks, as long as traders are not paid in a way that rewards proprietary trading. Wall Street’s bonus culture has been seen by some as a prime cause of excessive risk taking.

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Federal Reserve chairman Ben Bernanke said in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.”

The rule will not come into force until July 2015 and Wall Street lawyers are now expected to comb through the document looking for loopholes and considering whether to mount a legal challenge.

Oliver Ireland, co-head of financial services practice at Morrison and Foerster, said with such an enormous rule “the devil is very much in the detail.”

“Fundamentally it’s the same rule in that it tries to put an end to prop trading,” he said. But he said he doubted it would be enough to halt the next financial crisis. The rule addresses banking entities – not hedge funds. And even in this case, where risky trades are being limited, Ireland said there was a good case that the wrong issues were being tackled.

“It’s not going to stop ‘too big to fail’. It’s not going to stop banks taking risks. Banks lend money with the expectation of getting it back and that’s fundamentally a risky business,” he said. “This is aimed at trading and if you look back at the last financial crisis that goes back to bad lending practices on mortgages. That happened before anyone had traded anything,” he said.