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Dear readers,
The closure of Nigel Farage’s account with Coutts is filled with an ironic twist. The NatWest subsidiary decided to sever ties with the ex-politician due to his views conflicting with their commitment to inclusivity. However, in excluding Farage, Coutts has become an anti-inclusive entity itself, hence contradicting its own principles.
To a quantum physicist, this might make sense, but to me, it simply shows that the individuals responsible for closing Farage’s account lacked intelligence. This ensuing battle has pitched a niche broadcaster and former politician against a financial institution boasting over 62,000 employees and more than £700 billion in gross assets. NatWest quickly realized it was greatly outnumbered.
Farage successfully ousted Alison Rose and Peter Flavel, the CEOs of NatWest and Coutts, respectively. He achieved this by highlighting the following reasons:
1. It is wrong to deny someone a bank account based on the fact that they hold and express widely held opinions.
2. Whenever writing about someone in internal company documentation, it is crucial to consider how it would appear if it were made public. Coutts officials failed to follow this important guideline.
3. NatWest provided misleading information to the press and was subsequently exposed. Rose mistakenly mentioned certain financial thresholds that could lead to a client losing their Coutts account during an interview with a BBC reporter. It later emerged that some Coutts customers retained their accounts despite falling below those thresholds, indicating that Farage’s account closure was politically motivated.
4. NatWest fell prey to groupthink within the London bubble of executives, campaigners, and journalists who frequent ESG conferences. Though considered beyond the pale within this sphere, Farage is considered a hero by many Britons and the right-of-centre press for his instrumental role in the UK’s departure from the EU.
Personally, I do not align with any of Nigel Farage’s beliefs and I wholeheartedly praise any efforts made by major corporations to become fairer and more compassionate entities. Nonetheless, it is evident that NatWest made a serious mistake in handling the Farage affair. This incident serves as a reminder that backlash against corporate policies often dismissed as “woke” can have significant business repercussions. As further confirmation of this, Anheuser-Busch recently announced several hundred layoffs due to a right-wing boycott in response to a minor controversial advertisement featuring a transgender influencer.
That being said, this does not mean that corporations should retract policies aimed at promoting tolerance and equality. However, they must exercise caution to avoid missteps. At times, they must also be prepared for resistance, as demonstrated by Nike when it featured civil rights activist Colin Kaepernick in its advertising campaigns.
On a personal note, I must admit feeling some level of embarrassment in how captivated I am by the Farage affair. In the grand scheme of things, it holds no greater significance than two schoolboys playfully hitting each other with wooden swords while wearing saucepans on their heads. Moreover, it bears little financial consequence for NatWest, as they recently announced commendable results. NatWest is a stable and mature banking franchise, and if Paul Thwaite, the current interim boss, secures the full-time position, he will undoubtedly run it efficiently. Additionally, finance director Katie Murray exhibits impressive intelligence. However, her decision to stay out of the highly politicized CEO contest may be due to this very reason.
Meanwhile, in a completely separate business story that significantly affects the lives of millions, US interest rates have reached their highest point in 22 years. The US Federal Reserve recently raised its key rate by a quarter of a percentage point to 5.25-5.5%. Experts predict that the Bank of England may follow suit next week, raising base rates by the same amount to 5.25%. This measure is necessary to combat rampant inflation, which is expected to push UK interest costs to the highest levels in the developed world.
The surge in UK interest costs can be attributed to heavy issuance of index-linked gilts by the government. Consequently, the government will need to sell a larger number of bonds to finance its deficit. In terms of gilts prices, Lex believes that rate expectations, which have peaked, have a greater impact than supply. Therefore, gilts present a promising investment opportunity for fund managers. Private investors should also consider gilts as discussed in our Lex Populi column for FTMoney.
With the weakening of the US dollar, it is advisable to consider purchasing emerging market bonds. Countries in the beautiful south have been swift in raising rates and stabilizing inflation ahead of the US Federal Reserve’s paltry efforts under Jay Powell. Particularly noteworthy are Brazil and Mexico.
Lex identifies an opportunity for investors in the decoupling of declining shares in emerging market bond fund manager Ashmore from the rallying underlying securities.
High rates have proven profitable for banks. Among the notable lenders reporting strong numbers this week is Deutsche Bank. Chief Executive Christian Sewing has effectively stabilized the institution. However, Deutsche Bank’s shares are currently trading at an abysmal 0.35 times book value, worse even than its erstwhile rival Commerzbank. The performance of Deutsche’s investment bank may be a contributing factor to this situation.
Additionally, the high rates have greatly benefited private debt businesses, which has earned this newsletter’s coveted “So Hot Right Now” award. Carlyle, for instance, will acquire floating rate interest starting at 15% by lending to struggling company iRobot. This deal appears favorable for the business behind Roomba vacuum cleaners, especially given the potential acquisition by Amazon, pending regulatory approval. As we approach the peak of the interest rate cycle, the US is still dealing with the aftermath of costlier money and its repercussions on high-risk banks. The Federal Deposit Insurance Corporation aims to recover the $15.8 billion spent on mitigating bank runs through a levy on uninsured deposits.
Certain banks are attempting to exploit loopholes in the system. They seek to reduce the tally of uninsured deposits by excluding accounts backed by collateral. The FDIC rightly opposes this tactic, as it imposes greater costs on banks that adhere to the rules, ultimately impacting customers and shareholders.
The acquisition of PacWest by Banc of California represents another consolidation effort following the upheaval in the banking industry. Fortunately, this all-share deal did not require state intervention or involve lopsided economics. PacWest had been weakened by a flight of deposits, leading to lenders such as Silicon Valley Bank falling into the arms of the FDIC.
In Europe, Credit Suisse experienced the most significant setback. We initially expected Julius Baer, Switzerland’s largest private bank, to reap considerable benefits in terms of new business from displaced Credit Suisse clients. However, net new money of SFr9.2 billion ($10.6 billion) in the first half of the year was disappointingly low in this regard. This could indicate UBS’s success in retaining client assets after acquiring Credit Suisse.
In the UK, prominent wealth manager St James’s Place is facing potential challenges due to a vague new “consumer” duty set to come into effect next Monday. The duty entails a steep 5% upfront charge on individual savings account purchases. While the level of service provided by the company remains high, this fee is significant. As a result, Lex believes that St James’s Place will modestly reduce certain long-term fees, and further cuts may follow.
On another note, it seems that Lex writers frequently engage in other activities. For instance, our Asia editor, June Yoon, explored the diverging share prices of Nvidia and suppliers TSMC and Samsung in an Inside Business column this week. Deputy editor Elaine Moore released a new episode of her Tech Tonic podcast, focusing on the future of the social media industry.
This phenomenon appears to be driven by management. Our section head penned one column regarding the squeeze on Generation Rent due to higher buy-to-let mortgages. In their second column, they veered into an entirely unrelated topic about the cognitive abilities of crows, with no apparent connection to business or finance. Perhaps a gentle reminder is in order.
Outside of work, I fulfilled my necessary obligation as a culturally aware newspaper columnist by attending screenings of the movies “Oppenheimer” and “Barbie.” This was time-consuming, and it is unfortunate that the production teams did not collaborate on a single film featuring Barbie leading the Manhattan Project. Nevertheless, I remain hopeful that they might create a combined sequel, “Ken: Father of the Hydrogen Bomb.”
Thank you for reading The Lex Newsletter.
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