January Update: Essential News

Fed rate zero
The US Federal Reserve cut interest rates in December to a target rate between
zero and 0.25%, the lowest rate since records began in 1954. Its Federal Open
Market Committee says weak economic conditions “are likely to warrant
exceptionally low levels of the Federal funds rate for some time.”

BoE rate 2%
The Bank of England cut interest rates in late November by one percentage point
from 3% to 2% – the lowest level since 1951. Minutes from the MPC meeting showed
it had considered a more dramatic cut initially.

IMF 09 forecast
This year will be a very difficult year for the global economy and economic
recovery won’t be a possibility before 2010 at the earliest, according to the
International Monetary Fund. Making his comments in December, IMF managing
director Dominique Strauss-Kahn said “bailout fatigue” was slowing down
discussion about the future shape of government oversight of financial markets.

BAA grounded
The Competition Commission says it requires BAA to sell its Gatwick, Stansted
and Edinburgh airports to break its monopoly of UK air travel in southeast
England and lowland Scotland. BAA responded by upholding its view that the
Commission has not provided “compelling evidence” that selling Stansted and
Gatwick will increase competition.

Last post
Royal Mail must part-privatise to survive, a government report has found, and
Dutch rival TNT is thought to be interested in forming a “strategic minority
partnership” with the company. Royal Mail was found to be less efficient than
rival western European companies and has lost £500m in profit from technological
reform of its sector.

Pot of gold
The Irish government agreed to recapitalise its banking system to the tune of
E10bn. The Irish Department of Finance says the state may use money from the
National Pension Reserve Fund to inject into institutions affected by the
credit crisis, and affected parties must submit proposals for recapitalisation
in January.

Pound/Euro parity
Sterling is approaching parity with the euro as fears that the UK economy will
suffer a harder, more prolonged recession than other European countries works
its way into sentiment on the currency. This prompted reopening of the debate on
whether the UK should join the euro, though the government said it was not
considering this. On 15 December, after commission and handling fees, the BBC
reported customers at some UK airports got just E197.13 for £200.

Bailout no truck
Ford CEO Alan Mulally blames the pace of debate over the proposed $14bn
automotive industry bailout for slowing down a US recovery from downturn. “The
debate in Washington has slowed down thawing the credit crunch,” Mulally told
reporters. The first bailout plan was rejected by the House of Representatives
on a lack of strong business plans from the major auto companies.

FTSE-100 shuffle
In its annual review, the FTSE-100 index admitted Home Retail Group, business
services company Serco Group, gold miner Randgold Resources, Tate & Lyle and
insurer Amlin. For news on Tate & Lyle’s new FD, read our People page.
Stagecoach Group, Lonmin, Wood Group (John), Fresnillo and Petrofac were removed
from the index.

Boris London plan
Mayor of London Boris Johnson has recommended forming a lobbying board to
maintain London’s profile as a leading international financial centre amid
recession and as companies dump the UK for more favourable tax domiciles. The
Financial Services Board will comprise representatives from the City of London
Corporation and from around government, acting as “a politically independent and
strong voice for London’s financial services”.

Goldman cracks
Goldman Sachs reported its first loss since going public in 1999. The bank saw a
$2.12bn loss for the three months to end of November 2008, compared with net
income of $3.2bn at the same time in 2007. The diluted value of its common stock
dropped to $4.97 for the period from $7.01 the same time in 2007.

TECHNICAL UPDATE
– Auditing
For the first time, the Audit Inspection Unit published in-depth performance
reports on a sample of audits conducted by seven leading firms – the Big Four
plus BDO, PKF and Grant Thornton. The AIU, part of the
Financial
Reporting Council’s Professional Oversight Board, said, “The
quality of auditing in the United Kingdom remains fundamentally sound with no
systemic weaknesses. However, they identify some important issues in certain
areas in relation to which further improvements need to be made by the audit
firms.” It highlighted shortcomings such as possible conflicts of interest
involving tax partners and internal auditors, the amount of evidence obtained or
kept on file, and the rotation of engagement partners.

– Anti-corruption law
German electronics group Siemens has paid E1bn to settle corruption cases
brought by the US and German authorities. It paid $450m to the US Department of
Justice in a plea bargain over a criminal action and $350m to the SEC to settle
a civil action under the Foreign Corrupt Practices Act. Separately, it paid
E395m to the Munich Public Prosecutor’s Office. The $800m penalty dwarfs the
previous $44m record fine for such violations paid by Baker Hughes, says law
firm
Lovells.

Gartner ­ correction
In last month’s IT Strategy column, a sentence written by Robert Jaques was
misinterpreted in our editing process and changed to read that Gartner’s credit
rating had been downgraded. This is incorrect. It was, in fact, Gartner’s
forecasts for IT spending that had been downgraded. We apologise for the error.