Two sorts of regulation

In a recent article in Financial Director, Robert Bruce, warns of the danger of politicians knee-jerk reactions to financial crises. He takes as his text a recent ICAS publication by Laura Spira and Cath Gowthorpe, as 'tres formidable' a pair of academics as one could hope to meet. Their report Reporting on Internal Control in the UK and the US: Insights from the Turnbull and Sarbanes-Oxley Consultations compares experience of the UK Combined Code with American reactions to the Sarbanes-Oxley Act passed after the Enron scandal.

Bruce thinks regulations set in the heat of the moment, like SarbOx, are likely to be poor ones and cautions against political interference in the aftermath of the current crisis. I'm not so sure. At least something is done and the current crisis is an almighty failure of the City's traditional approach of self-regulation.

With one bound, Jack was free.

The option to reclassify some financial assets from 'available for sale' to 'held to maturity' has been seized by two European banking groups Schroeders and Deutsche Bank. In the case of Schroeders this turns a £50m loss into a profit.

If this is being treated as a change of accounting policy, prior year figures should have been restated.

[The title is taken from a story about writing in weekly comics in days when comics included tales told in episodes from week to week. According to the story, the hero of a tale had been left bound to a tree and surrounded by hostile savages at the end of one week's episode. Unfortunately the writer had gone sick and no one could think how to get the hero out of his predicament. Eventually the writer returned to work, took up his pen and started the next week's instalment with the words, 'With one bound, Jack was free'.]

Do falling corporate tax rates lower the tax yield?

A recent EU paper gives the first impression that, although corporation tax rates have fallen across Europe, the tax take has not declined because the total proportion of corporation tax to GDP has not fallen. At first sight this would seem to give some support to versions of right wing economics that claim cutting taxes increases income. The authors of the study find this is not the case; what has happened is that economic activity has been shifted into companies to take advantage of the low tax rates.

Click on the title to go to the paper.

Short selling corner

Every now and then someone successfully 'corners' the market in a security or commodity. A well executed corner is a thing of elegance and beauty, even if it results in financial mayhem for some. In this case, short sellers have somehow managed to sell short more Volkswagen shares than are available for trade, because Porsche has acquired rights to a large proportion of the shares. The result is that the hedge funds and others who have sold shares they don't own now have to buy them in at almost any price. Click on the title link to go to an article that explains what has been going on.

Dynamic provisioning

In its recent bi-annual stability report, the Bank of England has called for measures to improve the financial stability of banks. One of these measures is called 'dynamic provisioning' which involves building up 'reserves against future losses in the good times, which they could then draw on when times were tough'. What a good idea! This used to be called 'prudence'. Admittedly, in the past banks kept these reserves hidden in the form of secret reserves and there is everything to be said for keeping them transparent.

The FT, in another article about the same report, says the Bank blames the crisis on 'shareholders' for failing to supervise their companies and 'marking to market'. As a shareholder in Lloyds TSB I shall chastise myself severely for failing to attend their AGM and point out to them the error of their ways. I'm sure that would have made all the difference. But it is interesting that the Bank explicitly cites marking to market as one of the causes of the crunch.

We are beginning to need a new name for the 'credit crunch', which was fine when the problem seemed to one confined to interbank lending. Something more indicative of the scale of the problem would now seem more appropriate: something like 'Global Financial Meltdown'.

The Wonder of Woolies

Older readers will remember the slogan with which Woolworths used to market itself. The company is a useful case study in corporate decline having lost around 90% of its value over the last five years. Today we hear that lenders have appointed there own accountants to look at the company's plans and budgets. Normally such an announcement would cause a huge drop in share price, but in a turbulent market it seems to be just one more bit of glum news.

More Credit Crunch Humour

Accountancy Age misdirects[1] me to a splendid satirical offering thedailymash whose recent articles in the news/business section include 'Leprechauns are stealing our gold, claims Darling' and other gems.

[1] The URL in their article is wrong.