A Byers bungle that could end very badly indeed

Sentiment driven; Olivetti/Tronchetti Â

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Pressure grows on Byers over handling of spin and Railtrack

Michael Howard: The Railtrack fiasco is far worse than a Whitehall farce

Byers may be forced to renationalise Railtrack as bondholders get tough

Leading article: Mr Byers has badly mishandled Railtrack

It was all meant to be so different. Stephen Byers, our newish Secretary of State for Transport, finally loses patience with Railtrack and takes back control of the rail network from a much hated company. Public applause all round. Except that it hasn't turned out that way. What should have been a triumph in transport policy has turned into a public relations fiasco, and though it continues to seem unlikely it will cost Mr Byers his job, it has certainly wounded him deeply. He's been made to look incompetent and, Blairite poodle though he is, the wolves are at his door.

Mr Byers' mistake was to assume that widespread public antipathy towards Railtrack would make him immune to criticism, whatever he decided to do to the company. Getting rid of it was bound to strike a popular cord, he figured. Unfortunately for him, the public is as capable of recognising bad policy when it sees it as a lousy company. Mr Byers' approach has already been revealed as seriously flawed, and it now seems to have the potential to go very badly wrong for the Government indeed.

Just consider what would happen if the City decides not to play ball with Mr Byers' "not for profit trust", which it might well do given the strength of feeling over the way Railtrack shareholders have been treated. Railtrack's existing £3.5bn of debt would be called in and there would be no question of the extra £5.5bn of bond and bank borrowings the company needs to fund its commitments.

At that point the Government would be forced into the outright nationalisation it is so desperately trying to avoid, with serious implications for the public finances at a time when the number of calls on the public purse is spiralling out of control. No wonder the Treasury is sending its top mandarins out to the City to try to calm tempers. There is a real danger of the Government losing control of the situation.

Then there is the administrative order itself. The more that becomes known about it, the more dubious it seems. Railtrack directors found themselves ambushed by the Government's sudden refusal to pay the second tranche of a previously agreed subsidy, and the administration was presented as a fait accompli before any proper consideration could be given to it.

Few people outside the City seem to have much sympathy for Railtrack's 225,000 shareholders, but only because they are ignorant of the facts. Investors in Railtrack are not, in the main, City fat cats, or even naive private investors living in the shires. The great bulk of the capital is owned by ordinary people through their pension funds and endowment policies, and they have just had their property cynically confiscated by a Government which thinks the undoubted disaster of rail privatisation gives it carte blanche to do whatever it likes with the railway.

Well, it's going to have to think again. The legal case for compensation looks stronger by the day. There seem to be at least three grounds for suing – misrepresentation, expropriation and misfeasance. Plainly investors would have sold Railtrack shares if they had realised there was any danger of assumed Government financial support being withdrawn. Railtrack asserts that the money was promised only days before the company was told it would not be forthcoming.

The case for expropriation relies on the fact that this is not a proper administration, where all assets are sold to the highest bidder. In this case, the Government is seeking to have the rail assets and most of the property transferred to its "not for profits trust". There is also some debate over whether the Government's refusal to dole out any more cash made the company technically insolvent. Railtrack was trading profitably at the time, and in a normal private sector company, management would have dealt with the absence of funds by cutting back on investment. The possibility of misfeasance arises because the Government may not properly have exercised its powers in seeking "railway administration".

The Blair government has a majority as solid as the Rock of Gibraltar, but that doesn't give it the right to behave like a tin pot dictatorship. As for Mr Byers and his inept special adviser, Jo Moore, they seem to be fully justifying their reputation as political lightweights.

Sentiment driven

The London stock market has bounced back 16 per cent since the low it hit in the aftermath of the terrorist atrocities in America and as our table on page 22 shows, nearly a quarter of the FTSE 100 is up by more than 25 per cent, making it one of the most remarkable rallies of all time. How much longer can it last?

The underlying causes of the recovery are easy enough to identify. The bear market that has been raging since the turn of the century is one of the longest and most serious ever relative to bonds. As a result, equities have started to look very cheap indeed relative to the main investment asset alternative of bonds. With the rate of return on both bonds and cash pathetically low, equities have started to benefit from the lack of investment alternatives alone.

Then there's been all the policy action by central bankers and governments. Interest rates have been cut sharply and the system has been flooded with liquidity. Neither of these things would have happened but for the events of 11 September, or not so quickly anyway, so there's a reasonable case for arguing that prospects for equities and the wider economy are now better than they were before the war on terrorism began. Companies have also been galvanised into brutal cost-cutting programmes, enhancing longer term prospects for earnings.

All well and good. Only one problem. Although equities may look cheap compared to bonds, they are by no means cheap on traditional valuation yardsticks. The earnings multiple for London shares at 16.8 is still one percentage point above the average for 1989-99. What's more, the immediate outlook for earnings growth right now is rather worse than it was for most of the 1990s. The same applies to yields as well. In absolute terms, equities only look cheap against the inflated levels they reached at the turn of the century, and things have changed a lot since then. In other words, this seems disconcertingly like a sentiment-driven rally and, as such, it looks highly vulnerable to bad news.

Olivetti/Tronchetti

Only in Italy. The capital markets are being entertained by a corporate drama of almost operatic proportions – Marco Tronchetti Provera's attempt to gain creeping control of Olivetti on the cheap. Olivetti's main asset these days is Telecom Italia, so the stakes are high.

Mr Tronchetti Provera, an aspiring latter day Agnelli, has bought 28 per cent of the company and his friends probably account for another 7 per cent. At a shareholders meeting tomorrow, he will be seeking shareholder approval to embark on a 17bn euros rights issue. Others have objected, on the grounds that it's far too much and there are much cheaper ways of raising the money.

From the outside it looks like a wheeze that will allow Mr Tronchetti Provera to gain control without having to make a bid. It's a classic stitch up of outside shareholders, and the authorities in Italy aren't lifting a finger to stop it.

j.warner@independent.co.uk