Episode 8 The Bottom Line

a day's pay. That's the latest BBC News headlines. Now it's time for

The Bottom Line. We can't escape the turmoil in the

eurozone bond markets this week. I'll be asking my guests what do

bonds mean for business? If you think using an airport is stressful,

you should try running one. Each week, influential business leaders

gather for the BBC Radio Four programme, The Bottom Line. Now you

We have a lot to talk about today. That's very quickly meet my three

guests. First up is the president UK executive of the UK and Northern

Ireland arm of General Electric. What do the UK specialise in?

and gas equipment, digital energy products, big finance arm. I'd like

to say to people we make everything other than heavy duet gas turbines

here. -- duty gas turbines here. You have a huge operation,

manufacturing and researching? have about 40 manufacturing service

sites in the UK with about 20,000 people now. So probably the largest

integrated manufacturing business. But we have a very big market for

products made globally we sell in the UK. We have a chairman of the

property company Land Securities. You have a number of other board

positions under your hat, what are they? I sit on the board of

Barclays Bank. And I sit on another board that makes trucks in Europe.

Most people know what Barclays does. And I sit on the board of a

hedgefund manager. Land Securities, it is shopping centres and big

property development? A bit more specific than that. It's shopping

centres around the regions, large shopping areas which are part of

mixed used buildings in London. Offices we own and obviously

collect rent from, as we do from tenants in our shopping centres.

And obviously at this stage, in the property cycle, we're doing quite a

lot of development and a few schemes including offices,

residential accommodations and retail. Shopping centres basically.

My third guest is chief executive of BAA, a Spanish-owned operator of

several major British airports. Update us, because a lot of people

will know you were told you had to sell some of your UK airports?

Gatwick is gone? It was sold two years ago. We have recently

announced we will sell Edinburgh and then we have four others.

in all? Exactly. The revenue you get, the revenue model is regulated

revenue for landing fees for airlines? That's true for Heathrow,

Stansted and Gatwick. That's not true for the other airports. In the

case of Heathrow, yes. Whether it comes from landing fees or retail,

it goes in to one pot. The more we make from retail, the less people

pay for landing. We're going to talk about airports in much more

detail in a minute, particularly Heathrow. With these brief

introductions out of the way, I want us to spend a few minutes

reflecting on turmoil in the bond market. Even as we hit here, a lot

is going on -- sit here, a lot is going on in Italy. It would be

silly for us to try and run a ball by ball commentary. But it is worth

us, I think, asking how bonds affect business. For those who

don't know much about bonds, they are quite sital, they're bits of

paper that have a promise to pay attached to them. You can buy and

sell them and the person who gets the money is the person who was

holding them when they are to be sold. How important, aside from all

the shenanigans going on, how important are they to business?

Absolutely fundamental. In 2012, we will invest more than a billion

pounds in Heathrow. A bigger chunk will be my bonds. And on an ongoing

basis, to invest in Heathrow, the markets need to be open. Over a

period of time, our business is based on having access to those

bond markets. Absolutely fundamental to jobs, to the airport,

to a billion pounds of investment in 2012. And that will be the same

in our business. The banking business is part of the bond market.

These markets are very deep markets. Even though we're talking about the

eurozone markets, the US markets, it's the deepest capital market in

the world. Corporations as well as government? Yes. The biggest issuer

of corporate bond in the well and although the scale of corporate

bonds as a percentage of money raised is less, it is still very

large. Back to your question about what's the impact of what's

happening today? And it really saps confidence. And it drives a

corporateest view that Europe is obviously a very uncertain place.

And we want to look to put our investments in regions and

countries where we're going to get a rate of return, and we have a

stable government that's not going to see violent changes in its own

spending habits or its spending ability which does affect for a

company like ours the amount of money spent on infrastructure and

new plant, hospitals. So it's having a very significant impact on

confidence. I can say something, looking at it, bond yields in the

UK - a bond yield is the price, a return again from say a 10-year --

ten-year bond in the UK. I don't know what it is today but this is

hovering around 2% or 3%. The yield you'll get on investing in property

is much greater than that. The gap is as big as it's ever been,

certainly in my living memory. People are regarding prime assets

in the UK as a haven. If you can't put your money in half the

countries of the eurozone and lend money to those governments,

actually I suspect it's quite attractive at the moment, GE bonds.

They won't go under in the next couple of years. I hope not. We've

changed our balance sheet to protect it with a significant

amount of cash. We were sitting on $90 billion of cash at the third

quarter which is a protection against the risk you can't raise

money in the bond markets. People are saying how can the economy get

energised when so many corperates are sitting on the cash because

there -- corporates are sitting on the cash. Bonds are significant for

all of the infrastructure spending in the UK, really, but why do you

prefer going to the bond market than going to the equity market?

Just give a primer for people who haven't followed the history of

finance. You always have both. You have debt and equity. And the

efficient way for us to raise debt is by going to the bond market. Not

just by the bon market in the UK, but Europe, the US, Canada and

Switzerland and any currency in order that we spread across all of

those sources. Our spending at Heathrow is huge and that leads to

lower cost of funding and. funding. The bon market is a beast.

It has its mood swings. When it turns against you, it's very easy

to get in to the vicious spiral at the rate in which the bond markets

are charging you to lend money to you goes up, and then you look less

solvent. So they charge you more because you're looking less solvent.

We're going in to a nightmare circle. We have an era now in the

eurozone and in the US where political events are driving these

markets and that's very difficult. If you want to follow the bond

markets, and analysts want to know what's going on, everybody knows if

you want to follow the UK equity market, you look at the FTSE 100.

In the US, it's the SMP or the Dow Jones industrial average. What's

the best way to look at it? We have to look at economic data. There's

no single thing that tells you the bond market is up or down.

equity market. There's no single thing. We all think there is and

report it. Right. There's real earnings that companies make.

There's a cyclical factor that goes with some company's traditional

business models. You have to look at the underlying fundamental data,

unemployment rates and all this stuff - Inflation matters. All of

those are statistics which are very available but I don't think they

are written about that frequently. In terms of the big scale of things,

how worried should we be about stresses in the world? Is it worse

than 2008? It's different. And I think we should be very worried

about it because of the risk that this puts Europe in to a no growth,

slow growth or even a recession. That will affect whether people

want to fly, whether they want to buy new cars, whether they can

afford to pay their electricity bill. It will affect everything.

should be worried about it. I think we are beginning on the journey. I

don't know how long that journey will be. I think it could be five

or ten years. I think it will drive economic growth down. Possibly zero

and below. And that's a very grim prospect for most people out there

who just want jobs and earn their living. We'll be watching

developments in the bond markets with great interest. I want to talk

about airports, the business you're in, Colin. Heathrow in particular

is an interesting business case study, isn't it? Three or four

years ago it hit a real low point. The regulator said its performance

was unsatisfactory. I'm wondering how far you think you've turned it

round? We're not perfect. But I do think that we're better than we

were. That's my ambition, is to make sure each month and each year

we can look back and say that we're a bit better than we were and

better in a year's time. Partly that's about spending new

facilities. And we're spending more than a billion pounds every year.

This is a question I've been wanting to ask for some time. You

explain to the passenger - I think Terminal 5 is a dream - when I'm

coming back in to Heathrow, I just don't understand why I have to

circle the City of London which I've seen many times from the air?

I can explain why it is that way. What can we do to make it better?

We can better integrate what air traffic control does with what

happens on the ground. Just as it's true in Heathrow, so we've got to

line up the slot in the air with a slot in the runway with a parking

stand. You cram in two many arrivals in talkoff slots. If one

thing goes slightly wrong, it creates chaos. I'm not sure that's

true. It doesn't mean we can't make it better. If we have the parking

stand lined up with the runway slot. But you don't. We can squeeze in

more. Air traffic control only control aeroplanes when they come

in to air space. If you take control using a satellite and

computer, you can line these things up way, way further away and you

can get them coming in in sequence. It's being done in China, Brazil,

Australia. We've done a trial project in Sweden and it works.

this is General Electric equipment? Yes. Say a plane goes off from Hong

Kong, and the pilot will know where he's going to land at Heathrow.

That's not planned in until he arrives at Copenhagen. We can be

much more bold. And you reckon that, and without cutting the number of

flights, the actual number of them, you could get rid of the queues of

planes? We could. But you wanted to build a runway and the advantage of

building a third runway was you could get rid of the queues in the

sky init seems the problem is capacity? As an excuse, I don't

think it is. Of course, we can do a better job want first of November

this year, we started working with NASA and it will take a long time

to get rid of those stacks. But we're on that journey. If you want

to learn more about the topics in the programme and about our partner,

the Open University, visit our website. Now, briefly, I want to

talk to you about one of your previous titles. We talked about

some of your jobs at the moment but the one we didn't mention, you were

chairman of a company called MF Global. It's just gone bust,

basically. Yes. Some client money is missing and being searched for.

Its chief executive has stepped down. When you were there, you were

there until last year? Resigned in 2010, yes. The middle of 2010. When

the business had lost its previous chief executive. I was an

independent chairman, a non- executive chairman. I didn't feel

like it some of the time, but anyway. He was appointed because he

was looking for a way back in to Wall Street, and we were able to

secure his services. A quite senior, very senior at Goldman Sachs, a

Democrat Governor of New Jersey. Was it on course to go bust when

you were there? No, no, no. It was a business that was listed on the

US market in 2007. It was a spinout from a hedgefund business here in

the UK. It brokered derivatives. The derivatives market is many

times as big as the bonds markets. Buying and selling on behalf of

clients. That's what I thought brokers did? That's what they do do.

When does it turn tine a thing that it can go bust by making the wrong

debt? That appears to have happened post 2010. John's background was

more a trader than a broker. So he was used to trading in bond markets.

That's how he came up through the ranks. So trading on its own

account, speculating on its own account. He made a bunch of bets

and I believe they were eurozone bonds, as it happens? They turned

out to be, you know, the holdings of those bonds, which I think

investors knew about for some time. But a combination of I think a very

poor quart's losses, combined with a downgrading of their debt,

combined with an elevation or a rearticulation of these positions.

A brokerage business holds customer accounts for use and when customer

accounts disappear, liquidity disappears, confidence disappears

and that appears to be what happened. An interesting case study

in terms of the way Wall Street and perhaps the city is addicted to

going. You have a perfectly respectable, and it is never quite

attempting to just stay in that, it is to go on? That would have

appeared to have been the case. you have arguments with John? You

were chairman. He was chief executive and he took your job,

basically? He did. He essentially took my job happily, but I signed a

three-year contract to help them through the transition on to their

listing. And I met him on two or three occasions. Very convinced of

his views as to wanting to turn the business in to something that had a

future. He articulated this vision? Yes, and it must be said that the

business model that MF had been pursuing over many years did need

some tinkering and reinvention because the market had changed and

interest rates were very low and we weren't earning a lot of money. On

the one hand, I would completely agree that we needed a chief

executive who was going to change things. What appears to have

happened is a very sharp change of direction in to an area which

appeared to be risky and that ened up resulting in the end for MF.

3,000 people out of work. 700 in London. And I'm sure many books

will be written on this. Indeed so. Right, now it's not hard to find

senior executives who have moved from one sector to a completely

different sector. Colin, you're an example of this. You moved from

Japanese car firms to water companies, to BAA running airports.

Take one of the most famous xachles in the UK, the man who ran the post

office, ITV, is it a good model? Are good bosses transferrable or

not? I think you've had the least transferrable career? I mean, I

haven't transferred from sector. I've transferred from profession

aid to professional. I spent 24 years as a lawyer. And as I say to

people, I got foun out and was asked to become chief executive.

But to answer your question, it depends who the person is, and it

depends where you've learnt your skills and your management style.

Personally, I think the grounding and the rigor around having toon

ablitical and solve problems that have complex backgrounds, it

teaches you how to understand, how to see through complexity, to try

and find an answer at the end. Equally, if you started in a

business like the company I'm currently with, where you grow up

in a structured and rigorous organisation which teaches you

different skills and you are in a function whether it's marketing or

sales or commercial or engineering, etc, you learn a set of skills

which aren't clearly transferrable. Colin learnt a lot of his skills at

GE. I forgot you worked there. describe GE as my school. They most

influenced how I think about the role of leadership and of

management. But if you have a key ten people running a business, you

want the majority to have great knowledge where you are, preferably

someone who has been 30 years and knows everything about the history.

Some people have 15, some have ten, so as long as you understand it's

only a sprinling of people with different industry experience, that

will explain why that's a benefit. Whether the Japanese industry was

teaching Europeans -- I was in the Japanese industry when they were

teaching the Europeans about the model. I don't know if you remember

the Honda Sifrbics that arrived in -- Civics that arrived in the UK in

the 1970s. Every single model of the Civic has improved. I think it

is entirely relevant to airports today. So there's an example that

there are skills that are transferrable but you'd want nine

out of ten people to have great, great knowledge in your own

business? I agree with that. I think it's horses for courses. Some

businesses have been in the doldrums and lacked leadership and

motivational skills. They're a good team of perfectly sensible,

adequate and knowledgeable people. But they could have anyone that

could have come in from any industry as long as they have the

key leadership skills. And to move in as the chief executive into a

business and change everybody immediately is a great mistake.

suspect there are people you would want to bring in to fix a

particular problem? A lot of CEOs of companies that move fairly

frequently are brought in by shareholders or the chairman to

deal with a specific issue and maybe they've got experience in

turnarounds or experience in fundraising or whatever else it is.

And I think you'd need to bring in those skills from time to time.

there any business that would be difficult, for example, say Colin,

any business that you couldn't put Colin in because he's done cars,

he's done General Electric, he's done water, you've done virtually

everything. Is there anything you couldn't put your mind to?

Businesses which are a similar state in their efrblution have

things in common -- evolution have things in common. So controlling

costs and raising standards has a lot in common. I don't know how I'd

go in a brand new, hydro place. You place ten bets that one will win

and you're fine. You don't do that in airports or launching a new car

model. Well, that's all we have time for, I'm afraid. Just time to

thank my guests. Mark of General Electric, Alison of Land Securities,

and Colin of BAA. I will be back with more guests next week. If you