Morning:
8°c
'Only three people understood the Schleswig-Holstein question. The first was Albert, the Prince consort, and he is dead; the second is a German professor, and he is in an asylum; the third was myself, and I have forgotten it.'
– Lord Palmerston
Rumours circulated the City for months that Legal & General could be in trouble. How much trouble wasn't clear, but the insurer was slow to state its capital position, the dividend looked under threat and the stock-market bears moved in - the shares have been crushed.
Last Thursday, L&G tried to reassure.Under the terms of the Insurance Group Directive, it has surplus cash of £1.6 billion - down, alarmingly, from £2.9 billion before, but still plenty of dosh. A confused conference call with analysts followed, and the City responded with a raspberry.
The next day Prudential came out with its own IGD, which at £2.5 billion is beefier than L&G's, but then it is a much bigger company. The stock soared. Why the difference?
What quickly became clear was, like the Schleswig-Holstein question, almost no one really knows what L&G's IGD means. Or why stating it should be comforting.
One analyst I asked said: "I can't predict what the number is going to be. If it's falling that quickly, could it go to zero? It isn't any more reassuring than a bank's tier one capital ratio. It is moving all the time." Chief executive Tim Breedon is scathing about analysts who can't understand his balance sheet - his patience for anyone who isn't an actuary seems thin.Another analyst offered: "It's a communication issue rather than a substantive one. It is a well-run company, but Breedon's personality is not to engage with lesser mortals. It is damaging them."
I asked Breedon if he has a communication problem. His response? "No." Fair enough. Except this sounded like every conversation I had with Equitable Life boss Alan Nash on the road to that insurer's ruin: I know this subject better than you, Nash would argue, therefore I am right.
Breedon is not Nash, and L&G is not Equitable. But his approach to criticism from the market is similar. L&G might moan that it is under attack from short-sellers, but it has only itself to blame.
To be clear, the insurer is not going bust, despite what some in the City have claimed. To imagine it could be, you'd have to force L&G to take all of its as-yet-unrealised losses on bond investments and reduce the solvency surplus by that amount. It has no reason to do that, and in the meantime is meeting its obligations with ease.
If it could have explained itself better, the shares wouldn't have slumped. The question now is whether to pay the dividend. I hear the Financial Services Authority is leaning on life insurers to play safe. The regulator is mindful that last year our banks paid out chunky divis just months before they ran out of cash. L&G, and the rest of the sector, needs to get this one right.
Pru chief's lost history
Prudential chief executive Mark Tucker is riding high — this week, anyway. The market has been persuaded of the Pru's stability, there's talk of a bid for the UK arm from Clive Cowdery's Resolution and his shares are in demand.
Tucker has worked for the insurer for more than 20 years — so seems the ideal type to be in charge in fraught times. But it's easy to forget he quit in June 2003, returning only in March 2005.
During this sabbatical, he was Sir James Crosby's finance director at HBOS, just as the bank started drilling holes for the rest of us to repair later. Investigators into the HBOS crisis may feel Tucker knows where some of the bodies are buried, and should be given a grilling.
Come on Mark, get back on your tank
Enough pussyfooting around with the bankers — let's set Mark Thomas on them. If it's shame and embarrassment we are after, and I think we are, Treasury Committee hearings will only go so far.
What's required is a pointed and comical attack led by someone with a total disregard for the usual codes of conduct when dealing with wealthy financiers.
Thomas gets dismissed by some as merely a left-wing comedian, but his stunts have purpose. Unlike other bank critics, Thomas wouldn't get lost in detail, allowing the minutiae of credit-default swaps to distract him. Blunt instruments would be preferred — it would be entertaining and cathartic for all of us.
A taste of what I'm after was seen years ago in Thomas v William Waldegrave. The comedian pursued the former Tory minister in a tank, shouting for help in exporting the vehicle to Iraq at the height of the controversy over arms sales to Saddam Hussein. Adam Applegarth deserves something similar.
As it happens, almost unnoticed, Thomas attended the recent select committee hearings, where Fred Goodwin, Andy Hornby et al got a mild duffing-up but mostly got away with it. One of his staff tells me Thomas is indeed working on a TV show about wily bankers. Thomas himself insists he was only there out of personal interest, but I hope the aide is right.
Thomas is fearless and incredibly rude (on stage I mean). He is what the banking industry deserves and what the rest of us need.
Dispiriting message of the Domino's effect
A great company would have at least the following attributes: it would employ many people in fulfilling jobs, it would make tidy profits that enabled it to invest in itself and pay handy dividends to pension funds, it would sell quality products that most people could afford without being overly bad for the health of the planet or the customer. After many years of this it would reward the chief executive with several millions — he'd have earnt it.
Domino's Pizza isn't this company. Last week it unveiled a 25% leap in profits. It's more than recession-proof, actually benefiting from the downturn as ever more people get a sticky treat delivered when they are too tired to cook.
Chris Moore, the likable chief executive, seems to be enjoying himself as his expansion plans grow ever bolder — forget 1000 UK stores by 2017, why not 1500? But perhaps he isn't asking himself enough of the right questions.
Domino's products are a parody of pizza, if not of food altogether. Is Moore honestly proud of what he sells? Does he worry about the risks his men-on-mopeds take for very little money?
That Domino's is a success story is somewhat dispiriting, like the news that KFC is to create 9000 (completely depressing) jobs.
The company insists it is not part of Britain's obesity problem, because on average customers only order a Domino's once every 34 days —just long enough to forget how bad it was last time.
If you are interested in Domino's as a private investor, I reckon most of the upside to be had from the shares has already happened. If you are interested in it as a hungry person: have a word with yourself. Things can't be that bad.
