ALEX BRUMMER: Legal & General bosses shift the blame over LDI

Legal & General has long viewed itself as a cut above other players in insurance and pensions.

So eagerly awaited the testimony of Chairman John Kingman and CEO Nigel Wilson on the group’s exposure to liability-driven investments (LDIs), the lightly regulated, highly leveraged strategy that was at the heart of the Bank of America rescue. England last month.

After all, when companies entrusted L&G with the future management of the pensions of more than 1 million citizens, they could not have expected that this would expose them to complex derivative strategies beyond the understanding of mere mortals.

Thanks to the Bank, no one was seriously hurt by the chaos in the government bond market caused by the mini-budget.

And as L&G is often fond of telling people, every day it has a wall of cash coming in from depositors, meaning it’s able to deal with unforeseen events.

But one can’t help feeling that Kingman and Wilson, in their responses to a Lords select committee, were concerned with money passing.

Former Mandarin Kingman, the author of an excoriating report on audit failures, argued that no one would have considered it a plausible scenario for the government to “create such extraordinary instability” in two trading days.

But hold on. The Bank of England already warned in 2018 about the dangers of LDIs and called for stricter regulation.

As a major player in pensions, you might have expected L&G to monitor risk more closely. The big lesson from the financial crisis of 2007-2008 was that highly leveraged products could explode at any time.

Liz Truss/Kwasi Kwarteng’s growth drive, with its unfunded tax cuts, was poorly assessed.

But so was L&G’s decision to embrace LDIs so warmly. Insurers, pension funds and banks are encouraged to hold gilts (government bonds) because they are the safest instrument available. Exposing them to the casino economy is unconscionable.

Aveva Warning

At a time last month when all eyes in Britain were on the political ramifications of the failed mini-budget, the country’s head of cybersecurity, Jeremy Fleming, issued a warning to the West about China.

The GCHQ chief warned that Beijing is using its “economic and technological clout to rear its ugly head domestically and exert control abroad.” He claimed that China was trying to gain advantage by shaping the world’s technology systems.

Protecting Britain from technology transfers and the shipment of intellectual property was one of the main factors behind the Boris Johnson government’s support for the National Security and Investment Act, which mirrors a similar process in the US.

In France, things are more direct now that Paris yogurt maker has declared Danone a strategic industry.

The French electrical giant Schneider thinks it is good that it takes over the minority in the industrial software group Aveva. But Paris wouldn’t take kindly to a similar investment in the opposite direction.

Schneider argues that the proposed nearly £10bn Aveva acquisition poses no threat to national security because the joint venture operates in China for Chinese customers and exports very little.

Would Fleming, or even the French security services, be so complacent about the risks?

Schneider’s website states, “We are driving digital transformation through the integration of leading-edge processes and energy technologies.”

It’s hard to imagine, given the joint ventures or more direct operations in China, that Aveva software could be foreclosed. Schneider’s local executives make no secret of the fact that local operations are driven by automation and advanced technology.

It seems increasingly likely that minority investors in Aveva will tell its dominant shareholder Schneider to step up.

But even if it wins the hearts and minds of the minority — generally it’s just negotiating the price — there are solid strategic reasons to block an unwanted transaction.

Price guide

The idea that inflation is a homegrown disease, as caused by the Labor front bench, needs to be corrected.

Data from the Office for National Statistics shows that in a universe of 29 developed economies, 69 percent suffer from “high” or “very high” prices.

About 79 percent had a CPI above 6 percent in September due to spikes in energy prices.

British exceptionalism is a myth.