Britain’s almost-Lehman moment

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In today’s newsletter:

Margin call: Kwarteng’s rough third week

At the height of the financial crisis that preceded the one he has just created, Kwasi Kwarteng taunted his political opponents with an axiom of finance that — even now — he may not fully understand.

“Any stimulus . . . will be judged by the international markets,” the UK chancellor wrote in 2008, as the then Labour government readied tax cuts to jolt the economy back to growth. “If you are a borrower, the more you borrow, the more it costs.”

In the three trading days after Kwarteng announced he planned to borrow an extra £72bn by next April to pay for a tax cut on high incomes and other giveaways, yields on long-term government debt increased by more than a percentage point, an extraordinary figure.

“At some point this morning I was worried this was the beginning of the end,” a senior London-based banker said on Wednesday, describing the moment he realised there were no buyers of long-dated UK government debt.

“It was not quite a Lehman moment,” he added, “but it got close.”

Kwarteng and his Conservative party friends may not be too troubled by the consequences for the UK public finances, which will force the government to raise taxes or take a scythe to public services.

But they surely cannot have intended the collateral damage to the financial system.

The action in bond prices, which fall as yields rise, has torn through the assumptions of pension schemes whose £1.5tn in assets are carefully calibrated to match the payouts they have promised to make to retired workers in the coming decades.

Many of those schemes have pledged their long-dated gilts as collateral to repo lenders who demanded extra security as prices fell. Others faced margin calls on derivatives contracts tied to long-term interest rates. Before the Bank of England stepped in yesterday, some were thought to be hours from insolvency.

Rather than allow pensioners to face losses, the BoE announced a 13-day plan to buy gilts “on whatever scale is necessary” to restore order.

It is not entirely clear whether order is what this government wants. In the six years since the country voted to leave the EU, Britain’s political leaders have sometimes been likened to revolutionaries.

Vladimir Lenin would not have approved of their objectives, but the late Russian communist leader might have saluted the Tories’ efforts to “heighten the contradictions” — that is, to make current conditions so untenable that a rupture becomes impossible to avoid.

The FT’s Robert Shrimsley has a less forgiving take. “We are now watching the real-time implosion of the governing party . . . It’s going to be a hell of a show, though sadly the tickets will prove expensive.”

Talk isn’t so cheap after all

The message from US regulators has been heard loud and clear: anything you say can be held against you.

On Tuesday, 11 Wall Street banks and brokers including Goldman Sachs, Morgan Stanley and Barclays agreed to pay more than $1.8bn in fines over charges of “widespread” and “longstanding” failures in their recordkeeping practices. JPMorgan Chase paid a $200mn fine for similar issues last December.

Such transgressions include the use of encrypted messaging apps such as WhatsApp and Signal. The apps had become common ways for bankers to communicate with clients and each other over the course of the pandemic and are popular among a growing Gen-Z workforce.

The fines, levied by the Securities and Exchange Commission and Commodities and Futures Trading Commission, come after regulators opened an inquiry into employees communications and banks overall record-keeping capabilities last year that set off a panic across Wall Street.

Nervous dealmakers began lawyering up amid fears of personal liability and to prevent their employers accessing their private phones to check for work messages. Credit Suisse and HSBC fired employees found to have used unapproved messaging applications with clients last year.

Compliance departments are supposed to monitor all employee communications to uncover wrongdoing such as market manipulation and insider trading.

The expensive slap on the wrist won’t be the last headache for compliance departments.

Though dealmaking pipelines have dried up for bankers, compliance and legal departments still enjoy a solid cadence of looming sanctions to resolve.

Those include a block trading probe that has engulfed Morgan Stanley, as well as additional potential fallout from the $10bn blow-up of family office Archegos Capital Management.

With the probes now resolved at a cost borne by shareholders and not executives, banks continue to face existential issues.

They are struggling to adopt 21st-century communications for a workforce increasingly born in the digital age on their existing technological architecture that harks back to the 1970s and 1980s. 

Whether a rogue trader or a rogue texter, employees continue to short-circuit compliance barriers.

Low power mode: Britishvolt’s drive for survival

Many things can disrupt a funding round: management changes, concerns over product, market turmoil, spiralling costs.

Britishvolt — the ambitious start-up that has painted itself as the UK car industry’s great hope in the battery era — has witnessed the collision of all four.

The debacle threatens the company’s future and the rich embarrassment of a UK government that made the business a flagship project, the FT’s Peter Campbell, Harry Dempsey and Harriet Agnew report.

Let’s back up for a second.

The company, founded in 2019, has garnered backing from investors including commodities group Glencore and has just shipped prototypes of its first in-house product to a handful of carmakers.

But its latest series C investment round has been derailed by market conditions the company describes in its considered assessment as “wild”.

As a result, it’s now talking to the UK government about an advance on the £100mn grant it received — money that was only supposed to be paid out as it advanced with its plans to build a £3.8bn battery gigafactory in north-east England.

Britishvolt is burning close to £3mn a month on staff costs alone after a hiring boom took its headcount close to 300.

That may not be a vast sum by the standards of the cash incinerators of Silicon Valley, but it’s certainly more than the company can afford given its flagship battery plant won’t open — and begin generating revenues — until 2025 at the earliest.

Efforts to convince potential investors that it is a grown-up business included replacing its mercurial founder Orral Nadjari with respected former Ford director Graham Hoare as its chief executive earlier this year.

Investors really just want to see two things, though: working batteries and carmakers lining up to buy them.

Both developments, Britishvolt promises, are just around the corner. One reader comment on the FT deep-dive offered this withering assessment:

Job moves

Alex Mashinsky, the head of crypto lender Celsius Network, resigned on Tuesday with an apology to customers for the “difficult financial circumstances” the company’s bankruptcy had left them in.

Burberry has replaced its chief creative officer Riccardo Tisci with Daniel Lee, the former creative director at luxury fashion house Bottega Veneta, in the latest change at the top of the British luxury fashion chain.

Tikehau Capital has appointed Sir Peter Westmacott, the former British ambassador to Turkey, France, and most recently the United States, as its UK chair.

Fried, Frank, Harris, Shriver & Jacobson has hired Richard Powers as an antitrust partner in New York. He was previously deputy assistant attorney-general for criminal enforcement in the US Department of Justice’s antitrust division.

Smart reads

Keeping the faith In the digital currency haven of Portugal’s “Bitcoin Beach”, a tight-knit community of optimistic investors are waiting out the crypto winter for what they believe will be a great revival, the New York Times reports. Are they in too deep?

Bargain-hunting Britain’s currency crisis has its perks for foreign investors, including private equity billionaire Stephen Schwarzman, who has led the charge for prized UK assets with his £80mn purchase of a 17th-century country estate, writes Reuters’ Breakingviews.

Counselling with a conscience Advising companies to comply with the law is no longer enough for general counsels. Senior in-house lawyers are now seeing their roles evolve to become advisers on ESG matters, the FT reports.

News round-up

‘Just a question of when’: Citadel’s Ken Griffin predicts US recession (FT)

Saudi Arabia opens wealth fund’s books ahead of debut bond (FT)

Shell acquires Nigerian renewables group in first African power deal (FT)

JPMorgan’s digital bank Chase UK hits 1mn customers (FT)

Goldman Sachs leases new Birmingham office with space for 1,000 (Bloomberg)

Cineplex seeks to revive Regal merger after Cineworld bankruptcy (Wall Street Journal)

‘It cannot be the madness that it is today’: what’s next for Petrobras? (FT)

An ex-Morgan Stanley employee has been repping staffers with bias claims against the bank (Business Insider)

IPO chart fest (Alphaville)