Careless talk: Kwasi Kwarteng's bruising lesson that being Chancellor is a serious job

Decision to meet with hedge fund managers was a baffling misstep, writes Chris Blackhurst

Britain's Chancellor of the Exchequer Kwasi Kwarteng defended his tax cuts in a speech to the Conservative Party conference. EPA.
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During my career I’ve learnt to be on my guard. I’ve become used to the phone calls and messages. They’re the ones from friends and acquaintances who work in the City wanting to know if I can share some “intel” with them. They’re employed by hedge and investment funds, and they’re seeking information.

What they’re pursuing is the “edge” over their rivals and the market. They don’t say it so baldly. The request is less direct, chattier. “Just wondering what you thought of so and so,” or “Have you heard anything about X” — that sort of thing.

And the time they’re most pressing is if there is a major political story breaking, when there is a rumour of an impending resignation or key economic measure.

Given I’m a journalist and I move in gossipy circles and yes, I meet senior politicians and their advisers, they suppose I might have gleaned something. What they want is anything, any nugget, no matter how small. Put it together with another morsel, build a picture, run the numbers and hey presto, a lightning investment play emerges. It might be enough to move a stock, nudge a currency, to make a killing.

Given that he once worked for Crispin Odey, the rumbustious star hedge fund manager who describes his huge bets against the UK government as the “gifts that keep on giving” (Odey’s main fund is 145 per cent up this year from betting against UK bonds), Kwasi Kwarteng surely knows this. Careless talk costs lives. In hedge fund land, careless talk means profit.

Which is why it is so baffling that on the evening of his mini-budget he should attend a party where at least one hedge fund titan and others with cash tied up in such funds were present.

It's doubtful they approached Kwarteng for a straight, detailed lowdown. He would be on his guard against saying too much.

Equally, though, the chancellor should have realised their antennae would be primed, they would be roaming the room for any glimmer of insight, the tiniest crumb that would help them form a view, enabling them to assess investors’ reaction — in this case to gauge the impact on sterling. It could be a throwaway line, the casual mention of more big plays in the offing — whatever, it would suffice. Even his pumped-up, emboldened body language would provide a clue.

Hedge fund manager Crispin Odey's hedge fund has made large bets against UK bonds. PA

For hedge fund managers and their ilk, information is potential gold. It doesn’t matter where they got it from, where they heard it. Confidences, background, off the record — these can be meaningless expressions to sharks whose primary objective is to make a financial killing.

It’s their duty. Some newspapers and commentators have reacted with shock to the news that hedge funds shorted the pound and that they doubled down after Kwarteng’s public remark that further tax cuts were likely.

But hedge fund managers are charged by their clients with netting the maximum return possible. They’re expected to stay within the law but after that, pretty much anything goes.

They’re not cynically trashing Britain or personally slighting Kwarteng, as some have claimed. They’re taking a view that after what the chancellor has announced, after the shock unfunded tax cuts and the lack of objective analysis from the Office for Budget Responsibility, the currency would fall, that the global financial community would move against Britain.

Going long, going short, this is what they do. If some observers are to be believed, short selling is some sort of crime, deserving of being outlawed. According to this worldview, presumably, there is only room for taking a long position, for believing shares and investments can only move upwards. That leads to inflated, unfounded values. They can’t always rise — they can go down as well as up. For a hedge fund to ignore the probability that they might fall and to ignore the opportunity to make a gain from the drop would be grossly negligent.

Kwarteng’s belief in his own cleverness was his undoing. It was not the energy price cap for consumers and businesses that spooked the City, it was the surprise of the tax cuts. He’s no fool, he was employed by Odey and socially he moves among those who play the markets for a living. He must have known his measures would provoke, as he put it in his conference speech, trying unsuccessfully to play it down, “a little turbulence”. In case he didn’t, he was also warned — at least one senior economist told him privately investors would react badly. Still, he pressed ahead.

Having done so, he went to that soiree. It was part pleasure, part work. Those at the gathering were Conservative donors. This is where the Tories in particular run into a quagmire. They can claim, justifiably, that Labour also holds receptions for its backers. But Labour’s supporters are trade unions and the like, not those who are sniffing for any chance to profit from stock and currency movements.

Kwarteng’s belief in his own cleverness was his undoing.

A Conservative chancellor, therefore, is bound to be drawn into meeting and conversing with such people (doubtless too, several of them are long-time pals from his Eton, Cambridge days).

Throw into the mix his desire to hit the ground running, to go full pelt and his newness to the post, and the ingredients are there for disaster. A wiser bird, a Nigel Lawson or Ken Clarke say, might not have attended — the job comes first, whatever the party fundraisers may claim. But then they would not have sprung Kwarteng’s package in the manner he did and they certainly would not have fuelled the fire with a boastful follow-up comment.

Hopefully, Kwarteng has learnt his lesson. He’s now all too aware that being chancellor is a serious job. Casualness will not do.

The omens are not promising. Dismissing the chaos that he caused as mere “turbulence” might have appeared funny but it suggested indifference, trying to make light of something that was deadly important. That was not a good look. If he wishes to survive, and even after a relatively successful conference address on the back of an embarrassing U-turn, it remains a big “if”.

He should know it’s all about perception. Nothing might have been said at the party but that’s not the point. It gave the wrong impression, of a chancellor favouring his mates, the City slickers. He needs to be more careful in future and that means being more selective with what he says, where he goes and his choice of friends.

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Published: October 04, 2022, 12:41 PM