Saunders' portfolio puzzle

IT IS difficult to keep up with the saga of Robin Saunders, the head in London of the principal finance unit of WestDeutsche Landesbank. Relations seem to have broken down between her and her bosses in head office - otherwise why would they refuse so publicly to allow her to finance a bid for AWG, the Anglian Water group?

But she is still in place - she has not resigned in pique and the bank has not fired her - the reluctance of the German head office to move being the more understandable of the two.

The last time a German bank tried to get rid of a high-profile woman in London - one Nicola Horlick - she stormed off to Frankfurt with the Press in tow to confront the bosses of the bank in their dens. It did not save her job, but it certainly embarrassed her then employer, Deutsche Bank. They probably now assume in Germany that this is par for the course in a flexible economy.

Given that WestLB is State-owned and in hot water with the local politicians anyway, one can imagine the very thought of anything like a repeat of the Horlick farago would scare the management rigid. Being given the job of firing Saunders if it comes to that may not be a career enhancing move.

Mind you, if they had not been rigid for so long they might not be in the mess. The Saunders affair has all the hallmarks of an overmighty employee seemingly making pots of money for her employers in ways they do not fully understand and therefore being given too loose a rein.

The period of the employer basking in the warm glow has given way to the period of the employer wondering whether these activities were quite as profitable as they at first appeared and what might be coming out of the woodwork.

The board of WestLB is discovering the inherent risk of profits that appear to be too good to be true. Sometimes they are.

Adding further confusion are reports that she has mobilised £800m to buy out the principal finance business. Perhaps she has the backing, but what does she propose to buy? If, as is often said, a business like this is the people - she and her key colleagues - it would not cost £800m. They simply have to leave and walk into an empty office across the street. If, however, her people cannot do what they do without access to the bank's balance sheet, £800m will not help.

It can only mean she wants to use the £800m to buy the portfolio of debt and equity it now appears that WestLB is carrying on her behalf. But this raises more questions. It is at least possible that some of these holdings, such as Formula One, went into the bank in the first place because Saunders' team could not sell them to outside investors when doing the original deal.

That would certainly chime with the experience of Morgan Stanley which had first stab at securitising F1's income stream three or four years ago. It found that people did not want to buy at the price at which F1's owner Bernie Ecclestone was determined to sell. Morgan Stanley was astonished at the apparent ease with which Saunders placed the securities when she took over the deal. Of course, if the parent bank absorbs any unsold bonds, it does make it easier.

If this is a typical pattern of behaviour, it would imply WestLB is sitting on a large portfolio of securities whose names correlate closely with the high-profile Saunders deals. But the face value of these securities runs into several billion pounds - so where does the £800m come in?

A portfolio that consists of the rumps of unsold and arguably overpriced deals, if that is indeed what it is, is liable to be marked down when valued by an outsider. But not that much surely?

As I say, it is all very confusing.

Housing hope

BRITAIN'S housing market works pretty well. It has had its booms and busts, of course, but the swings have been less frequent and the plunge from peak to trough less extreme than similar swings in the equity market - and much less severe than in investments like art or fine wine.

It is therefore alarming to learn from Gordon Brown's euro statement last week that he plans to interfere with the housing market to 'improve' it.

When Labour came to power in 1997 the UK pensions industry was the envy of Europe. Unfortunately, Brown decided it could support a £5bn-a-year increase in tax on the income flowing into the funds. That has played a huge part in undermining the industry's finances in the six years since and contributed directly to the disaster we now see on all sides.

To Brown's suggestion on the housing market, we can only say: 'Please don't. It works.'

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