New world order
The new rule for any bank or financial institution in the world is don't be too dependent on any one source of funding - because in the stormy conditions on world markets, that funding can disappear, sending said bank crashing on to the rocks.
That's the main reason why HBOS last night agreed to be taken over by Lloyds TSB for £12bn.
The buffeting its shares were receiving on the London stock market week after week, the perception that it was too dependent on a British housing market heading for serious difficulties, was gradually undermining the confidence of the big institutions that provide around 44% of its funding.
There were signs of lenders to HBOS and depositors taking their cash back and putting it elsewhere.
If that had continued, well the consequences would have been unthinkable.
So the main benefit of its merger with Lloyds TSB is that the enlarged group will benefit from more diverse sources of finance - which should mean, to put it in crude terms, that the beefed-up Lloyds TSB will be less at risk of a run than either HBOS or Lloyds on their own.
It was exactly the same logic which drove Merrill Lynch, the big investment bank, into the arms of Bank of America at the weekend - because all the big investment banks, like Merrill, feel dangerously dependent on retaining the confidence of the big money managers and institutions that fund them.
And it's why Morgan Stanley - Merrill's great rival - is also looking for a partner or owner with more stable sources of funding (it's talking to America's Wachovia and others).
Even Goldman Sachs, the pre-eminent investment bank - in its recent heyday, one of the most powerful institutions in the western world - cannot be confident it can thrive and survive as an independent.
Also the recent behaviour of the US and UK governments has sent out a worrying message to the investment banks and their backers.
The authorities on both sides of the Atlantic have demonstrated that they'll do all they can to protect and preserve institutions that directly touch the lives of millions of people, retail banks such as Northern Rock and HBOS, mortgage funders such as Fannie Mae and Freddie Mac, or even an AIG, which has a huge retail presence.
But the US Treasury refused to prop up Lehman, which was allowed to collapse - and the salient fact about this investment bank is that it was not in retail banking.
The credit crunch is creating a new world order in banking and finance.
It's striking terror into the hearts of hedge funds, who can see their backers head for the hills at the mere sniff of an investment boo-boo by hedge-fund managers.
Conservative institutions, and those with simpler business models and a history of careful management of their funding sources, are the new superpowers.
It's a world in which Bank of America, JP Morgan, HSBC, Santander and even Lloyds TSB have the whip hand.
It's a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK.
And it's a world in which even Morgan and Goldman may well have to surrender their proud independence.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~51~RS~)
Comments
Sign in or register to comment.
Sigh! ... common sense appears to have left the building, instead fear has moved into the arena ... looking at balance sheets and I can see no good reason for the drops we see, but my gut tells me we have lots more blood to see yet ...
Complain about this comment
....or to put it another way. It is a return to normalilty and common sense. A healing process.
Complain about this comment
Maybe there should be a register of the names of all the failed finaciers, executives and directors of the bankrupted institutions so that they cannot get another job in that capacity again.
Complain about this comment
This is a 1929/1930 situation.
The precedents, and indeed much of the comments from informed financial commentators and market-makers is that this is a ten year problem.
The underlying house prices will have to fall to long term multiples of income, and until they do the problems will persist.
UK house prices are yet to fall significantly and until they do, to perhaps half of present levels reconstruction of banking confidence cannot begin.
To rebuild confidence all mortgages fro more than 50 percent loan to value will have to be written off. When this has happened and when the market has seen that this has happened (a year or so later) then banks will have confidence in each other again and in the balance sheets of the banks.
Accounting methodologies MUST be changed to include all presently off-balance sheet assets and liabilities and contingent liabilities. Liabilities MUST be valued as worst case if there is any doubt. (Institute of Chartered Accountants please note.)
Theses accounting changes are essential for balance sheets to be trusted again. All synthetic liquidity construction methodologies must also be on the balance sheet and valued as worse case.
Regulation and supervision will (regrettable) have to improve to check that these accounting changes are actually implemented.
Debt rating agencies will also have to be nationalised, or so closely regulated that it will be the same thing.
Complain about this comment
Hmm - I think you are being overly fair to HBOS here, who seem to me to be the architects of their own downfall.
In their rush to create scale in the mortgage business they were among the worst offenders in breaking common sense rules with their lending multiples.
At the same time they were furiously competing to give savings customers extra, with rates higher than they were earning on standard mortgages.
To fund this business model, they appear to have used a strategy of stocking the balance sheet with high yield (=high risk) US mortgage securities, and relying on a good credit rating for access to cheap funding.
And noone appeared to spot the rather obvious link that when the high risk piece wobbled, the cheap funding would disappear, swiftly followed by the hard-earned high street market share.
I doubt banks will be rushing to appoint FMCG experts again in a hurry.
Complain about this comment
Or could it be that everyone is seeking retail deposits, with a nice state guarantee attached, as a cheap source of base funding? How long before Gordon, in the interest of financial stability, suspends the competition commission's activities in this area too?
Complain about this comment
The HBOS CEO statements in the recent interview with you revealed rather to much vulnerbility. He was a smooth talker but there seemed to have been little conclusion of where the business was going. No dynamic means collapse, there is no middle ground. Pretty grim for a business that had to have been aware problems were coming for years. Comments along the lines of - it will take a long time to work through - are just an invitation to a Boston Tea Party.
The willingness of the UK government to bend the law on this deal are disturbing to say the least. The CEO of Lloyds must think all his Xmas' have come at once. You can only conclude that the workforce will suffer and the UK consumer will suffer.
The biggest challenge is how governments stop multinational companies setting the landscape, and however difficult it is as a job this government shows no sign of being up to it. The then boss of Courtaulds was quite unequivical about a decade or so ago or maybe more in interview - It is the job of a business to create a monoploy and the job of government to stop monopolies being created. Just how is this government discharging its responsibilities in this area.
Complain about this comment
Conservative institutions are not rewarded, as the bailouts and taxpayer subsidies keep the market in the grip of those institutions bailed out.
Northern Rock should have failed, the bondholders and equity holders capital gone, and the prudent banks would then have picked over its assets in liquidation. But that would have meant a faster housing bust, which destroys his illusory economic growth and no more boom and bust nonsense he kept saying as he turned his blind eye away from the clear excesses in the market.
I think it's a scandle that Brown is now chucking out years of regulations in a single day, to prevent a situation where only a few banks ending up controlling the UK domestic banking market, and is now helping to form a mega monopoly of TSB-HBOS to save one institution.
The best outcome for the UK consumer and saver would be continuing competition amongst banks in the mortgage market, the savings market, with the imprudent banks who created this bubble, going to the wall. And new banks coming along.
Brown is trying to go back to the days when BT and mercury owned the phone network and there was no competition. He is doing this to rebuild the banks balance sheets - at our expense!
Complain about this comment
Dear Robert
"How much of tax payers money went into the merger between Hbos and TSB"?
Complain about this comment
"... looking at balance sheets and I can see no good reason for the drops ."
This is fantasy! Banks create an asset when the write a loan. The asset is only as good as the probability that the loan will be repaid. Banks are paid to manage risk, this they have failed to do. The assets on their books are worth much less than they purport - that's the problem.
Complain about this comment
The return to comon sense and risk management is important - people forget that things can go wrong.
This will now be another risk management test, the banks are supposed to limit risks in any one area.
This doesn't seem to have worked with regards to mortgage backed securities, we will now see how their counterparty risk processes work wrt to Lehman bros.
What we appear to be finding is that some of the banks just don't seem to have a clue about how to run a bank - they thought it was all about making money for themselves and forgot they had a business to run.
We shold also be looking at Bank's auditors, who are supposed to review these risks.
Perhaps it will be a better world for the banks customers in the future.
Complain about this comment
Who in their right mind would want to take an unlimited punt on the UK housing market right now (least of all a bank which has remained pretty unscathed by the housing crash)? I think there's more to this than meets the eye.
Complain about this comment
With all these central banks putting Billions of £ $ € in to "the system" and buying failed banks.... who's supplying this cash?
Who now owns our banks... and our governmensts?
Maybe in a few years we will be seeking debt relief!
Phill
Complain about this comment
"The new rule for any bank or financial institution in the world is don't be too dependent on any one source of funding"
duh you don't say.
it appears to me that specialism in all areas of business has been encouraged for to long, rather than having diversified symbiotic businesses that are more tolerant of shocks, but maybe not as profitable in short term.
Complain about this comment
Maybe the BBC should take some blame for the state of the housing market. last week you interviewed the head of the Nationwide who predicted a peak to trough fall in average prices of 25%. You then repeated that as 'house prices to fall by a further 25%'. As with Northern Rock the BBC is making the news not reporting it and ordinary people are suffering because of panic you cause.
Complain about this comment
"So the main benefit of its merger with Lloyds TSB is that the enlarged group will benefit from more diverse sources of finance - which should mean, to put it in crude terms, that the beefed-up Lloyds TSB will be less at risk of a run than either HBOS or Lloyds on their own."
Robert you fool - Lloyds TSB was NOT AT ANY RISK OF A RUN so stop causing chaos by the asinine suggestion that there was one !! This is what gives financial journalism a bad name!
You are only doing to placate Lloyds TSB who have been shafted [just look at the Share Price this morning !!] with a deal they neither want nor need !!
Just wait until the pension funds and other shareholders vote down this deal...
Oh, hang on.....
Complain about this comment
I'm not sure it's worth you guys spoending too much time rationalising this situation.
It's the free markets doing what they're supposed to do. Whilst there's money to be made, traders will make it. If they can generate profits (and bonuses) by bringing banks down, then they will continue.
Its not 'if' but 'when' and 'who' now. The short sightedness of the system is now exposed for all to see and RP you shouldn't be focusinfg on the individuals but looking at the core reasons.
Complain about this comment
Robert, Can you at some point please make clear to joe and joeanne bloggs that there is a deposit insurance scheme in place, and how much of their deposits are insured.
This flight of deposits seems to only be exacerbated by the fact that noone is mentioning this!
Thanks
Complain about this comment
How blindingly obvious that if you rely too much on one source of funding you are vulnerable.
Do they not read any of the reams of literature they spew out when selling pension plans and investments - spread your risk.
The more worrying problem is that most of these banks appear to be buying and selling things they do not understand.
I find it a general rule if you don't understand something, don;t buy it until you do.
Complain about this comment
Investment Banking is a parasitic industry, run exclusively for the benefit of those who work in it ... long term, its demise is going to be a GOOD THING. We'll all be better off eventually.
Complain about this comment
The credit crunch has cause a massive reduction in the money supply as banks are forced to deleverage. On the other hand you have the US Govt creating billions of dollars to enable it to bail out these failing institutions. What is the overall impact of these to adjustments to the money supply and how will it impact inflation into the future?
Complain about this comment
another nice piece robert, but i think you make one error at the end.
i fully expect contagion from the current crisis to spread to china over the next 12 months. this is an economy that has been growing at 10% plus per annum for nigh on a quarter of a century. but given that country's dependence on exports to the us and europe, and the fact that these two main export markets are going into recession at the same time, i think a sudden slowdown in china is now inevitable. and when the tide goes out, you get to see who was swimming naked. china has already experienced a meltdown in its stock market. i expect a banking and currency crisis to follow (watch how quickly those reserves deplete..).
if i were an optimist, i would hope that this will lead to public protests in china and some kind of democratic transition. more likely it'll just mean we're all really screwed.
Complain about this comment
I think the real reason HBOS was such a concern was not that it was too dependent on one source of funding more it’s exposure to the UK mortgage market. On the funding front the money is still there in the system somewhere, the cash has not just disappeared it is being effectively horded until better times arrive. The BOE needs to stop reacting when times reach crisis point and put in place more long term robust plans. Just the prospect of liquidity being available over the medium term will probably precipitate a return to some normality for the wholesale money markets. The real moral hazard here is to push the financial system to the point of total meltdown, and along the way demolish the pensions, wealth and livelihoods of the entire UK population. Now is not the time to try to adjust the financial system in such a fundamental way, if the model is not appropriate then the time to correct it is when there is an improved economic climate i.e. a growth phase not a recessionary phase. The government and the BOE are the route cause for any structural problems with both the economy and the financial system, they need to address their mistakes when these systems are in a better shape to cope.
Complain about this comment
Are we seeing the bursting of two related bubbles here - A housing bubble and a banking bubble? If house prices do fall back by say 40%, then is it inevitable that the banking sector both here and in the US will be scaled back by a similar amount, either through failures or through mergers?
I've never liked the propostion that the financial services sector is the future of the British economy and that it now responsible for "generating" a fifth of our GDP. It seems more realistic to look at this sector as an overhead, like the finance division of a large company, and a 20% overhead is ridiculous and unsustainable.
As Robert says, maybe the future is with more Conservative institutions, but I would have thought the sector is not going to "earn" anything like as large a slice of GDP that way.
Complain about this comment
Was the US panic yesterday because market participants think there will be no US Treasury/Fed support for wholesale institutions, just for consumer related ones? This sees to be Robert Peston's interpretation of reactions to the AIG "nationalisation".
Or was it because Paulson and the Fed looked at the derivatives book of AIG and the wider portfolio of the AIG Financial Products group and saw the "Heart of Darkness". A complex, massive position which was impossible to value and where the funding requirement has gone from $20, to $40, to $75 and then to $85 bill in six days, and who knows what it really is? A company which reached into almost every significant financial institution in the world, and whose bankruptcy would force realism into derivative books across the globe?
The UK government has moved aggressively and sensibly to move HBOS into a company which has been much more conservative about its lending.
Who is monitoring and is ready to act with the transnational banks and insurance companies in Europe?
What are the infrastructure banks and PE funds doing about funding now their business models (like investment banking) are looking "old world"?
It seems to me that there needs to be coordinated US and European and Chinese intervention to lay out a medium term solution (medium term = weeks and months, not fire fighting).
Underlying this whole crisis is a massive US fiscal and current account imbalance, which has been funded by Chinese and Arab money. Consumer spending is being buoyed up by a return to negative interest rates in the US. But negative interest rates didn't get the Japanese consumer spending again in the mid-1990s.
It would be great to think that the financial crisis and the property asset price drop can be sterilised from the real economy, but the real economy of consumer and capital spending has been sustained by fantasy economics - a fantasy that US consumers can spend forever without saving, that companies can leverage without undue risk, and that investment banks and hedge funds are perpetual motion machines
The one thing that we don't want now is a sell off of the dollar. The ex-IMF chief economist, Kenneth Rogoff, addresses this in today's Financial Times. More than anything else US policy now needs to avoid a run on the dollar, which would result in another enormously disruptive market dislocation.
I read Friedman and Schwartz on the "Great Contraction, 1929-1933" this morning. It makes you think. No answers, but it reminded me that things can be bad, but bad subsequent policy reactions can make things even worse.
Complain about this comment
Wait a minute......£12Bn sounds familiar!! Was not £12Bn the sum raised by the Royal Bank of Scotland from its shareholders only a few months ago? Looks like Fred "I'll pay cash" Goodwin has been caught napping again, or is a case he no longer has the redies? It's a pity that he had not slept on the last time when he foolishly overpaid for ABN. Had he kept his powder dry he could have beat Lloyds to it and instead of merely being Sir Fred, he could have become King of Scotland!!
Complain about this comment
Not sure about your analysis of the the new world order. I would put HBOS into the category of conservative with it's business model primarily focused on the UK mortgage market, which should have made it a 'superpower', it doesn't look much like a superpower to me.
China are bound to be cash rich and now able to hold us to ransom with our own money due to a combination of the Chinese's manipulation of their own currency, and our(UK and US) incompetent handling of the structural flaws within our own economies. Given that we are generally in a lot more debt than them why don't we let inflation take hold thus reducing our own debt and in turn reducing the value of their cash stock piles, that'll teach em. Maybe that's what the Americans have got planned with the slashing of interest rates, perhaps they are ahead of the curve and we just need to fall in line?
Complain about this comment
the key issues here is what is being done to stop this happening again in the future?
if the banking sector is important enough to the UK and US economies for tax payers money to be spent keeping it afloat surely it should be regulated in a much tougher way such as, for example, the energy market is?
Complain about this comment
"China are bound to be cash rich and now able to hold us to ransom with our own money due to a combination of the Chinese's manipulation of their own currency, and our(UK and US) incompetent handling of the structural flaws within our own economies"
You would think so. Unfortunately (for China) a lot of Chinese banks have lent huge amounts of money to US banks... and the value of the debt was calulated in dollars. By devaluing the dollar the US have cleverly reduced the size of the debt and left many Chinese banks with huge holes in their balance sheets.
Complain about this comment
How sensible would it be for China to invest more of its reserves in Dollar assets, when the Dollar must, in the long run depreciate against the Yuan? Add to that how many of their investments in the past year have slid in value. A country in China's position should be deploying its wealth at home, to enrich its own people and stimulate trade in tangible goods. Wouldn't a rational chinese move be a managed withdrawal from dollar assets, not to pile into them more?
Complain about this comment
*Also the recent behaviour of the US and UK governments has sent out a worrying message to the investment banks and their backers.*
Really…? Oh dear, oh dear, and what about the very worrying message of colossal hypocrisy and double standards that is sending to those of us who are not investment bankers or their backers?
There is a double hypocrisy at play here in the cosy world of the self appointed *free marketers*:
The first one is the well rehearsed one of privatizing profits and socializing losses.
The second one is that the HBOS saga very clearly portrays the peculiar notion of free markets that these neo-liberals defend. First by making a joke of competition regulations they allow markets to become oligopolies in where only 3 to 5 dominant players are allowed. This is the case in banking, grocery retailing, energy providers, mobile telephony and a long etc. Then, as these oligopolists become far too big for comfort they – the free market zealots – declare that they are *too big to fail*. The recipe of the *free marketers*? Rescue the failing player with taxpayers money and push for an even larger player to be created, thus reducing even further the players in the oligopoly.
It doesn’t occur to this Public-School-cum-Free-Market elite that we wouldnt find ourselves in this situation if the banking sector – like so many others – was not an oligopoly in the first place, i.e. there wouldn’t be players that are *too big to fail*.
I wonder what would happen if and when Lloyds TSB-Halifax goes to the rocks. Would they nationalise the whole banking system and then privatise it in one go to put it in the hands of a single private monopolist, like the free market zealots previously did with BAA?
I don’t think this is a *new world order* but rather *business as usual* for the hypocritical self appointed defenders of *free markets*.
Complain about this comment
I don't think it's the funding that is the primary problem - it's where the funds are placed . If the placements are not secure then that rebounds on the funding . Diversity of both is very important .
The other situation is that we have had all these problems primarily emanating from the USA . Historically , this century and the last century , this is where problems with the financial markets have emanated from . The logic from this is that the World needs to restructure itself on a more compartmentalised basis such that it can ensure that problems , such as the sub prime crisis , are kept local to the countries where they occur . As such - countries such as the USA suffer the full results of their actions thus we - internationally - avoiding moral hazard problems .
Complain about this comment
We are all going to pay for this debacle..
I predict a return to an era when when banks charged us for each and every transaction.
This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember
Complain about this comment
Robert,
In all the discussions of the takeover of HBOS by Lloyds TSB, why no mention of the EU? The EU Commission has the final veto over whether the takeover will be allowed to go ahead, not the government, the FSA or the competition commission.
It is a measure of how seriously reporters have neglected the power of the EU to determine Britain's economy that they seem to be entirely unaware of this. If the EU vetoes the takeover, we plunge in to the abyss.
Complain about this comment
Anyone out here in the real economy knows that you have to diversify your business in many ways to make it stronger - customer base, credit sources, differing markets, suppliers and all the rest. This can be difficult but it has to be done to survive.
So how come all the City whizz-kids on their fat salaries could not see the blindingly obvious?
Probably lack of experience and training. So why the salaries and why the bonuses?
The people of Britain have been ill-served by the financial sector, by the government and the rest of the over-paid concert party that have been ruining this country for the past ten years.
Complain about this comment
Robert your defence of HBOS to the redoubt, in the last few days, has been out of character. Your point about sources of funding, however, is well made. The "flashy harry" style of management did for Northern Rock, including trading in US assets via Collateralized debt obligations (CDOs). A year goes by and the second most culpable player, in the form of HBOS, has now succumbed. Funny that Lloyds were not allowed to grave rob Northern Rock, but today the grave keeper has invited them back to pick over HBOS.
Lloyds are overpaying for HBOS, I guess that is an attempt to leave a few bruised egos in tact. It also means all those naughty "shorters" of the few few days make an even bigger profit.
Robert your defence of HBOS to the redoubt, in the last few days, has been out of character. Your point about sources of funding, however, is well made. The "flashy harry" style of management did for Northern Rock, including trading in US assets via Collateralized debt obligations (CDOs). A year goes by and the second most culpable player, in the form of HBOS, has now succumbed. Funny that Lloyds were not allowed to grave rob Northern Rock, but today the grave keeper has invited them back to pick over HBOS.
Lloyds are overpaying for HBOS, I guess that is an attempt to leave a few bruised egos in tact. It also means all those naughty "shorters" of the few few days make an even bigger profit.
That's capitalism!!
Complain about this comment
"It's a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK."
Three months ago I would have been horrified to read that. Now I would welcome it. "Democracy", according to the Anglo-American model, has become no more than the exercise of a spasm of emotional self-indulgence, in which a lupocidal maniac like Sarah Palin can actually be regarded as seriously electable, and in which the collective hysteria of the hypnotised adolescents of the stock exchanges puts )(un)paid to thousands of people trying to do an honest job and live a reasonably rewarding life. Is no one else embarrassed at this meaningless lunacy? Is this supposed to be a civilisation?
Complain about this comment
I'm afraid all this goes to show that you can't actually trust anybody. They Govt, the top banks and their executives, financial advisors, or anyone else that purports to know what the heck is going on. Trust your own instincts with your future and don't let anybody say they know best because they are only in it to make themselves money. My instincts are; house price to fall by 50% of current, world markets to crash, Brown to go before Xmas, Labour to lose by a landslide next election, and the Tories to take us to the brink of civil war by 2011.
Complain about this comment
Some people seem to be criticising the central banks for supplying money to the moneymarkets.
Management of the money supply is one of their duties, but the loans from central banks are not permanent, they are extended whilst they are needed.
The loans smooth out the turbulence and do not necessarily impact on Inflation at all.
The loans help restore stability which makes economic activity possible.
The big problem right now is derivatives most types of which should be ruled out by regulators.
Issuing Bonds to raise money is no problem, selling on packets of Mortgages to Investors is a problem as the Investors are not directly managing the Mortgages.
Like Stock Lending (lending other peoples Shares at a profit) repackaging Mortgages takes the risk away from the lender or mortgage broker and gives it to someone who doesn't know what they've got.
It means an unscrupulous lender (ie American Mortgage Brokers) don't have to worry who they lend to, as they won't take the risk !
So lenders should remain the owners of the loans they create, in order to make sure that they behave in a scrupulous fashion.
Likewise Fund Managers should not be allowed to profit from lending out their Clients property (it wouldn't happen with any other type of property, for example an Estate Agent couldn't lend out your House whilst it was up for Sale !).
Stock Lending distorts the market in favour of Hedge Funds and Gamblers who wish to manipulate prices for their own gain, usually to the loss of the actual Shareholders of the companies being manipulated.
If these issues are not addressed the New World Order will not include Small Shareholders or any Private Pensions.
Complain about this comment
as a Lloyds shareholder do i get the chance to vote on this merger? if so what happens if it is voted down? What exactly was gordon brown's role it this affair or is he just wanting to be seen to be doing something? Did the government offer a sweetner to Lloyds? Do European competition rules have precedence over UK rules? what happens when the next bank is targeted... is HSBC/Barclays/RBS coerced by the government into taking it over?....so many questions so few answers. come on Robert lets see some investigative reporting.
Complain about this comment
@ 34 Soddball, I don’t think you understand how the EU works (in common with so many people).
To be honest, not sure if I understand it fully either, but as far as I do understand it the EU is responsible for competition in the *Single Market*, not the UK market, i.e. there is supposedly enough (?) banking competition in the EU27 Single Market, irrespective of the oligopolistic situation in the British market and the *even more oligopolistic* situation created by the HBOS saga.
Complain about this comment
Robert,
Do we need some discussion about exactly where all the money is coming from that the US and UK governments are pumping into the system? I heard that the US has a debt of some $800 billion, if the costs of the Iraq and Afghanistan wars are included. So taking over Fannie and Freddie, and bailing out AIG et al looks like simply moving debt from one (private) column to another (public) one.
I am not an economist but this looks very worrying to me. Can the Fed go bust? What are the implications of all this?
Complain about this comment
Well, personally I'm pretty hacked off about all this. I was just about to move my business bank account to Bank of Scotland, largely motivated by their generous interest rate on credit balances and low bank charges.
What's the betting those will still exist this time next year?
Complain about this comment
Ikantbelieveit wrote at 10:16am on 18 Sep 2008:
"We are all going to pay for this debacle.
I predict a return to an era when when banks charged us for each and every transaction.
This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember"
I wouldn't be surprised if he/she was right.
Free banking? Was it really free? Somebody had to pay for it.
I remember when I had to pay for every transaction on my current account when I lived in another EU country (not a country which sufferes from a banking crisis like the UK).
Complain about this comment
"JorgeG1 wrote:
@ 34 Soddball, I don?t think you understand how the EU works (in common with so many people).
To be honest, not sure if I understand it fully either, but as far as I do understand it the EU is responsible for competition in the *Single Market*, not the UK market, i.e. there is supposedly enough (?) banking competition in the EU27 Single Market, irrespective of the oligopolistic situation in the British market and the *even more oligopolistic* situation created by the HBOS saga."
JorgeG1,
I understand full well how it works, thank you.
In this case, council regulation EC 139/2004, of January 2004, means that EU law overrides UK law and the final say lies with the Commission.
Those wishing to read the document itself can get it here:
[Unsuitable/Broken URL removed by Moderator]
Complain about this comment
needafilip wrote "why don't we let inflation take hold thus reducing our own debt and in turn reducing the value of their cash stock piles, that'll teach em."
What an insightful and utterly wrong statement !! Will you be willing to pay £500 for a Big Mac ?? That is what it will take to really reduce the Chinese cash pile since they will insist on COD for all future trades. The only people hurt by galloping inflation are the poor of Britain !!
Commenting on #33 - it was a famous American who said, "In God, we trust. All others pay cash !!" But in their headlong rush in pursuit of wealth and happiness, the Americans totally forgot this saying !! Now they are paying the price of living off the never-never !! The British, not to be outdone by their American cousins, are also now paying that price !!
And those of us over 50 years old remember that *GOLD* is king after the £ (cash) was suddenly devalued by the then Labour Chancellor !! There was a mad dash for gold sovs, half-sovs and kuggerands !! There was no trust in the lying weasel-words of slime barrow boys trying to convince us that their air-filled assets were worth more than diamonds !!
Complain about this comment
And interestingly the US and the UK - the country with the most unrestricted capitalism are now falling prey to the country that runs a state coordinated capitalism. What does that tell us about the superiority of systems?
And note that the less free market a country appears to be the less in danger it appears to be from the powers of unbridled greed?
this is one of the possible translations of capitalism "rule of greed", the preference of the personal good over the common good.
Complain about this comment
Interesting that HSBC and Lloyds are coming out as the good guys when I seem to recall investors were heavily criticising them for 'underperforming'. It goes to show that the rule that directors are there to act in the best interests of the 'company'- ie all the stakeholders and for the longer term- is the right maxim. Shareholder power was being abused and lo and behold- the new order will need to make sure this does not happen. And this takes us to hedge funds and the enormous amounts of cash floating around the world- caused in my view because of the huge US trade and budget deficit in the main- there must be something put in place to limit 'gambling' in the worlds markets. If a company builds a genuine stake in a business it must declare it- we need really strict controls on buying and selling what you have not got as well.
Complain about this comment
The European Commission has no role in this take over because both companies have more trhan two-thirds of their EU turnover in the UK.
Complain about this comment
"I predict a return to an era when when banks charged us for each and every transaction.
This will be the end of free banking and a return to the good old days when cash was king. Only those people over 40 years of age will remember"
Not really. Cash can't be King with the importance of on-line shopping anymore. Equally as long as there are still 2 retail banks in the high street the customers who have money will move to the one that charges the lowest fee.
In real terms there's no such thing as 'free banking' and never has been. The banks have always more than covered their costs by paying sub-inflation interest rates on accounts and by slapping outrageous charges on any error the customer makes.
Complain about this comment
"And interestingly the US and the UK - the country with the most unrestricted capitalism are now falling prey to the country that runs a state coordinated capitalism. What does that tell us about the superiority of systems?"
It all depends on whether you think China's labour laws, health and safety rules and enviromental concerns are 'superior' or not. Ironically for a communist country its economic success is generated by exploiting its workers viciously. Mao must be spinning in his grave.
Complain about this comment
Of course, this does mean that all small banks in the Uk (and America) will end up taken over by larger Banks.
Economies of scale will rule the day!
Complain about this comment
Great headline Robert - gets one thinking and a wee bit research tells one all one requires to know about our future.
cheers
Complain about this comment
Are you ready to admit yet Robert that you missed the bigger picture altogether last year when you were so keen to focus on Northern Rock? Why didn't you tell us then that the same issues affected other banks too? Was it just more convenient to keep the story focused on a smallish bank up North than to explain the real issues facing the entire banking sector? If you did not know this- why not? Isn't that your job?
Complain about this comment
This battle is another win for the short sellers. The selling of shares should be only from shareholders only,any thing else causes too great a swing in the markets.We see swings of 20-30% in share price with no material change in companies true performance.
Complain about this comment
Justice was prostituted on the evil alter of securitisation years ago. Now we see the consequences. I can smell the panic in the Treasury, who in their right mind would buy a bank with a £200bn black hole, Lloyds must have been pushed.
The resultant Lloyds/HBOS is said to be worth £30bn. They hold a combined £675bn of customer deposits. Their loan book is £640bn. Well, assuming they have no defaults, stop selling the future and stop depositors withdrawing then we will be alright, wun'us?
Complain about this comment
The name of the article says it all....New World Order.
For those of you who don't know what that is........It is essential that you do a quick study to learn the history and future of what is refered to as the NWO. The central bankers have a plan for your future, that doesn't benifit anyone but them.
Covert class war is all I'm seeing.
Complain about this comment
A New World Order is exactly the reason we are seeing all this financial turmoil and banking crisis. This Lloyds/HBOS deal has created a monster and more mergers and takeovers will happen so eventually we will end up with one world bank. People need to wake up and smell the coffee before it's all too late. All this talk of it saving HBOS from collapse is nonsense it hasn't been saved at all. HBOS shares collapsed because investors pulled out because it's engineered that way.
Complain about this comment
15: peter-sym:
Peter: don't be silly.
Complain about this comment
My prediction for Interest Rates
Expect Mortgage rates to fall and deposit rates to fall faster.
Official Inflation will probably end up around four percent in the coming months.
Public Sector will probably go on strike over very unfair pay rises.
BBC/media reporting will remain melodramatic.
Labour will lose next Election to Tories.
FTSE 100 will probably touch 4600 by Christmas.
Now tell me why I'm wrong !
Complain about this comment
Givent that we are in extremely unusual and worrying times where the traditional market rules and frameword seem to be perilously close to imploding it astounds me that the Fed and the FSA/No 11 Downing Street haven't used the one lever which would stop all the market speculation. All financial services companies should be allowed to request that all trading in their stocks be suspended particularly the retail banks.
They should be given 12 - 18 months to clean up their balance sheets, focus on their core activities, divest all non-core business (AIG being the most extraordinary example). Much effort should be focused on extracating themselves from their interdependence which going forward needs to be more closely monitored.
Had Paulson suspended trading in Merrills, Lehman, AIG and Darling had done the same for HBOS they would still be around today. There would be no need for the $85 bn AIG bailout and calm would be more or less restored (at least in the financial markets) for a period to allow the balance sheets to be restored to some modicum of health. Leverage ratios also need to be looked at very closely going forward 20:1 doesn't give you much wiggle room if any of the assets in the 20 decline by 5%!
I also think there is a very strong argument to outlaw short selling. The advocates of short selling argue that they provide a critical service identifying and punishing poortly performing businesses is frankly nothing more than self-justification. Short selling allows the pendulum to swing far to aggressively particularly in times of fear. If nothing else financial institutions which hold retail and commercial deposits need to be protected from short selling speculators who have made obscene amounts of money in the last few days.
It strikes me that in 'interesting times' times someone ought to be looking at 'interesting solutions' and I am astounded that the suspending trading in certain stocks hasn't been given much more serious consideration.
Complain about this comment
I suspect that the reason for this merger was fear. Fear of what could happen.If HBOS failed the cost to the Treasury would be immense. It would break the Bank of England, Goverment debt would be increased. The pound would fail and the IMF would have to pick up the bill. This could happen if the other banks under pressure fail. This is one of the problems of not being in the EURO, we have no pants on and the tide is going out.
Complain about this comment
51: Peter Sym
Very good points about China, which is ultimately a one-party state. I don't think a one-party state is an effective economic model, so why is their economy out-performing ours?
The answer, I think, is that the US and the UK economies are suffering because both countries have been rather idiotically trusting and naive over globalisation.
China, India and others are free traders, but only where it suits them; try to export into their markets and you'll find out that there are very hefty tariff barriers.
It's time that we pursued equality in trade. Unless China et al remove import tariffs, we should retaliate. Free trade has been economic orthodoxy for decades but, as the public in the US and elsewhere look for a New Order, I can see protectionism returning to the agenda.
Complain about this comment
following on from ishkandar @ 46, it is interesting to see how well gold mining stocks performed in the recent crisis. have a look at the top performers on nyse on bbc's business marketdata site today.
the big fear that hank paulson and ben bernanke have right now is that if the crisis continues with falling stocks, loss of confidence in us banks, increase of expected supply of us federal debt (due to "socialisation" of losses) and further rate cuts by the fed, there may be a total loss of confidence in the usd.
the next few days will be crucial. if the us treasury cannot restore confidence, expect the usd to plummet through 1.60/eur. then the proverbial will really hit the fan.
Complain about this comment
60 supercalmdown
You're not wrong, you haven't gone far enough.
Anyone who hasn't read through a copy of 'Shock Doctrine' should do...this is the shock building and building till everyone supinely accepts the therapy of the new world order to save their homes, jobs and pensions.
Then the true level of economic and social inequality and immobility will begin to explode...
Complain about this comment
Somewhere in all this is the nagging feeling that if the UK were in the eurozone then all this wouldn't have happened. Better late than never?
Complain about this comment
59 Why is it silly to say the BBC are spreading panic? If they tell people that their house prices are going to drop 25% then people worry. You only have to see what 3 days of NORTHERN ROCK IS GOING BUST did to NR.
Complain about this comment
For years we've been buying nearly everything we use from China and now the big news story is that China owns us.
They own us because we don't make stuff.
And our banks have forgotten the rules of stable banking, lend only as much as you know is securely yours. Seems like certain banks have become more like money brokers, middle men in a chain of foreign money.
Complain about this comment
61 Bazmond:
Good ideas. Putting a stop to short selling might mean that you don't need to suspend share trades as well, but either approach could be a good one.
The danger when bank share prices come under attack is that it can spook depositors. They think 'there's no smoke without fire', i.e. if a bank's share price is being clobbered it must be in trouble. This means that the economy as a whole pays a hefty price for allowing short selling. The balance of public interest surely favours putting a stop to it - right now.
Complain about this comment
bazmond @ 61
well let's see what it achieves in russia
Complain about this comment
I 'd like to compliment poster no 61 for his well considered observations. The time to apprehend the west end mafia and put them behind bars is long overdue. Morgan Stanley has given the SEC the names of at least four "liquidity providers" it would like to see taken out. I am sure those that have been behind the sustained attacks on NR LB and HBOS are also well known to our regulatory champions. Perhaps it will again fall on the Rt Hon John McFall to haul these light-weights over the coals. They whistled in the wind when NR was attacked on tha basis that NR shareholders were invested in a reckless business and as such deserved what they got. I guess they summize that HBOS was little different. Is it any wonder that the hedgies feel they have complete control over who survives and hwo goes under?
Complain about this comment
I would agree with the comments in 61 about short selling.
Whenever you sell shares in a private business, one of the things you have to sign in the legal agreement is a clause confirming that you own full legal title. Why should this be any different for publicly quoted companies?
Complain about this comment
I cannot believe that the regulators allowed HBOS and for that matter NR to leverage themselves to this extent. HBOS was about 48% reliant on wholesale markets for sources of funds. This is a bit like having your business rely on one customer for 48% of your sales - a suicidal busines model. While I am sure the current CEO of HBOS must carry some of the can, he has only been in charge for 2 years. Hence we need a full investigation into the HBOS management going back about 10 years, basically since its (the old BOS) conservative model changed to one using the markets.
Complain about this comment
I cannot understand where all this money comes from - central banks pump in £180 bn; AIG is bailed out with £80bn; Bof E releases an extra £20m ?
Who pays for this or is the answer no one and that is part of the problem !
I know banks can just print new money but doesn't that cause inflation.
I have worked in the finance depts of many businesses and the answer to this could solve the continual problem of budget overspends - Just print some more money !
Complain about this comment
Toxic Brown has just been on the telly as usual saying how right he is and how much he has done. All he has done is let a banker slide up to him and propose the law be bent to suit the banker.
Oh yes lets jump to it. The solution is to allow a takeover that wouldnt normally be allowed, which will weaken competition and therefore damage every consumer's rights in the UK, and lets burn a few tens of thousands of jobs as well.
Strange how little he is bothered about anybodies job other than his own. When is this bloke going to do something proactive. The bankers have been on a Mad Hatters tea party since at least the mid 90's and they are still running the show from what I can see.
Browns answer is always he will do something vague at some undetermined point in the future. In the meantime he wants to keep marching everybody up to the top of the hill and marching them down again.
Complain about this comment
The LloydsTSB and HBOS is a funny one.
A big acronym too. LTSBHBOS.
Or rearranged: BS - BOLSHT
Complain about this comment
What is Lloyds playing at? For a bank that got its fingers burnt in South America in the 80's it had appeared to have learnt its lesson and had avoided all the derivative nonsense and the worst of the reckless mortgage lending. So why get into bed with a bank whose major business is (less prudent) mortgage lending and a lot of the funding reliant on cheap cash which has dried up?
So what if HBOS's share of the UK mortgage market is 20%. If, as in all reality, the mortgage market is dead for a generation, 20% of nothing isn't a right lot.
Complain about this comment
#74 - natashasdad
It's my understanding that the £20bn the BOE released was in the form of overnight or very short term funding, with interest, so in effect they're just making a profit while appearing to help the liquidity of the market.
What I'd be more interested in knowing is if the credit crunch was as "a result of banks no longer lending to each other", which banks have the money to lend, but are now hoarding it? It can't just be HSBC, effectively bankrolling all the other banks, can it?
Complain about this comment
I mean, clearly the likes of Northern Rock, B+B, C+G, HBOS weren't doing the lending but borrowing it, so who was funding them? Which institutions are cash rich?
Or were they lending and borrowing, all at various rates, to each other? If that's the case, what a mess!
Complain about this comment
The ritual slaughter of at least one big name company has taken place. The FTSE has plumbed the 5000 line. Now let's pick up the pieces and get on with running our country and our world to mutual benefit.
Surviving companies will become stronger (what does not kill me makes me stronger).
Displaced financial "wizards" will not go back to their cauldrons but will have energy and funds to invest. Expect a lot of self starters to be setting up small companies (after the initial flush of wine bars and art shops expect real investment in such potential growth areas as tourist facilities).
With a more sensible pound-dollar/euro ratio the chinese, russian, brazilian and indian tourists will be flocking here. A more competitive currency will boost our staple exports (whisky and weapons). Wage inflation will remain low with unemployment threatening. After some corrective deflation house prices will become affordable again to new buyers - and remember there is still a shortage of good housing - so the deflation will be short lived.
No this is not post 1929 it is more like post 1945. We are damaged but we can be optimistic of better times.
Complain about this comment
There are a few things I just don't get.
1. Why are any senior bankers still in their jobs? They have presided over the virtual destruction of the western economy and we, the people, will have to pay for their greed.
2. Why are the traders (rumoured to be hedge fund managers), who drove down HBOS shares by creating a false run through short selling stock, allowed to get away with raping the hard earned capital of the ordinary shareholder? Isn't it illegal to create a false market?
3. How can we ever allow these people to police their own behaviour in future. They had a chance and now we have their measure.
Complain about this comment
There seem to be two issues here.
1.) The decline in the HBoS share price has apparently unnerved institutional lenders, who began to look at calling back their loans. RP has descirbed this well, but he's not really looked at the cause of the share-price shifts.
2.) The Halifax management's business strategy (some might call it "greed") was funded by an abnormally large number of big loans from other banks. Under normal circumstances, these would have been paid back and replaced with MORE loans in a few months time. The credit crunch makes this replacement harder, and the size of the loans makes this a bigger problem than it is for less aggressive banks like Lloyds.
The question that RP isn't answering is whether the share price decline that has triggered the merger is really a genuine market reaction to the extent of the funding problem, or is it primarily the work of manipulative short-selling.
Yes, the HBoS senior management have been burned by a flawed strategy, but if the share price has been artificially manipulated here, then it's possible that the debt could have been serviced and HBoS could have remained independent.
There are clearly knock-on effects from a HBoS/Loyds TSB merger, for jobs, competition and the rule of law. So the haste with which this shotgun marriage is being arranged by the PM seems troubling. Even his pet chancellor is quoted as being "extremely concerned" that a lot of his constituents will lose their jobs and vote for someone else.
So, to echo what bazmond (comment 61) said: why not suspend trading until the actual facts are sorted out?
Or...
At the back of this, were the Government worried that THEY would have had to give HBoS money to repay the loans, which would have dealt a further blow to their already dubious borrowing targets?
Is HBoS the sacrificial lamb on the altar of government economic incompetence?
Has Labour made a big, unneccessary mess here in a clumsy attempt to help their chances of winning an election?
Given every other decision they've made since Mr. Brown took charge, I wouldn't be surprised. Gordon has been guilty of the same mistake as Halifax, Northern Rock, and all the people with maxed-out credit cards and overblown mortgages: spending money he didn't have. And now he's in trouble.
He's trying to stave off his own economic collapse by turning on shareholders and workers who don't deserve this punishment.
Isn't he?
Complain about this comment
The financial system is too complex and too closely coupled.
See 'Normal Accidents' by Charles Perrow - especially in the Afterword on financial systems.
See also article by Leon Gettler in TheAge. "These forces are so tightly linked, often in ways previously not contemplated, that problems will inevitably cascade through the system, leaving little room for safety and error."
Basically financial derivatives, Wall Street innovation and hedge funds have created close coupling between disparate financial and economic systems. No one can predict what the fallout will be.
The brainy oxbridge graduates who designed were not quite so brainy.
It's time to decouple and disrupt amplifying feed-back loops. Close the shop (i.e., the markets) and sort out the problems before they escalate even more?
Complain about this comment
trevst @ 80
the problem with your forecast is that any further downward correction to the housing market will cause bigger problems on bank balance sheets and lead to more crisis.
all the same, like you, i am reasonably bullish about the uk. i don't think our economy has been fundamentally misvalued for the last 10 years. unfortunately, i do not think the same can be said of the usa or china. and if both of these blow up, then we are all in trouble.
Complain about this comment
80 trevst
You must be in the running for a job as David Cameron's speechwriter!!!
Anyway, as any Batman fan knows its : whar doesn't kill me makes me stranger
A definite re-write for our times
Complain about this comment
Can someone please explain to me why those high flying bankers that have received five and six figure bonuses have not been made to pay it all back!
Complain about this comment
If China DOES hit the buffers because all its markets have crashed at once, perhaps it will reduce all the thefts of war memorial plaques and man hole covers for scrap.
And hard to see a way back to the top for the US - all its supplier countries have been lending it money for a decade to keep buying their goods, like the town grocer running a tab for the gun-happy drunken profligate young squire. Why would they want to start doing that again having just been financially wiped out? That US government credit is no longer AAA is unbelievable.
As another poster says, the demise of the investment banks is easier to take. Lending a predator money to take over a company, piling all the debt on the victim, and making sure you get paid on day one - nobody will miss that.
Complain about this comment
Supplying $'s £'s and Euros to the market is not helping but killing the values of each currency.
De-leveraging has meant a rush to unwind huge derivitive positions that were leveraged purportedly up to 35 times. These 'loans' to the market can never be paid backin full so we are left with a massive influx of new cash. That can only spell inflation down the line.
The problem was not only the leveraging issue but the dementedly large bonuses that made recipients think they could do no wrong.
We can not forget those in a position of responsibility also cast blind eyes because the gravy train was blinding them from reality.
If we are to really have a new order then present managements must all be kicked out, as should incompetant Treasury officials and overpaid FSA executive. WIth all these 'safeguards' events have shown they have all been a total waste of space!!
Complain about this comment
'Size matters..'
Indeed. The bigger they are, the harder they fall...
Complain about this comment
They should have let HBOS go to the wall and dealt with the consequences. Barclays seem to have driven Lehman to it's death, only to see them cherry picking the carcass and leaving the rubbish. I reckon that Lloyds have done the same here. People are waking up to the realisation that these corporations manipulate us like governments and it is not for our benefit. How many more times do the Government think that we will stand for them bailing out large shareholder run businesses when we need better schools, prisons and hospitals? Railtrack, Northern Rock and now Lloyds TSB? I'm off to put all my money into shares as it seems these are a guarenteed way to make cash....the business does well, you make money; the business fails spectacularly and the government bail you out.
Complain about this comment
This is an incredibly accurate look at the big picture.
Governments worldwide have been so apathetic at the opportunites laid open for those with enough resources to take over without a shot being fired.
They are now completely on the defensive for they don't know where the next attack will come from.
Very Worrying.
Complain about this comment
You are all very negative. Such negativity is self-fulfilling, as has been proven over the past few days. HBOS must have been a viable business or Lloyds would not have bought it, but speculation almost brought it down.
If someone could put a break on the current downward financial cycle, everything would be fine. Although house prices may stagnate over the next few years, whilst employment remains high, mortgage payments will continue to be paid and there will be no crash in the market. Only if the negativity demonstrated on this blog continues will banks continue to go bust, businesses fail through lack of finance, people become redundant and house prices crash.
Time to put a stop to this. Unfortunately the best people to do this are the top people at the banks who caused all this in the first place. However, I think we've all got a responsibility.
A questions I have though - why didn't G Brown buy HBOS for £12bn - seems like a bargain to me (compared to trident missiles)?
Complain about this comment
One of the things I have constantly wondered (and posted) about is what the cost to the taxpayer is of propping up our financial institutions.
I have asked previously on Robert's blogs if anyone could quantify this, but with no takers, so I thought I'd perform a worked example to stimulate discussion.
From the figures quoted on the BBC's website, it appears that we have accrued an extra £126 billion debt since the baling out of Northern Rock. Assuming we have to service this debt at 5%, this means we have to find £6.3 billion extra from the tax revenue.
There are apparently 29.54 million of us in work, so that means we each have to contribute an extra £213.27 per annum just to bale out Northern Rock.
Would anyone like to comment on my simplistic calculation, which assumes that NR are the only liability and that the 29.54 million of us in work is not decreasing ?
Complain about this comment
Absolutely correct, years ago, and now, and very likely into the future:
"It's a world in which the Chinese state, if it co-ordinated the investments of its cash-rich institutions, could end up owning more-or-less the entire financial system of the US and the UK."
Like the Chinese (??) said many years ago, "...we will hand you the rope with which you will hang yourself..."
U.S. President Reagan helped bring about the economic downfall of the U.S.S.R. and its satellites (which is trying to make another comeback now), and in a like manner, the Chinese, and one can be assured a few others, are acting in concert to now bring down the U.S. and other Western nations.
Complain about this comment
The people that will pay for all this as usual are ordinary savers, pension holders and workers. Just Capitalism going through its normal routine and the same people making the same apologies and excuses while lining their pockets at the same time. Brad Pitt had the right idea in 'Fight Club'......Instead of trying to run the system better (which can't be done) why not destroy it (or let it destroy itself)
Complain about this comment
What's curious is that Gordon Brown is now talking about "clearing up the City". Even supposing he could which I sorely doubt, one asks why he allowed things to get into this state over a period of 12 years, therefore?
Answer: either because it was convenient to let the City run riot, or he simply didn't know what was going on. Or he didn't know what was going on but this credit expansion thingy really is good for a boom economy. And until very recently he's remained in denial about bubbles bursting.
All he has to do is get the regulators to regulate; to ensure they understand the technicalities and risk of financial instruments in their sphere. I mean, just passing around packaged debt of dubious quality at high prices should have raised eyebrows but neither Brown nor his regulators knew what was going on.
And he needs to keep his nose out of the housing market - let it find its own levels instead of trying to promote the turnover of properties at bubble prices. The most useful thing he could do is enforce the rule that mortgages should never be greater than 3x one's salary or about 4x for joint mortgages. Dead simple. And personal borrowing should never exceed 1/3 of one's net income.
Complain about this comment
'Conservative institutions, and those with simpler business models and a history of careful management of their funding sources, are the new superpowers.'
....as well they should be!
Complain about this comment
I believe that Mr Peston is grossly ill informed with regards Wachovia and Morgan Stanley, more panic info!!
Complain about this comment
Some of the optimism that I'm reading here about the UK economy baffles me; it also seems to baffle the forex markets, since the trade-weighted value of Sterling has slumped over the last six months.
The UK has understated inflation (and consequently overstated GDP growth) for years; we've allowed our trade balance to become dependent on the financial services sector which is now being battered; our utilities are foreign-owned; we do not export very much in terms of physical goods; we've shut down our coal industry; we've depleted our oil and gas reserves, and are now importers of both; we've no idea how to replace our power stations before the lights go out; our public sector finances are shot; we have a cripplingly expensive bureaucracy and public sector; our economy depends on consumer debt hitherto 'secured' against artificially-inflated house prices; and our government is run by idiots.
Apart from that, it all looks great.....
Complain about this comment
The root cause of all these problems has been the property inflation bubble. The bottom line is that speculation in commercial property is natural and acceptable because a high proportion are leased with ownership vested in institutions and individuals who are in it purely for investment purposes.
There should, however, be a moral dimension to speculative investment in residentials which are, at the end of the day, peoples' homes. If some individuals are tempted to take big risks on their houses because they see them as speculative investments rather than 'a roof over their head', they take the usual risk that values can go down as well as up. However, if this is widespread, it drives prices up to a level at which first time buyers in particular simply cannot afford to get onto the ladder.
Not only does this mitigate against the interests of people who simply want somewhere to live but it makes a nonsense of the so called 'property owning democracy'. While downward pressure on property prices will hurt those who have to move for business or personal reasons or over-mortaged for other purposes, it is a necessary adjustment and values should be allowed to settle at realistic levels if the housing crisis is not to continue.
Complain about this comment
#93 - wiganwoking
I believed from day 1 that NR was the example that was never set. If it had been treated like Lehman Bros and allowed to fail, the tax payer would not have this liability and some lessons might have been learned earlier.
I simply do not believe that a mechanism could not have been found for bailing out the mortgage holders without propping up the business.
Complain about this comment
"The credit crunch is creating a new world order in banking and finance"
This is all part of the agenda of those with power and influence in the world (corporate heads, polititians, media) to concentrate power in an ever decreasing number of institutions, whilst attempting (unsuccessfully) to convince us that it's 'for the best'.
The "New World Order" you speak of is the dangerous situation whereby all aspects of our daily lives (not only financial) are being controlled by and concentrated into the hands of a small number of individuals.
The 'crisis' in the the world financial markets is just another example of the "Problem-Reaction-Solution" paradigm being implemented by those in powerful positions.
The Problem Reaction Solution Paradigm:
1) The government creates or exploits a problem blaming it on others
2) The people react by asking the government for help willing to give up their rights
3) The government offers the solution that was planned long before the crisis
They take more control, ruling by fear.
Complain about this comment
The most depressing point of this whole sorry mess is the way that all the prominent authorities (heads of state, financial regulators, central bankers, etc) are so surprised by what is happening, as if it had never happened before! There have been numerous market panics in the history of the modern world, and the current one - just like others - has been caused by massive amounts of credit. Have a look at this article that I read a few years ago:
http://www.safehaven.com/article-2626.htm
Note that the market panic of 1907 was also the result of extreme levels of credit:
"Even so, the Panic of 1907 was like many of the crises that went before it and would happen after it. It was inevitable, because highly leveraged and overextended lenders and speculators lead to eventual ruin."
And what allowed the recent massive credit binge to take root? A sustained period of excessively low interest rates in the developed world (USA, UK, Europe) as a response to the economic shock of the September 11 attacks. And if low interest rates CAUSED all the problems in the first place, low interest rates certainly ain't gonna solve them!
Read up and learn. History has plenty to teach if you will only take the time and make the effort to avail yourself of its riches.
And so, to quote George Santayana:
"Those who do not learn from history are doomed to repeat it."
Come on down, Mr Brown!
Complain about this comment
96 atrisse:
Spot on. As well as a 3x earnings limit on mortgages, and your other very sensible suggestions, I'd also suggest mortgages should be no higher than 90% loan-to-value.
Complain about this comment
How long does it take the Treasuryor FSA to ban the borrowing of shares to short-sell them?
Does the Uk need businesses whose main activity this is?
HBoS was shorted weeks ago and regulators stood by and watched,
If its business model was flawed, why did'nt the BoE or FSA intervene?
Surely if it was flawed and it seems it was, wealthier suitors could have been lined up earlier and its 'rescue' better managed for employees and long term sharehoders alike.
Brown's statement today is just another soundbite.
Are tax receipts from hedge funds so important to the Treasury that they have been reluctant to curtail their behaviour that so damages the wider economy?
Complain about this comment
"Spot on. As well as a 3x earnings limit on mortgages, and your other very sensible suggestions, I'd also suggest mortgages should be no higher than 90% loan-to-value."
Funnily enough thats what my building society (The Yorkshire) basically do. They have this crazy idea where they only lend money that they already have and make sure the loan is safe.
The only thing I would point out is that many people are paying more than 3x salary in rent so can clearly prove that
they can pay that much back. We rented on one side of the street then bought on the other and our mortgage was only 50/mth more.
Complain about this comment
What is worrying is that no one seems to know the extent of the problem. Banks have loans to other banks that are secured against loans in yet more banks etc etc etc. No one seems to be capable of unwravelling all the deals to find out who the ultimate loser is. In this uncertainty speculation is rife- leading to runs on banks such as HBOS.
Surely this is due to poor ,or even non existant, regulation in the past - you know when our best ever stong chancellor who believed in prudence was in charge!
Also not helped is the sensationalism of 24 hour news , the "who is going to be next" attitude or the "no reason to panic but...." approch to reporting. Even last night once the HBOS situation appeared resolved there was speculation that RBS would be next! I have to say that the BBC dumbed down news approach and the Daily Mail are very guilty of this!
Complain about this comment
Can anyone tell me how much has been pumped into the markets, including buying banks etc, worldwide by governments, since the crunch started? It's just that I wonder where it all came from and how much it will cost!
Complain about this comment
Some of my suggestions to help. Stop short selling using borrowed shares. Lower intrest rates to 1-2%, would allow most people to pay mortgages, and stop reposessions. All new loans only 70-80% of property value. No new loans for new build property for 2 years,to get rid of unsold stock. Change accounting rules to let banks have longer period to settle losses to loans.
Complain about this comment
The end of capitalism in the west is but months away. What we are seeing at present is consolidation of banks and investment banks with the weakest (as defined by massive funding requirements to support business) being swallowed up by more conservative and less damaged banks. Meanwhile governments across the world support the markets with injections of short term loan facilities.
Unfortunately once the weak banks have been picked then exactly the same treatment will be dealt by the short sellers to the few bigger banks still trading who again will not be able to support their burgeoning loan books. The end game will be nationalisation of these mega banks and currency freefall.
Pity the shareholders in the 'stronger banks ' who will now see their values plummet
Complain about this comment
If you were into conspiracy theories, you might consider the following. Suppose Lloyds TSB have had their eye on buying HBOS for a while. They knew they would never get away with it because the Competition Commission would stop them.
So what do they do? They get together with their pals in other bits of the City to start a huge campaign of shorting HBOS shares to make it look like the bank is in serious trouble. They are then free to take over HBOS not only at a favourable price, but also in an emergency situation so that the competition rules are waived.
Of course, I never believe in conspiracy theories myself, but you have to admit that as conspiracy theories go, it's rather a good one, isn't it?
Complain about this comment
"New world order", Robert?
"Conservative institutions are the new superpowers"?
Well, sure but doesn't that pre-suppose that people learn from mistakes?
When did that ever happen?
It's only few years since the previous disaster - the internet bubble. Even I can remember that but I didn't learn my lesson and neither, it would appear, did; the public, the banks, the regulators or the governments.
It doesn't matter how much knee-jerk regulation is put in place after this. As soon as some pimply, 20 year old, whizzkid thinks up a new instrument which doesn't fall under the regulations - and his bosses smell 'profit' - we'll be on our way again :o)
Complain about this comment
#103 Yummy...
Just thought I would agree with you view. Low interest rates as a 'solution' would add aviation spirit to a fire.
Also see my post #4 above. I really do think the accountancy professions needs to change the way it accounts for liabilities for anyone to trust balance sheets again any time soon.
Complain about this comment
Bird: So as Chief Executive of one of the UK’s leading banks, can you explain why your shares have slumped so much that you have had to be taken over?
Fortune: Well, it was the shorters, you see. They’ve been at it for months, just attacking one financial institution after another. And we were next in line. Our fundamentals are…
Together: …absolutely sound, of course
Bird: So in that case why would they want to do that?
Fortune: Ah, well, excellent profit to be made here. What we, I mean, they do is to phone up and ask if they can borrow some shares for a bit and then just sell them and take the cash.
Bird: Well, don’t they have to pay for them then?
Fortune: Ah no, well that’s the clever bit you see. What we, I mean they then do, you see, is to wait till the price goes down…
Bird: And if all the shorters are selling together, of course it will…
Fortune: Yes. No collusion, of course, you understand, that would be ..
Bird: Illegal?
Fortune: No, just jolly hard to do after a three-hour lunch. But then after the price goes down, you use the money you got from selling them earlier, to buy them back again – and keep the change, what ho.
Bird : And jolly nice change too. But if the financial institutions are being attacked by shorters, who exactly is it that is lending them the shares to sell in the first place?
Fortune: Well of course, all the shares are actually held by, er, the financial institutions, like ourselves, and so we lend them out. And we get a jolly good interest rate for doing it, too.
Bird: Er, and you don’t think that your own shareholders might not wholly appreciate you doing this?
Fortune: No, I don’t see anything wrong with it, just an accepted financial practice in today’s modern no holds barred, exciting City, that I must say, I have been so proud to have been a part of for so long.
Bird: But perhaps for not much longer…
Complain about this comment
Am I right in think that people are now selling LLOY shares short? The price is dropping as badly as HBOS price. Shouldn't this behaviour be made illegal? Surely you should actually have the shares before you try to sell them.
Complain about this comment
Robert Peston,
Once again, thanks for your continued work covering this issue. I for one appreciate your blog.
Complain about this comment
We await the storm of reposessions.
I would not assume the worst is over.
Complain about this comment
I continue to be amused by the use of the term `property ladder'.
Property snake is more appropriate at the moment.
From a mortgage banks' point of view it is the `property Grendel'.
Oh, who will be our Beowulf?
Complain about this comment
Robert Peston talks about a "new world order".
After these years of greed-orgy could the Communist party make a massive return?
Millions of the public are very racked-off with our greedy "elite".
Complain about this comment
To be honest, stock lending coupled with shortselling is a form of legalised theft.
It transfers asset value from the owners of shares (pension funds,small investors) to Hedge funds.
And of course the Pension fund manager/ nominee account company receives a fee for lending the shares.
Meanwhile the actual owners have their wealth transferred to third parties probably outside the UK.
If this system of abuse is not dealt with, the City of london will be ruined, it may take a year or three, but the FTSE will decline 25 to 50 points a month as the spiral of wealth removal continues.
People will not buy into Pension Funds if they know their contributions are being stolen.
People will not buy Life Assurance policies, same reasons.
And of course who will commit their savings to people who are basically not worthy of trust.
This level of dishonesty should not be allowed to continue.
Complain about this comment
I think you have entirely underestimated the contribution of the hedge funds this week and as they see their backers disappearing in front of their eyes perhaps they may regret the huge short postitions some of them have been running as they let their greed cloud their judgement, not for the first time I fear.
Complain about this comment
With Lloyds TSB shares down around 18% today the merger certainly doesn't seem to be good news for shareholders like me. Maybe the egos of Blank and Daniels have something to do with this merger. Egos are partially responsible for getting us into this mess in the first place.
I am a long term holder but now wish I'd been shorting.
I'll be learning more about these options for the future, probably just in time to see the practice banned!
I was in the City today and one banker was saying that the markets will take 15 years to recover! Not a nice thought but then I thought what does he know
Complain about this comment
Today I received a letter from my mortgage lender offering me a loan of up to 12,800 pounds. Absolute madness considering the news at the moment.
I was straight on the phone to let them know what I thought of their offer... politely of course, it's not the call centre worker's fault.
Complain about this comment
Gordon Brown is amazing! Initially under Tony Blair he embraced Thatcherism but somehow has badly lost his way. Now he seems to be some sort of US capitalist just when they themselves are seeing the failings of their own economics.
Conservitism as advocated by George Osbourne and David Cameron is the obvious way out of this economic mess.
Unfortunately poor old Gordon and Alistair now seem unable to take Conservative advice - even when they need it most!
Complain about this comment
Perhaps now the banks and mortgage lenders will act more responsibly with regard to their lending. Bank of Scotland play no small part in the troubles of HBOS due to their dodgy lending. On residential valuations they were prepared to lend 125% on the valuation of a property - absolute madness.
Complain about this comment
I'm delighted to have just read this on the BBC business pages:
"The Financial Services Authority (FSA) has announced restrictions on short-selling, whereby traders bet on share prices falling.
The city watchdog will clamp down on the speculation that some believe was to blame for the sharp falls in HBOS shares in recent days."
Good!
Apparently they're stopping all short-selling of banks and insurance stocks until January. Let's hope they make it permanent.
Complain about this comment
Just a few days ago 2 enormous financial institutions in the US had to be bailed out, and it was revealed that most mortgages in the US are run by them: so now in England are our companies going to merge together into bigger and bigger ones, to create the same situation as in the US, and that's what's failed there?
I hardly understand any of this - all I think though is that some people are making an awful lot of money somewhere out of all this, as all the robbing Peter to pay Paul finances come home to roost (there's some mixed metaphors!)
It's a tower of cards (there's another one!) all ready to fall......in fact falling.....
Complain about this comment
Don't get your hopes up friendlycard #126. It’s based on disclosure of net positions at market close - what about intraday shorts (naked)? I'm going to bet there were plenty of those that attacked HBOS. What about short CFDs? What about sector CFDs?
Too little, too late, wrong target and all for puff..
Complain about this comment
I'm astonished to see Robert Peston defending short selling on News 24. I thought little about this until recently, since I've never done it. But I do trade shares and hold them in nominee accounts. I was astonished to find out that my own shares in companies could be 'borrowed' by institutions to short sell. This is scandalous.
The claim that short selling results in shares being more honestly valued seems to me to be purely a con by the Hedge funds.
If you buy a share, you do so because you believe it will rise in value. If you are wrong, and it drops, then you can sell. If sufficient people do one or the other, the price goes up or down accordingly. There is positively No requirement to distort markets by selling share that you do not own. It is time the markets returned to financial sanity.
Complain about this comment
No one has explained wher central banks get all this money to pump into the markets.
In my simple understandinmg when King Ethelred wanted a war he needed gold. Then centuries later governments issued coined money to the value of gold they held. So money represented the value of a nation. Then the value of a nation was represented not only by the gold it possessed but all it's assets - including to overseas investments down to Mrs Jones' dog down the road.
But the US is the most debted country in the world. If it issues more money surely it must be devalued at some point. What happens when other central banks/ governments etc sell their holdings of dollars beffore they're worthless. And ahat of our 1+ Trill. debt. Will UK not suffer the same fate. Where the the new world order whne US can't flex its muscle when it feels like? How will they reacat if they become the impoverished underlings.
Complain about this comment
Without doubt errors, misjudgments and foolish behaviour within the banking structure all played their part. However, to fully understand what has happened, we need to go back more deeply into recent history. The collapse of the "sub-prime" market started 3 years or more ago, it was the weakest point on the avalanche slope. The cause of the weakness, the opportunity within which this particular market could operate, was the exceptionally low interest rate environment existent at the time. The trigger, the bang that started the slide, was the increase in those interest rates. To understand the mechanism, we must understand the pressures behind the increase in rates.
There were two principle factors, most obvious were the Fed anti-inflationary increases, however underlying this were increases by the banks themselves.
The pressures stimulating both may have had a common cause.
If we go back further, we find government attacks on the banking structure. Most well known of course was the attack on UK pension funds which resulted in removal of significant capital from the investment environment. Following this were internationally applicable "anti-money laundering" regulations, making the deposit and movement of capital increasingly difficult. It became a case of "anywhere but in a bank" The final straw was probably the "European Savings Tax Directive" which led to a slow but steady bleed off of private capital from the banks.
All this money had to go somewhere. So it went to property, gold, speculative funds, anywhere but the banks.
Some appeared inflatively in the overall economy.
To counter the shortfall in input the banks increased savings rates.
To counter the inflationary drift The fed increased base rates.
The rest is history - as they say.
Complain about this comment
Dear Robert
I along with other analysts at work have been pondering long and hard over your meaningful words of wisdom relating to your credit crunch and are truly in awe of your findings.
However, this said the true fact remains your words come second place to a more important question........ do you dye your hair and if so, what brand do you use?
Some say you will not tell as this would be advertising and unfair to the opposition but I don't think this would stop a man such as yourself. So come on, are you painted on top or perhaps a wig?
Complain about this comment
It is entirely due to financial institutions such as JPMorgan;Goldman Sachs;Lehman Bros. and their BOARD OF DIRECTORS who are so intermingled with public banking institutions in that they have the same boards with very little change in personnell.
This going after CEOs is nothing more than a false flag, it is the Boards of Directors of these failed corporations that should bear the brunt and any legal ramifications, including jail time for being the common criminals that they are. What a pathetic lot.
Complain about this comment
Whilst Peston and many seem to comment as outsiders being nice about the banks there are a number of key factors as to why the credit crunch has actually happened and the sad thing is that so many of the general public don't have an inkling or understanding of what is going on.
The big thing was that when Labour let some of the financial restraints off the banks, giving them exactly what they wanted they started to run the banks like greasy salesmen, showing forecasted profits rather than real figures meaning that most banks started to then run a sales regime startagy as a business model.
No government intervention to try and cool down the housing market allowed idiotic bankers to believe estate agents and property developers who told them that housing prices would never ever stop rising higher than wages??? Why supposedly clever people would beleive something so stupid is difficult to fathom, but believe if they did, even though I would watch them spout endless tripe on the GMTV sofa I knew the game was up.
The last thing that really id ruin them was the ridiculous insurance loans to be paid with their loans. These bumped up repayments and then when something bad did happen the bank fought like tooth and nail not to pay out on the very insurance that they had paid into. These allowed for short term gains but also meant that people could no longer pay for the very loans they took out.
The allowing of credit to people on benefits was also something that would not have been allowed in the past but under the new system people on Incapacity benefit were allowed to run up huge debts even though they had no discernible assets.
The last nail in the coffin was the ridiculous credit rating system which allowed people to drum up huge credit bills based on the fact that everything had been paid rather than the ability to pay.
The banks have played russian roulette with other people's money claiming that they can be let off the leash and be responsible and now ten years down the line they have proved that they can't.
Although 30,000 people will lose their jobs, if the banks hadn't oversold other people's money in the first place they wouldn't be in this position. Pity the poor beggers who will now have to cure even longer as the counter staff halve to get their own money.
Complain about this comment
How do you calculate 3 times annual pay for someone on performance related pay or commission?
Complain about this comment
Re: short selling ban
I think that blaming short-sellers for current problems is just easy scapegoat. When oil was going up, speculators got the blame, now its coming down in price, anyone suggesting this is due to short selling oil (futures)?
Short-selling shares is risky business, seems to be reported as though it involves making guaranteed profit by forcing price down, clearly this isn't true. If price goes up get shorters get badly stung. If it's so easy to manipulate asset prices (oil or shares) why didn't government short oil months ago to bring price down then or 'speculate' now to push shares up. It just isn't that simple.
Blaming speculators/shortsellers is just an easy excuse to ignore fact that there are real fundamental problems in the economy that drove oil prices up (weak dollar/inflation after rate slashing by fed?) or bank shares down (exposure to bad debt from mortgages?). These real problems need addressed.
I know oil/share prices issue aren't directly comparable but anyone agree that short-selling isn't the real issue here?
Complain about this comment
#15, Peter_Sym, it is only a felony to cry out
"fire" in a crowded movie theater if there is no fire.
Complain about this comment
#22, benagyerek, you have pointed out a bright
spot. Perhaps the US/UK financial mess can drag
the Russians and the Chinese down with us so
that they are as bad off as we are.
I'll bet that the big winners are the Gulf states,
because they don't have to make big populations
content, and because they need us to continue to be
able to defend them.
Complain about this comment
Hi as a HBOS employee it has been a stressful couple of days. Yesterday morning when the share price dropped to 88p we all wondered would we have a job at the end of the day. It's hard to imagine that a company the size of HBOS could be in this situation.
What also doesn't help is the media with there scare tactics they seem to love a story like this I think the likes of Martin Lewis need to think what impact some of his general comments can have on the employees of HOBS and their familes.
It all seems to have calmed down now and staff are starting to look at this as a positive step. Lloyds and HBOS have been looking to merge for years so it would have happened eventually.
Complain about this comment
robert,
WE MAY HAVE TO DELAY, ANY FURTHER SHORT SELLING OF OUR TARGET BANK, WE DONT WANT TO UPSET THE REGULATOR AS ITS GOT SO MUCH POWER?
THE CENTRAL BANKS LOOK DETERMINED TO KEEP THROWING MONEY AT THE PROBLEM BUT WHO CARES WE ARE ALL STILL MAKING LOSTS OF CASH JUST WHEN WE NEED TO.
I UNDERSTAND THE HMRC ARE EXPECTING A WINDFALL AT BONUS TIME FROM ALL THE MONEY THATS BEEN MADE.
COULD HAVE BEEN DIFFICULT FOR THEM WITH ALL THE REDUNDANCIES AT LEHMAN.
LETS HOPE THE FED DONT DECIDE TO TACKLE THE PROBLEM HEAD ON AND DECIDE TO KEEP ALL US MORTGAGE HOLDERS OF 5 YEARS OR LESS IN THEIR HOMES WHETHER THEY WERE MISS SOLD OR NOT, SUB PRIME OR NOT.
THAT WOULD REALLY SPOIL OUR FUN!
WHY ARE BANKS CONTINUING TO TAKE BACK HOUSES FROM POOR FAMILIES WHO WERE BASICALLY JUST SOLD THE AMERICAN DREAM BY GREEDY INDIVIDUALS.
THEY WILL BE NO BETTER OFF, THEIR IS NO ONE LEFT TO BUY THEM AND THE LOCAL GOVERNMENT WILL HAVE TO FIND THEM SOMEWHERE TO LIVE.
WHY DON'T THE CENTRAL BANKS TARGET THE REAL VICTIMS IN ALL OF THIS. THE FAMILIES, THE COUPLES JUST STARTING OUT IN LIFE WANTING TO START A FAMILY, THE INDIVIDUALS WHO JUST WANTED TO THEIR OWN PLACE! WHY BECAUSE THEY WOULD NOT BE SUPPORTING WHAT THEY ARE PART OF................. THE FINANCIAL SERVICES INDUSTRY.
Complain about this comment
To stop short selling dead change the taxation treatment on gains and losses that are created in under a minimum period of time. Essentially, tax the activity until the pips squeak!
Of course it may well kill most financial institutions, but they seem quite good at doing that themselves without legislative help!
I have just read FSA/PN/102/2008 and all the FSA is talking about is a 'Code of Conduct' - smacked wrists all round! Very few teeth, but I may be surprised, when the detail is published before the market opens tomorrow, but, on past performance, I doubt it.
Tax would actually stop it but that is not actually the intent - it looks like public declaration of short positions in excess of 0.25 per cent of ordinary share capital is all that will be needed. (Full new rules to be published in Jan 09 - what speedy action!)
Again the FSA is living in the past of voluntary regulation and itself it needs a good shaking up.
Complain about this comment
THE CRISIS IS OVER
DOW up 617 points
Complain about this comment
ropeadope: I'm certainly not blaming short selling as the basis of the current situation. We all know the reason is the reckless policies that the institutions have been allowed to pursue by governments.
But short selling as a means of making money from the SEs is a basic distortion of the function of a stock exchange and if ways can be found to eliminate it completely, then markets would function much more sensibly. CFDs can go too... Let's get back to BASICS.
Complain about this comment
so i am a fund manager and joe comes to me to borrow some shares. now why would i lend him any shares when i know that when he returns them they will be worth less, impacting negatively on my fund's performance? Now i am paid a bonus only if my fund increase in value, so why on earth do i lend shares?... or am i missing something?
Complain about this comment
The New World Order is indeed The Creature From Jekyll Island, birthplace of the Federal Reserve. Thank you Robert for reminding us of how our financial destiny was set in 1910. Maybe more people should read or re-read this book by G. Edward Griffin and see the light.
Complain about this comment
Robert,
If comments to your blogs in recent days and weeks have shown anything it is a deeply concerning misconception about securities lending and short selling. The first being that these two activities are one and the same - which is not the case.
I know David Rule, CEO, of the International Securities Lending Association, has responded to your blogs in the past. I would encourage everyone reading this to check out their website. ISLA an independent association which represents lenders and borrowers - both sides of the market - and lays out in clear terms the facts and truths behind so much of this noise.
What is worrying though is the FSA itself is bowing to public, or maybe government, pressure in introducing this restriction. It should know better. Greater transparency of activity - absolutely. But has anyone ever seen a financial regulator issue a statement before whereby they both prohibit an activity and declare it is a perfectly legitimate practice at the same time?
What brought HBOS to the point of its merger was not "evil short sellers" in their Mayfair offices but fundamental concerns about the stability of the business. The government, firstly, would not have brokered the deal and, two, overridden the clear anti-competitive concerns, otherwise.
Markets, like most things in life, are about opinions. By restricting the ability for participants to express an opinion (namely "I think that company is overvalued") you only get one thing - an artificial price - and that's no good to anyone in the long run.
By all means insist participants express their opinions in an appropriate manner, and allow those opinions to be recorded and available to the public, but no good ever comes from denying an opinion to be expressed at all.
Complain about this comment
Whilst I understand the importance of financial institutions to our economy. They are businesses at the end of day.
If a normal business was either badly run or suddenly had a bad debt, the banks would pull the plug on it pretty quick.
So why should the tax payer, most of whom don't spend £42,000 on a meal, bail out these financial businesses that have got us into this mess through shere greed.
After all it is not only short selling that has caused the credit crunch, it is the unchecked lending and speculation on everything from orange juice to oil. I don't feel sorry for the speculators at Lehman Brothers or Merrill Lynch et al. For them the chickens are returning to roost.
No I feel sorry for those caught in the cross fire. The people who have or are about to loose, their jobs because the costs for business have gone through the roof thanks to these Gordon Geecho types that believe they are untouchable and can speculate on anything then go out for a fat lunch.
The FSA is proving to be toothless.
Complain about this comment
Dear Robert, I am from Asia and I am not sure whether you were commenting at the time of the Asian crisis in 1997. But at that point in time, there were a number of recommendations by the learned community on the panacea in spite of the complaints from Asia: 1) Short selling of is normal. The reason why the currencies crashed is because of weak fundamentals and nothing to do with speculation. 2) Financial institutions should be allowed to fail. This is normal and a punishment for reckless behavior I bought into all this at that point in tiem but now I am not too sure and I appreciate your clarifications. 1) Why was there a need then to stop short selling of naked positions that were announced by the FSA. Surely, going by the same argument, this has nothing to do with speculation but really to weak fundamentals? 2) Why was there a need to prop up Northern Rock, AIG? Why shouldn’t they be allowed to fail for their reckless behaviour? Of course, they are reasons to do that but are these reasons not dissimilar from the arguments made on the rescuing to the financial institutions in Asia in 1997? Thanks Rgds [Personal details removed by Moderator]
Complain about this comment
Further to my #128. This knee jerk reaction by the FSA, politically inspired, just gets to me.
It wasn’t short selling that moved HBOS’s share price from 980 to 88 in less than a year, it was classic market. There were more willing sellers than willing buyers, ergo, the price goes down. And why? Because they worked out that there was nasty smelly stuff in (and possibly off, but that’s another story) the balance sheet. Sure, in the final days there would have been some shorters, administering the coup de grace, but the rot had set in long before. And most of those final shorters would not have been doing it based on borrowed stock – which indicates the kind of shorting that the FSA's new regulations will not catch. But it makes a great headline..
Complain about this comment
Anyone know where I can get stats on short-selling of HBOS shares? Lots of blame on short-sellers but would like to see some facts. Heard some guy being interviewed on BBC news that shorting hadn't increased recently, just tradiitional firms selling their holdings reduced share price over last few days. Any help on getting stats please, tried googling for info but no success so far!
Complain about this comment
Not a City Boy so not ruing how I invested my last bonus or even thinking about how I might get my next one from my current, or probably, next employer. I'm just a well educated person managing a company with 35 staff...and I've only logged on to say, "Thank You," to this blog both for the informed quality of Peston's lead and the even more valuable opportunity to read the comments of those who are actually living the news rather than just reporting it.
It's a wonderful and informed insight that I am sure I am not alone in valuing enormously.
Complain about this comment
To jolo13, 144, the first point would be that a short seller can no more guarantee the price of the security will fall than you as a long only manager can guarantee the price of a security you buy will rise. Short selling is not a risk-free method of making money. If the price goes up short sellers have theoretically unlimited loss potential.
It is also important to understand the strategies that are being employed by the short seller to make money. The short sale is normally part of a broader strategy, very often one that involves buying securities as well, and very few hedge fund managers take what would basically amount to an outright punt on the direction of a stock's price. The risks are too high.
Secondly, there are numerous reasons for borrowing and lending securities. Borrowing to sell is only one reason.
Thirdly, you'll be remunerated, i.e. paid. In these times where a few basis points may make a difference to the ranking and performance of a fund such revenues are often very valuable.
Final point is the borrower will give you something in return as security. This "collateral", usually high quality securities such as government bonds, is held by the lender in case the borrower fails to return the securities when you demand. The value of the collateral would usually exceed the value of the lent securities.
Like anything, it must be properly controlled and managed, but if done so securities lending is essentially a low risk way for beneficial owners to earn incremental revenues.
Complain about this comment
All financial valuations are based on confidence. How much confidence would you have in a vast company with many trillions of dollars of debt? That is a paradox at the heart of capitalism. The worlds largest company - USA inc - is blithely sitting on an immense mountain of debt, which no creditor could demand without bringing the mountain down on itself. The success of the American Dream is built on a foundation of massive failure - failure to pay its way in the world. But of course size is everything - especially where failure is involved. The US economy is so big it's a law unto itself and can get away with anything. After all, USA inc is "too big to fail" isn't it? But should the unthinkable happen, who would or could bail them out? The Arabs and Chinese perhaps?
Complain about this comment
I'd describe myself as illiterate with regards to high finance, so I'm hoping that someone can answer a couple of questions that have been puzzling me over the last few days.
1) Governments around the world have recently been pouring money into the banking sector. The type of amounts in fact that would allow for massive tax cuts or a greatly improved NHS etc. Now I'm sure governments would do the latter if they could as they are both big vote winners, so obviously they can't because they don't have the money, so where has all this money come from to help the banks?
2) Both the US and UK have now taken control of financial institutions with a view to restructuring them and then returning them to the market. But why should they return them. Surely there is nothing more secure than a government backed bank, so if they become profitable why not keep them? and why don't we see government backed banks as a matter of course? Would this not improve government revenue?
Complain about this comment
An observation...
one looks at the Asian Financial crisis and compares... two very different scenarios however the series of events that have unfolded and the steps taken by governments and central banks are somewhat along the the same lines to that taken by the Asian markets... for instance the bailouts within the financial system, ban on short selling and the formation of an entity to segregate bad debt.
whats next...
Complain about this comment
Are the financial markets going to have their 'Gilligan' moment with regard to the events over HBoS.
This is a posting which I I made on the Nick Robinson Blog on the 17/9 at 10:22 on Your Fickle Business:
'The FSA which was set upi with Gordon Brown was Chancellor must ac now. Dealings in HBoS must be suspended, this is such a false market that nobody benefits. So, if anybody in this godforsaken government is reading this then do something, share dealing in HBoS must be suspended. Message timed at 10:22. Do something you idiots before it implodes completely'.
Now then we have to ask why dealing in the shares were not suspended.
We also have to ask why market sensitive information with regard to the take-over by Lloyds TSB of HBoS was allowed to be given by the BBC through one of their correspondents.
There must be an inquiry as to who supplied the information to the BBC, when it was given, and why the Editors did not embargo any publication because it could be seen as insider information which should have gone to the market before going onto the BBC news.
There is a conflict because surely financial news should be treated just the same as news from the front in respect of our wars.
I do not apologise for being critical of the BBC because the information should not have been released by the BBC until it had been disclosed to the market. This is not the way to run an economy with the BBC being used in this way.
I know that reporters like to have a scoop but sometimes there is a time for judgement and I don't think that the BBC comes out of this at all well.
Complain about this comment
More Captain Mainwaring than New World Order!
The immediate problem for HBOS and the one which brought it down was short selling by hedge funds, which have been "cleaned up" according to Gordon Brown by the FSA.
As of today short selling of bank stocks is banned till January, and probably forever thereafter.
The brave new world of traditional banking will exist without hedge funds and so called investment banks.
Frankly, all those Canary Wharf and Wall Street investment bankers would have been better off going to a betting shop because there they couldn't have levereged their bets. That way they would have only lost their stake and not the bank.
So what defines this post Canary Wharf age of banking? Nothing more than the using your depositors savings to fund new loans.
Captain Mainwaring would have been comfortable with that. His comment to a boy banker from Canary Wharf? Stupid boy!
Let Canary Wharf stand as a monument to the follies of capitalism twinned with that other east end riverside folly the Millenium Dome.
Yes, and the tapayer paid for that too.
Complain about this comment
That the banking free market system has failed is not in doubt. To suggest that it is a failure of the free market system is however being dramatic in the extreme.
The dictatorial communist economic model has also failed dramatically.
The common sense answer therefore is a blend of the two that fits in with the social needs of society not just the greed of a few.
Earning half million pound bonuses for pressing keyboards and making phone calls is obscene and brings life down to a surreal life trying to live apart from nature.
life is about balance and harmony.
Maybe all of our so called leaders should learn that lesson before we sink into anarchy.
Complain about this comment
Twelve months ago I said in this column that short-selling should be banned with regard to the buying and selling of shares in banks and other financial institutions. I am sure many others thought the same. How can it possibly work when the very people who buy shares with the sole intention to then short sell those shares could be the very people that lend the banks the money in the financial markets. The share buyers are therefore able to starve those banks of the very commodity they rely on to perform their business requirements, money. Which financial scenario can be more ridiculous than one where the owner of the shares benefits from starving the very company it has bought shares in of the very commodity that drives those shares down. What has the government now done, banned short selling completely. Therefore, once more poor government and no early intervention into a particular problem means that now all must suffer because of the abuses of a system by the few. Short-selling being a type of share dealing that our own "pest on the BBC" sees as beneficial in addressing the value of over priced shares.
Complain about this comment
So now that the traders in the city have destroyed the independance of HBOS for the own personal/corporate profit for no real good reason WHO IS THER NEXT TARGET
Complain about this comment
Is the current state of affairs in global markets the most internecine of all situations...? Some of those most dramatically affected almost certainly shorted key players themselves even if it was only a 'necessary' hedge strategy
Complain about this comment
The BBC have been very good at telling the world about short-selling well here's another one for you.
A bear squeeze.
Now this is where you sell stock you haven't got to somebody but eventually you have to buy it back to cover your short position. Now when you go to buy back there is now a seller, only they know that you are forced buyer, so they will say want a price of GBP1, then they know that you are desperate to cover so they then increase the price to GBP2, and if you are having to pay GBP2 then you really must be desperate so hey lets try GBP3, and so it goes on.
You are so finished, all those gains you made on the way down gone, just like that.
So, commentators, lets have the classic bear sqeeze explained, because the bankers have got the speculators over a barrel, or the short and curlies if you like. They will be, as Alastair Darling will say, well 'pissed off'.
Come on give us another scoop, or are there now going to be complaints that they used the options market to purchase call options to cover there short positions and now they are making even more money on the way up. What did they say about Mohammed Ali, floats like a butterfly stings like a bee. Study the options market then you may just understand.
Complain about this comment
What puzzles me is that none of the mainstream media this side of the pond are picking up on the story posted by the NY Sun.
http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/
An Ex-SEC Official Lee Pickard is stating that the whole issue with the various banks going to the wall was caused by a decision in 2004 to allow 5 banks to ignore the financial regulations in respect to Debt:Capital ratios.
These 5 banks were allowed to increase their ratios past the legal 12:1 ratio, up to a massive 30:1 or 40:1.
Unsurprisingly, the banks involved were:
Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley
Complain about this comment
If the UK is "well placed to weather this economic storm", as voiced by GB and AD many times, why of the five recipients of the Feds £100bn "loan", is the UK receiving an equal share to the European Central Bank, covering the whole of the rest of Euroland?
Surely if £20bn covers the whole of Europe, we don't need the same? It looks like Switzerland is the only other Eurozone country in serious strife?!
Where are France in all this? Do they just need a proportion of European CB cash? Weve been lied to by our PM and it's time he left - By choice or not!
Bank Of England
European Central Bank
Swiss National Bank
Ban Of Japan
Bank Of Canada
Complain about this comment
I wonder if, now that the FSA has clipped the wings of the hedge funds by restricting, for the moment, short selling, if the latest rise in the ftse is due to hedge funds doing a pump and dump? If you can't trade down, trade up.
This could be as damaging in the long term as the necesary corrections in the market become lost in over valuation.
For the hedge funds this would be the ideal riposte to the FSA as they could cause the market to overheat.
Complain about this comment
Market up 6%, crisis over???!!
The authorities have made a real pigs ear of this one. Can someone explain how you can you ban short-selling? Isn't this a normal part of market activity? Isn't it rational for someone to sell something if he believes that he can buy the same asset cheaper in the future???? Ahhh, but it seems like something that smells suspiciously like market abuse is taking place. Is it my imagination, or weren't the FSA supposed to have brought laws into place regarding this sort of thing???
Complain about this comment
with todays upturn i have a couple of questions.
1. does the increase in share price mean Lloyds now pays more for HBOS?
2. has the deal been done, can HBOS, now not under the same pressure, walk away from the deal?
3. Does the non competition law, invoked in an emergency, still stand?
Complain about this comment
Until now I've been content to read other people's comments, but the actions of this government and the FSA in "temporarily" banning short selling is outrageous!
This is market manipulation of the worst kind, and politically motivated by regulators and politicians who were too slow, too ill equipped or too afraid to use the rules and regulations they already have at their disposal designed to stamp out this sort of thing. If market abuse was happening, the correct course of action is to strengthen your regulators, and not ban normal market practice!
No wonder the ftse has shot up like a rocket. The banking sector is the engine of the ftse, and if you ban people from selling the stocks in this sector, the only thing left for people is to buy... the ftse is index is no more than a house built on sand... which inevitably will come tumbling down.
Buying and selling.... that's how the free market works! Or it did until this group of clowns led by the "greatest post war chancellor" came into power.... (only to be replaced by the greatest post bore chancellor).
I wonder how long it is until Brown claims credit for restoring "stability" back to the markets. What do they think will happen when the temporary ban on short selling finishes... or are they going to permanently protect financial stocks from normal market scrutiny... as well as plough billions of ordinary tax payers money into protecting these banks...
The short sellers did not cause this crisis, they saw an opportunity and took it... if anyone is to blame it is the politicians and regulators who are looking for (as always) someone else to blame.
Complain about this comment
As Monty Python could have said:
FSA: So how do we know this short seller is a witch?
Mob: Well, she looks like a witch.
Short-seller: I am not a witch.
FSA: But you are dressed as one.
Short-seller: They dressed me up like this.
Mob: We didn’t, we didn’t.
Short-seller: And this isn’t my nose, it is a false one.
FSA: Well?
Tabloid newspaper: Well, we did do the nose.
FSA: The nose?
Tabloid newspaper: And the hat. But she is a witch.
Yesterday, the Daily Mirror headlined: “The greedy pig U.S. billionaire” and showed a picture of Philip Falcone of Harbinger Capital Partners, who the august Mirror said had brought HBOS to its knees.
But, on this occasion, the media is merely reflecting the views of an aghast public.
Trawl though the blogosphere and you will find calls to have short-sellers banned from working in public, or to have them locked up, their names displayed in their town’s market-place, with burning stakes, prepared by local authorities, from which to burn the evil wrong doers.
There are arguments for and against shoring. Under normal circumstances speculators only short stock if they believe the share price is too high relative to fundamentals. They are, in effect, trying to second guess the future. As such they provide an important service. They can accelerate market adjustment.
The speed with which the recent events have occurred is frightening, and has spooked us all, but actually, that may be a good thing. History tells us that financial crises of this type compound when they are long drawn out affairs, as happened in Japan before it lost a decade.
The sooner markets adjust, the sooner the recovery can begin.
But that is not to say there are not serious drawbacks with short-selling.
For one thing, speculators earn too much money. Wealth has become too unevenly distributed in recent years. This has helped distort house prices, and perhaps create an environment of greed. Maybe the modern day spend, spend culture has its roots in uneven income distribution, as each tier in the income hierarchy tries to keep up with the tier immediately above.
For another thing, maybe too many bright people have been sucked up into the short-selling thing. Maybe the wealth that is generated from speculation is out of proportion to the questionable benefits it brings. The City of London may thrive because of its relaxed attitude to speculation, but does that really benefit your average Brit?
Maybe, ultimately, the answer is to tax profits from short-selling more heavily.
But consider this:
The witch-hunt aimed at short-sellers could distract us from the real problem. If short-selling is fundamentally damaging because it is a form of what Roger Bootle, the head of Capital Economics, calls ‘Money for Nothing,’ so too is property speculation. And quite frankly, a big chunk of the UK’s population are property speculators. Sure, the buy-to-let brigade are speculators, but so too is every person who has a home which is bigger than they need, because they see the spare space as an investment. Every person who buys a property with half an eye on its expected future price is a form of speculator.
And no one is more guilty of encouraging this practice than the media. Some of the newspapers which have been most vicious about short-sellers have talked up house prices shamelessly in the past.
If the backlash against short-sellers blinds us to the true villains of this episode, then that would be disastrous, and merely provide the fuel for the next bubble.
http://defaqtoblog.com/iabn/2008/09/19/authorities-turn-evil-shortsellers/
Complain about this comment
IT'S ONLY OTHER PEOPLE'S MONEY...
alterego2 (#129) "I was astonished to find out that my own shares in companies could be 'borrowed' by institutions to short sell. This is scandalous."
Indeed, and it's probably something which all too few people with nominee accounts have appreciated - i.e. that they've given their brokers the right to be magnanimous with their investments as well as voting rights and more. Do the true owners of the stock receive the fees which the brokers charge the borrowers (note, I'm referring to nominee accounts here)? The answer is no to the best of my knowledge, but surely this is why these brokers are so keen to electronically hold investors shares? Anyone care to justify this practice to savers? The chutzpah, surely, is that brokers charge the nominee account (or ISA) holder fees for their 'services'.
Apart from the fact that money just IS debt these days this, in the past (and again, imminently if this isn't stopped?) had dramatic repercussions. Will these recent Fed/BoE/ECB/SEC/FSA actions be enough?
Complain about this comment
are we watching our high street banks go the same way as the local shops.butchers bakers,green grocer etc: where we the consumer ended up with supermarkets and nex comes superbanks, with very little or eventualy no choice at all?
the baker gave us bread that lasted and didn't go off the next day and the butchers and green grocers gave us fresh meat and ripe fruit!
lets hope the new superbanks actualy have the money this time and its not more of the £9.00 they lend out for every £1.00 of ours they actualy have !
poor Mrs T wanted a nation of shopkeepers and it looks like she got a nation of supermarket!
jonny7
herts
Complain about this comment
APPEARANCES
cyberjonny7 (#171) "Mrs T wanted a nation of shopkeepers".
That's what she led most people to believe, but in reality, Keith Joseph (and the rest of his Trotskyite 'liberals') were in practice Hayekian (Austrian School) anarcho-capitalists whose sole objective was the destruction of our national-socialist, welfare state in order to be able to make money more easily. National socialism tends to be rather regulative (see China, N Korea, old USSR) so it's anathema to Neocons. Hence all the Political Correctness and 'Human Rights' chicanery - and we have been deluged with it.
It's a highly duplicitous game is politics.
Complain about this comment
appearances (172)
thankyou for a great reply.
we have without doubt been deluged with it !
but such an artful subterfuge offering to the so called gods has not gone un-noticed, perhaps they need to be a little more duplicitous in the future or we may all wake up at once!
then who would put us all back to sleep?
jonny7
Complain about this comment
I think the expression of New World Order is one we will continue to see and hear and I think it answers all the impossible questions that have been posed by this financial "meltdown". Such as why the UK and the US goverments should be helping the rich bankers (the culprits) with our taxes and not the thousands of "soon to be homless" victims and this irresponsible behaviour.
Complain about this comment
cyberjonny7 (#173) It's hard to stand up to organised anarchism when it's systematic nihilism and everyone's led to believe that it's 'freedom'. Thatcher talked of 'the enemy within', yet looked at objectively, the alleged 'enemy' were her de facto assets (e.g. Militant Tendency) in that they excoriated 'Stalinist' systems which helped undermine our once respected Civil Service (note how Thatcher's brood treated this as akin to the soviet GOSPLAN). National socialism, both here (Old Labour) and abroad (in the USSR etc) has been consistently vilified for decades in a truly Orwellian fashion (Orwell was a Trotskyite) making it inevitable that Old Labour never stood a chance electoratally - hence neocon New Labour being no different from the Conservatives. It's irrelevent whether any of Thatcher's activists directly coordinated the discontent in the 70s (certainly 'the evil empire' of the USSR was later painted blacker than black by both her and Regan) but I'm aghast that so few people see that her party's anarcho-capitalist backers were the true beneficiaries as she asset stripped the welfare state/public services whilst egregiously making out that this was all for the benefit of the British people. Jeffrey Sachs and his Chicago School friends conned the ordinary Russians th same way in the 1990s - a select tribe of oligarchs benefitting at the Russian's expense.
Not only did Thatcher's tribe (and Blair's was/is no better) destroy family life for the indigeous population via their nihilistic attack on the 'nanny state' and 'society' (socialism), but they now give bad press to Islam as 'fascist', patriarchal/sexcist because it's anti-usury and pro-family, which is a major threat to their beloved markets given Muslims' high Total Fertility Rate (if they remain religious) and Liberal-Democrats' below replacement level TFRs eroding the indigenous population.
If one asks whose interests Muslims really threaten one begins to see more clearly the true drivers of the so-called 'war on terror'. But as it's highly politically incorrect to even think such thoughts, expect self-censorship.
Complain about this comment
Any potential banking bailout heading our way is a case of the poor missing out on funds that should be used to help them. The massive wages paid to big business figures actually makes the average wage look respectable-£24 000 a year, here in Scotland. I live in the highlands and believe me the majority of ordinary people bring nowhere near that amount into the house. With banks tightening their belts right, left and centre we will see small business loans and other business development revenues drying up, we will see innovation stifled and our economies eventually missing out on this talent. I think the moneymen need to take a good, long look at themselves, their working practices and ask themselves if a bit of wealth distributuion now would, in the long run, save us all from an avoidable burach.
Complain about this comment
jadedjean 175
thankyou again for a most informative response to my post.
do you think mrs T's north sea gas might bail us out now and all our fuel bills will fall ? have they been saving it for just such a time or has some select tribe got thier greedy hands on it ? how many british people did benefit ? i,m sure you'll have the answers.
ps,
self-censorship is the only way forward in a "free speach" society.
Complain about this comment
stonebloke (176)
small business will most certainly suffer as reult! wich leads me back to the point i was making (171)
i' sure we will see some very big winners at the end of all this but they won't be the ordinary people!
makes one wonder whats behind it all?
i can't see where all the money is comming from to bailout these massive financial wizards!
If i had a tool hire shop i could only hire out the stock i own,if i'm a bank i can lend much more than i actually have!!!
am i missing something here????
Complain about this comment
Many people tend to spread negative news regarding payday loans, they believe that payday loans part of some conspiracy is to trap people in debt. It’s bunk, but it persists anyhow, and so do conspiracy theories about the Illuminati. Part of the Illuminati conspiracy canon is that a shadow group runs both the banks and most world governments. The cabals of people who believe in such things probably think the Illuminati are involved somehow with payday loans too. The growing speculation of bank nationalization after the Obama inaugural leads a lot of conspiracy nuts to think that the new world order is already taking over, and Obama has been making Personal Loans to our supposed soon-to-be overlords.
Complain about this comment
#60 supercalmdown wrote :-
"FTSE will probably touch 4600 by xmas - now tell me I'm wrong..."
well FTSE was around 4000 at xmas - oh how wrong you were - LOL :-)
Complain about this comment
View these comments in RSS