...a blog by Richard Flowers

Monday, December 08, 2008

Day 2899: Things Robert Peston Should've Ought to've known


If there's a PROBLEM with the BBC's funny-talking money-guru Mr Robert "Hey!" Presto, it's NOT that he knows NOTHING, but that he tends to know ONE thing and make a big thing of stating and re-stating this. But he certainly doesn't have the depth or breadth of knowledge that, say, his predecessor had.

Normally, this is fine, because the ONE thing that he knows is the IMPORTANT thing, and the focus of the story. (Then you call up Mr Vince and let him explain it.)

But occasionally, it means that he'll TOTALLY MISS the POINT by a country mile.

For example, his "coup" for today is the news that Mr David Ross, the deputy-chairperson and co-founder of Carphone Warehouse, has had to resign for failing to disclose that he was using his personal shareholdings as collateral for a loan.

Why is this BAD? he was asked on the The Today Programme.

"Well," says MR Presto, "the rules say that you can't use your personal shareholdings as collateral for a loan without disclosing it."

This isn't so much an answer as re-stating the headling. It's the ONE THING that he knew, so he said it again.

The presenter tried to help him out.

"Could it be because the bank might foreclose?"

"Ahh," Presto snags the lifeline, "yes, suddenly the share-ownership is in doubt; the bank could end up owning a fifth of the Carphone Warehouse. Not that those loans are at risk at the moment, but they might be. The economy. You know."

He repeats this sage advice on his BBC sponsored diary.

"Investors will therefore see this morning's announcement as raising great uncertainties about the future ownership of that fifth of the company…"

The only problem with his answer is that it's completely WRONG.

Investors don't care STUFFING about the OWNERSHIP of a PLC – they care about the share price, the dividends, the debts, the profitability and the management, but owners don't have much, if any say, about those things. Certainly, the bank COULD end up owning those shares were they to foreclose. Just as they could if the deputy-chairperson SOLD them to the bank. It would be JUST be a change of name on the share certificates. That's NOT a RISK to the business.

(There's a remote possibility they might care that the bank won't dump the shares on the market all at once to recover their cash, but that would at worst cause a short-term fall in the share price that might actually be seen as an opportunity to buy at a depressed price.)

The POINT, that Mr Presto so badly missed, is that Mr Ross secured his loan against the value of his share but as a DIRECTOR of the business, Mr Ross is in a position to INFLUENCE the value of those shares.

There is therefore a CONFLICT of INTEREST.

He might USE his powers as a director to protect HIS OWN interests in the value of those shares ahead of the interests of the business, or the other shareholders.

(e.g. he might press for a higher dividend, which would support a higher current value of the shares, even if it's not in the long-term interest of the business to pay cash out.)

That's NOT to say that he IS doing that – that's why it's not ILLEGAL. But it is proper for him to let them KNOW about the clash, so that they can decide whether that makes things more risky or not.

Proper disclosure, i.e. honesty, about WHAT directors are doing with other people's money and assets is VITAL for proper supervision and regulation. And that is at the HEART of why the economy has gone BASE over APEX. Businesses – specifically banks, but let's not forget car makers and house builders – were throwing a lot of money about without anyone knowing – or ABLE to know – what it was they were really doing.

THAT is why concealing things, eg, these debts, is BAD.

And so it's a bit worrying that the BBC's economics editor doesn't appear to realise that.

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1 comment:

Liberal Polemic said...

Yeah. I'm starting to worry about Preston.

I am thinking of using his line, though. Whenever anybody asks me anything difficult, I might respond with "Ahh... The economy. You know."