Asset Valuation as the Name of the Capitalist Game
How what was done to The Spectator could be done to your investment/pension
Continuous and accurate valuation of assets is at the nerve-wracking heart of today’s financial capitalism. Flawed valuations can be the cause of systemic crisis - and of losses for investors and pensioners - unless and until we are compelled to face reality.
Why so? readers may ask. Karl Marx hinted at an answer in The Communist Manifesto. “All that is solid” he wrote, “melts into air. All that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind”.
Amidst the horrors of brutal wars in the Middle East and Europe; mass starvation in the Sudan, and floods across Eastern Europe, I was reminded of these lines. Grappling with these events I came across the story of an extraordinarily privileged man, Andrew Neil. He had been compelled to face his own real “conditions of life” and was not happy.
I recount his tale briefly, because while apparently trivial, it illuminates much about the real conditions of today’s ‘Asset Economy’1 and the risks we are compelled to face with sober senses.
The Woes of The Spectator
Andrew Neil was chairman of the right-wing Spectator, one of Britain’s oldest political magazines - “established in the age of the quill pen”. He was recently forced to resign his post after the magazine had been ‘placed in receivership’ by its bankrupt owner, Frederic Barclay, and sold to a right-wing christian nationalist.
In short, the very pen-pushers paid to defend rapacious capitalism and irresponsible capitalists, had been duffed over. Not by enemies on the left, but by irresponsible capitalists. As a consequence, and after a tortuous sale process, The Spectator was sold for £100 million to the hedge-fund billionaire, Paul Marshall.
It’s not fair. Boo-hoo.
The way in which he and his team of journalists had been treated by Frederic Barclay angered Mr. Neil. They, he asserted in his resignation letter, had borne all the risks associated with publication of the valuable asset that is The Spectator. Yet they shared not a penny of the capital gains made from the sale. Flourishing his ‘quill’, and with just a touch of exaggeration, he lamented the sale of his beloved magazine thus:
In recent years The Spectator has never been more profitable, its reach never wider, at home and abroad (helped by our splendid Australian and American editions) and its journalism (under the peerless Fraser Nelson) never better nor more influential than it has been in its almost 200-year history.
Ahem. Fraser Nelson has rightly been criticised for “The Spectator’s lurch into the wildness of bigotry, hated and prejudice” and for giving editorial platforms to, and defending writers promoting authoritarian far-right politics and political parties - even while the magazine purports to defend democracy. See below.
Andrew Neil writes that a pertinent indicator of his colleagues achievements is that a magazine which was given a notional value of £20m two decades ago was sold for around £100m earlier this year. At a time, he argues, when most “legacy” publications are struggling to retain anything like their pre-digital worth, this was an unprecedented increase in value.
It is sad, even unfair, that nobody responsible for this success — that is, everybody at 22 Old Queen Street — will share in the upside.…..That is a result of the strange and surprising circumstances, definitely not of our making, we found ourselves in June 2023.
The self-pitying tone is palpable.
Suddenly and without warning we were placed in receivership because our then proprietors had used us as collateral for massive debts unrelated to us (without ever telling us).
They then failed to pay these debts.” (Emphasis added)
Collateral, risk and capital gains
What Frederic Barclay had done in collateralizing a magazine is not unusual. Present day financial capitalism - the Asset Economy - transforms assets, including right-wing magazines, care homes, doctors surgeries, commodities, forests, works of art - the list is endless - into income-generating collateral.
It does so in order to raise (‘leverage’) trillions of dollars of finance (debt). The collateral is used to guarantee repayment of that borrowing.
The key point is this: the asset has its value in the present. But its real value is calculated on the basis of yet-to-be-actualised future income streams.
That is why The Spectator’s value was ‘notional’. And therein lies the rub - and the risk.
When the value from Barclay’s predicted future income on all that collateral fell, so did the value of the asset. That raised the possibility of default on his debts, or even bankruptcy. In an attempt to avoid bankruptcy he sold the Spectator, and other assets, to raise finance. That decision transferred risk on to 30 journalists and their chairman on The Spectator - amongst others. The gravest risk, it transpired, was capture of the magazine by ‘the left’ on the one hand, and sale to an undemocratic foreign government, on the other.
Sure enough, Redbird IMI, an entity run by the former head of CNN, Jeff Zucker (deemed left-leaning) backed by the United Arab Emirates (UAE) and majority-funded by vice-president Sheikh Mansour - made a bid for the magazine. Both were unacceptable to Andrew Neil and his colleagues. They promptly lobbied the Conservative government, then on its last legs, which hastily introduced a law that banned foreign ownership of media, and stopped the deal in its tracks. Fraser Nelson reported that
Julia Lopez, the media minister, has delivered. She ended up delivering a government amendment even stronger than that which the rebels wanted.
Andrew Neil defended the bill and the attack on the UAE in a Newsnight interview.
The UAE is a terribly successful place. I’ve done business there, but it’s not a democratic government. We’re a democracy. Our publications are part of the democratic process. How could we be owned by an undemocratic government? …
Andrew Neil’s real beef
Given the Spectator’s taste for authoritarians and authoritarianism, and given the Tory government’s approval of numerous foreign and undemocratic government-financed purchases of UK assets (including a nuclear power station and numerous football clubs) we need not take seriously Neil’s or the Conservative party’s protestations about democracy.
In any case, that was not the real complaint about the sale of his magazine. It was that he and his colleagues had been treated as mere collateral by an irresponsible capitalist - who had failed to share capital gains from the sale with Neil and his colleagues.
Valuation as the name of the game
Continuous and accurate valuation of assets is at the heart of today’s financial capitalism. As we learned from the Great Financial Crisis, a flawed valuation can be the cause of systemic failure. In August, 2007 a sudden realisation that the value of assets held by BNP Paribas bank against massive borrowing may not have been the true value (as admitted in a press release) triggered panic.
The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly – regardless of their quality or credit rating.
Whoosh! With just one media notice and an uncertain valuation, the global financial system blew up - although many failed to notice the significance of the event straight away.
Irresponsibility: the deep flaw in financialised capitalism
Money and currencies are everywhere and over all time relationships, that must be founded on responsibility. Any arrangements for money (credit, debt, currency) depend on trust, cooperation and responsibility (enforced by regulation/law).
Today’s global markets for money are the antithesis of this logic.
In the ‘shadows’ of the global banking system, money relationships, human relationships are traded as if they were mere commodities, characterised by de-regulation, distrust and speculation.
In other words, the global trade in money is now based on distrust and irresponsibility.
And we, the citizens of the world, like those 30 Spectator journalists, bear the risk of that irresponsibility. That risk is most palpable in the privatised and globalised world of pensions.
Pension assets and Insolvency: who is at risk?
Andy Haldane, then head of financial stability at the Bank of England explained (back in 2014) why the failure of today’s big capitalist corporations’ to shoulder the risk of their activities, matters. He reminded us that
“…….a progressively greater share of investment risk is being put back to end-investors, with commensurately less being borne by intermediaries and companies. One clear example is found in the pensions industry, with the structural shift away from Defined Benefit (DB) and towards Defined Contribution (DC) pensions.
Defined Benefit (DB) pensioners (‘end-investors’) have pensions where risks are pooled and collectivised, and post-retirement benefits defined in advance. For Defined Contribution (DC) pensioners or insurance premium-payers, benefits are not defined in advance. Risk and reward is shifted on to the individual pensioner, saver or insurance holder.
Haldane goes on to explain that asset managers do not own the assets - notably pension funds - in their portfolios. They simply ‘manage’ them - and collect the fee.
That means, says Haldane, that
“……asset managers do not bear credit, market and liquidity risk on their portfolios. Currently, Blackrock has over $4 trillion of assets under management but has only $9 billion of assets of its own. Fluctuations in asset values do not threaten the insolvency of an asset manager as they would a bank.
Asset managers are, to a large extent, insolvency-remote.”
Instead, individual pensioners and insurance holders bear all the risk of flawed, downward valuations of their pension pot.
Pensioners whose savings are transferred to global asset fund managers are, like Spectator journalists, unwittingly bearing the risk of poor asset valuations and irresponsible pension fund speculation.
They, and we must prepare for the time when all that is apparently solid, melts into thin air.
See The Asset Economy by Lisa Adkins, Melinda Cooper and Martijn Konings.
Spare a thought for Andrew Neil and Fraser Nelson 😅 Thoughts and prayers etc..
Great analysis, thanks for posting!