Afternoon:
10°c
THE SCALE of the fraud carried out by Bernard Madoff, affecting RBS, HSBC, several UK pension funds and well-known names such as Arki Busson and Nicola Horlick, is unprecedented - at least according to the perpetrator himself.
But the key point for worried savers and pensioners to remember today is that Mr Madoff, now under arrest, operated in the minimally regulated world of hedge funds. It would be easy to conclude from his establishment status as a former chairman of New York's Nasdaq exchange that no financial services organisation can be trusted, and to call for increased regulation on an equally unprecedented scale. That would be wrong.
The appeal of the Madoff operation and hedge funds generally was that they are not subject to the restrictions and investor protection rules that cover mainstream investment businesses. For years, the hedge fund industry managed to get away with limited transparency and high fees because it used strategies - such as selling shares it had borrowed - to deliver returns many traditional fund managers could not match. There is a separate question as to whether investors in the Madoff operation should have noticed that even by hedge fund standards, there were obvious flaws, such as its use of a three-man firm as its auditor. But the key point for London, as a centre both for hedge funds and traditional fund management businesses, is that the hedge fund model needs reinventing.
Hedge funds generally have had a bad year. They were supposed to outperform especially in bad times. Yet the credit crunch has forced repayment of much of their borrowed money. The investing institutions who chased the high returns they offered are to blame for simply accepting the opacity and high charges involved. After Madoff, on behalf of the pensioners and savers whose money they manage, they must never do so again.
The Financial Services Authority, for its part, should not now be planning further blanket regulation of the entire investment industry - especially when the US reaction could repeat the mistakes that followed the Enron affair, damaging New York's competitiveness. Instead, it should focus on the decisions involved when UK banks and fund managers put investors' money into hedge funds. If hedge funds want institutional savings and pensioners' money, they must open up and face more scrutiny.
Energy crunch
Today's inflation figures will come as some relief to consumers — but not as much as they might have hoped. The drop in the Consumer Prices Index of 0.4 per cent in November, to 4.1 per cent, came because of continuing falls in oil and other commodity prices. But analysts had expected the figure to drop to 3.9 per cent; that it did not is due in part to the refusal of many energy companies to pass on drops in wholesale prices to their consumers. Today they were threatened by energy watchdog Ofgem with a full-scale cartel investigation unless prices come down in the new year.
Wholesale markets for gas and electricity are complex. Nevertheless, energy companies have been quick to pass on previous price rises, while few are now passing on large falls in wholesale prices, especially electricity. They claim they need the funds to invest in renewable energy to meet government targets. This is a feeble excuse: their renewables obligation has not changed. Their reluctance looks especially mean during both a recession and one of the coldest Decembers for years. Meanwhile, it risks blunting the already limited impact of the Government's tax stimulus. Inflation remains high and people are less likely to spend if being stung on fuel bills. The energy industry should pass on its price windfall to consumers.
And celebrating...
YOUR GENEROSITY. Notwithstanding the economic downturn, bidders in our charity auction have raised more than £200,000 for Greenhouse, a charity that works with some of London's most deprived children to provide opportunities in sport and performing arts projects. The winning bidders will enjoy extraordinary experiences including a shopping trip to New York with Sir Philip Green and Kate Moss, a lecture with Brian Sewell and a Paul Smith suit fitting. To all who took part, on a large and small scale, we extend our grateful thanks for their Christmas spirit in supporting a most deserving cause.
Reader views (1)
Can you explain how wholesale prices have crashed? I work part time in the gas industry and prices are consistently higher now (because of the weather) than the rest of this year . Most gas in the UK is sold on long term contracts which are based on alternative fuel sources. The prices for the 2008/9 gas year, which began in October, are sky high as they are linked to the previous quarters oil based products. I do not work for an energy retailer so have no vested financial interest in defending them, but think you and it seems the rest of the media and maybe the Government, are misleading the public.
- Samantha Reed, Wilmington,England, 16/12/2008 21:46
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