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.
Monday, 9 March 2009
Friday, 6 March 2009
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.
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.
Wednesday, 4 March 2009
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".
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".
Monday, 2 March 2009
"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.
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.
Friday, 27 February 2009
I'm all right, said Fred
Does anybody look good in the Fred Goodwin pension farrago? The man himself looks unfathomably greedy, and has certainly managed to cast fresh doubt (as if any were needed) on the sincerity of his "apology" to the Treasury Select Committee a couple of weeks ago. The Government looks both incompetent (for apparently not paying enough attention to this matter when it was showing Sir Fred the door a few months ago) and duplicitous (for trying to renege on what appears to be a valid contract). Dear old Robert Peston looks smarmy and mean -- when are we going to get the details about your pay and pension, Bobby baby? After all, you work for a company that's entirely dependent on taxpayer funds too.
The letter Sir Fred sent to Lord Myners on Thursday is so carefully worded that you have to wonder where the truth lies. Sir Fred (or rather his brief) is adamant that the pension is in line with RBS's normal practices, and it seems to have been given the nod by Lord Myners on that basis. However, it's not at all clear that the Government understood that those "normal practices" allowed RBS to give Sir Fred his full pension at age 50 instead of 60. This has the effect of doubling the value of the notional "pension pot" from which it's taken. If the Government can prove it didn't know that the RBS board would do this, its moral and maybe even its legal case against Sir Fred would be strengthened enormously. Otherwise, it would be a very disturbing precedent if the Government tried to find a way not to pay the agreed money to Sir Fred, as Prezza is demanding they should and Gordon Brown is hinting they will.
By the way, Sir Fred has helped to prove a point that I made in my recent posting about RBS's bonus scheme. ("RBS: Ridiculous Bonus Substitute"). Sir Fred has willingly "sacrificed" his contractual one year's salary-in-lieu and share options, worth a grand total of not much more than £1 million, for an £8 million boost to his pension pot. Well, you would, wouldn't you? Even further by the way, reports suggest that a lot of City bankers are asking for 10% base salary increases in lieu of bonuses, so it looks as if RBS's absurd deal for all of its staff is going to set a precedent.
I can't help noticing that all the politicians who are calling for Sir Fred to commit seppuku are entitled to very generous pensions of their own -- not as big as Sir Fred's, but fully indexed at taxpayers' expense. And most of the people who think it's fine to wash Sir Fred's financial linen in public are fantastically secretive when it comes to their own expense claims. Even so, I think Sir Fred is going to have to give something back, whether he likes it or not.
The letter Sir Fred sent to Lord Myners on Thursday is so carefully worded that you have to wonder where the truth lies. Sir Fred (or rather his brief) is adamant that the pension is in line with RBS's normal practices, and it seems to have been given the nod by Lord Myners on that basis. However, it's not at all clear that the Government understood that those "normal practices" allowed RBS to give Sir Fred his full pension at age 50 instead of 60. This has the effect of doubling the value of the notional "pension pot" from which it's taken. If the Government can prove it didn't know that the RBS board would do this, its moral and maybe even its legal case against Sir Fred would be strengthened enormously. Otherwise, it would be a very disturbing precedent if the Government tried to find a way not to pay the agreed money to Sir Fred, as Prezza is demanding they should and Gordon Brown is hinting they will.
By the way, Sir Fred has helped to prove a point that I made in my recent posting about RBS's bonus scheme. ("RBS: Ridiculous Bonus Substitute"). Sir Fred has willingly "sacrificed" his contractual one year's salary-in-lieu and share options, worth a grand total of not much more than £1 million, for an £8 million boost to his pension pot. Well, you would, wouldn't you? Even further by the way, reports suggest that a lot of City bankers are asking for 10% base salary increases in lieu of bonuses, so it looks as if RBS's absurd deal for all of its staff is going to set a precedent.
I can't help noticing that all the politicians who are calling for Sir Fred to commit seppuku are entitled to very generous pensions of their own -- not as big as Sir Fred's, but fully indexed at taxpayers' expense. And most of the people who think it's fine to wash Sir Fred's financial linen in public are fantastically secretive when it comes to their own expense claims. Even so, I think Sir Fred is going to have to give something back, whether he likes it or not.
Tuesday, 24 February 2009
Protectionism is in the air
President Barack Obama may have watered down the Buy American provisions in his mega bailout bill, but there are still worrying signs that the US is pulling up the drawbridge. The President has just announced that the Defense Department is to review an existing contract to replace the Presidential helicopter, known rather oddly as Marine One. (Is it a floating helicopter? Anyway, it should actually be Marines 1 to 19, because that's how many there are in the fleet). In response to a question from, of all people, Senator John McCain, Obama said he thought his existing helicopter was "perfectly adequate", while admitting that he'd never had a helicopter before (still less, presumably, nineteen of them).
Here's the thing. The helicopter contract was awarded many years ago to a European consortium that includes Westland of the UK. What are the odds that this contract would have been cancelled if it had been won by a US company? How about if it had been won by a company in Senator McCain's home state?
This is not the first such example. Last year the Defense Department (then as now led by Robert Gates) cancelled a contract for airborne refuelling tankers that had been won fair and square by Airbus Industrie, over squeals of protest from Boeing. That company's lobbying to annul the contract paid off, and the business is to be retendered with new specifications. You have to suspect that they might just as well include in those specs "only US firms need apply", because there's surely little doubt about the outcome this time.
These are worrying trends. It will be interesting to see whether Lord Mandelson is as outspoken about this blatant US protectionism as he was about the refinery protest in Lincolnshire last month.
Here's the thing. The helicopter contract was awarded many years ago to a European consortium that includes Westland of the UK. What are the odds that this contract would have been cancelled if it had been won by a US company? How about if it had been won by a company in Senator McCain's home state?
This is not the first such example. Last year the Defense Department (then as now led by Robert Gates) cancelled a contract for airborne refuelling tankers that had been won fair and square by Airbus Industrie, over squeals of protest from Boeing. That company's lobbying to annul the contract paid off, and the business is to be retendered with new specifications. You have to suspect that they might just as well include in those specs "only US firms need apply", because there's surely little doubt about the outcome this time.
These are worrying trends. It will be interesting to see whether Lord Mandelson is as outspoken about this blatant US protectionism as he was about the refinery protest in Lincolnshire last month.
A new low for the Daily Mail
The UK's most loathsome paper manages to plumb new lows today (February 24), with a big banner above the front page headline reading "Why is it clever to be dumb?". On one side of those words is a picture of Gail Trimble, the young woman who just led her Oxford college to victory in University Challenge. On the other is a picture of Jade Goody.
The author of this pile of bile, one Harry Mount, says he has nothing against Jade Goody. He has a funny way of showing it, ranting against "a young woman famous only for being famous, and her wedding to a violent ex-con".
Jade Goody is the product of a broken home. She has terminal cancer, so her two young children are about to be orphaned. You'd think even the Hate Mail would think better of criticising her at such a time, but evidently you'd be wrong. Mount's article is despicable, and the paper's editor should be ashamed of himself for giving it such prominence.
The author of this pile of bile, one Harry Mount, says he has nothing against Jade Goody. He has a funny way of showing it, ranting against "a young woman famous only for being famous, and her wedding to a violent ex-con".
Jade Goody is the product of a broken home. She has terminal cancer, so her two young children are about to be orphaned. You'd think even the Hate Mail would think better of criticising her at such a time, but evidently you'd be wrong. Mount's article is despicable, and the paper's editor should be ashamed of himself for giving it such prominence.
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