The MT Diary

Our boys in Brazil; bankers huddle against the storm; Rose doubles up; Spitzer's legacy

by Howard Davies
Last Updated: 31 Aug 2010

There are many worse places than Rio de Janeiro to spend an early spring weekend, especially one that was marked in London by the worst storm of the year.

The sun shines, the caipirinhas slip down a treat, and you can watch beach volleyball from dawn to midnight. Of course, you have to keep a weather eye open for your neighbourhood muggers - but Copacabana seems to have been cleaned up a little by some ostentatious and in-your-face policing.

The economy is in good shape, too - at least, as good as any economy can be in these difficult times, growing at 5% or so on the back of high commodity prices. Brazil is often unkindly described as 'the land of the future - and always will be', but maybe the B in BRIC is now finally justifying its place in that Goldman Sachs acronym.

My old pal Digby Jones has a job to do there, though, as our trade promoter-in-chief. Although the UK still accounts for 5% or so of world trade, we have only 2% of the Brazilian market. On the weekend I was there, our approach to winning new friends was robust - we had sent a gunboat. Well, a destroyer, actually. Given the savage cuts to the Royal Navy about which retired admirals speak so movingly, HMS Nottingham might well now be the destroyer, for all I know. But she certainly cut a dash in the port of Rio, celebrating the Navy's role in transporting the Portuguese court to Brazil when they fled from Napoleon's armies 200 years ago. The Brazilians ought really to be more grateful and buy more Land Rovers, Burberry and Frank Cooper's Oxford Marmalade, but they don't, preferring Mercs, Burgundy and Bonne Maman. There's no accounting for taste.

The conference I spoke at was the annual shindig of the Institute of International Finance, the main trade association for global banks and brokers. In the audience were 300 anxious bankers checking their BlackBerries every five minutes to see if they still had a job.

These are terrible days in the markets. No-one can recall anything like it. Volatility is off the map. In many products, liquidity has disappeared. It has not been so difficult to palm a dodgy structured credit off on an unsuspecting investor since before the Norman Conquest, I hear. And the troubles have spread from the swamps of the mortgage market, crashing through the thickets of commercial property and into the leafy suburbs of monoline-backed municipal bonds, killing a Bear or two on the way.

It's hell out there and I suspect it will take more than Alistair Darling's mesmerising repetition of the word 'stability' to prevent the UK economy, like Geoffrey Howe on Budget Day, falling fast asleep. The Treasury forecast of 2% growth this year and next is at the very top end of anyone's rational expectations. I can't see how we can escape at best a short recession.

Financial stocks have already taken a beating, and now it's the retailers' turn. Marks & Spencer is back below Philip Green's offer price. So it may be thought an odd time for the firm to go off-piste in corporate governance terms, giving Stuart Rose both top jobs. Last time it did so, under Rick Greenbury, it was not a conspicuous success. In the US, there is growing interest in our split-role model - indeed Citigroup has adopted it. So the M&S change has come at a particularly unfortunate time.

The shareholder reaction has been surprisingly muted. Not a red-top in sight so far. Maybe the substantial presence of Lord Burns has reassured them - but he and his persuasive Geordie blarney won't be around much longer.

I forecast that the institutions will live to regret their reticence. Stuart Rose may himself avoid falling into bad habits, but the M&S example will be prayed in aid by other more doubtful boards. It could be the thin end of a pernicious wedge: the last thing we need in tricky markets.

In New York, however, my next port of call, they've been much more interested recently in governors than in governance. The demise of Eliot Spitzer was a rare bright moment in a dark month on Wall Street. Red-braced traders celebrated joyfully, if unkindly. What is less well understood is that Spitzer also went unlamented in the regulatory community in the US.

Spitzer made no secret of his contempt for the SEC. Why did they not lay into the brokers, like him? Well, they are constrained by tiresome requirements to collect evidence before charging people, and can't conduct trials by media.

But was his influence on the Street beneficial, in spite of the unconventional methods used? I wonder. He certainly shone a light on some poor practices, especially in the insurance market, where there is no powerful federal regulator. But the regulatory landscape is now littered with Spitzer settlements, in which firms paid up without admitting guilt, or indeed without reaching any explicit agreement on the facts of the case. Settlements of that kind create baffling non-precedents, and can leave in their wake great uncertainty about what is, and is not, acceptable market practice. That kind of uncertainty is net-negative for firms, and probably for investors too.

The only unquestioned winner from Spitzer's career is Kristen, whose $4,300 will prove just a down-payment on her future media earnings. I await news of her first starring appearance at an insurance brokers' convention.

- Howard Davies is the director of the London School of Economics.

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