Uncertainty will drag on for tobacco industry

COMMENT

The only thing that can be stated with certainty about the giant tobacco settlement now under negotiation in the US is that its outcome is so uncertain and legally complex that it will be many years before we know for sure whether it's a runner or not. Oh, and there is one other thing; the main beneficiaries will, as always, be the lawyers.

That being said, there is no doubt about the industry's urgent need to settle. The cost of litigation in the US is estimated at some $600m a year at the moment and rising. That, it ought to be understood, is just the cost of success, for the industry thus far has been largely triumphant in seeing off the litigants. Just imagine how the sums will escalate once the industry starts to lose.

The size of compensation for tobacco victims is only a part of the wider settlement problem. The headline figure of $300bn over 25 years quoted by the Wall Street Journal yesterday is based on the sort of settlement already proposed by Liggett Group, and as such is fairly meaningless. The Liggett formula, of approximately a quarter of revenue, spread across the industry equates to this sort of sum. Gobsmacking though such numbers undoubtedly are, they achieve nothing from a public policy perspective if unaccompanied by a deal that also brings tobacco under much tougher regulatory control.

All that would happen is that the costs of servicing past "victims" would be paid for through higher prices to future addicts. The benefit of settlement would all be one way, and that would be towards the industry. What the White House is after is a deal that would address the wider problem of present and future generations of smokers, those fully aware of tobacco's dangers, as well as those already unwittingly damaged by the habit.

Again, this is no simple matter. To bring tobacco under the control of the Food and Drug Administration would require root and branch reform. As things stand, all products approved by the FDA are by definition "safe". It is not allowed to licence harmful substances. Furthermore, to make tobacco a prescribed drug would be to destroy the industry and make it incapable of meeting the liability of present compensation claims.

As President Bill Clinton is about to find out, the Middle East peace talks have got nothing on this.

Imro shows poor judgement

No-one would disagree that the Peter Young scandal was anything but a gross failure of management on the part of Morgan Grenfell's top brass, one which deserves harsh and public punishment. Few, however, could agree that Imro's findings yesterday, and the record fine handed down by the regulator, are a satisfactory outcome to this grubby and unhappy affair.

As to the quantum of the fine, pounds 2m is neither here nor there to Deutsche Bank, Morgan's parent, and the impact of the levy, albeit the biggest under the Financial Services Act, was rightly shrugged off by analysts yesterday. It may be that the damage to Morgan's business of its time in the stocks is punishment enough, but a fine of less than 1 per cent of the black hole left by Mr Young's dealings means the punishment hardly fits the crime.

The real problem with Imro's judgement, however, lies in the questions it leaves unanswered. The fact that the regulator has yet to reach any conclusions about the individuals responsible for the debacle is a telling admission that it is in no position properly to judge the seriousness of the offence. The level of the fine therefore becomes an entirely arbitrary judgement, as does Imro's claim yesterday that the compensation Morgan offered its 90,000 investors last December was fair and equitable.

If Imro hasn't yet reached the conclusion of its deliberations, the question ought to be asked as to why it has chosen the middle of the election campaign to throw its weight around in such a high-profile manner. A cynic would say it must have something to do with the ambitions of Imro's chief executive, Phillip Thorpe, keen to prove himself and not at all averse to playing public hardball just ahead of the incoming Labour administration's restructuring of the City's various regulatory bodies.

Unfair or not, the point was being widely made in the City yesterday. Imro's posturing aside, one thing is for sure - the future does not look bright for Mr Young's superiors, at least one of whom, the regulator believes, knew Morgan was selling dodgy trusts a full five months before the balloon finally went up. They can expect harsh, even brutal treatment, as well.

Again the regulator can hardly be blamed for wanting to make an example of those who perhaps thoroughly deserve their fate. The case could equally well be argued the other way, that far from being too hard Mr Thorpe is being too lenient. He might, for instance, have stripped Morgan Grenfell Asset Management of its licence. The problem with City regulation as it now stands is that the process is too opaque and arbitrary to know.

Look at what's under the economic froth

No single indicator can deliver a cast-iron assessment of the state of the economy. Recoveries are always patchy, and different bits of evidence always need to be weighed up against each other. But there could be no clearer sign of economic froth than the breakneck expansion of two particular types of retailer: the luxury coffee bars where a cappuccino will set you back nearly pounds 2, and the speciality candle shop. Remember the Filofax accessories and Belgian chocolate shopping spree in the late Eighties?

The row about fiddled unemployment figures yesterday was a red herring. It is certainly true that the decline in joblessness has not been as precipitous as the headline claimant count figures would suggest. But that does not mean that the labour market has not got tighter. The alternative, and more reliable, Labour Force Survey figures show a drop in unemployment during the past year about three-quarters the size of the decline in the number of claimants. That is still a big, and welcome, fall. The ultimate test of whether the economy is booming, though, is whether the pace of activity is prodding awake the slumbering inflation monster. Are enough exotic coffees, scented beeswax candles and other goodies being sold in high streets up and down the land, or at least the South-east, to over- stimulate consumer spending? Do higher pay and free building society shares make higher borrowing costs a must?

The most ominous sign that the answer is yes lies in the sudden upward scamper in average earnings growth. It has climbed from 4 per cent to 5 per cent since October.

Even those in the economics fraternity who believe everything in the economy is just fine are not, when you really look at their position, walking their talk; at the same time as talking down the boom, their money is on the emergence of more inflationary pressures. Every single one of the 45 economic forecasts listed by the Treasury predicts that base rates will be higher by the end of this year, including all the City forecasters who insist that the recovery is not all that strong. These economists, cappuccino drinkers to a man, cannot all be wrong.