To stay or not to stay after Equitable victory

Anthony Hilton12 April 2012

VANNI Treves and his boardroom colleagues at Equitable Life have achieved a famous victory. By securing an overwhelming vote from the membership in favour of the compromise scheme designed to help their insurance society escape the legacy of guaranteed annuity policies it cannot afford to honour, they have taken a massive step towards stabilising the society.

It is a result few would have bet on 12 months ago, and the fact that no one was particularly surprised should not be allowed to detract from the magnitude of the achievement. Treves and his colleagues had a weak hand - no hand at all in fact, other than the members' fear that the alternative to compromise would be something worse.

But they had credibility because they were in no way responsible for getting the society into the mess. Despite some provocation, they stuck firmly to the message. Compromises rarely made anyone completely happy - but they made members understand there was no realistic alternative.

Yet even with this vote in the bag, the society is not out of the woods. It has next to go to the High Court to get ratification that the reconstruction proposals are fair to all parties, have not been improperly pushed through and reflect the genuinely held wishes of the membership.

The Court is not a rubber stamp, and Equitable has had enough experience of unforeseen judicial decisions not to take anything for granted. It would, however, be a cruel irony if it were to be sunk at this point, once again by Her Majesty's judges.

If all goes safely through, the next question for Equitable members is whether to leave their money in or whip it out. They certainly should hang on until they get the uplift due on their policies as part of the settlement, but whether they should stay for the long term is another matter.

Running a fund that is mature or not recharged by a regular inflow of fresh money is hard, and Equitable is unlikely in future to attract the best talent. One can never be sure whether members will get a better return with another insurance company, but it is certainly something they should think hard about.

Time not on Fed's side

IT IS unlikely that the US Federal Reserve will cut interest rates when its Open Market Committee meets this week because it is beginning to appear that previous cuts are working their way through the American economy with the intended outcome.

If economists are right, economic data this week should show the US economy is stabilising. Financial market indicators have suggested an upturn for a while. Now we will see if durable goods orders, personal incomes, construction and labour market activity show improvement where it matters.

A critical test will come on Friday, when figures are expected to show the rate of job losses in America is slowing rapidly, a necessary prerequisite to encouraging enough consumer optimism to strengthen recovery prospects.

As Fed chief Alan Greenspan told Congress, the concern now is not whether the recovery is coming, but how durable it will be.

Factories are operating at such low capacity and stocks reduced so dramatically that the switch to stockbuilding will provide significant temporary stimulus. For that to be sustained, however, final demand must strengthen. Consumers appear willing to do their part but the dramatic cutbacks in capital spending, combined with falling profits and share prices, exerted a triple-whammy on US companies.

It will take some time to reverse the defensive trend and even in the best of circumstances capital investment is unlikely to approach levels of yesteryear. However, there is significant upside potential. Greenspan said surveys show most businesses have not completed their hi-tech upgrades.

A lot can still go wrong, but at the moment it appears the economy is on the right track. If luck holds, history will note the past 18 months as a mere bump on the path of global prosperity rather than the end of one of the healthiest business cycles ever for many Western nations.

The Fed could ruin that legacy by over-reacting and cutting interest rates more than necessary, which would require draconian counter-measures down the road. Last autumn, as the US economy crumbled, Greenspan waited too long to start easing. He should not make the same mistake and wait too long to stop.

Blame game

MANAGEMENT guru Peter Drucker observed that when hit by a crisis, the first thing companies do is find a scapegoat. Energis, the telecoms infrastructure company, is clearly following this script.

Last week it shocked the City with a profits warning. On Sunday several newspapers carried an obviously planted story that Bill Trent, Energis's finance director, was about to lose his job. One institution was quoted - anonymously, of course - as saying that Trent had lost all credibility because he did not see the trouble coming.

Even if Trent is partly to blame there can be few more shameful ways to treat a perfectly ordinary guy than to tell him of his probable dismissal through the newspapers. If the source of the story is the company, it does it no credit at all. If the source is the institutions, they should be ashamed of themselves. They are far too quick to demand the heads of directors when something goes wrong, purely as an act of revenge. Their position is the more indefensible when they fail totally to apply such rigorous standards to themselves.

There is barely a fund manager in the country whose performance has been much better than lamentable these past few years. But I cannot think of any who have publicly put their hand up, said they made a mess of things and quit.

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