9th November 2006, Letting off Frankincense

Today’s title is whimsical but frankincense sounds better than ‘steam’ or ‘hot air’. Posting will be about:

1) The Farepak debacle
2) Private Equity & other business items
3) US after the mid-terms
4) Personal stuff

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Understandably, there’s been a lot in the media about moves to make good the sad losses that Farepak customers have sustained (like MPs donating a day’s pay and Sainsburys giving out vouchers) but there doesn’t seem to have been much analysis about what has gone wrong.

As far as the business itself is concerned the key problem seems to have been that the supplier of the voucher scheme they used went into administration at the beginning of 2006. Farepak didn’t lose money directly but when they came to look for an alternative provider they had to accept that they would have to pay up-front (ie. this autumn) rather than when their customers had spent their vouchers (ie.early 2007– after Christmas). You wouldn’t have thought that this should have been too much of a problem for them as they would still be getting most of the money from their customers (in the form of their weekly/monthly payments) before they(Farepak) had to pay for the vouchers. Apparently, the vouchers cost £20m and having to bear that expense earlier than in previous years was what broke the camel’s back.

Presumably, Farepak’s parent company, European Home Retail (formerly Kleeneze) had already put Farepak’s customers’ subs to use investing in other things. In particular, EHR was in the process of investing an extra £10m to expand into home shopping in Germany.

As a matter of fact Farepak made a small loss in the year to April 2006 but they still managed a final dividend of 0.7p a share on top of the interim dividend of 1.2p a share. In view of the level of the share price (less than £1) the shareholders had no reason to complain about this. It’s worth mentioning that the shares are fairly closely held – a few individuals (including directors) and other companies held about 60% of them.
The real problem with Farepak (and EHR) is not that the directors were making hay or incompetent; even if they made mistakes, it doesn’t seem likely that they set out to lose all that money for their customers. The real problem seems to be that no one thought to treat an operation like Farepak as a financial institution and to give the customers the kind of protection that, say, bank depositors receive. The powers-that-be deemed a Christmas club to be too ephemeral for the financial watchdogs to worry about.

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There was a lot of coverage of what the Financial Services Authority had to say about Private Equity. Like Farepak the FSA aren’t going to supervise private equity firms but they will be paying them visits. The FSA’s report thinks there’s scope for insider dealing when the finance for private equity deals are put together (but haven’t been able to find any evidence of this). They also think that a bank could ‘come a cropper’ by lending to companies that have been taken over by private equity partners but, curiously, they don’t think the consequences of this would be serious.

There’s a “real problem” here, as well: private equity investors are like the 18th century aristocracy enclosing all the agricultural land so that the poor villagers couldn’t graze their livestock. The more companies that they buy and which lose their stock exchange listing (at least temporarily) the less choice the pension funds and life assurance companies have when investing on behalf of ordinary folk. In particular, it’s wrong that companies like utility operators should be snapped up private equity firms. Their almost guaranteed markets and safe streams of income should stay in the publicly quoted domain so that millions of people can benefit.

Today’s Times has its annual survey of the top 100 most powerful people in British business. Coming out on top is the former Chief Finance Officer of BP, John Buchanan. There’s a piece about him in the main section of the paper by Robert Cole. It’s not clear if this is an interview but if it was he wasn’t asked any questions about the BP disasters in Alaska or Texas, although presumably he would have had something to say about how much was spent on things like safety and pipeline inspections. John Buchanan doesn’t court publicity according to this article but it does quote him as saying that the directors of the UK’s top business are a meritocracy. The commentary reads as if these 100 top business people are carrying the economy all by themselves; it would be more realistic to see them as presiding over it – like Queen Victoria and the British Empire.

The Times also canvassed its ‘Power 100’ for their views on a few topical matters and 81% of them said that the government should use taxes to fight the threat of climate change, presumably because they think their businesses need an incentive to persuade them to cooperate.

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The aftermath of the US elections give a strong sense of America’s lack of leverage over events in Iraq. In the US the results are seen as momentous but in Baghdad no one expects a Democrat Congress to make any difference.

Unhappily, it looks as if the Democrats and the Republicans may reach agreement in deciding that the Iraqis need to take more responsibility for their own government. To his credit President Bush sounded a more determined, courageous note yesterday by going on record on how he would define completion in Iraq.

There are parallels between Iraq and another state that came into being as part of the international settlement at the end of World War One; the Czechoslovak Republic. Both nations were unnatural creations, lumping together peoples with centuries old antagonisms towards one another, Czechs and Germans, Slovaks and Hungarians. I remember a history lecturer telling us that there was no such people as Czechoslovaks, merely Czechs and Slovaks. Just as you hear talk of the dismemberment of Iraq today, there were good arguments in favour of the break-up of Czechoslovakia at the time of the Munich crisis of 1938. The trouble was that the process was vitiated by the true motivation of the great powers – appeasing Hitler. Similarly, if the allies walk away from Iraq claiming that the country needs to be allowed to disintegrate, I’m not sure it will redound to anyone’s credit in years to come. The only chance that ordinary people have of justice and freedom anywhere except the Kurdish areas (which should be allowed self-determination soon) is if the elected government in Baghdad survives. Imagine trying to survive as a Christian, a Jew or a secular humanist in one of the confessionally based successor states.

As far as the US is concerned I would forecast that the main area that the President and Congress are going to be struggling over will be the budget deficit. The extent to which the US presence in Iraq is a casualty of that process won’t be apparent for a while.

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I wrote most of today’s post in draft this morning mostly. So I’ve taken some time out to take a 90 minute walk....

This time I started walking along the boundary wall of Witley Park (next to Witley Common). This is a very imposing stone park wall. I’ve never seen the house but guessing from the appearance of the various gates and gatehouses it must be quite impressive. The original owner was a famous Edwardian embezzler and more recently the estate has been owned by the Bhutto family, so Witley Park combines two of my abiding interests, financial misdeeds and Pakistan. I came across a round structure rather like a band stand, the sort of place where the gentry might have had a picnic while out on a shoot (as in Gosford Park). Looking at the map there’s an extensive lake just by there but you can’t see any water because the boundary wall is too high. However, you can treat yourself to a view of the estate sewage works because they are outside the wall alongside the public right of way. After that I went past a charming mill house. The right of way isn’t very clear here but there were big signs about no rights of way in every other direction so I presumed I was on course. I took the new bridge over the A3 and then across some fields towards Thursley Church. It was out in the open here and very bright. At the edge of the village I turned left to go back to the A3 – hoppity skippity this time because there’s no bridge or tunnel (tho’ it is part of the Greensand Way). Down a lane to a house called Cosford Farm, which looks more like a stables, up a steep slope to a field being sprayed with extremely pungent muck skirting Bowlhead Green. Along a lane and on to Witley Common.

On the work front I applied for a job as an investment manager with an organisation called the Charities Aid Foundation. Although I identified the prospective employer myself I first read about the post on the website of a recruitment agency. They proved a bit difficult to get to speak to but I thought that, conscientiously, I should persevere via them. In the end they wrote back to say that my CV didn’t match any of the posts that they had on their books at present but that they would keep my details on file in case suitable posts arose in the future. I don’t find this approach very satisfactory; Recruitment agencies that don’t interview candidates when they first put them on their books are being lazy. It seems like a system designed to prevent candidates doing much to recommend themselves. I think I’ll insist on an opportunity to meet them even though it means a trip up to town.

We do have some essential oil frankincense - I love the smell. This week we've been burning eucalyptus oil because it's soothes inflamed passages.