It's fun to see the big names of economic punditry (such as Anatole Kaletsky and Gavyn Davies) profferring their opinions on the current rout in global debt markets. Their take on the situation can be summarised as (a) this was all very predictable (though off the top of my head, I can't remember either of these gents actually predicting it) and (b) it doesn't spell the end of the bull market, because the world economy is in good shape and corporate balance sheets are healthy.
The most dangerous words in investing are "it's different this time". Even so, for now I think the optimistic Kaletsky/Davies view is probably more or less right. However, I am worried about the extent to which the long bull market is the product of cheap (and loose) credit rather than sound fundamentals. Years of cheap money have produced a boost in asset values, rather than the historically more normal rise in goods prices. Asset price rises (houses, stocks) have persuaded individuals, particularly in the US, to leverage themselves up in order to consume beyond their current incomes.
It's hard to predict how people will react if asset prices stagnate for a little while and banks turn off the credit spigot. And the situation is complicated by the fact that inflation has begun to perk up a little, which makes it more problematic for central banks to try to ease the pressures by cutting interest rates.
When I was involved in the lending business, we were always very conscious of the fact that banks always find new ways to lose money. What strikes me right now is that the problems facing the banks are very little different from those they faced in the credit crunches of the '70s and '80s. This suggests that the "institutional memory" that helps to keep up lending standards may have been eroded by the long spell of benign business conditions that we have enjoyed in recent years.
Take the mortgage market, for example. There is certainly one new element in the equation this time: the existence of the securitisation market means that banks can (or at least could until very recently) package up their mortgage assets and sell them on to end investors. However, it's arguable that the ability to do this, and the profits it can generate, encourages banks to pile up mortgage assets without fully assessing the underlying risks.
A long bull market in any commodity always causes lenders to relax their guard. During the oil price surges of the 1970s, Canadian banks were giving mortgages in Alberta based on the assumed future value of properties -- and were even ignoring the fact that mortgage security was almost unenforceable in that Province. Until recently in the UK, we have seen interest-only mortgages for more than 100% of the property value -- well, people have to be able to buy a fridge and sofa, don't they? These kinds of practices always cause problems in the end, and it would be reasonable to assume that demand from the securitisation market has exaggerated them this time. But underlying the problems is the same old mistake that banks have always made.
Or take corporate lending. The big game in town, with the really large, prestigious deals, has always been M&A. Again, there is a new element this time, in the shape of the private equity industry. To compete for deals, banks have offered what has become known as "covenant lite" loans, with few of the traditional conditions that bank loans carry in less expansive times. This is not new, however: harking back to my lending days, I can clearly remember one genius coming up with the concept of "slippage", whereby covenants in the loan agreement could not be enforced by the bank the first time the borrower breached them.
This makes no sense at all. Banks never want to call in a loan, but it's imperative that they should be able to do so in certain circumstances. With "slippage", whether a covenant breach was the result of a temporary market downturn or outright management incompetence made no difference: the bank could not ask for its money back. Needless to say, that was a recipe for trouble then, just as "covenant lite" is proving to be a recipe for trouble now.
If Messrs Kaletsky and Davies are missing anything, it's probably this: when banks start to lose money on bad old loans, they stop making good new ones for a while. In an economy as credit-driven as today's, markets won't be able to withstand the withdrawal of credit for long. It's too soon to say whether that will happen, but it's certainly much too soon to be sure that it won't.
Monday, 30 July 2007
The road to peace runs through.....Barbados???
Just last week we saw Tony Blair making a start on his new job as a Middle East peace envoy, with a visit to Jerusalem. To keep the momentum going, this week Blair is in Ramallah. No, wait, he's swanned off on holiday to Barbados for the next few weeks. There's no word on whether he's left John Prescott in charge of the peace effort.
I suppose in a way it's nice to see that Blair the private citizen is the same as Blair the politician: once a mooch, always a mooch. As usual, he's staying at Cliff Richard's villa in Barbados. Can anyone remember the last time the Blairs actually paid the going rate for a holiday? I know he claims to make a charitable donation with the money he saves, but rumour suggests that the amount wouldn't buy you much of a meal at the fancier spots on the St James coast.
I'm going to try hard to be kind about Blair's peace mission, because his achievement in Northern Ireland entitles him to the benefit of the doubt. But this is not a very good start.
I suppose in a way it's nice to see that Blair the private citizen is the same as Blair the politician: once a mooch, always a mooch. As usual, he's staying at Cliff Richard's villa in Barbados. Can anyone remember the last time the Blairs actually paid the going rate for a holiday? I know he claims to make a charitable donation with the money he saves, but rumour suggests that the amount wouldn't buy you much of a meal at the fancier spots on the St James coast.
I'm going to try hard to be kind about Blair's peace mission, because his achievement in Northern Ireland entitles him to the benefit of the doubt. But this is not a very good start.
Tuesday, 24 July 2007
No capitalism without egalitarianism?
Long, long time ago, when as a freshly-minted graduate I was working in Whitehall, I attended a conference called "Modernising movements in the Middle East". (For further context, this was before OPEC engineered its first oil shock). The crowd was the usual mix of academics, private sector execs and civil servants.
At some point I plucked up the courage to pose a question to one of the distinguished men of letters. I asked him to comment on my view that until the countries of the Middle East developed a more egalitarian economy, it would be difficult for them to sustain economic growth. I viewed the essentially mercantilist nature of those economies at that time as inconsistent with producing the gains in employment and mass consumption that drive modern economies in the "West", and I wondered what it would take to trigger the type of transformation that the Industrial Revolution created in Europe.
The professor was not hugely impressed by my question, but I still rather like it, and I think it still holds water. One thing that's quite clear is that the surge in oil prices, in the 1970s and on several subsequent occasions, has not been enough to trigger the sort of changes I had in mind. In 1970 Saudi Arabia was a poorish country with one product; in 2007 it's a rich (but unequal) country with one product.
My reason for bringing up this ancient history is that I am wondering if recent developments in capitalist economies, especially the huge shift in income and wealth toward the already-rich, may ultimately prove self-defeating. We seem to be moving away from an economy driven by rising living standards and mass consumption, toward one in which we rely on the excesses of the ultra-rich to keep things moving -- a return to the mercantilist era, in fact.
A piece today by James Harding in the business section of the Times notes that a lot of senior finance types are selling their personal equity holdings. They fear that the fallout from the US sub prime debacle (note to self: time for another anti-Greenspan diatribe) will undermine US consumption and bring the world economy to a standstill. There was a startling statistic: for the average earner in the UK, discretionary spending power has fallen by 25%, as a result of rising prices for food and energy and rising local tax bills. This problem is not about to get better. Thanks to ethanol mania, food and energy price rises are increasingly tied together, and there can be no doubt that the clean-up costs for the current flooding will add to the pressure on local taxes.
These things are happening at the same time as the media, with the Times in the forefront, are stuffed with stories about conspicuous consumption by the rich. But if the average family in the US, UK and elsewhere is forced to cut back, how big a yacht will Roman Abramovich have to build to keep the economy moving?
At some point I plucked up the courage to pose a question to one of the distinguished men of letters. I asked him to comment on my view that until the countries of the Middle East developed a more egalitarian economy, it would be difficult for them to sustain economic growth. I viewed the essentially mercantilist nature of those economies at that time as inconsistent with producing the gains in employment and mass consumption that drive modern economies in the "West", and I wondered what it would take to trigger the type of transformation that the Industrial Revolution created in Europe.
The professor was not hugely impressed by my question, but I still rather like it, and I think it still holds water. One thing that's quite clear is that the surge in oil prices, in the 1970s and on several subsequent occasions, has not been enough to trigger the sort of changes I had in mind. In 1970 Saudi Arabia was a poorish country with one product; in 2007 it's a rich (but unequal) country with one product.
My reason for bringing up this ancient history is that I am wondering if recent developments in capitalist economies, especially the huge shift in income and wealth toward the already-rich, may ultimately prove self-defeating. We seem to be moving away from an economy driven by rising living standards and mass consumption, toward one in which we rely on the excesses of the ultra-rich to keep things moving -- a return to the mercantilist era, in fact.
A piece today by James Harding in the business section of the Times notes that a lot of senior finance types are selling their personal equity holdings. They fear that the fallout from the US sub prime debacle (note to self: time for another anti-Greenspan diatribe) will undermine US consumption and bring the world economy to a standstill. There was a startling statistic: for the average earner in the UK, discretionary spending power has fallen by 25%, as a result of rising prices for food and energy and rising local tax bills. This problem is not about to get better. Thanks to ethanol mania, food and energy price rises are increasingly tied together, and there can be no doubt that the clean-up costs for the current flooding will add to the pressure on local taxes.
These things are happening at the same time as the media, with the Times in the forefront, are stuffed with stories about conspicuous consumption by the rich. But if the average family in the US, UK and elsewhere is forced to cut back, how big a yacht will Roman Abramovich have to build to keep the economy moving?
Friday, 20 July 2007
Groundrules for dissing the BBC
It's distressing to see the BBC breaking faith with its audience over phone-in shows, and there should certainly be severe consequences for those responsible. But it's far more distressing -- in fact it's downright nauseating -- to see the right-wing media putting the boot in with such undisguised glee.
We had a taste of this over the Hutton report, when the BBC's enemies were undeterred by the fact that the Corporation was clearly in the right, and apparently unconcerned by the fact that an unhealthy precedent for Government treatment of the media had been set. This time, the jackals are carrying on regardless of the fact that they are just as culpable as the BBC. So I suggest that the following should be barred from criticising the BBC over this issue:
* anyone who puts stories about the goings-on of "reality TV" shows on the news pages
* anyone who reports anything to do with "Big Brother" on the front page
* anyone who uses premium-rate phone lines to provide solutions for crosswords, sudoku puzzles etc
* the Daily Mail (as a matter of principle, and just in case it isn't captured by any of the other categories).
What we really need is to free the BBC from the necessity of taking part in the "race to the bottom" in which its broadcast competitors and much of the print media seem to be happily engaged. But it's hard to find much of a constituency for the poor old Beeb these days, either within the government or among the public at large. We are in danger of letting the rogues and hypocrites deprive us of something unique.
We had a taste of this over the Hutton report, when the BBC's enemies were undeterred by the fact that the Corporation was clearly in the right, and apparently unconcerned by the fact that an unhealthy precedent for Government treatment of the media had been set. This time, the jackals are carrying on regardless of the fact that they are just as culpable as the BBC. So I suggest that the following should be barred from criticising the BBC over this issue:
* anyone who puts stories about the goings-on of "reality TV" shows on the news pages
* anyone who reports anything to do with "Big Brother" on the front page
* anyone who uses premium-rate phone lines to provide solutions for crosswords, sudoku puzzles etc
* the Daily Mail (as a matter of principle, and just in case it isn't captured by any of the other categories).
What we really need is to free the BBC from the necessity of taking part in the "race to the bottom" in which its broadcast competitors and much of the print media seem to be happily engaged. But it's hard to find much of a constituency for the poor old Beeb these days, either within the government or among the public at large. We are in danger of letting the rogues and hypocrites deprive us of something unique.
Wednesday, 18 July 2007
PPP RIP? Probably not
Metronet, the consortium holding a contract to maintain about two-thirds of the London Underground, filed for bankruptcy this week after an arbitrator refused to award it extra funds for carrying out the work. Metronet's bankers had previously said they would not extend its line of credit unless it could squeeze more money out of Transport for London (aka TfL, aka the taxpayer).
I last wrote about this as recently as June 29. In brief, Metronet has spent way over budget while massively underperforming its obligations under the contract. In fact it's done even worse than that, since it has admitted that it was responsible for the recent derailment of a Central Line train, which hit a tarpaulin that Metronet staff had left in a dangerous spot.
Media reactions to Metronet's collapse are interesting. In an editorial, the Times admits that Metronet has only itself to blame for its failures. However, it argues that this does not invalidate the principle of "public private partnerships" (PPPs), and it comes close to throwing responsibility back onto TfL. According to the Times, the test will be whether TfL can readily find someone else to take on the work. I'm not sure if this is a principle that can be applied very widely: "I'm sorry that your meal cost more than it said on the menu and that you were sick for two days afterwards. No, you can't have your money back, and we're not paying your medical bills, but there's another restaurant down the street that you can try when your appetite returns".
Jeremy Warner in the Independent's business section has a more reasoned view. He admits that the Metronet fiasco has driven a coach and horses through two of the supposed benefits of the whole PPP approach to public works: that the private sector will do the work more efficiently/cheaply than the public sector, and that if it fails to do so, it will bear the cost. He observes that it seems that the City has, as usual, run rings around the public servants in putting the deal together.
To me, this last point -- that the private sector will try to bamboozle the public sector in these deals -- almost amounts to sufficient reason not to continue with the whole PPP approach. (I say "almost" because the Government has shown itself quite capable of playing fast and loose with contracts -- take a look at the experience of GNER with its contract to run the East Coast Main Line). There isn't much hope that the Government will abandon PPPs, but we should at least ask if there are any lessons that can be drawn from this episode.
One that occurs to me is that the Government should choose its partners carefully. Metronet isn't a real company -- it's a consortium put together by five engineering companies solely to bid on the Underground contracts. These shareholders all appear to have limited liability for Metronet's doings. Apparently the Government's negotiators either never heard of, or at any rate did not insist on, things like guarantees, deficiency agreements, covenants or even comfort letters that would have made the partners liable for Metronet's failings. In these circumstances, it was misleading for the Government ever to suggest that the private sector would be on the hook for any cost overruns. In fact, when you consider the huge sums that have already been paid to Metronet under the contract, it's likely that the losses incurred by the partners are quite limited -- and, of course, deductible from earnings elsewhere.
The next question is this: TfL, and particularly Mayor Ken Livingstone, never wanted this deal in the first place. Will the Government, which rammed it down their throats, now step in to defray the costs? I know which way I'm betting.
I last wrote about this as recently as June 29. In brief, Metronet has spent way over budget while massively underperforming its obligations under the contract. In fact it's done even worse than that, since it has admitted that it was responsible for the recent derailment of a Central Line train, which hit a tarpaulin that Metronet staff had left in a dangerous spot.
Media reactions to Metronet's collapse are interesting. In an editorial, the Times admits that Metronet has only itself to blame for its failures. However, it argues that this does not invalidate the principle of "public private partnerships" (PPPs), and it comes close to throwing responsibility back onto TfL. According to the Times, the test will be whether TfL can readily find someone else to take on the work. I'm not sure if this is a principle that can be applied very widely: "I'm sorry that your meal cost more than it said on the menu and that you were sick for two days afterwards. No, you can't have your money back, and we're not paying your medical bills, but there's another restaurant down the street that you can try when your appetite returns".
Jeremy Warner in the Independent's business section has a more reasoned view. He admits that the Metronet fiasco has driven a coach and horses through two of the supposed benefits of the whole PPP approach to public works: that the private sector will do the work more efficiently/cheaply than the public sector, and that if it fails to do so, it will bear the cost. He observes that it seems that the City has, as usual, run rings around the public servants in putting the deal together.
To me, this last point -- that the private sector will try to bamboozle the public sector in these deals -- almost amounts to sufficient reason not to continue with the whole PPP approach. (I say "almost" because the Government has shown itself quite capable of playing fast and loose with contracts -- take a look at the experience of GNER with its contract to run the East Coast Main Line). There isn't much hope that the Government will abandon PPPs, but we should at least ask if there are any lessons that can be drawn from this episode.
One that occurs to me is that the Government should choose its partners carefully. Metronet isn't a real company -- it's a consortium put together by five engineering companies solely to bid on the Underground contracts. These shareholders all appear to have limited liability for Metronet's doings. Apparently the Government's negotiators either never heard of, or at any rate did not insist on, things like guarantees, deficiency agreements, covenants or even comfort letters that would have made the partners liable for Metronet's failings. In these circumstances, it was misleading for the Government ever to suggest that the private sector would be on the hook for any cost overruns. In fact, when you consider the huge sums that have already been paid to Metronet under the contract, it's likely that the losses incurred by the partners are quite limited -- and, of course, deductible from earnings elsewhere.
The next question is this: TfL, and particularly Mayor Ken Livingstone, never wanted this deal in the first place. Will the Government, which rammed it down their throats, now step in to defray the costs? I know which way I'm betting.
Saturday, 14 July 2007
Back to Black
In mid-March I posted a piece recommending that everyone should pay close attention to the Conrad Black trial, which was just getting underway in Chicago. I styled it as a "celebrity death match". Well, if anyone died, it was probably from boredom. I had expected legal tantrums, outrageous tales of high living and who knows what else. There was some of that, but mostly it was about non-compete agreements, the workings of audit committees and the technicalities of mail fraud. Despite that, I've been following it avidly, which just goes to show how a lifetime spent in the financial sector can mess you up.
Black has now been found guilty on four of the thirteen counts against him -- three of mail fraud, relating to the non-competes, and one of obstructing justice. (It almost came out much worse for him: according to one of the jurors quoted in the Toronto Globe and Mail, earlier in the week a majority of the jurors also wanted to convict on another of the fraud charges, plus a racketeering charge, but were finally dissuaded by the minority). Black plans to appeal the convictions, and sentencing will not take place until late November, so he won't be heading for the Big House any time soon.
The prosecution did not make a particularly strong case against Black, and came in for a lot of criticism for pushing the "class envy" button a little too hard. In the event, Black was acquitted of the major lifestyle-related charges -- spending company money on a party for his wife, and buying his Manhattan apartment from the company at an unduly low price -- but it may still have been this part of the case that led to his conviction on the charge of obstructing justice, which carries the longest potential jail term.
Why do I say this? Well, the charge related to an incident in which Black was captured on CCTV carrying boxes of papers from his Toronto office. The lifestyle evidence must have had some part in convincing the jury that carrying boxes was not a normal activity for Black. After all, he famously attended a fancy-dress ball dressed as Cardinal Richelieu, not as a UPS deliveryman.
The lifestyle evidence also produced one of the great quotes of the whole affair, though it was penned before the actual trial began. Peggy Wente of the Toronto Globe and Mail wrote that "there are only a handful of women in the world who can afford to dress the way Lady Black does. Unfortunately, Lady Black may not be one of them".
There could still be some fun and games to come here, but given the tedium of the trial itself, it may not be worth trying to bag a ringside seat. Pity, then, poor Mark Steyn, who sat through and blogged the whole thing as one of Black's very few sympathisers, only to miss the day of the verdicts because of a prior commitment in Madrid!
Wednesday, 4 July 2007
The price of getting old
The Times ran an impassioned piece this week by one Liz Penny (a pseudonym), complaining about her experiences in arranging care for her elderly parents. Basically she hates just about everything -- the hospitals, the care homes, the lack of advice, the cost...
I've been through some of the same experiences, but I'm not nearly as angry as Liz Penny seems to be. Both my mother and my aunt are now in care homes, in each case after long spells in hospital. My mother was clearly seen as a bed-blocker. On the say-so of a physiotherapist, she was discharged back to her own home just a few days before Christmas -- and wound up back in hospital inside a week. As for my aunt, the hospital experience was better -- but two of her friends contracted c. difficile while visiting her!
Things are much better now that they are both in long-term care. The homes, at opposite ends of the country, are modern and well equipped. The staff lie along a spectrum from the merely dedicated to the positively angelic. The food is monotonous, my mother carps about it all the time, but the fact is that she has regained all of the weight she lost while languishing in hospital.
There is one key difference between the two of them. My mother is in a position to pay for her own care, mainly because she owned her own home, which we have now sold. My aunt has always lived in council housing, has minimal savings, and is consequently having most of her care expenses paid for by the council. This has not been difficult to arrange.
It's clear from Liz Penny's article that she deeply resents the fact that her father was required to pay for his own care at the outset. She acknowledges that he extracted £50,000 from the value of his home in order to provide funds for this purpose, but is scandalised that he actually had to spend it! I've seen lots of examples of people getting angry at having to sell their parents' home for this purpose -- there goes the inheritance! (My sister even heard a man on the radio saying that he should be allowed to have his father euthanased, rather than having to sell the house to pay for care!) But think of it this way. If I'm going to be taxed to pay for Liz Penny's dad's care, so that she can benefit from the value of his home, who's going to pay for my care when I get old? Or for Liz Penny's, since she presumably won't want to sell the home when her time comes, either.
I seem to write about issues like this, raised by the aging of the baby boom quite often. It's one of the biggest issues facing society. I was recently told by my pension adviser that the actuaries will base my pension on the assumption that I will live to the age of 84. I have an uncomfortable feeling that medicine is allowing us to prolong our existence, but not really extending our lives.
I've been through some of the same experiences, but I'm not nearly as angry as Liz Penny seems to be. Both my mother and my aunt are now in care homes, in each case after long spells in hospital. My mother was clearly seen as a bed-blocker. On the say-so of a physiotherapist, she was discharged back to her own home just a few days before Christmas -- and wound up back in hospital inside a week. As for my aunt, the hospital experience was better -- but two of her friends contracted c. difficile while visiting her!
Things are much better now that they are both in long-term care. The homes, at opposite ends of the country, are modern and well equipped. The staff lie along a spectrum from the merely dedicated to the positively angelic. The food is monotonous, my mother carps about it all the time, but the fact is that she has regained all of the weight she lost while languishing in hospital.
There is one key difference between the two of them. My mother is in a position to pay for her own care, mainly because she owned her own home, which we have now sold. My aunt has always lived in council housing, has minimal savings, and is consequently having most of her care expenses paid for by the council. This has not been difficult to arrange.
It's clear from Liz Penny's article that she deeply resents the fact that her father was required to pay for his own care at the outset. She acknowledges that he extracted £50,000 from the value of his home in order to provide funds for this purpose, but is scandalised that he actually had to spend it! I've seen lots of examples of people getting angry at having to sell their parents' home for this purpose -- there goes the inheritance! (My sister even heard a man on the radio saying that he should be allowed to have his father euthanased, rather than having to sell the house to pay for care!) But think of it this way. If I'm going to be taxed to pay for Liz Penny's dad's care, so that she can benefit from the value of his home, who's going to pay for my care when I get old? Or for Liz Penny's, since she presumably won't want to sell the home when her time comes, either.
I seem to write about issues like this, raised by the aging of the baby boom quite often. It's one of the biggest issues facing society. I was recently told by my pension adviser that the actuaries will base my pension on the assumption that I will live to the age of 84. I have an uncomfortable feeling that medicine is allowing us to prolong our existence, but not really extending our lives.
Subscribe to:
Posts (Atom)