The media predict a riot (and send cameras)

The media on both sides of the Atlantic are warning that populist rhetoric from the Obama and Brown administrations could stoke public anger and trigger social unrest.

Get serious! People don't need to be coached to be angry about soaring unemployment and bankers' bonuses. The politicians are reflecting the nasty public mood, not creating it. Does anyone really think that the great American or British publics would be less angry about the economic crisis if politicians were acting all nonchalant? Rather the opposite, I'd have thought.

Mind you, there may be someone out there fomenting all this anger that the media are so worried about: the media themselves. There are particular concerns over the possibility of rioting in London next week, when the G20 meeting will be taking place in the city. If the media really want to help forestall any trouble, I have a suggestion for them: they should announce right now that they won't be sending any cameras or reporters to cover the demonstrations. It's the corollary of the old question, "if a tree falls in a deserted forest, does it make a sound?": if nobody films a Womble, does he bother to protest?

War on Peace

Back in early 2007 I posted a brief comment here on David Peace's remarkable novel, "The Damned United", about the late football manager Brian Clough. I've read it again since, and I still like it.

The Clough family, however, doesn't like it one bit. With a film based on the book (loosely based, from the bits that I've seen on TV) about to appear, the family has co-operated in the production of a documentary telling their side of the story. Peace's Clough was a chain-smoking, hard-drinking, Ramsey-swearing genius who wasn't above accepting a few quid in a plain brown envelope once in a while. The man the family remembers seems to have been a mordant wit who only just failed the audition to join the Twelve Apostles.

Clough was a moderately successful manager with Hartlepool and Brighton and an amazingly successful one with Derby County and Nottingham Forest. His only failure was his brief tenure at Leeds, in between his triumphs at Derby and Forest. It's not surprising that a novelist like Peace would choose to examine this low point in Clough's career, rather than the more upbeat parts. Peace's achievement is to demonstrate how the personality traits that stood Clough in good stead elsewhere failed him so spectacularly at Leeds. Leaving aside the smoking, swearing and boozing, which most of us would consider to be minor sins, Peace's Clough is a dedicated and decent family man who can't quite believe what he's got himself into. It's a work of fiction, and some of the more bizarre episodes are completely made up (Clough's burning of his predecessor Don Revie's desk, for example), but for anyone who watched Clough's career from the outside, it's quite credible.

So I think the family is protesting unduly -- and in some ways, may inadvertently have proved Peace's point. The documentary recounted how Clough was waiting at FA headquarters for an interview for the job of England manager, a post he craved. An old gent came past and began to struggle up the stairs, prompting Clough to yell after him that a man in his condition should take the lift, in case his heart gave out on the stairs. That gent was, of course, one of the panel who were about to interview Clough. The family also claims that the entire interview process was a fix -- the FA already knew who it was going to appoint -- but as there are no written records of the interviews, that claim is no less fictitious than anything in Peace's book.

Peace is a challenging writer and a bit of an oddball. His speciality is fiction based on real people and real events. Before "The Damned United" he wrote a searing indictment of the Yorkshire police (recently televised as the Red Riding trilogy) and a novel on the unpromising theme of the miners' strike. He now lives in Tokyo and is writing a trilogy on that city in the aftermath of World War 2. The first volume, Tokyo Year Zero, is already out in paperback. It makes The Damned United look like Little Miss Muffet, but fortunately for Peace, all of the protagonists are now dead.

The positive equity trap

You hear a lot these days about people who've fallen into "negative equity" in their homes. The value of their home has fallen below the outstanding amount of the mortgage. A lot of these people are finding it hard to refinance when their mortgage falls due, even if the loan is entirely current.

"Which" magazine, never slow to jump on an anti-bank bandwagon, is now trying to drum up support for a group who claim to have the opposite problem. Back in the nid-1990s, a couple of banks offered a "shared appreciation mortgage" or SAM. You got the loan free, or at a very low fixed rate, but in return the lender took a proportion of the increase in the value of your house -- as much as 75% in some cases -- when time came for you to sell.

The April issue of Which contains what it presumably imagines to be a sob story from one "victim" of this outrageous free money scam. A gent who is now in his 80s borrowed £44,000 via a SAM in 1997. This was about a quarter of the value of his home at the time. He now wants to sell, but because the house is worth £450,000, he would have to repay £250,000 to the bank. He'd be left with "only" £190,000 or so, and the home he now wants to buy would cost him £230,000.

It's hard to pick your way through the logic of this, at least the logic as the victim sees it. Let's suppose the value of the house had not risen at all from 1997 to today. Our "victim" would have to pay back no more than the amount he originally borrowed, which would presumably make him happy, but he still might not have enough cash to buy the new home to which he now aspires. If the house were to go up by a further £150,000 or so, he might have enough for the new place, but something tells me he wouldn't be happy about paying over £350,000 to the bank to retire the existing loan.

Apparently there are 8000 people with SAMs outstanding. I don't know if all their stories are directly comparable to the one quoted by Which, but I'd bet they have something in common. They're all prople who saw a chance to get their hands on some free money, and now they're mad as hell that they've lost a big chunk of the benefit of rising house prices. Somehow I can't feel as sorry for them as I can for the negative equity crowd.

"Two Homes" McNulty

The sheer chutzpah with which senior politicians dip their grubby paws into the public trough never ceases to amaze. It was only a few weeks ago that we learned that Home Secretary Jacqui Smith was claiming as her principal residence a house in London in which her sister just happened to live. Since Ms Smith represents a constituency in the Midlands, she has a good case for needing a second home closer to Parliament, but the fact that a close relative was living there didn't pass the smell test, and there were doubts raised about whether the Minister actually spent much time at the house in question.

Employment Minister Tony McNulty has now admitted that he has also been claiming a second home allowance. His principal home is a flat in Hammersmith, in West London. His constituency is in Harrow, in north-west London, and he claims an allowance for a home there, in which he allows his parents to live. Even if McNulty ever used the Harrow home -- and it appears he doesn't -- there is no possible justification for the allowance. Harrow and Hammersmith are not just within easy commuting distance of Westminster -- they're both on the Tube, for heaven's sake. McNulty is declining requests to repay the £60,000 he received in allowances on the Harrow home. Although he has now stopped claiming the money, he may still be hauled up before the parliamentary sleaze watchdog, a body whose scariness is perhaps best judged from the frequency with which politicians of all stripes are prepared to flout the rules.

McNulty, of course, claims that he hasn't flouted any rules. He does, however, admit that the situation may look strange "to outsiders". Just to remind you, Tony (and Jacqui and the rest of you): a synonym for "outsiders" in this particular context is "voters".

A footnote to this. After I wrote it I came across a list of second-home allowances claimed by London-area MPs. Several MPs with easy access to the Tube have claimed well over £100,000 over the past few years. Jacqui Smith and Tony McNulty are among the most high-profile abusers of the system, but the rot is widespread. The inquiry into all of this may not get going until October, which will probably mean that it doesn't get completed before next year's general election. How convenient. The will to do anything about this scandal, on all sides of the House, seems strangely lacking.

Who'd want to be me??

One morning this week my mail included a nice letter from a hotel in Vienna, thanking me for the positive feedback I'd given them on my recent stay. Vienna, we have a problem! I haven't been to that fine city for several years and have never stayed at the hotel in question. I contacted them to see if there had been some mistake, but was told that someone using my name and my exact home address had indeed spent a night there in mid-March.

A quick check of my bank accounts has confirmed that no money has disappeared, and there are no dodgy entries on my credit report. Still, it's a bit worrying. Fortunately my bank has provided me with the services of a security company, and they're looking into it for me. One thing we're agreed on is that we're probably not looking for a master criminal here: if you're going around pretending to be someone else, it's probably not the smartest idea to fill out the feedback form when you check out of a hotel!

More on this as it happens....

Moneygrubber gets day in court

A couple of UK local authority pension funds who own shares in RBS are launching a class-action lawsuit in the US against the bank's former management (Sir Fred et al) to try to recoup their losses. To represent them the've chosen....Cherie Blair. Well, at least it isn't hard to figure out who's the likeliest to get rich as this case plays out. (If you need a clue, it's not Sir Fred and it's not the pension funds).

In her professional capacity, Cherie normally uses her maiden name, Booth. As in tollbooth, I suppose, as nobody seems to get past her with their wallet intact. The most delightful thought of all is that if the pension funds win their case, they (and Cherie) will presumably be looking to the UK taxpayer to fork out the compensation. You can just imagine how pleased Gordon Brown will be if he has to sign that cheque.

Who Madoff with the money?

Where has it gone? Madoff's supposed $50 billion, that is. Now that Bernie is facing a life term in Sing Sing (or maybe in the Club Fed joint in Florida with Conrad Black -- jeez, does even Bernie deserve such a fate?), people are still wondering where all the money has gone.

It would be nice if the media, as well as employing someone who can spell the words "Ponzi scheme", would also give a job to someone who knows what a Ponzi scheme is. No doubt a lot of the cash was creamed off by Madoff himself, but the bulk of it went to....the investors! Or to be more precise, the early ones. Yes, it's true. In a Ponzi scheme, since there are no underlying investments (the bank account where Madoff apparently parked the cash doesn't count), returns to existing investors are mainly funded from cash injected by new investors.

Since Madoff was paying dividends of the order of 12% year-in and year-out, he needed to grow the fund by 12% each year, by attracting new victims, just to stand still. The bigger the fund gets, the harder that becomes. Once the inflows slow, the Ponzi artist starts paying investors back with their own money (i.e. the capital provided by the early investors) and starts to pray. When people ask for the return of their capital, the whole thing starts to unravel very fast. As the credit crunch began to bite, that seems to be what happened to Madoff.

In short, most of the missing £50 billion is hiding in plain sight, in the bank accounts of many of the people who are screaming for Madoff to be lynched. The early investors have got their money back, in the shape of the outsize returns that Madoff was paying in order to rope a new set of marks -- though I doubt if many of the investors (or their lawyers) see it that way. Barring some very messy litigation to wrestle that money back, those who signed up late in the day are going to be out of luck.

Doin' that scrapyard thing

There's a report in today's Times that the UK government is thinking of giving owners of older cars cash incentives to scrap them and buy new ones. I haven't seen the story anywhere else in the media, though, so maybe the Times is wrong about this. I certainly hope so.

Supposedly the plan would involve setting up a series of government-approved scrapping stations across the country (see?? job creation!!). People with cars nine years old or older could take their car into one of these stations and receive in exchange a certificate to show the vehicle was off the road. This certificate would have a cash value of £2000 if taken into a car dealership and applied to the purchase of a new car.

What effects would such a scheme have? Well, it would put a floor of £2000 under the resale value of any car eight years old or older, for one thing. If you're looking for an older car to provide cheap, basic transportation, you're going to be out of luck. And it would lead to a stampede into the nation's garages and barns to get all the old bangers off their cinder blocks and down to the nearest scrapping station. (Or some combination of the two. If you can't afford a new car but you've got some old heap in the shed, I'll buy it from you for a few quid and take it to the scrapyard to collect my £2000 reward).

But would this scheme reduce the price of vehicles and get people buying again? There's been a proliferation of car ads on the television and in the press in recent months. Makers and dealers are desperate to shift the metal. So desperate that they're actually cutting prices, in many cases by more than £2000 per unit. It's working, too: UK car sales have fallen by about 20% in the past year, but that's less than half the decline seen in the United States. What odds would you give on those dealer discounts surviving if the government steps in with a £2000 bribe of its own? (Don't think too hard about this one!)

I haven't even mentioned the fact that much of the benefit would seep offshore, since that's where so many of the UK's new cars come from, or the likelihood that the £2000 freebie might persuade people to buy larger cars than they otherwise would, thus offsetting the supposed environmental benefits of the scheme. I could also point out that whizzes like this only alter the time profile of car demand: if people buy a car this year in response to this scheme, they won't be buying one next year. What does the government do then? These are valid points, but they're not as important as the fact that it's plain nuts for the government to be throwing money around like this (more money, that is; they've already cut VAT) when there's every reason to think that the car makers are doing a pretty good job of dealing with it themselves.

An automotive consultant is quoted in the Times story as saying that the scrappage scheme is "a no-brainer". He's right, but not in the way that he means.

Hitler, Gordon Brown and the Lloyds debacle

I noted in my previous post that Lloyds Bank shareholders were reported to be "incandescent" with rage over the fate of their bank. Lloyds, whose conservative approach to risk might well have seen it come through the financial crisis relatively unscathed, has been crippled, at least in the short term, by its takeover of HBOS. The government's stake in the bank is up to about 65%, and could easily reach 75% in the coming months. If I were a Lloyds shareholder (and it's the most widely-held stock in the UK), I'd probably be pretty steamed about it.

But from a taxpayer's viewpoint -- and there are a lot more of those than there are Lloyds shareholders -- is it the worst possible outcome? Iain Martin in the Telegraph certainly seems to think so, and he's amazed that Gordon Brown, who helped to see the deal through, isn't paying more of a political price. However, like many right-wing commentators on the financial crisis, both in the UK and the US, Martin is rather longer on spleen than on logic, and completely fails to offer any viable alternative.

Martin certainly doesn't hold back. He claims that the ultimate cost to the taxpayer of the Lloyds deal could reach £130 billion, and even suggests that taking account of inflation, the combined costs of the Lloyds and RBS deals could amount to more than a third of "the bill for seeing off Adolf Hitler"! There are two problems with this, though. First, Martin is assuming that everything possible will go wrong at Lloyds. If the value of the bank's toxic assets improves, there may be no additional cost to the taxpayer at all, and potentially a profit to be made when the time comes to return the bank to private hands.

Second, and more seriously, Martin is in effect assuming that the choice facing the government last November was between putting Lloyds together with HBOS, or doing nothing. HBOS was, as is now quite apparent, a midden of rancid assets. Should the government have let it go, in the manner of Lehman Brothers? We've seen how well that worked, though Lehman's assets seem to have been so toxic that the US Treasury may have had no choice. The HBOS mess had to be sorted out and paid for one way or another. Arguably, by getting Lloyds involved, the government secured private sector expertise in resolving the problems at HBOS, along with at least a smidgen of private sector risk sharing. It's in that sense that I'd argue that the deal may not have been the worst possible outcome from a taxpayer perspective. And you never know: it might work out well for Lloyds shareholders too, given enough time.

Bailouts breeding bailouts

At some point over the past weekend I saw a piece on the financial crisis on one of the 24-hour news stations. The story was about the latest injection of public funds into Lloyds Bank, and the visuals were.....a shot of the Lloyds insurance building in London. It's good to know that the media are doing their homework at this perilous time.

Anyway, Lloyds Bank investors are reported to be "incandescent" over the latest bailout of their firm, though I'd bet they're not angry enough to subscribe to the new share offering, which will be made available to them before the Government steps up to the plate again. In return for giving the government an bigger stake in the bank, Lloyds gets insurance for about £250 billion worth of toxic assets. About £200 billion of these came into Lloyds' possession through its recent, government-brokered takeover of the benighted HBOS. If that takeover hadn't happened, Lloyds would probably have been able to avoid falling into the clutches of the government. The government's half-assed attempt to rid itself of the HBOS problem directly led to the need to rescue the previously healthy and conservative Lloyds.

Given the fresh dilution, it's not surprising that Lloyds shares have taken a bruising on the FTSE this morning. Ominously, though, shares in both Barclays and HSBC, neither of which has taken any Government money so far, have also fallen sharply. Each of these banks has issues of its own: Barclays is in talks about insuring some of its riskier assets, while HSBC is in the midst of a rights issue, and is under continuing pressure from a dissident investor.

Still, you have to wonder whether banks that haven't fallen into the embrace of HM Treasury are starting to be put at a competitive disadvantage. The UK financial sector is reeling from crisis to crisis, and returns on savings are spiralling ever lower. It's becoming harder to blame depositors for preferring the assumed safety of a government-owned bank to the unknown risk of banks that are trying to make it through on their own. The case for nationalising the banks may yet become compelling.

Opponents of bank bailouts argue that all that is being achieved is the creation of "zombie" banks that are still too traumatised and too under-capitalised to function normally. They argue that clearly insolvent banks should be wound up as quickly as possible, leaving the way open for new institutions to take their place. The scale of the current crisis seems way too large for this to be a realistic solution. However, there are new players planning to step up to the plate and launch banks in the US, and there is talk of the same happening in the UK. Every silver lining has a cloud, however. Predictably, one of the front runners in the UK is Sir Richard Branson.

The wrong winners

The property section in today's Times features a gent who says he doesn't want to be smug, but he's coining it in. He's a buy-to-let investor whose interest-only tracker mortgages are costing him less and less as interest rates continue to tumble. Earlier in the week the Telegraph's Alex cartoon, always down with the zeitgeist, showed two middle class couples at a dinner party, bragging about how low the tracker mortgage payments were on their second homes in the Cotswolds. And just weeks ago, the charming Rosie Millard revealed to the world that she had bought a million pound home at auction, taking advantage of the widespread distress in the property market.

Back in the real world, today's Times also includes a despairing letter from the parent of a young man whose mortgage lender has just demanded full repayment within thirty days, despite the fact that the mortgage is fully up to date (and has indeed been partly prepaid). The lender has offered no justification for the action, but is not prepared to reconsider. According to the Times' lawyers, the lender is fully entitled to do this. More generally, first time buyers and existing homeowners who are teetering on the brink of negative equity are still finding it hard to get fianncing. Meanwhile the well-off, fed up with the lows returns on saving acoounts and worried about the stability of the financial system, are back to the old game of remortgaging the family homestead to buy additional properties as investments.

Is there anything in the preceding paragraphs that's not thoroughly dispiriting? Before the credit crunch hit, it was apparent that easy money was distorting the housing market. Lo and behold, today's record low interest rates are doing more of the same. The proportion of people in the UK who own their own home is falling for the first time in a generation, and it looks as if the credit crunch is set to prolong that trend.

There's another aspect to this that bothers me too. The UK banks that got into trouble (aside from Lloyds TSB, which is a different story) were all characterised by their high dependence on wholesale deposits to fund their loan books. If low interest rates continue to discourage savers, it will be difficult for the banks to return to a more stable funding mix. This will make them vulnerable to further problems in the future. We may need low interest rates for now, but we should hope to see the back of them as soon as possible. Sorry, Rosie.

The non-destruction of non-wealth

One of my mean little tricks when a financial advisor tries to sell me something is to ask him/her to tell me when stocks regained their pre-Great Crash levels. The answer, depending on which stock price index you use, is anywhere from 1952 to 1954 -- i.e., about a quarter of a century after the Crash itself. I realise that posing this question makes me look like a smartarse, but I happen to think that it's a piece of information that anyone selling financial products to someone of my age should know. (They never do).

In today's Independent, Hamish McRae suggests that the "wealth" that has been destroyed in the current crisis may not be rebuilt for at least a decade. If the Great Crash and the subsequent two decades are any guide, McRae is an optimist. But is it really correct to talk about "destruction of wealth" in the current context?

Many of the commentators who have responded to McRae on the Indy's website have made the point that the real "wealth" of the global economy has hardly been impaired at all. Sure, the argument goes, lots of sub-prime mortgages have gone sour, but the houses that they financed are still there. That's true, but it's a very backward way of looking at things. The non-payment of those mortgages means that future housebuilding plans, and likely a lot of other things too, are going to be put on hold or cancelled outright because of a lack of financing. That's already happening, and it's a real problem, as you can easily tell from the increasingly loud pleas from the business sector for governments to do something to restore the flow of credit to the global economy.

It all comes down to how you define wealth. The backward looking view adds together the housing stock, factories, roads, Buckingham Palace, the Colosseum, the Statue of Liberty etc. Fair enough -- it's certainly good that we have those things. But they're of only limited value for the future, which is where we and the financial markets are going to be spending our time. Most financial assets are valued on the basis of the earnings (both income and capital gains) they can be expected to produce in the future, rather than on the value of the assets that may have been put up as security against them. The collapse in global equity and corporate bond values is telling us that the expected value of that earnings stream is much lower now than it was when the crisis hit. So if you regard wealth as a measure of future income, then we are indeed witnessing a destruction of wealth, even if your house and mine are still standing.

If that's all there was to it, this crisis would not look much different from any of the recessions of the post-WW2 period, and would presumably be no harder to resolve. There is one big difference this time, however, and it relates to the huge quantity of impossible-to-value assets on bank balance sheets. It's well established that the total value of the infamous credit default swaps outstanding, at over $600 trillion, is many times greater than the value of the underlying assets (i.e the bonds against whose default they supposedly insure). There's no reasonable way that these CDSs can possibly be regarded as "wealth".

It stands to reason that if some magical way could be found for the world's financial institutions to net out their CDS positions, the financial crisis would be massively eased. Absent a way of doing this, we find ourselves in a situation in which non-wealth is contributing to the destruction of real wealth. No wonder Warren Buffett called CDSs "weapons of financial mass destruction".

"Court of public opinion", is it?

The ever-scarier Harriet Harman has jumped into the Fred Goodwin pension controversy. During the weekend she asserted that Sir Fred should not "count on" receiving his full pension. She said that while his agreement with RBS might be valid in a court of law, it would not stand up in the court of public opinion, which is "where the Government comes in".

Is this the start of a new phase for the Government, where it actually listens to what people want? What's next, Harriet? Are we going to uninvade Iraq? Renationalise the railways? Cencel the third runway at Heathrow? Or, God forbid, bring back the death penalty?

The notion that someone with no respect for the sanctity of contracts is in the running for next leader of a major political party is pretty scary. It would seem that Ms Harman and others would be quite prepared to pass a spot of ad hominem legislation, if that's what needed to claw back the booty. (Vince Cable is also doing himself no favours on this score except, no doubt, in the court of public opinion). Gordon Brown has quickly stepped in to shut Ms Harman up. If the Treasury can find a legal way round the contract, that's fine. Otherwise, barring a Damascene conversion by Sir Fred himself, the Government is just going to have to live with the deal, and with its probable electoral consequences.