Recession: Lay Off the Optimism

After weeks, and months, of whispering and speculation about the chances of the UK falling into a recession, today was the first day evidence showed itself. I've just now heard 'we are in a recession' for the second time in a few hours; once before lunch from a fairly well informed colleague, and once immediately after lunch from a friend who, working in marketing, I'll presume is equally well informed on corporate spending patterns. And it really put the kybosh on my post-lunch lull.

This for me is pretty momentous (the admission of being in a recession, not the loss of a post-lunch lull) since no one has quite had the courage (or the brass neck) to say it out loud this year. People have pussy-footed round the idea, taking refuge from impending doom in whatever random positive stats or news stories they could find to legitimise their upbeatness, while others just clung to conventional wisdom, waiting for the two quarters of negative growth to pass before opening their gob either way. I really can't recall anyone saying out loud until today, we are in a recession. Once it's said out loud, it's just a matter of accepting the situation, watching and waiting - while companies gird their loins for the 'strategic reviews' and the bums disappearing from seats. Certainly the news headlines today preceding the two recession comments sounded pretty bad: for example, pre-tax profits in the first quarter (before restructuring and redundancy charges) at BT fell by 7 per cent to £613m, and large half-year losses at the UK's biggest mortgage lender HBOS have hit at a time when fears over the strength of UK banks (and their potential to hurt the overall economy if another one reveals dire circumstances) are running high.

I think we can deceive ourselves no longer: here we stand, it seems, in recession. Recession. Just let the word roll around in your mouth. Get up close and personal with the idea. Take it to your bosom. Just don't shoot the messenger...

Melanie Stern, deputy editor

The new Dame of Throgmorton Street

Finance directors of all the companies on the Stock Exchange can feel justly proud of their London listing - and they should all be raising a glass to LSE chief executive Clara Furse who has just been made a Dame in the Queen's Birthday Honours.

The LSE was once regarded as little more than an EBay for stocks and shares, and seemed destined to fall into foreign hands - be they Swedish, German or American.

Dame Clara has breathed new life into the market, attracting foreign companies to London. As a result of her efforts, a London listing still means something to the companies traded on it - and certainly much more than if the LSE were just a subsidiary of some foreign bourse.

Carbon dating?

The recent International Green Hero Award was given to Version One by a UK environmental group, The Green Organisation, which got me thinking about historical carbon offsetting.

Version One has not only reduced its carbon footprint by as much as it can reasonably afford, but also offsets more than it emits. The company estimates that by 2010 it will have offset all the emissions the company has ever produced. The Co-Operative Bank also takes part in historical offsetting.

It made me wonder: would this be something that would get big business excited? The Co-Operative Bank markets itself on its environmental credentials and Version One is a document management systems for accounting and ERP systems, which will enable them to become paperless.

But would Bank of Scotland, for example, want to offset its historical carbon emissions as well as its current? The Governor and Company of Scotland's first bank got together way back in in 1695. That's a lot of emissions to account for!

Call me a cynic but I don't see this as a trend many of the larger corporates will be moving towards.

Famous last words, revisited...

She's gone - sort of. Lehman Brothers announced today that CFO Erin Callan, who had the grave misfortune to preside over massive losses and an even bigger attmpt to inject new capital into the bank, is "rejoining the investment banking division in a senior capacity" and being replaced by Ian Lowitt - "effective immediately".

Ms Callan, who was only appointed to the role in December - was emphatically not an accountant and had no finance function experience. New man Lowitt has been the bank's co-CAO - chief administrative officer - responsible (says Lehmans) "for the global oversight of corporate real estate, expense and sourcing services, finance, operations, productivity and process improvement, risk management, and technology". He's been CAO of Lehmans Europe and was also global treasurer and global head of tax. He's got a clutch of university degrees - four at the last count - and is ex-McKinsey.

So he's no dumb bunny - mind you, no one ever said Callan was, either - but to what extent it adds up to more solid beancounting experience than his short-lived, flashy, but now embarrassingly-demoted predecessor remains to be seen. It ain't over till it's over.

The substance of the form

Deloitte informs us today that many companies are in danger of leaving it far too late to complete their HMRC Form 42 returns by the 6 July deadline date. The form (as if you needed reminding) relates to share-based payments to employees but it's a complex beast, as Deloitte also tells us that only 11% of companies are "very confident" that they have completed it correctly.

Coincidentally, just the other day we met a finance director from a small, Aim-listed company who explained that he was training a new member of  his finance team and asked him to start getting to work on the Form 42. This was a particularly challenging exercise, this FD told us, not least because the guidance notes for this single form are 52 pages long. And oh, by the way, if you're late or you mess it up, it's the director responsible who is liable to HMRC penalties, not the company.

Other examples of bonkers bureaucracy are very welcome...

Famous last words

Well, we didn't have long to wait. Barely three weeks ago we told you about the fawning Wall Street Journal article profiling Lehman Bros CFO Erin Callan. Ms Callan had a number of important attributes that the WSJ wanted to bring to its readers' attention (not least a pair of legs that would grace any of Rupert Murdoch's other titles). A tax lawyer-turned-investment banker, she was, unlike her predecessors, an accountant and - get this- had never worked in the finance department. She was reported to receive ""a slimmer daily financial summary than predecessors", her preferred means of information-gathering being "the trading floor contacts built during her 13-year Lehman career".

A lot of good they've done her. Lehmans has just announced a Q2 loss of $2.8bn - worse than expected, thanks in part to "negative net revenue" (we'll leave it to you accountants to figure out how that's possible). The bank also unveiled plans for a $6bn capital injection - $4bn in shares and $2bn in convertible stock yielding 8.75%. Moreover, Moody's has put Lehman's credit rating on watch, calling into question the bank's risk management practices.

Last month the WSJ quoted Ms Callan as saying, ""Sometimes in hindsight, your forecast will not have been accurate based on the real world outcome." Maybe we're doing her down. Maybe that was a coded warning that Wall Street had it wrong. Or maybe her CFO-lite approach is partly to blame for the bank's undoing.

We're in trouble

It's said that one of the best leading indicators for a recession is the ease with which you can flag down a taxi - in the rain.

So this evening was a bit of an eye-opener. During rush hour, when it was peeing with rain, in the half-mile walk between our Soho offices and Leicester Square, we counted no fewer than nine black cabs with their orange lights on.

Oh, sh-------! We're in trouble!

American Apparel: Overpriced fairtrade jersey handbags at dawn

The departure of American Apparel CFO Ken Cieply has to be one of the most preposterous tales I've heard in the business world for a long time. Cieply left the uber-trendy seller of overpriced spandex leggings last week, after CEO and founder Dov Charney incredibly called his CFO "a complete loser" in an interview with the Wall Street Journal, adding that the Canadian had "no credibility" in the retail apparel industry. Presumably he wasn't counting that time when Cieply took Canadian no-brand sweater company Gildan Activewear to market. Smelling blood, WSJ got on the blower to Charney after the story ran and reported that the CEO retracted his comment as "juvenile", adjusting his views to saying that Cieply had "enormous credibility" in the manufacturing world - but lacked extensive retail experience. Announcing Cieply's departure a fortnight after that, Charney went full circle and said of his outgoing CFO that "his impressive pedigree in apparel was a key reason I asked him two years ago to come down to Los Angeles to help take our business to the next level".

This Jekyll-and-Hyde-ism from a listed-company CEO is rare, but seems the stock in trade of the AA founder: he adds foot in mouth disease to alleged sexual harassment of female staff, chronic corporate unreadiness for public life (the company wasn't GAAP ready when it went public last year), and has a knack for scaring off financiers (Charney said auditors of the company that claimed it inflated earnings were "exaggerating". The audit was conducted for potential private investors who would have provided much-needed growth capital).

After the last CFO died unexpectedly of a heart attack in 2005, an interim CFO came and went within a week. Cieply's attempts to shore up very shaky finances only exposed AA's weaknesses: perhaps the embarassment was what spurred the CEO's 'loser' comment.

All this will hearten Cieply's successor, William Gochnauer, who leaves his interim CFO role at catalogue gifts company Red Envelope for the same title at AA. Gochnauer's USP, Charney says, is his "extensive experience with SEC reporting and Sarbanes-Oxley compliance" - and this second interim CFO must now build a finance function that can handle its new reporting burden as a public company. AA has stated it intends to hire a permanent CFO in the next six months.

Sorry Darling...

Something odd is happening. We’re starting to feel sorry for Alistair Darling. True, his ability to take the flak for his boss’s cock-ups is matched only by his own ability to shoot out policy decisions and ask questions later – but he has already had an entire career’s worth of problems.

His first crisis was the queues outside Northern Rock as the tripartite bank regulatory regime created by his predecessor was found wanting. Then there was the embarrassing loss of personal data of around 25 million taxpayers. Then, after months of “dithering”, he decided it was time to nationalise Northern Rock.

You’ll recall the howls of outrage at the near-doubling of capital gains tax for long-term investors and entrepreneurs (coupled with a slashing of CGT for short-term punters and speculators). Or the theft of Tory policy on ultra-high net worth non-doms, followed by a reversal of some of the more onerous compliance rules. And as companies queue up to escape the UK’s proposals for “simplified” taxation of foreign income, Darling suddenly realises it’s time to listen to the business world. Finally, his acquiescence, then fudging, then capitulation over the 10p tax band was an excruciating episode.

Now the poor man has to put up with Gordon Brown saying, “I think I can steer this economy through difficult times. I have done it before and I can do it again.” Darling must be desperately sorry that Tony Blair didn’t make Gordon wait another 12 months to become PM.

Apologies to readers whose copy of the June Issue was missing the last line of this 'Extraordinary item' owing to a typesetting cock-up!

SocGen's JK report: Avarice, sloth, and middle management

Societe Generale's 'Mission Green',  the report on its findings in the investigation of trader Jerome Kerviel's activites and the wider framework of management and technology that (inadvertently) faciliatated them, is rather dull. Charts and graphs aplenty follow a 9- page analysis of what went wrong, going so far as to list each relevant day in diary order of Kerviel's fradulent trading actions, from New Year's Eve 2007 to Wednesday 18 January, and a run down of what happened, to the second. Traders are re-badged 'agents' - Kerviel is re-branded 'JK' - but it's not exactly a James Bond/Dr. Evil- style thriller we've got here.

What the report basically seems to conclude is that SocGen's middle management, those supposed to regulate their traders, ensure they stuck to trading limits, identify any dodgyness early on, and use their intelligence to keep things runing smoothly, couldn't be arsed. That meant, perhaps, that someone who was switched on enough to see this laissez-faire attitude simply capitalised on it, knowing that he wouldn't get caught because no one was bothering to look up the basic warning signs, or act on the ones their eyes did happen to meet with. Those employed to respond to big, flashing red lights (Eurex contacting the bank to flag up odd-looking trades coming from around Kerviel's patch, in-house trading systems automatically generating reports highlighting someone in Kerviel's general direction had been busting their trading account limits without authorisation, that sort of thing) didn't do, or didn't move in time, or strongly enough. Indeed, the report says that "supervision of JK appears to have been weak" despite several alerts to front-office about the trader on grounds of vigilance "or for investigation" and adds that desk management didn't identify initial fraudulent trades or their concealment, and tolerated JK's taking of various intraday directional positions that had nothing to do with his mandate there. (Maybe this last point is common in the trading world where making as much as as possible means rule-bending, within limits, is ok).

Obviously, the middle managers around JK had lapsed - but again, SocGen says it can't question JK's then-manager because he doesn't work there anymore. Kerviel was able to move under the radar because when his higher-ups were busy not monitoring him properly or bothering to take action when he was found to have exceeded trading limits, they were preoccupied with finding people to replace staff that had left the bank - such as the person who was responsible for a critical front-office function whose work went uncovered for ten weeks from January 2007.

One manager under whose remit Kerviel fell failed to carry out detailed analysis of his trader's earnings or their positions (all automated) as he was supposed to do. It was a case of clicking a few buttons. Now SocGen thinks Kerviel may have had an accomplice in his trading assistant, who was "dedicated to JK's activity" and registered 15% of Kerviel's trades.

Pre-report, initial speculation across financial newsrooms of Kerviel's motives led to good old capitalist greed. Some thought he just wanted to be seen to be the best, a star trader. Others put it down to a reaction to family troubles or just being a bit of a weirdo: always the quiet ones. But it was such a simple rouse for a man in his position, I doubt Kerviel even needed much of an underlying motivation like wanting more cash, needing more glory, an Oedipus complex, and so on. I''d wager he was just using that nose for opportunity that he was probably hired for. A door was open - he walked through it.

The post-mortem shows that the bank had all the info there, but sadly needed a big kick in the derriere to be pushed into collating it, and into paying attention. 20/20 hindsight is a brilliant invention for the remorseful. It's incredible that an organisation of SocGen's size can marshal its resources to publish something this detailed 16 weeks after fraud was publicly announced, but was unable to organise itself to this effect on a daily basis, something that may have prevented the Kerviel affair from happening.

Of course, from here on in SocGen must show that it has a plan to make all the identified problems better, and then show that it is enacting that plan, and then that the plans is working, and that another Kerviel cannot happen. Avarice is expected of banks and their traders. But in their world, slothfulness really is a deadly sin.

See the report here http://www.sp.socgen.com/sdp/sdp.nsf/V3ID/8D7F118212725EC6C1257452005AA90E/$file/report%20part%203.pdf