Smack smack - we're dead
If the patient is the financial economy, here's a smattering of the latest worrying symptoms.
1) National Savings has been overwhelmed by calls from anxious savers wanting to lend their money to HM Treasury rather than keep it in a high street bank. And there's also been such a rush to place deposits in taxpayer-owned Northern Rock that it's had to suspend its more attractive products and is turning money away.
2) There's been a flight by some British savers to the safety of Irish banks, where deposits are 100% protected by a government guarantee. And here's an odd thing. Yesterday Ulster Bank, a subsidiary of Royal Bank of Scotland, was given 100% deposit protection by the Irish government, on the same basis as the independent Irish banks. So it's now safer for both wholesale and retail depositors to put their money into Ulster Bank than into RBS's NatWest subsidiary in the UK.
3) Austrian, South African and US mints are working 24/7 but still unable to press enough gold coins to meet soaring demand.
4) As I disclosed on the Ten O'Clock News last night, British banks urged the chancellor and the governor of the Bank of England at a hastily arranged meeting on Tuesday to please please let them swap their car loans, their loans to companies, their commercial property loans for cash from the Bank of England - because of their deep concern that wholesale funds are draining from the system. The banks felt they received a sympathetic hearing from the chancellor and a relatively hostile one from the governor. The banks fear, perhaps guiltily, that Mervyn King's understandable desire to see them spanked for their past sins and deterred from repeating their errors could turn out to be a capital punishment (smack! - no more banks).
5) Those same banks told the chancellor that their real vulnerability isn't the instability of retail savings, or the fear that the likes of you and me will move our modest amounts of cash. What really worries them is that huge wholesale deposits made by professional money managers are harder and harder to retain. And what the banks warned is that the Treasury may find itself having to follow the example of the Irish by guaranteeing retail and wholesale deposits (though the Treasury is reluctant to do this, because of how it would automatically lead to a ballooning of the national debt).
And now for the complicated and scary stuff. Today is the beginning of "auction season", when the International Swaps and Derivatives Association starts a series of auctions to settle who pays what to whom on a plethora of credit derivative contracts relating to businesses that have gone into default.
It's settlement time on those humungous insurance policies for corporate debt, called credit default swaps, which I've mentioned to you as being another potentially lethal flaw in the financial economy.
In the coming three weeks, payouts of hundreds of billions of dollars may be made - or at least demanded - to cover losses arising from the defaults on the debt of Fannie Mae, Freddie Mac, Lehman and Washington Mutual.
Sandy Chen, the analyst at Panmure who's been a smart predictor of credit-crunch accidents, estimates that payments on Lehman's battered bonds could be as much as $350bn.
Now the problem here is that for every beneficiary of these payments, there's an underwriter - those who provided the CDS insurance - which has to find the cash. And, as I've pointed out, this was a largely unregulated market, so the great fear in markets is that some underwriters have insufficient capital and will simply collapse when the claims are made.
That in turn would hurt financial institutions expecting to be paid out on their CDS contracts and damage others with separate exposure to the collapsed businesses. The shock to the system could be very severe.
To compound the current anxiety about all this, the CDS market is so opaque that it's impossible to know right now who is holding the radioactive baby.
This gigantic CDS mess has contributed to the seizing up of money markets in recent weeks, the tendency of all banks and financial institutions to hoard cash - because no-one knows who or what may be vulnerable during the CDS auction season.
That, as if you needed telling, is just one more reason why the US $700bn bank bail-out is no panacea, even if we should be relieved that it has passed its first Congressional hurdle.
The financial weather ahead remains stormy and unpredictable.
PS. The most significant British corporate announcement today was that Marks & Spencer is slashing capital spending, It was planning to spend up to £900m this year on improving stores, its supply chain and computer systems. That's being reduced to £700m - and next year it'll be slashed to £400m.
In other words, M&S will be placing far fewer orders than planned with other businesses - which will have a damaging impact on their profits and on the prospects for their employees.
That's a graphic illustration of how the horrors of the financial economy are infecting the real economy.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~19~RS~)
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Ah, such positive news to start the day.
Didn't realise about the CDS auctions, that could be very scary. And I was starting to think we might have seen the worst of this now.
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This comment was removed because the moderators found it broke the House Rules.
Robert - If we come out of this with the Hornbys and Goodwins still in place and still earning their massive salaries then most people will be furious.
Punishing the banks isn't sensible. Punishing those that got us into this situation would be. In fact it is perhaps an indication of how little honour there is in the financial services sector that the CEOs and boards of the banks haven't already resigned and publically apologised!!
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Well a massive recession is a given. For me the only question left is:
Deflation or hyperinflation?
Will we just destroy money left right and centre, or do we have to print it 24/7 to get out of this?
It may well be deflation THEN hyperinflation.
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This is just small fry
Its when the governments start to go bust that it all caves in
Government UK has not got that long with whats coming so putting your cash in the treasury in not a good idea either.
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I can't help thinking that what we are seeing are just the visible symptoms (although sometimes they are not as visible as they might be!) of major shifts in the global economic landscape.
The shifts are happening (they started years ago and are continuing) and our economies have to make uncomfortable adjustments to new realities.
The most that governments can do, I suspect, is to make the process of adjustment less painful. A bit like a surgeon chopping of a diseased limb before the contagion infects the patient's whole body.
For some good news check out last night's football results!
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Pharmaceutical stocks are usually a safer haven in troubled times.
BUT this time they have problems of their own as I explain on my blog.
My mattress is a bit lumpy at the moment, given all the gold coins I'm sleeping on.
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Robert at what point do countries start failing?
The numbers in this crisis are so huge - did the fat cats really earn all this in bonuses ... where has it all gone.
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To all who are about to read and post to this blog?..
?IT?S ALL ABOUT ?THE FRAUD? THAT IS FRACTIONAL RESERVE
BANKING?..STOOPID!!!?
Go research ?money as debt? and find out about the greatest hoax of all time. Don?t be a slave to debt for the rest of your lives.
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How is a bankrupt western economy with its love of welfare and bureaucracy going to compete with the far east economies?
It really is a wake up call to western governments. We can no longer afford your grandiose ideas.
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So the main street banks have been at their work again,little wonder when computer freaks ate running these major institutions and as long as they can create the most complex financial model to come up with some complex product which no one understands not even the computer nerd this is what the chief executives of banks run on,the add for the nat west is not so silly this is what really happens albeit nat west are one of the worse offenders until we get back to old fashioined lending where the local manager knew who he was lending to and what was going on the community this practice will continue,also there is strong argument that retail banks should be prohibited from doing commercial lending.There is no doubt that one of the major banks has a black hole on its books ammounting to approx 15 to 20 billion,what gordon brown should be doing is giving the banks 24 hours to come clean about the size of their black holes if they dont then when it comes out the executives should face 20 years in Prision or 20 years on the dole and executive who have been involved in dreaming these mickey house financial models should be barred from working in an financial institution for te rest of their lives,what has gone on in these banks makes Nick Lesson look like the uriah heep,i tell you how can two different branches of the same bank two miles apart encourage developers to bid against each other to drive up ther price of land only a numskull wouldnt realise the long term consequences of this stupid system of banking and as long as these banks were growing business either god or bad so that they could look good in the beauty parade of the city and off course cream off large false payments its a disgrace.The old saying is a sale is not a sale until its paid for should be drummed into fat cat bankers that all loans are dodgy until they are repaid
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Oh yes... credit default swaps. These little toxic gems have been widely regarded as the elephant in the room for quite some time, since atleast last November infact.
Mr P. omits to mention that these 'insurances' where traded in much the same way as all those CDO's and MBS's where. A bank or hedge fund that had been thinking that so far they had got away with maybe about to find that "oh no they haven't!"
And as for that daylight robbery masquerading as a rescue, the Poulson Plan, it will do nothing...absolutely nothing to address the CDS problem. Neither Poulson or 'Big' Ben have referred to it once in recent weeks. All they are going to do is print money for banks who will then go speculating on the commodity exchanges..OIL and GOLD inparticular and rack up the profits for themselves and misery for the rest of us.
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Time to invest in Gold (even shares in a gold mining group) may be a good bet - all the prices are low at the moment. Alternatively the banks (along with the bank of England AND the present government) should fix interest rates low (5%) for every £1 borrowed - force ALL money lenders (private and corporate) to do the same and freeze all charges on tax, be it corporation or council etc.
The sooner our "financial gurus" stick their necks out and do something Pro-active and not Re-active the better for the country and every "honest hardworking (not work shy) citizen"
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Ah, so now we have the reason why Paulson was on his knees. CDS's are going to fail big time eh ?
I think your point earlier hit the mark spot on. Smack... No more banks.
I hope this is true. I think all of the current banks need to fail, they've failed to be banks and turned into sales companies for insurance, credit cards and other dodgy financial instruments. That's why I will never, ever use a bank again. And no I don't have a credit card, nor a mortgage. I saved my money and what I cannot afford I don't have.
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Great news for first time buyers!!
Sale now on!!
Hi ho silver lining?
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Austrian mints eh?
On the CDS auctions, isn't this effectively just moving around the losses already announced, albeit in an unpredictable and therefore unsettling way?
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@5:
The UK Government going bust? Not to put too fine a point on it, but I don't think so!
The UK Government is has the longest continuous credit record in the world, and has NEVER even DEFAULTED on any loan payment. That's why Gilts are regarded as so safe.
The UK Government has survived every economic disaster without so much as a blemish on its credit record - the Wall Street Crash, World War II, Black Wednesday...
It'd take something considerably more serious than this to cause the UK Government to collapse. You're talking about the entire country going bankrupt!
It's this kind of scaremongering that contributes to the problem.
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Most of the ills caused by shifting money in the retail sector can be fixed by three moves.
Firstly: the one Gordon Brown got WRONG yesterday - the UK must issue the same guarantee as the Irish government, as must all other European central banks.
Secondly: Give a Tax benefit for keeping savings in a single institution for more than (say) 3 months at a time.
Thirdly: Put UP interest rates to reflect the inter-bank rate i.e. to at least 6 percent NOW. If this is not done rate-'tarts' will rush to the highest interest rate. Most of the people moving the small sums of money will be living on their savings and will be under extreme pressure to get the best deal.
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Robert,
Thanks ... scary stuff indeed especially if, as you say, the CDS market is largely unregulated.
Can anyone give an estimate of the billions (or trillions) of CDS contracts up for settlement ... just to add perspective to the UDS 700bn proposed bailout!
Who are the major CDS players? Can we start naming names or do we have to wait until the Serious Fraud Squad wakes up?
More info please!
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Why worry if countries start failing, the Chinese and middle-eastern sovereign wealth funds will happily buy them out at bargain prices...
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As the biographer of Gordon Brown (and a reporter who is certainly less critical of the government than he could be), does Ropbert Peston stop getting all these scoops when Labour lose the next election?
Is his future inextricably linked to GB? I can't remember hearing of him before GB became PM and he started getting high level info, first. Now he's a media superstar -
I can't help wondering if it all goes away when Gordon does...
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8:
Fat cat bonuses don't get anywhere near these numbers. Not remotely. But they will get the blame because: they are visible; we are envious; and we don't want to blame ourselves.
The primary problem is that the public have borrowed vast sums against houses whose values have now slumped (and are in many instances virtually impossible to sell). This is where the real value chasm lies.
Second, our over-indulgence on imported energy has sucked trillions of dollars of liquity out of the system as oil prices soared from $25 to $100/b.
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Once again it seems that Mervyn King is weeks behind the curve. Sure, the bank's have fouled up, we all know that. Everybody is guilty: consumer greed, our buy now pay never mind set; banker's arrogance, hubris and misaligned interests that create clear conflicts of interest; regulators' and policy makers' incompetence or ineptitude. However, can't Mervyn see the nuclear winter descending? The banks need liquidity and re-capitalisaton urgently. We can now see quasi protectionism descending via the Irish governments naive move. None of us can afford to revert to the days of wholesale trade barriers.
The time for reckoning, correcton, punishment and a return to basic (did someone say Victorian?) values will come. Now is the time to act boldly. Get on with the immediate imperatives Mervyn, Gordon and Alistair. Extend the Special Liquidity Scheme to at least March 2010, include the rest of the trashed assets (credit card debts et al), get the inter bank market working. Hang the consequences for the PSBR; as with the US £700 bn this would not be direct spending, most of it should be recovered - eventually. Otherwise we will all hang together. Happy Christmas anyone?
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re my post @ 2 - the bbc moderators really do suck!
this crisis is going to get a lot lot worse. anyone interested to know more should google "veneroso second wave" and read the first two results.
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10:
Exactly.
The only logical way ahead is to cut the welfare and bureaucratic overhead. I have been saying for a long time that bureaucracy has become an unaffordable waste of resources.
But don't expect logic to rule here. The likeliest thing that politicians and bureaucrats - and voters - will try to do is to keep the system going by imposing ever-higher taxes on the private sector.
The goose may get strangled in the chase after ever fewer golden eggs.
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Hopefully there will be a revolution and the people will overthrow the privately owned central banks (the Fed, the ECB and IMF) for creating this illusion of wealth.
Then perhaps we will all start to listen to the Austrian School Economists!
Note to Robert:
Please make some contacts at the Mises institute, they have predicted this mess for years and years and nobody listened. It is high time that the financial press took note!
http://www.mises.org/
You can get in touch with Lew Rockwell:
http://www.lewrockwell.com/
I'm sure he would make time for you!
Then perhaps you can talk about the bill to end the Federal reserve:
"Congressman Ron Paul introduces HR2755 - Abolition of the Federal Reserve Board and repeal of Federal Reserve Act of 1913"
Instead of covering the smoke an mirrors of this flawed and ineffective bailout plan.
The US and UK economies of consumption, and fictional wealth generated by the banks is coming to an abrupt end. It is high time we restart our economies to produce more and consume less, with a sound monetary system.
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just goes to show that the 'sub prime' housing market which is being blamed for absolutely everything is only a bit player in this whole debacle
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Anyone on here think its Ironic that the safest place for money is in property? Bricks and mortar cement (excuse the pun) your place on the greasy pole.
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The following questions have been raised several times but NO ANSWER.
1. Why can't Wholesale market simply be bypassed. BOE lend money to retail Banks on proviso a fair proportion is lent to House purchasers and businesses. There is then no need for this lack of confidence between banks rubbish.
2. Why don't 'strong' banks simply publish their current assets / liabilities and exposure to risky loans? They would then be very safe, the dodgy ones wouldn't publish, so everyone would know who they are and they might go to wall or be subject to takeover.
A big problem is that people in Wall st, The Stock Exchange, Banking and Government and major investors KNOW the situation. This is kept from smaller shareholders who can lose everything. Any Executive who says BANK is SAFE (Bradford and Bingley / HBOS?) should be jailed for false utterances as they clearly knew the bank was NOT safe.
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Dear Robert
"ARE THE RATS DESERTING A SINKING SHIP"?
WHEN BROWN BLAMES AMERICA --- IS IT SINKING, ?
The fact is this is the first honest remark he has made, where are the life boats, a true fact is, when America passes this bill,NO MONEY will be leaving its shores, so we'll all be in the same boat, whose going to bail us out then Britain is already Bankrupt under Labour, and PFI is begining to bite into local authorities fianace
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23:
Brilliant post. I hope RP passes this on to GB!
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Further to my earlier post, isn't it actually the monolines who will cop it for the Bond defaults? And if the resulting payouts damage the monolines' own credit ratings, this could undermine the remainder of the Bonds market
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Good points Robert, we won't know the true extent of the mess until the end of October.
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A question for RP and other bloggers: Rather than an unfair bailout, wouldn't it be better to get financial institutions to renegotiate their mortgages with 'subprimers'? Then repayments continue and people don't lose their houses. This is what usually happens when countries can't pay their debts.
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Hands up who thinks this so-called crisis is hilarious? ME! I care not a jot about losses to investors who have made money on trading money, or the City lackeys who grow fat on selling money to each other. I feel sorry for hard working people who may be thrown out of work because of banker's incompetence, but that's it. As for the bankers and dealers who hopefully have lost their jobs - good. Get a proper job instead. I recall when Thatcher threw out of work tens of thousands from inductries like steel and coal - and the City investors welcomed it as clearing out dead wood. Well, now we are clearing out the financial sector dead wood, and investors losing money are learning the meaning of the fine print - the value of investmenst may go down as well as up. It's sickening so many come carping to the Govt DEMANDING a handout. Typical selfish, greedy capitalists.
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#17,
And what would have happened in the 70's if the IMF told us to bugger off?
We are already bankrupt, your about to find out too.
Labour spent the lot.
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#17 - you are right, tere is zilch chance of the UK Govt going 'bust' - or US. they have been known to inflate their way out of the odd problem though, that has much the same effect for a Bond holder
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Sounds like were in for a bumpy ride. You make some good points Robert, all this hoohaa about the US bailout is just a side issue. Somewhere along the line 'reality' will enter the market, and this means letting those companies that have screwed-up go to the wall. These CDSs are pretty weird 'products'. I don't pretend to fully understand these financial 'products', but hey! that just means I know about as much about them as the bankers who invented them. We truly are in a mess.
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#23
I cannot comment of Mervyn Kings performance simply because I don't know the full details.
I think it a bit rash for people to keep critising the Bank of England unless they have the full details of all sides.
My guess is there is a hell of a lot more to Mr King being cautious than meets speculation or casual critcism.
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It is great to have someone like Robert Peston who makes the facts and the situation so clear.
Thanks Robert for a great blogg.
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RE: 17 jdennis_99
"The UK Government is has the longest continuous credit record in the world, and has NEVER even DEFAULTED on any loan payment. That's why Gilts are regarded as so safe."
Are you sure about that? My understanding is that the USA extended huge loans to the UK towards the end of the First World War and the UK subsequently defaulted on the repayments. That had consequences in the early part of the Second World War when the USA required cash-on-delivery precisely because of the UK's previous failure to pay it's debts.
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Rather than an unfair bailout, wouldn't it be better to get financial institutions to renegotiate their mortgages with 'subprimers'? Then repayments continue and people don't lose their houses. This is what usually happens when countries can't pay their debts.
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Here's a little snippet of info that helps show just how stupidly optomistic (insane as Mr P. put it yesterday) the markets are at the moment. JP Morgan have put out a note regarding the next wave of asset writedowns this autumn. In no particular order:
Lloyds £4.5billion
Deutsche £3.6billion
UBS £2.1billion
Barclays £2.9billion
Soc. Gen. £2.1billion
The intresting one there is ofcourse Lloyds. Just how are they going to afford that HBOS take-over if they keep taking hits like that? Borrow the money?
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This is now the real crisis. CDOs caused all the mess up till now - CDS - about $54 trillion of them are why there is no chance of getting the banks to loan to each other. It is human nature to want to do something to fix a problem but when the problem is not fully understood there is no chance of fixing it. CDSs now account for the equivilent of the whole world's Gross Domestic Product - they were unheard of 10 years ago - this looks like a bubble to dwarf the housing bubble that it was built upon. Not only will our children live their lives in serfdom, but also our grandchildren and great-grandchildren - the money still exists, it hasn't disappeared - it sits in the pockets of the very wealthy bankers who like whores sit crying on our shoulders asking for expensive gifts and trinkets to make them feel better. Let us not give it to them. Let us rather shake the money out of their purses and give it back to the system that needs it to save the futures of our kin folk!!
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29:
You raise some extremely pertinent questions, and the lack of answers is worrying.
The sub-prime bomb detonated more than a year ago now, so one would think that there has been sufficient time in which to identify the scale, nature and location of the toxic assets.
It is interesting to contrast, against the general slump in the bank sector, the robust share price performances of a small number of super-robust banks. The BBC website pointed this out this morning.
It may be, of course, that Paulson, et al, do know this information, and have calibrated the rescue plan accordingly?
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#9 BankRSlicker
Googling 'Money As Debt' threw up some very interesting links.
Here's a good article discussing the issues raised.
We may well be all doomed!
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It was apparent with the first push for a so called bail-out bill in the US they were desperate to get if thru before the end of quarter. You go home at the weekend if you can. Target missed, in part it would seem due to Nancy Pelosi showboating and Bush not keeping the troops in line, next stage entered. The second attempt looks as if it will go thru now but too late to save carnage which could have been avoided. Not that there will not be carnage anyway, but some could have been avoided.
Fear remains the driving force alround in this. The US bill was never meant to sort everything, it was keeping the boat afloat and get to habour. For those who say let the boat sink the problem is insufficient lifeboats. The longer it goes on the higher the fear has to get. It is very very simple.
It is interesting that MandS are already feeling it. They usually do, they did at the start of the nineties. They are an early warning.
For those who do not understand, and many still do not seem to understand, what happens to a private sector business when credit dries up in the system - it is very simple. Business is based on trust and without trust business does not occur. When somebody asks you to do or supply something for them and then does not pay, or pays so late it damages you, then you stop or reduce dealing with them. This situation also leads to a demand for payment up front which takes yet more money out of the supply system reducing the efficiency of the economy. Many supply chains in practice rely on the end of the chain being funded by the links. Those at the end of the chain therefore do not have the funds to pay pro forma, such capability having been reduced by the competition model to the benefit of consumers.
Far from learning from the events that resulted in New Labour being elected in the nineties Brown seems to be heading for a yet more perfect storm which can only damage the economy. The Brown experience will be highly unpalatable. Consumers had better get used to paying more for almost everything.
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I think CDS losses may lead to a crisis in the hedge fund industry (which used CDS to take highly leveraged net long credit positions).
I don't think the CDS losses will lead directly to major problems at the banks (but a collapse in one or two hedge funds would cause real problems for some banks, per LTCM). Although the banks do write the vast bulk of these contracts, they are very careful to maintain almost zero net exposure to the underlying credit risk, and their counterparty exposures are fully cash collateralised on a daily mark-to-market basis.
However, if hedge funds are faced with big payouts (and, equally importantly, big margin calls) on these CDS contracts, they will suffer a liquidity crisis. Hedge funds are also heavily leveraged (like banks, but without the deposit guarantee), so a run on them has to be a big risk now.
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RE #17
"The UK Government is has the longest continuous credit record in the world, and has NEVER even DEFAULTED on any loan payment. That's why Gilts are regarded as so safe."
SO READ THIS on the state of the western worlds finances.......
"That possibility is still deemed to be quite low. But the ultimate financial question ? until recently, unthinkable ? is now being asked. Yes siree, the mighty US government could default. That?s how much the world has changed. (Daily Telegraph 20th Sept)"
Now If it is now possible for the might US please dont be Niave enough to belief that our small economy could ride it out.
Scaremongering no - fact yes - western world government debt is out of control and now we're just about to add trillions too it
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Guarantee all deposits. This is becoming a competition between economies. Once one country (Ireland) sets itself up as a safe haven, it draws in liquidity from everyone else, but in this case particularly the UK. By doing the same, UK will not only reverse the flow to Ireland, but draw in liquidity from other countries. The only logical outcome is that most countries will end up doing the same. The risk then shifts back to credit, where it belongs. The CDS market may be a time bomb, but transferring risk to depositors will simply accelerate the withdrawal of liquidity and set it off sooner.
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#34 - there are umpteen other ways they could use the money - by investing in the Banks in return for new shares - as many have pointed out - by buying existing shares, buying repossessed or unsold houses, thus addressing the original source of the problem, loaning the money to productive companies, capitalising a new 'good' bank(s) etc etc
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If fraudsters nick money and commit fraud and go and live on the 'Costa del Crime', their bank accounts can be frozen and the assets recovered.
Maybe we should go after the Stan O'Neals of this world and hoover up the millions from their bank accounts to help pay for some of this clean up....
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I am Irish, but have lived in Scotland most of my life.I have my money in the RBS and I don't think I'll move it. Am I being stereotypically stupid?
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Is this Gordon Brown that is worried about the competitive implications of the Irish bank guarantee.....
Not the same Gordon Brown that
1. nationalised Northern Rock and allowed it to hoover up deposits at competitive rates from its branch in Dublin with a 100% guarantee from the UK taxpayer
2.
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Is this Gordon Brown that is worried about the competitive implications of the Irish bank guarantee.....
not the same Gordon Brown that
1. nationalised Northern Rock and allowed it to hoover up deposits at competitive rates from its branch in Dublin with a 100% guarantee from the UK taxpayer
2. oversaw a bank run across the Irish Sea that provided a powerful demonstration effect for Irish savers.
Ho Hum. Hypocrisy doesnt begin to describe it.
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@36:
While I appreciate your point - the State has needed help along the way - we're still a long way from bankruptcy.
Of course, Labour have hardly done anything to ease the situation - they've been spending money like it's going out of fashion, and now we don't have anything left. The easiest way to get out of this mess would be to ease fiscal policy as well as monetary, but there's no free cash - thanks to Gordon.
My point is, the State has endured greater trials than this, and it will endure this. Yes, we might need some help. Things may not be the same afterwards. But talk about doom and gloom and the sky falling in won't help to restore confidence in the system - and it is that loss of confidence which is damaging it more than anything else.
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Credit Default Swaps aren't the elephant in the room. They are the monkeys in the parlour. The elephant in the room is our current financial system, fractional reserve banking, or whatever you would like to call it.
Soon the monkeys are coming into the room where the elephant is.
We are in totally uncharted territory and nobody can begin to imagine what will really be the outcome.
It is helpful to discuss the possible scenarios here though. Thank you Robert. Shame you don't read any of the comments!
P.S. I think you said "of" when you meant "or" in line two of worrying symptom 5. I like that. It shows you are human like the rest of us.
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#41 - I believe the repayments were 'renegotiated'. We missed a month or two on our repayment of the 1946/47 US Loan too - the final installment was made last year I recall.
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It is not only the financial institutions and large corporations who are suffering because the banks are sitting on cash. One bank has been sitting on £1000 destined for my account for several days while the sale of a buy-to-let property I own has been delayed for two weeks to date because the bank providing my purchaser's mortgage has also been sitting on its hands. The cost to me and my purchaser has been considerable. My solicitor tells me that he has seen several examples, where house sales are being held up for this reason. My purchaser tells me that the bank is now refusing to answer her phone calls enquiring after progress and insisting that she visits the bank in person. As she has a busy job, this is extremely difficult!
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@23.
what makes you think everyone wants the interbank working again?
Under no circumstances should we try and continue the facade that has engulfed us in the last 15 years, or even 60 years.
You mention Victorian values - newsflash but not everyone has a new car, owns a house, eats out 3 times a week - in fact a lot of people are used to living in their means, which is frugally, and that number is becoming greater by the day.
Let the false debt lifestyle die. It's about time people returned to an even footing, no matter how painful that may be.
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What I see as being really scary is the sheer inability of the U.S economy to sort itself out.
$700 Billion of new government debt at a time when the U.S government is already so overwhelmingly endebted was not enough.
Now we have tax payer tax cuts and other tax concessions for small buisnesses.
So, at a time of increasing the demand on the tax payers, they are actually reducing their demands on the tax payers. It seems the solution to a debt bubble is ... more debt.
It is clear that the U.S Government has no idea how on Earth it is going to repay this debt. It has no idea when it will repay this debt, in short it can only be concluded it does not plan to repay this debt.
With this debt and all these toxic assets carefully stuffed into the naughty corner, they are going to inflate it away.
This will panick international holders of these debt obligations and their will be a run on the U.S dollar.
The linkage between U.S dollar and Oil will be lost because of devaluation, and from that point on the U.S dollar will be lost.
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Why the change to the title of the blog?
I'm sure it was orginally 'Where Might The Next Problem Come From' (or very similar) - was that not quite scaremongering enough so we've changed to 'Smack Smack - We're Dead' just in case anyone didn't get the point???
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Only the banks themselves know what exposure they have to toxic CDS such as Lehman's.
And if they are not forthcoming with that information should Mervyn King be blamed for not being warm hearted? Of course not.
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48:
Glad you pointed out the way in which banks match their positions. So many commentators use gross numbers - which make for nice scary headlines - and forget that netting-off is huge. This calculation is key to the calibration of the Paulson plan, I think.
Put simply, I owe you some money that I can't repay; you owe me a similar sum that you can't repay either; we agree to write both off. Net result nil, or maybe a small loss if one owed more than the other.
You are quite right about hedge funds. I think private equity is in deep trouble as well. (It always amounted to buying companies with their own money, and abritraging the post-tax interest/divided spread in a market that underpriced risk and liked leverage. I've long argued for either (a) giving tax relief on dividends, or (b) removing it from interest, in order to create a level playing field and removing a structural incentive to leverage).
What we are seeing is the crash of all models that are at the 'not-netted-off', imbalanced end of the debt bubble. Hedge funds, private equity and, in the housing market, BTL - these are the most indebted areas on a netted-off basis. It won't be nice, but I don't think it's the end of the world as we know it.
Some banks may even emerge stronger from this process.
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The buck will have to stop soon!
The CDS quagmire is going to be the final precipitating factor in the downfall of many banks, people, societies and economies.
Just google for plenty of commentators predictions abut this crisis that stems from CDS and derivatives. I have been reading them for at least 3 years!!!
They are not wrong! The whole world is leveraged against these things and it's going to be a hard, horrible. 'hairy' fall!!
The Army will be on the streets!
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The banks, the banks are on fire,
We don't need no banks,
Let the {rude words} burn,
Burn {rude words}, Burn {rude words}
We all need to learn to live within our means.
Always remember this saying: "Let me issue and control a nation's money supply and I care not who makes its laws." -- Mayer Amschel Rothschild, Founder of Rothschild
Educate yourselves. Knowledge is power.
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A CDS is like an insurance contract, a potential liability, not an existing one until the underlying credit is in default or similar. A rapid escalation in eg. bond defaults means a large number of CDS contracts need to be paid out, sometimes the amount is larger than the value of the underlying credit itself. However, they are a zero sum game. Hence, if the CDS contracts are "spread evenly" then you would expect the impact of defaults to be dampened as the pain is spread more widely. However, if there are concentrations (and no one knows where they are), what starts as defaults in credit sets of more bombs left right and centre, as CDS insurers suddenly incur a big liability that they may not be able to pay out, they themselves default, and on and on it goes.
The only thing worse than this scenario, is an acceleration of defaults due to further withdrawal of liquidity as everyone rushes to put their money into Bank of Ireland. I think Bernanke once talked about dropping money from helicopters to prevent a liquidity crisis. Well this is the time to do it, tuck all depositors back into bed with a nice cushy guarantee, crank up that rotor and get started. I want to hear some Wagner.
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Re 48
It has been very interesting from the word go. Perhaps interesting is the wrong word, there is a chinese curse - to live in interesting times - nevertheless, interesting. The Paulson crew behavior is very telling from the start. They let LB go when it could have been propped. It told you it was small beer. LB small beer. Stepped in for AIG because of damage seepage but there was no real gameplan revealed, AIG intervention seemed almost casual, buy a bit more time. Looked as though someting bigger was underway. Then up pops the 700 billion dollar plan. Now if that is a firebreak attempt in aforest fire it tells you it is one mother of all fires and it is still going.
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It seems we have slipped into the pit of madness. No-one cares anymore.
I saw a quote on the ITV news last night from a House of Representatives member who was explaining his voters opinions - encapsulated in this phrase.
"I don't mind being in a bread line - as long as there are tycoons and bankers alongside me"
I completely agree.
See you all on the breadline folks
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What in the hell is happening: International Swaps and Derivatives Association (ISDA) is now the auctioneer or the de-facto adjudicator of the values of the toxic assets?
ISDA's greatest achievement is establishment of the the ISDA standard agreement between counterparties of a swap deal. Thus permitting a whole gaggle of supposedly educated and informed but definetly clueless banks to engage in derivatives trading. Then these banks turn around and produced another agreement a more onerous one for their retail customers.
I think the pawn dealers auction in my country is a more transparent and efficient one. There is something wrong with a country that abdicates its duty of maintaining financial probity to an association whose primary interest to promote the derivatives market. The market that cause us so much mess.
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"PS. The most significant British corporate announcement today was that Marks and Spencer is slashing capital spending, It was planning to spend up to £900m this year on improving stores, its supply chain and computer systems. That's being reduced to £700m - and next year it'll be slashed to £400m.
In other words, M and S will be placing far fewer orders than planned with other businesses - which will have a damaging impact on their profits and on the prospects for their employees.
That's a graphic illustration of how the horrors of the financial economy are infecting the real economy.
In my view, this is a muddle-headed way of looking at things. How wrong is the concept that the last few years has seen the real economy adapting to changing circumstances independently of the developments in the financial sector? It's completely wrong.
A great part of the structure of the real economy has been determined by what has been happening in the financial markets. The bubble of unearned prosperity has been the stimulus for the creation and expansion of entire industries - industries for whose products there is minimal demand other than in a bubble. How can this distortion of demand be eradicated without causing major dislocation in the industries that supplied it?
So I'd say it's ridiculous to present the idea that Main Street is in a state of sustainable equilibrium, and that there is a way that this can be left largely untroubled if the right measures are taken to deal with the problems of the financial sector.
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Another reason the $700m bailout could be a poisoned chalice.
Certain banks have been wildly optimistic in writing down their toxic assets. When they come to sell them to the US Treasury they will no doubt receive far less cash than the book value stated on the balance sheet.
This bring to light further massive losses that some of our most venerable banks would rather keep hidden
http://williamflatau.wordpress.com/
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Has anybody noticed that while the Stock Exchanges throughout the world have fallen during the last 2 days, the LSE has continued to make gains. Who says there is no confidence in Gordon Brown and Alastair Darling's handling of this crisis. It's about keeping your head whilst all around are losing theirs, and being men, not chickens.
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#23
I could not disagree more. You cannot keep throwing money at a heroin addict and expect him to quietly go along to rehab all on his own.
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@41:
As I understand it, the UK Government has never defaulted on a loan payment. It has occasionally changed the terms of the repayment, but it has never actually defaulted.
@49:
So, there's a chance that we *might* default on a loan payment? Yes, there is. But there's a big difference between defaulting on a payment and going bankrupt!
Bankruptcy is the worst case scenario - it is total economic collapse resulting in total anarchy. Zimbabwe has inflation in excess of 1,000,000% a year, but the country hasn't bankrupted itself! Ours is running at about 4.5%, so I reckon we've got a fair way to go.
The State is not going to collapse in on itself - we might end up with high taxes, cuts in public spending, high inflation, high interest rates, wage freezes and high unemployment, though.
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Here is an explanation of where it all went wrong.
The media hype about the city being full of intelligent and clever people is COMPLETELY WRONG.
I heard Boris Johnson saying recently that we shouldn't tax the city because we will 'drive away the talent'.
Well having worked here for 5 years now, I can assure you that this talent does not exist. There are a handful of extremely clever people, the strategists and mathemeticians - but these are surrounded by hordes of incompetents who cannot do simple maths and whose knowledge of the markets is limited to pressing a button when the screen turns red.
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I suggest the House of Representatives make one more change to the $750bn rescue package. All applications need to made in person to a new facility to a toxic loan readjustment facility, based in newly decorated Guantanamo Bay.
Explain something to me.
So big broke bank (BB) was due to pay $xxxm on a CDS due to sub prime losses.
One assumes the not yet broke bank (NYBB) not only was owed this, but was also due to pay $xxxm to the broke bank, a CDS on some other set of bad loans.
I guess these will be netted off and NYBB could end up with what exactly? It is not covered on one CDS contract but does not have to pay the other. It reinsures itself but the does not have to pay the BB CDS.
If I am owed $1tr of toxic loans and I owe a $1tr of toxic loans, why not just tear them both up?
As long as the 'risk department' ensured they sold as much bad debt as they bought they just need to get in a room with their peers and start shredding, an equal amount of what they have bought and sold.
I guess Netting toxic loans results in the $750bn hole. There is not one radioactive baby but lots of them but they cancel each other out hence the small amount!
It is a good bet that once you get hold of these CDS docs, we will get to see our heroes buying and selling these toxic loans to one another.
Robert - thank you for the service
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25 quoted "The only logical way ahead is to cut the welfare and bureaucratic overhead. I have been saying for a long time that bureaucracy has become an unaffordable waste of resources."
great, just when we are about to dump thousands more people on to the dole, we stop giving them benefits to live on. CONSEQUENCE - IMMEDIATE RISE IN CRIME of just about every kind! No doubt you'll be okay in your fortress with your armed guards and two years supply of food and water, or perhaps you dont think that starving freezing people will try to anywat at all to live!
This is a big problem and I dont know what the answer is, but I'm sure it isn't to let people starve.
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...and, in other news, the stock market continued to rise today (up 1.5% at 12pm on 2nd October)!
Yes, we currently live in volatile times. But, let's not get carried away with the scare-mongering, Robert!
Also, interesting to see how the stock market snap-shot information is no longer posted on the front page of the BBC website, as it has been temporarily over the past few days. Presumably "boring" news such as a stock market rise in the current climate doesn't fit with the agenda of crisis that our oh-so-impartial journalists are perpetuating?
Cynical? Moi?
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So basically Mr Peston, you are saying because of the panic being generated, the "general public" whoever they are, are moving their money around because of fear and greed amounting to an exacerbation of the problem. Your analysis that some analysts are good at prediction, well some are and most aren't. Bears and Bulls and Capitalism unleashed tell you that. On the stock market there is a general trend down but it's easing off, so this CDS business will just be the little push down to the bottom, reached maybe summer next year. You mentioned some warnings and that is true there have been mini crises over the last few years. Those who have mentioned Asian economies I assume you refer to China and India as Japan and S Korea probably will suffer too. The problem is we can talk ourselves into problems. Generally if you panic (a lot of it is going round) you don't think clearly and get yourself into a muddle. More people need to stay calm and then may be ok. I think Mr King is right not to be sympathetic. It's not like we haven't seen this kind of underestimation of risk and profiteering before now is it.
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Now is the time to shout "Don't Panic".
If you have less than £35,000 in any British Bank then you are fully protected. IF the small investors realise that, and most of the deposits are less than £35,000, then the potential flight to Ireland/Northern Rock/NSI is pointless.
It is rather like running to the fire escape when there is no fire. People get unnecessarily hurt in the rush.
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please could someone explain what is likely to happen to holders of HBOS preference shares if the takeover goes ahead.Help !
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On the ''bail-out'', there will definitely be more concessions to be wrung out. Some might think $700 billion is cheap, but certainly it's no the time for the politicians to bow to peer pressure.
Indeed, it was interesting to see in B Obama's address, when he mentioned this, the audience started chanting, ''No NO!!''.
then, when he said he was supporting the bill, they quickly went quiet.
I suppose that's what one would expect from sheep.
Another game of bluff and turn, on the HOR(ROR)(Rescue or Riot) show, anyone??
The fact is, that although the markets dived, they have somewhat rebounded.
Clearly showing that there is plenty of money around. Ask Warren Buffet.Hardly the end of the world.
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I can only give a real life example of how the "Crunch" is moving down to " Main St" here in Manchester. My local, open all hours corner shop, is down about £300 a day on turnover.
Add to that the fact that all building projects have been frozen in a City which has been virtually rebuilt over the last ten years.( and is full of builders looking for work)
The CDS auction may look scary for the future but there are other real world things that look as scary and they are here now.
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The time has surely come to separate the retail and wholesale banking sectors. The ordinary man on the Clapham omnibus needs a bank account, and so that becomes something he ought to have for free, separated from all risk. As the banks have behaved disgracefully, taking his safe, secure cash and putting it on the banking equivalent of the 2.30 at Cheltenham, and now want to charge him heavily for the privilege into the bargain, simply to keep themselves in the style of bonuses to which, like pigs in clover, they have become accustomed, so it becomes total nonsense to talk about guarantees, competition, and the like.
It's become evident to the world and his wife that if the banks don't trust each other, why should they, and so they've have given up on the lot them and are voting with their feet, headed to NR and NSI, and all the better for it. It's time HMG blew time on the retail sector and gave everyone a free account with basic facilities such as debit cards, cheques and cheque guarantee cards. No overdraft, no complicated facilities, 100% guarantee, base rate, just the basic - but it would show proactivity and deliver a very strong message to the banks that they've got a baseline to compete against.
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i think supporters of the "fractional reserve banking" thesis are barking up the wrong tree.
firstly, why is gold any more intrinsically valuable than e.g. the us dollar? the value of money is the public's confidence in it as a widely accepted unit of value. that confidence stems from its scarcity value. gold's scarcity is ensured by mother nature (though it is interesting to note the great gold inflation of the 17th century fuelled by the conquistadors). the dollar's scarcity value is ensured by a central bank making a credible vow to minimise inflation.
the fractional reserve banking argument focuses on reserve ratios, but i think the real issue is capital adequacy. consider a simplified bank balance sheet:
assets:
loans: 91
cash: 9
liabilities:
deposits: 81
equity: 19
the reserve ratio is deposits / cash. it basically measures the bank's ability to deal with withdrawals. loans cannot be liquidated in a hurry, which is why a run on a bank is so catastrophic. but bank runs are a symptom of the loss of confidence, not the cause. provided a bank behaves sensibly and retains confidence, there is no reason why it should retain all deposits in cash balances and not lend any of it out.
the capital adequacy ratio is loans / equity. in this equation "equity" means the book value (the sum of original equity investments + retained earnings) not the current market cap of the bank. it measures the ability of the bank to take losses while still meeting its debts (i.e. depositor claims).
the problem in the current crisis is excessive lending, i.e. insufficient capital adequacy. total credit in the usa has ballooned to 350% of gdp. banks made very risky loans and classified them as less risky. loans were repackaged and taken "off balance sheet" via spvs, only to be brought back on balance sheet when those spvs ran into funding difficulties. and a lot of entities, especially hedge fudns, have acted as proxy banks, adding to systemic leverage.
the result is that the losses in the sub-prime sector, losses that should normally be manageable, have led to a serious depletion of bank capital and have sparked off a potentially catastrophic deleveraging process due to loss of confidence by lenders as to where the losses will crystalise. what is urgently needed to stop this crisis is a recapitalisation of banks by the state (something that the paulson plan only makes a half-hearted effort at).
the "money-as-debt" thesis makes two claims:
(1) debt is needed in society to "create" money. without debt, there is a collapse in the money supply. put simply, if i deposit £100 with my bank, and the bank then onlends this to someone else who then deposits it with their bank, both i and that borrower thinks they own £100, so the money supply has doubled to £200. but what are we really saying here? only that banks have increased the money supply to meet the need of the economy. if that borrower repays his debt, and nobody else wants to borrow that money, the supply reduces back to £100 again. so what? on the other hand, if the bank were prohibitted from lending out the £100, then there really would be a shortage in the money supply.
(2) debt incurs interest, but there is not enough money supply to meet the interest repayments. this is simply not true. the base money supply (i.e. the printing press at the bank of england) is used to increase the money supply in line with the growing needs of the economy. this point regarding interest rates is a good argument for taking a currency off the gold standard. because the gold supply is limited, it would only be possible to maintain parity of a currency with gold if the currency experienced negative inflation that offset the growing demand for money in the economy. as keynes pointed out, negative inflation is a very bad thing. so the solution is to scrap the gold standard and have a credible central bank committed to minimising inflation.
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Once the cAAAndyfloss economic system colapses the stick holder will decide matters buy putting a new taeser rated loan on the end of it .
BZZZZT .....BZZZZT I'LL PAY ,I''LL PAY,How about a pound of flesh as deposit
Once the ponzi sceme based on the dollar colapses power will drift to the East and as a new dawn comes from the East so shall the son of man
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Well, nothing lasts forever. Are we witnessing the beginning of the end of globalisation as we know it? I truly believe so.
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Everday the unexpected happens and the chaos grows. These are the classic circumstances that normally precede a catastrophic occurence. Without real leadership it is hard to turn these events around, someone really needs to take on that mantle soon. Cautiously worded half statements by Mr Brown on Guarantees is not showing leadership, not vote winning habits. We need good news to build confidence on and GB gauranteeing deposits is inevitable now, so why not come out and say it?
Great update today Robert...thanks
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How ironic!
I have just realised I was listening to 'I predict a Riot' from the Employment album by the Kaiser Chiefs as I have been reading this!
Hmmm.....there will be one, not much of the other and the latter have got us into this!!!
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Here goes Peston again-the master of doom and gloom!, get rid of this clown now before he talks all of us into slashing our wrists.
Were doooomed i tell ye.
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A free market solution;
Let those institutions that have lent and borrowed recklessly go under.
The current troubles are surely fertile territory for many small building societies and banks to start up,. Begin with a concrete business model that doesn't include mark to market valuations and complicated financial deals that no one can understand, that is designed from the outset to withstand a poor economy rather than just make off like bandits in the good times.
From many little acorns a few mighty oaks might one day grow through sound business sense and normal consolidations.
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Re 64
hello freindlycard
To me it is not about whether the system stays and mutates to a new level or if it is repalced by another system. It is all about management of the transition. It looks like a binge patient who needs a stomach pump at the moment. If you do nothing the patient dies of toxic load. Intervene, detox, re educate, ASBO, make the patient pay for the hospital bill and party etc, get him out working for you. Easier than starting from the Stone Age again which some seem to be what some want. The biggest problem is political, the percentage who do not want intervention and who have to let the fear message build, its an inbuilt overshoot. Emotions are dangerous when mixed with money.
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Robert
Very good article once again.
You mention the Rep of Ireland pledging to guarantee all deposits and loans of the 6 largest Irish Banks. What a desperate gamble that government has taken with a 400 Euros backed by an economy of half that size !
At least one major credit rating agency is looking to downgrade that credit level of the Republic following that huge national gamble.
People should be now careful not only about which bank they should their money with but also which government!
I am afraid that there are a number of small countries with overly large banks which could bankrupt their governments. It is not a question of too big to fail but too big too save !!
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excellent comment from ExcellenceFirst @ 71, as usual
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Robert,
I would like to see less drama nd more balance in your reporting both live and in this blog.
You do the BBC harm by 'playing up' events, no matter how serious they are.
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#48 You are correct - up to a point. The big problem with bank failures is that whilst internally they may be hedged on their trading of derivatives (i.e. Bank A enters into a forward purchase at $1 with Bank B, and a forward sale at $1.02 with Bank C), once Bank A collapses, the hedging is irrelevant. The contracts, whilst they are economically linked, are not legally linked, so Bank A's profit on one contract will not pay for the loss on the other. It goes into a big pot marked 'secured creditors'. And whilst margin payments may be made with regularity, there can be huge uncollateralised obligations out there. Its often forgotten that Leeson made margin payments of hundreds of millions of dollars prior to Barings collapsing.
Therefore, the big question is 'whose profit is derived from a trade with a bank that is collapsing', and so who might have to make up that profit, and pay money to their hedging transaction, out of their own pockets?
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Mr Peston...do you ever consider for a moment what escalating your language does? I have now made a conscious decision not to read your screaming, slightly hysterical headlines
There is no balance, just more 'shock horror'......yep there is a credit crunch...yep...it is going to be very hard...but guess what? People got through the great war and rebuilt, they got through 1929, 1945, the 1970's and 87 and even 9/11. Eventually, just to preserve sanity , your readers and followers will have had enough...I have. I do not pay my licence fee to have you being the voice of doom for over half the news broadcast. For self preservation the mind switches out. Perhaps you should consider a 'how we will get through this' approach and I might read and watch you again. Till then my finger will be on the off button when you appear on my screen because you are not telling me anything I don't already know and really don't want to hear again and again.
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#36
The UK national debt, even after picking up Northern Rock, is only around 43% of GDP - which is about the same value it was in 1997. From when they took power to 2002-03 they cut the debt down to around 30% of GDP, after that it rose slowly back to around 36% when the Northern Rock nationalisation happened. So if it wasn't for some banker with a moronic business model, the UK would be far better off now than when the Tories were in power, and even with that we are just back to the same level of debt relative to the ability to pay.
http://www.statistics.gov.uk/cci/nugget.asp?id=206
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I own a racing engine firm my phone has STOPPED RINGING. I note that the draconian legislation in the UK has not been altered to accomodate those who will now almost certainly 'fail' in business through no fault of their own.
Will you now take time and remark on this?
'The forthcoming consequences for the UK population'
I stood for UKIP in the last election. I paid for my own campaign. I predicted during my campaign that Brown would be a disaster for Britain. I have had numerous discussions with local MPs on this issue, going back to way before this latest crisis broke. I am told, by one distinguished Tory MP eg, that the Govt cannot afford to distinguish betw the 'deserving poor' and the 'undeserving poor'. And in his view that is that. People must take responsibility for their own actions.
What a medieval way of looking at it. The idea that it would be WRONG for us to believe Govt statements of growth and economic stability (eg 'stable macroeconomics, GB's favourite for many years) and at the same time say 'we would be GROSSLY IRRESPONSIBLE to borrow to, say, buy a house, fund new machinery for your firms, buy a car or sponsor a child thru uni (as I am, for an MSc) because there may some risk attaching is completely barmy. No borrowing is risk-free but we do have a right to expect that the risk to us is relatively well-contained.
We are not in that situation now. Here gigantic economic forces well beyond your understanding or control are at work and what safety net it there for those of us, like me, who have taken out MODEST and quite reasonable liabilities when measured against incomes in stable times? Should we never borrow because the economy may crash? Well maybe that is the future of things, sure.
In the meantime the bankruptcy courts will be hard at work punishing (yes) decent people caught up in this ghastly mess. You think I'm overreacting? Just wait. I lived thru the Major/Lamont/Clarke recession of the 90s. Many of my friends went bust, lost their houses, committed suicide, lost their senses, lost their marriages. This time it's gonna be 100 times worse.
No I don't have savings, investments, rich parents, gold or anything else to protect me and no I haven't been stashing it away for years. It would be a BIG help to think the Government would step in and say, 'this must not be allowed to happen' They won't. It will all be OUR FAULT. However at least David Cameron alluded to some alterations to the insolvency laws recently, for all the good it did.
So. We declare ourselves insolvent now - or hang on till the bitter end? What are we waiting for?
How I despise the people at the top for their present selective 'blindness' to the reality of life - what's left of it - for working folk.
Very disappointing that no-one in Politics - or here - is thinking BIG on this one. There is going to be a MASSIVE Mad-Max style socio-economic restructuring after the dust settles on this one.
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Isn't it a wonderful idea: replacing securities that promised future profits that would have never materialised with securities that promise future profit...
I really don't see any reason for saving any of the banks (apart from the political reason) - assets must be devalued, because they have no relationship with the reality and rescue packages only make the whole thing a much longer and less effective process (government intervention of course could help in a harmonic devaluation, which is less painful - with that goes the competition policy, we have seen it going already).
Big business will not suffer because they are self-financing so are most of the medium sized UK companies. The small ones are on overdraft anyway, that could be easily transformed into government loans. There is no effect there on the real economy.
So the only "victims" would be the financial vehicle companies (and the banks also became that) who, now we clearly know, contributed to the economy only on paper. No regret for them.
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"Is this Gordon Brown that is worried about the competitive implications of the Irish bank guarantee....."
The Irish government would not have had to act unilaterally if the ECB had had the power to provide such guarantees across the EU.
Ireland wanted the EU to have such powers but guess what ?
Eurosceptics in nations such as the UK - egged on by the Rupert Murdoch controlled British media (The Sun, The Sunday Times and Sky so called News) opposed such powers.
Independence comes at a price.
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..so i looked into creating a full-reserve bank. There's a £25,000 application fee, payable to the FSA.
so now i'm looking for investors.....
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Gordon Brown keeps saying that no one has lost money as a result of the banking crisis. However this potentially not true .I have clients who invested in structured products with NDFA.These offer certain guarantees but on the proviso that the financial institution providing the counter party risk is able to meet its obligations.On a number of NDFA plans the counter party risk was Lehmans. I understand that about 5 other product providers are in a simuliar position. In order for an individual to have access to the FSCS then the plan manager NDFA in this instance must have gone bust.As this is not the case then at present individuals are facing a significant if not total loss of their capital.Perhaps you can pose this question when next talking to Mr Brown or a senior Minister.A recent article suggested that about £500m could be involved.
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80:
To clarify, it was the bureaucracy I suggested cutting - including the bureaucracy that manages welfare - but not the actual welfare benefits. I should perhaps have been more clear on this. We could even improve benefits, if we could reduce the cost of administering them.
As you say, this situation is a big problem with no easy solutions. The economy is shrinking, to a certain extent at least. Likewise, unemployment seems certain to increase. In order to direct benefits to the newly unemployed, we need to get those benefits to them as cost-effectively as possible. Hence cutting bureaucracy.
It's all about where the shrinkage falls, and how it is distributed. I think it needs to be spread as equally as possible across public and private sectors.
If we try to make industry carry the entire cost of this problem, industry is going to shrink, and so will employment in industry, and the tax revenue from industry.
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#105 - count me in!!!!
We could call it the people's bank. Full Reserve, 100% guaranteed. We wouldn't need to pay any money towards FSCS....
We could even find some former bank employees to help set this up!
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The western economy is a debt junkie that ,not only cannot pay off its debt, but needs extra extra ammounts to survive
,This unrecoverable debt is disguised with the help of the mother of all credit bubbles giving the appearance of solvency through a temporary asset price inflation ,that appears to cover the debt like a roller blind before it retracts .[ When the oversesas wealh funds realise they are being had]
Asset price inflation is a measure of the credit bubble not the real economy as will soon become apparent
Stand by a traffic light and observe the number of people in fast expensive cars stiill accelerating despite the light ahead just turning red ....a pretty good indicator of the fools now ru[i]ning the show
We can soon expect a bank pile up at the junction between easy street and wall street with the central banks coming and crashing into the wrecksqueue of the stock car niage race
Hurt neither the oil nor the Roubini wine [rev]
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It's incredible that people are rushing back to Northern Rock.
I wonder how many of these new customers are the people who pulled out their savings leading (indirectly) to it's nationalization.
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On the subject of Gordon Brown, he is unbelievable...he castigates the banks for hiding debt "off the balance sheet" when he has done exactly that with PFI.......he now attacks the irish government for guaranteeing 100% of deposits, when he did exactly that with NR!
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#35:
Great post! Couldn't agree more.
A lot of bankers got paid a lot of money for coming up with all these complex financial instruments and no doubt thought they were being very clever. It's now just all being revealed for the smoke and mirrors than anyone with the slightest amount of common sense could have seen it was all along. If they lose their jobs, I won't be shedding any tears for them.
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If I had more than 35,000 in savings, I'd be pretty worried right now. Gordon Brown tells us that money invested in British banks is completely safe. However, he steadfastly refuses to offer the same unlimited guarantee that the Irish have.
Actions speak louder than words.
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@17
I agree! You guys over in Blighty should chill out a bit. So the banks get swallowed up by governments... so what.
1 million people have died in Iraq... what do YOU care about most?
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95:
Hi glanafon.
Yes, transition is the key to this.
For example, house prices are likely to fall by maybe 40 percent from their peak, but had risen a very long way before that peak.
That potentially divides people into three groups:
1. Those who bought many years ago, so are OK
2. Those who bought not long (maybe 1-3 years before the peak); they are in big trouble
3. Those who aspire to become first-time buyers in the future; they could benefit, presupposing that they keep their jobs and can get a mortgage.
So differential solutions are required appropriate to each group:
1. Buyers who are still in positive territory need to be reminded that, though the value of their house has fallen recently, so would the price of any house they might buy in the future should they move. They are still ahead overall.
2. These people - the transition victims - are in big trouble and need transitional help (see below)
3. These people, would-be first time buyers, need the economy to stabilise, which is why constructive efforts to assess and deal with the scale of the financial black hole are essential.
So, how do we help group 2, the victims of transition?
Well, whether it likes it or not, the government is now a big player in the mortgage market, through NR, etc.. Funds are flowing into NR, National Savings, etc..
NR (etc) could be used, at least in part, as a tool of social policy. It could help by partially reducing the mortgages of the victims of transition. Insisting on full repayment of mortgages is not rational if the only alternative to a write-down is repossession, which won't recover anything like the full mortgage owing anyway.
NR should act as a sympathetic institution, listening to and helping its customers - exactly what the mutuals did before they got turned into banks.
Yes, this costs HMG, but so would a wave of reposssessions. I think that could cost far more, in fact.
Ultimately, HMG's big de facto role in the future mortgage and savings market can help us move back towards a more mutual-style, supportive system.
I'm saying that HMG, via NR etc., needs to absorb some of the housing equity hit suffered by transition victims. This isn't cost-free, but it might be a lot less damaging than some of the alternatives.
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105, 109:
Me too. We need to reinvest the mutuals.
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Re102
Hi, won't help but sorry to hear. Worth saying and must be hard to do so but best people understand what is going on and the consquences for policy failures. Sorry also dont like v much UKIP but good shout.
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#88
Very well put. I tried to make a similar point the other day and was shot down in flames so gave up arguing.
I think a few too many people on here have seen videos / articles by scaremongerers on a subject (fractional reserve banking) that they don't really understand and have decided that it is the reason the world is going to come to an end.
It's getting quite boring seeing these repetitive posts, it's ruining an otherwise very interesting blog.
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Re 82 Dunky R
Don't think you are alone in thinking Mr M King might be better to listen to than Mr A (pass me the happy pills) Darling somehow. ROFL
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What is "Smack smack - we're dead" (which replaces "The next threat" as the blog title depending on which screen you click on) referring too?!
Sounds very ominous - Even by usual standards!
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Act in haste
and
Repent at leisure
and
Prepare for the New Economy
[quotations removed to appease the Mods (who are as Gods)]
Peace to all
ed
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Re 111
Its not people Jason, its sheeple. We are all at the mercy of flocks of sheeple. LOL
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Hello everyone, here's a question that we might not want to answer.
Can the Irish, or for that matter, any government actually afford to pay the money promised to savers if a bank fails?
If they can, where does that money come from?
If meltdown actually happens, and banks continue to disappear, I find it hard to believe that the government will send me and all the other savers a cheque for £35,000.00 the next week.
Anyone?
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#105 - so how exactly are your investors going to make any money?
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#105/109 I've got a brlliant idea - lets call them building societies...
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#88 Benagyerek
Bena, great post, very interesting!
Sorry if I'm thick but when you say what's needed is the 'recapitalisation of banks by the state', are you talking about Nationalisation. If so, does that involve compensation?
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Why can not the Banks etc become landlords, ie: They could instead of taking over or repossess the properties, start to come up with a landlord agreement with the existing owner and start charging a weekly rent.
The property stays with the Bank and is not shown on there books as a asset loss.
To me this is what is causing the problem as they say "mark to mark" accounting. Either suspend this for 12mths or show this asset as a rented property.
Is anybody coming up with some plan to get us out of this mess. ?
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The UK Government going bust? Not to put too fine a point on it, but I don't think so! jdennis_99 - post # 17
Don't be so sure. Nothing is 100% sure in life. Countries have defaulted on their debts before, and will do so again. On thing is for sure, the amount of borrowing the govt is proposing is not sustainable. Taxes must rise or spending fall, or both. It is entirely conceivable that at some point the international money market will refuse to buy UK govt debt, or demand a higher return as risk premium. Then we all pay....higher taxes and higher interest rates.
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A wonderful reminder of the sorts of attitude that led to our current mess.
http://www.portfolio.com/views/blogs/market-movers/2007/04/17/how-risky-is-the-derivatives-market
A sample quotation: "It's worth remembering, here, that the derivatives market can't crash,"
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#116 - I'm in category 3 of your little analysis, but by choice. I could have got a mortgage by now, but I foresaw that house prices were getting silly, and that the income multiples were quite frankly stupid. That said, I'm a higher rate tax payer. Can you please justify to me why my tax money should be spent funding the property purchases of people who are too stupid/greedy to work out that if 60% of net income is going on paying a mortgage when interest rates are historically low, when they get higher there might be problems?
Why should my ability to make a rational choice and purchase at a sensible time be hampered by those whose greed drove them make a very stupid decision (even discounting those who committed fraud to get their mortgage)?
Surely a better approach would be for NR to reposess, take ownership of the assets (which are probably mainly ex council houses anyway) and rent them back to the occupant, with benefits help if required? That way, the individual gets the roof over their head, but the state gets the asset, instead of state sponsored individual house ownership...
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If the taxpayer is to be expected to guarantee the deposits in all banks otherwise the banks go bust, then surely the taxpayer has every right to full ownership of those banks.
Two months ago I went into my local branch of HBOS to place a small deposit in a small account and was received with customary indifference. Two days ago my better half went into the same branch and they rolled out the red carpet for her.
I think they are starting to get the message but as my wife said they have spent so long treating the depositor like something the cat dragged in that she has little time for them.
The retail banks could resolve their problem overnight by paying the retail depositor a rate of interest that reflects their need for money. No doubt they consider the government an easier touch.
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Can Ireland afford this guarantee? I suspect that Irish Taxpayers might be quaking in their boots!
Let's not forget it was iffy banking procedures that got us into this mess. Promises from Ireland will get no one out of the mess.
Before any one moves a penny to Ireland they ought to check that they are not jumping into a bigger mess than they are leaving!
If a court rules that Ireland is being anti-competitive then heaven help the Irish taxpayer.
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Looks like the mist is turning into a smog.
The apathy and inaction shown by governments at the moment is unbelievable.
It is a sign that none of them know what to do next.
This will obviously lead to panic among ordinary people which will make things ever worse.
The social implications have not yet been factored in and I have to wonder if these peple in high places really know what's going on in the real world.
The whole emphasis seems to be a wait and see approach to what the Americans do when they decide to do it.
But as you say Robert this is not going to have much effect in the longer term as problems are being compounded by the minute.
Trying to avoid panic among ordinary people should be the priority not by leaving them in ignorance but pointing out the realiity.
I am beginning to despair at the potential consequences if someone does not take the lead and fast. The recession word which politicians have been forbidden to use will turn into the depression word which could overtake both people and the economy.
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As a UK taxpayer I am a stakeholder in Northern Rock following its nationalisation...
And as I see it the 100% guarentee is not an *unfair* competative advantage.
As a taxpayer I (apparantly) have unlimited liability for NR and should get an appropriate return.
If the other banks (and their shareholders) are willing to take unlimited liability then they are free to do so - any volanteers?
The news reports say limiting NR to 1.5% of domestic retail deposits was part of the nationalisation agreement... But it doesnt' explain which party to the agreement insisted on this clause...
So who asked for it? and why was it accepted? what would have happened if it hadn't been accepted?
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Very interesting and worrying on CDS.
This all shows Marx was right doesn't it, this is what he said would be too many people chasing too few goods. It's too simplistic to see this whole crisis as just greed of the bankers. They and particularly the mortgage lenders have had to go after the areas of the market that are less profitable because all the good profit business has been done. They have gone too far in going after business where there is not any profit and in fact a loss because the people who borrowed will default on their loan.
But this is what happens in a market in a free market, eventually the customers, the trade, just isn't good enough. We've seen this extreme perversion of capitalism first manifest itself in the purest form of capitalism in the money markets. Once it's there it can't be prevented from bringing down the whole system, or can it that's where Marx has been wrong up to now, that the capitalist system has been remarkably resilient and adaptable, we might be at the end of that.
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Today RP suggests that the UK banking system is in danger of collapse. Yesterday RP says that the Lloyds-HBOS merger will go ahead.
Either Lloyds is safe and today's RP blog is scaremongering. Or Lloyds is not safe and the planned merger is crazy.
A similar dilemma applies for Barclays and their recent takeover of part of Lehman's.
As the UK banks are signed up to the Financial Compensation Scheme, the argument applies to the other UK banks also.
Is RP being irresponsible to Lord Haw-Haw proportions? Or are the boards of the major UK banks completely incompetent, drunk at the helm, or clinically insane?
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Re 116 NR as nice touch
Don't think it will catch on. Too much vemon about bankers who profit and householders who have tried to profit. Too much vulnerbility at government re using NR as a tool. Would get shouted down as soft touch rarther than nice touch. Nice idea though. Housing assoc part ownership likely model if any. Probably none. Really depends on numbers. If small numbers then default will be to hang householders out to dry
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105, 109, 126:
One day - I know it's a long way into the future, but it could happen sooner if depositor money keeps flowing in and business expands - NR (etc) will be able to repay its loans from HMG.
What if, once the residual NR becomes 'clean', shares are handed out to account-holders? On the basis, of course, that it can never be turned into a bank; no market in the shares, no carpet-baggers.
Hey presto - a building society!
Funny, I think some people in Victorian times had some good ideas along these lines......setting up mutuals because they didn't trust banks....that's a familiar idea......yes, this definitely rings a bell....
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Robert - this is one of the best worded and important pieces of journalism I've read in quite some time. Dear BBC News Editors - please get this information on the CDS issue higher up the TV news bulletins. I'm an accountant in industry so I have at least some financial training and I was completely unaware that there was such a large market with such far-reaching implications about to explode over the next 3 weeks. It is international ignorance to issues such as this that has caused many of these problems in the first place because people don't know the wider implications of what they're doing. I know there's a tendency to think that people will find financial issues a bit of a turn-off by news editors but I think average people are starting to take notice now and I think people will be interested.
What concerns me is that politicians have made no attempt to mention this upcoming problem, let alone regulate it in the past. This means either they don't know about it/understand it themselves or they're hiding it from us because they have no plans to counteract it. I know they're trying to avoid scaring people as well but sometimes it's actually more reassuring to know that it's out there but it's being dealt with. Perhaps we should send Mr Peston to explain it to them!
Can somebody explain one thing to me? Why is the Ulster Bank included in a deal from the Republic of Ireland's government? Ulster is part of the United Kingdom and the Ulster Bank is owned by a British company. If the argument is that they are just covering Irish nationals then surely this won't cover UK nationals in the Ulster Bank, and also surely Irish nationals could have deposits in UK banks and still be covered?
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#105/109/117
Count me in.
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Has anyone heard of these people before:
http://www.prosperityuk.com/prosperity/prosperity.html
Robert - it would be interesting to hear their view on what's going on at present. Might lighten up the ten o'clock a bit.
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Robert,
My mum has beome a fan of yours recently, she described you as the Alan Hansen of the business world!
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Think Mr. Brown is showing poor leadership here, he can easily avoid panic at the retail sector level by guaranteeing 100 % deposits, but bno he refuses to follow the Irish example and continue to micro manage on a day by day basis, contributing to sustained uncertainity.
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GBP 35,000 or GBP 50,000 in savings amy be guranteed in the UK. I wish I had anywhere near that amount.
In the real world of Sky tv, Ant and Dec and watching the X factor no one has GBP 35,000 of savings.
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Some interesting posts today
#87 I've been vaguely wondering about the same thing. Running a basic current account with no overdraft really can't cost much in this computerised age - secure access, rapid transfer of electronic bits around the system - in other words much the same as the free email account I use. And yet the banks seem to get away with using current accounts as a way of subsidising their other activities
#88 Very nice explanation. The capital adequacy issue is indeed at the root of all these problems.
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kielymj @ 79; anddrewh @ 99
this is how the interbank otc derivatives market works:
(1) hedging the underlying credit:
citibank sells $100 credit protection on general motors to deutsche bank
citibank hedges its position by buying $100 gm credit protection from ubs
every day, both of these contracts are "marked to market" based on current market cds spreads. this means the banks calculate whatever the cash payment would be needed today to close out the contract at the current market price and to obtain a replacement hedge, and then that amount is handed over as cash collateral.
if gm actually goes bust, this triggers the cds contract, and citi receives $100 from ubs and pays it on to deutsche bank. however, the truth is that companies like gm very rarely go bust overnight without any warning. more likely there will be a period of weeks or months leading up to the bankruptcy during which the situation at gm gets worse and worse. this will be reflected in the mark to market of the CDS contracts, meaning the amount of cash collateral posted from ubs to citi and from citi to deutsche will steadily increase towards the full $100 payout in case of an actual gm bankruptcy.
(2) hedge counterparty default:
let's say general motors' credit is doing badly. ubs pays $10 cash collateral to citi, and citi pays $10 cash collateral to deutsche. if for example deutsche goes bust, the cds is cancelled, deutsche's liquidators keep the $10 cash collateral as a "close-out" payment and citi has to find a new counterpart to sell gm credit protection to in order to rehedge itself. citi is not left out of pocket, just in need of a replacement hedge. if ubs goes bust, same story: citi keeps the cash collateral and has to find a replacement credit protection seller.
however, a big problem that can arise is that in a crisis like the current one, there is a time delay between e.g. ubs going bust and citi finding a replacement counterpart. the very fact that ubs has gone bust will most likely instantaneously make gm credit protection more expensive, so citi will make a loss finding a replacement hedge (or a gain in the deutsche bankruptcy scenario).
(3) margining two different contracts with the same counterparty:
let's continue with the above scenario, but assume that citi has also entered into a dollar-euro cross currency swap with deutsche. the cross currency swap is also cash collateralised, meaning that e.g. if the euro weakens against the dollar, every day deutsche (who let's assume is long euro in this contract) would have to post collateral to citi equal to the loss in value of that contract.
now if the cds contract is worth -$10 to citi (i.e. citi would pay deutsche $10 to close out the transaction today) and the cross currency swap is worth +$13 to citi, then the actual amount of cash posted between the banks would be $3 from deutsche to citi. if deutsche went bust, then citi's net exposure to deutsche would be covered by the cash collateral (but citi would still need to find replacements for both derivative contracts).
generally speaking, banks monitor and restrict their overall counterparty exposure very carefully. for example, about 2-3 years ago deutsche bank stopped doing any business with jp morgan because deutsche's exposure to jp morgan had become too great. but again the "exposure" we are talking about is the risk that the market moves against you on the very day that your counterparty goes bust and you have to find a replacement hedge. your counterparty exposure up until the point at which the counterparty goes bust is already fully cash collateralised.
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The general Population has very little to fear from this crisis, the economy will slow, but it happens all the time (Cycles).
Media, politicians and very rich, are trying to scare us when in fact there is little to be scared of if your exposure to the market is limited.
No bail out for Politicians, no bail out for Bankers
let the banks go bust, our money / deposits are guarranteed by the State.
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129:
Exactly that happened to the UK once before, in the 1970s - international bankers concluded that HMG was probably going broke, so woudn't lend to it.
The PM of the day called those bankers "the gnomes of Zurich" (google it), but they would probably have been right if the UK hadn't been bailed out by the IMF (which imposed very strict conditions, and only bailed out the UK for fear of collateral damage to other countries if the UK was allowed to fail).
I don't think we're in a comparable situation now, but the tax/spending/interest rate implications are as you describe them; not even a government can borrow forever.
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I wouldn't want to be Her Majesty just now. It's her face on all those notes alongside her guy in the cash office saying he'll pay up on demand. If you get the cold shoulder at Threadneedle Street it's only a sort walk across town to her place!!
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#88 - enjoyed reading this - very clear debunking of some ideas that bear as much relationship to economics as astrology does to astronomy.
I would like to see calmer economic analysis by the BBC too though!
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To hault the death spiral make the credit default swaps retrospectively illegal. STOP ANY PAYOUTS. GOVERNMENTS CAN DO WHAT THEY WANT. IF THEY THREATEN TO BRING DOWN THE SYSTEM THEY ARE ILLICIT.DO IT NOW
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dceilar @ 127
there is an excellent article by soros in yesterday's ft well worth reading on this topic.
recapitalisation would involve the government buying equity in the bank. this would be newly issued equity (not existing shares). the whole point is that by issuing new equity, the bank is creating additional capital (i.e. more equity investors that future losses can be attributed to before the bank becomes insolvent and is no longer able to repay its debts).
existing shareholders would be severely diluted by this, and it could well equate to nationalisation if the government takes over a majority of (newly created) voting stock in the bank. but not necessarily - soros suggests the government buys preferred shares plus warrants (i.e. non voting stock plus the right to buy additional voting stock). the warrant rights could be exercised by government to give it direct control, or alternatively could be sold in the market by the government at a later stage.
i don't think existing shareholders would have much to complain about. any bank seeking recapitalisation would be in serious trouble, meaning by definition that its equity is already close to worthless. the confidence that a capital infusion would bring to the bank would do a lot to boost the value of its existing shares. and the dilution of the existing voting stock (i.e. loss of control by existing shareholders over the company) is hardly a bad thing if the bank was allowed to get into such a sorry state in the first place.
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137, funny that you should mention Lord Haw Haw,
I was thinking lately of his teasing, ' tell us Royal Navy, what has happended to your Ark Royal?'
What would he say now? 'Tell us Great Britain! Where is your leadership now?'
Listening to the freefall of the UK economy like Clarke, Major, Lamont - on a transistor radio?
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People - why dontcha all calm down a little?
Now that the securitization of real estate debt has run its course they´re looking for the next big idea. They´ve sold themselves the dream that they can make out like bandits through the securitization of fear. Right now they are in the process of creating the market.
Once they´ve finished with that phase they´ll move on to the product launch phase. The greater the demand the higher the price - thus was it ever.
On the 51st floor all the commodities traders are packing their boxes and the new world order of emotions traders are getting ready to move in.
But a leopard doesn´t change its spots and this is more smoke and mirrors stuff.
It´s obvious that things will change, but they have to change because you can´t steal from the future forever. Given that there is no choice in the matter just relax and lean into it. Maybe the future won´t be so bad after all.
As Bob Marley said "Emancipate yourselves from mental slavery, none but ourselves can free our minds."
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Whilst everone is thinking about GOLD
Think 55%
Why
This is the amount of our gold reserves that Gordon and Tony virtually gave away when looking round to pay for their Grand Nu-labour schemes of the early noughties.
Stability HA!
Its just the usual Labour smoke and mirrors, so that now they can't even find Peter to pay Paul
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RP has posed a pretty bleak view of the state of banking, UK banking in particular, in this blog. I tend to agree that there are still some "lame animals" out there, but I think extrapolating a few random, though admittedly interesting, negative facts is perhaps over-stressing the predicament of the financial sector now. There has actually been some very interesting news coming out of the sector in the past few days, news suggesting that the market feels more comfortable that the "winners" and "losers" from the crisis can now be more accurately identified.
The first piece of good news was Warren Buffet's $10 billion investment into Goldman Sachs. RP correctly identified that Buffet got a good deal, but then he usually does. It probbaly explains why he's America's second ricjest person, without ever having invented something like MS Windows! The importance of Buffet's investment was its marketing impact. It's the kind of "badge of approval" that no markeeting budget can ever buy. it's certainly worth more to GS than any improved credit rating from S and P or Moody's. It helped them raise 100% more in their public sale of securities than they had budgeted.
Secondly, Bloomberg carried a story about how JPMorgan raised $11.5 billion to recapitalise in order to allow them to acquire WAMU. They approached 10 investment managers (no SWFs or PE houses), and got the $7 billion they had targetd from them. They then raised twice the amount expected in a public sale of securities, so ended up with $11.5 billion, not their target of $9 billion.
Thirdly, Mitsubishi UFJ invested $9 billion into Morgan Stanley.
Finally, earlier this week we saw different direction price movements across UK banks on the same day: strong banks (eg HSBC) rose in price, weak ones (HBOS, RBS) fell. At the same time, many non-financial stocks that had been heavily oversold for no apparent reason, began to tick up. This is all indicative of the equity market beginning to behave more rationally.
I still think the credit crunch is going to kill off a few more of the lame. It's indicative of how brutal market capitalism can be. We have probably seen 10 years of banking consolidation occur in about 10 days. I've got a few comments on that too, but I'll post those separately.
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126:
Funny, but this bank, unlike a building society, wouldn't make loans.
It also would not invest the deposits.
Neither would it pay interest (when a bank pays interest, they have to get the money from somewhere, they do that by charging interest on loans and from profits from investments, but this bank doesn't make loans or investments).
It would simply hold the money in trust.
125, the investors make returns from the fees which the bank charges depositors.
Yes it charges people to deposit. That is because it has ongoing costs to cover, including returns to investors. It is not a charity, it is a money storage facility, as with any storage facility, there is a fee.
However due to the possibility of low overheads these fees could be quite low (possibly a fixed rate, not a percentage of the deposit).
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131:
Good points. My emphasis is first on group 3 - your group - which means we need to stabilise the economy. That way, would-be first time buyers will have the job security, and the access to mortgages, to benefit from lower house prices. This is how we start moving forwards positively. It involves sorting out the housing market.
My idea of transitional help for group 2 was a pragmatic idea - to prevent a repossession bloodbath and mass homelessness.
Say a house was bought at 200,000, with a mortgage of the same amount, but is worth 150,000 now. If we write the mortgage down to say 175,000, we recover - eventually - a lot more than we would recover now through immediate repossession, because selling loads of repo houses into a weak market isn't going to recover much of the value.
The person still takes much of the responsibility for their mistaken decision. They still have negative equity, unless/until the housing market recovers.
Your idea of taking ownership and then renting back works just as well - it avoids a tidal wave of repossessions, homelessness etc..
Though even this idea does, in some ways, let people off the hook. Renting cancels all of their negative equity, which is a let-off, if you think of it like that; partial write-downs would leave them with some negative equity, albeit somewhat reduced. That was my outline idea, anyway.
Some kind of shared ownership deal might also be considered?
Overall, I think there's some kind of solution which squares the circle of responsibility, transitional help and pragmatism. Shared ownership might be a useful component.
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#109 and #105 - Yes, I'm in.
How about this for a model, simply openly borrow your money direct from the BoE under emergency funding rules at a rate which is less than the LIBOR (as the rates are no longer in sync)
Then you can lend to other banks at a rate less than LIBOR. You can also lend to consumers at tiny or no margin - instantly cutting out and bankrupting all the financial institutions in Britain - leaving you as the Fannie Mac of Great Britain.
Instant profit - can't loose.......or have we heard that one before....?
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44: LMAO - Aye, "whores will have their trinkets"............... nice one, still laughing.....
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#157 Excellent post. I wasn't aware of all of that. Nice to see some balance to the doom and gloom.
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#147 - I am well aware of how the bank derivatives market works. And my description is eactly in tune with your description. The main thrust of your argument appears to be that institutions go bust quite slowly, and margin payments protect from really big losses, and the only real risk is a short delay in finding a replacement counterparty,
You, sir, are a fool. Bear Stearns happened over a weekend, and Lehmans was not much longer. How many institutions would have gone bust overnight had AIG failed? And you would struggle to find replacement positions in a lot of those instances.
Believe me, it is perfectly possible for an insititution to go pop in a way that would sen massively destructive ripples through the derivatives market. Again, I point to the amount of margin payments that had been made by Leeson in respect of Barings' positions on the Japanese Yen.
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Post #'s 105, 109, 126 and 139.....could not agree more.
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I'm not sure of the accuracy of these facts but it might help to lighten some of the doom and gllom.
If you had purchased £1000 of Northern Rock shares one year ago it would now be worth £4.95, with HBOS, earlier this week your £1000 would have been worth £16.50, £1000 invested in XL Leisure would now be worth less than £5, but if you bought £1000 worth of Lager one year ago, drank it all, then took the empty cans to an aluminium re-cycling plant, you would get £214. So based on the above statistics the best current investment advice is to drink heavily
and re-cycle.
I'm away to place my order for lager!
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Thanks Wee-Scamp, my sentiments entirely. I posted much the same at the same time as yourself but it obviously did not pass scrutiny. My tilt at Sir Fred was presumably considered immoderate. I still feel he lacks the courage to come forward and make a statement. He owes it to the thousands of shareholders (many of whom are/were hard working employees of the bank), who have lost so much at his hands. He was said to have been knighted on the basis of his contribution to banking (many cynics would say his friendship with the PM) but let us be charitable. On the basis of the mess he has got the bank into, should it not be returned?
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Can't the US and UK Governments just call Ocean Finance? Then they an consolidate all of the fallout from CDS's and CDO's into one manageable monthly payment? =)
Ahhh, gallows humour really is the best, we're all doomed you know...
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Mr Peston, what a sad and twisted world you engineer, everyday another "exclusive" round of doom and failure, as well as self indulgent told you so's .
What does your nivana look like? - as from all the postings appears that nothing short of financial apocolypse will suffice.
Just once try a different tact , Jim Baines from Goldman Sachs is a realist but at least adds balanced positive comments not fear stoking.
May not get you "the journalist most likely to trigger runs on the bank award " but hey the world is bad enough without the "were all doomed Mr Mannering!" blogs
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165:
Ha! Great thinking!
I'm a rock music fan, and my best investments over the last year have been rare CDs. One that I bought for £22.50 is now worth £175.00; another bought for £12.00 is now worth well over £100.00.
And so on. I can think of at least twenty where I've made similar gains. And you even get to enjoy the music!
(I'd be quite happy to give a couple of recommendations).
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#168 Very funny
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"It's settlement time on those humungous insurance policies for corporate debt, called credit default swaps, which I've mentioned to you as being another potentially lethal flaw in the financial economy."
Interesting. I don't recall anything like this being said when the going was good!
How easy it is to spot the "lethal flaws" when everything collapses and the mega-rich might lose some money as opposed to Joe Public
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There's been a lot of discussion on the rights and wrongs of Ireland's decision to guarantee all bank deposits (any amount, retail or institional etc). Nobody, though, has commented on the number of institutions involved. This, though, is a big reason for the policy being implemented.
The legislation covers six financial groups. All six are heavily dependent on the domestic Irish market: they do not have huge international operations.
Is it not odd that a country of under 6 million people has so many domestic banks? And I'm being generous and including Northern Ireland as part of their market to get them to a potential total of 6 million customers. The Republic's population is about 4.2 million, ie roughly the population of Greater London north of the river, which does not have one bank selling exclusively within its borders, I suspect.
Add to this the fact that the Irish banks all have the "triple whammy" of large exposures to domestic (Irish) mortgages, large exposures to buy-to-let (with secured properties not only in Ireland but all over eastern Europe), and massive exposures to domestic property development companies. The big-4 financial firms saw their share prices fall last Monday by between 18% (Bank of Ireland) and over 40% (Anglo Irish Bank), simply because the market realised that such over exposure renders them highly susceptible to catastrophic losses. Take a simple example. My mortgage (with one of the protected institutions incidentally) is priced at 0.80% above the ECB rate, which equates to 5.05% right now. EUR Libor is currently running at about 5.3%, so the institution is losing about 0.25% on a fully performing loan.
Far more frightening is the fact that banks (via developers) are offering EUR100,000 interest free loans to people to buy new properties, effectively putting non-performing loans onto the books on which they lose 5.3% from the moment the loan is made. Why are they doing this? Because they have no chance of getting the loans made to developers paid back unless they can get the properties built with those loans sold. They simply cannot afford the level of provisions required against those non-performing loans. Losing 5.3% on a loan is very attractive versus losing 100%.
The Irish governement's guarantee is nationalisation in all but name. The State has taken the right to appoint Board members and set executive pay. Effectively the State controls the banks. The plan lasts for two years. Expect to hear of one or more investment banks being appointed to assist the State decide on how to restructure the industry, and expect to see all of them (with one possible exception - Irish Life would be my guess) sold off to non-Irish banks before the two year life of the guarantee is anywhere close to its end.
It is the "village shop" nature of the Irish banking industry, and its near-total dependence on property finance right along the chain that has caused the State to have to step in and guarantee them. Basically, they have the problem of requiring external (of Ireland) funding of a predominantly domestic asset base. The market got round to focussing on the Irish banks last week, following their share price falls, and everyone realised that the external funding would very soon dry up and be diverted to less risky banks. Hence the guarantee which, unlike all other countries, covers corporate and interbank deposits rather than retail deposits which is the norm everywhere else.
Ireland had to do this, irrespective of whether the EU or anyone else likes it, otherwise the entire banking system would have become insolvent before the end of this week. It will not have the dire consequences feared by Gordon Brown etc. Yes, there will be some seepage of deposits from UK banks, but none of the Irish entities covered has a sufficient capital base to absorb more than a limited increase in balance sheet size, nothing like enough to put any UK bank in danger of having insufficient liquidity.
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The other thing I'm now noticing is calls to cut interest rates.
We're in the middle of a problem caused because people were able to borrow lots of money cheaply, now business wants rates cut again.
5% seems like a reasonable amount to repay if you have to borrow money, 30 years ago, it was considerably higher. Borrowing money shouldn't be any easy option.
Businessmen are never happy unless they can borrow other peopes money for nothing. I presume that is because their profits can then be use to pay fat cat bonuses. We've really got to get away from that culture which has served us so badly.
If anything, I'd increase rates, rather than cut them.
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ZARDOZ3006 PART1
I have been trying to find out about historical house price corrections following previous booms and I have. The present housing upturn was about 5 times higher than the previous one. Both the previous recent house price booms in the 1970s and 1980s have returned to prior boom levels because that is how the market works unfettered. Interestingly after the 1980s boom, you can see the house price correction slow and began to stop at exactly the time of the dotcom bubble bursting. This was Mr. Greenspan?s work in collusion with government and it is amazing to see the folly of supposedly intelligent men ? hey when it?s going up I suppose everyone is happy.
Some people have told me that house prices would fall in total by 10% but this is at a time when they had already fallen by 12.5% as was reported on the BBC website this morning. There was a 2% fall this month By nature assets always undervalue on the down curve relative to natural growth which then stabilizes the market, produces confidence in the market and that is when the traditional big money investors used to make their money. Big bubbles are usually only created when demand outstrips supply and with government collusion produce artificially highly valued assets ? especially when people believe that they are making themselves rich by doing so. In this instance because some young Einstein created derivatives of our mortgages (CDOs) which could be bought and sold on the market, then you can see the impact at or around 1997/1998. This is a factor which we have never seen before in previous bubbles and is something that will make the fall harder and longer than we can imagine. I certainly don?t think that it will have a beneficial or neutral impact, and if you agree that it won?t you must also agree that it will cause the downturn to be much harder than would have happened in previous market falls. Based on the previous information, at this point, I would therefore say the value of houses will fall to rates pre-1996. I feel that this is a conservative estimate because taking aside the markets natural correction pattern which looks like it should jump back to 1997 prices I have only allowed 1 previous year of house price deflation caused by this huge financial disaster. If you think that I am being too optimistic let me know.
Now let us consider the next layer of this crisis, the credit default swaps (CDS). These have only just come into play and will have impacts on financial institutions for the next 3 weeks or so. Surely, because of the huge amount of these CDS and the fact that up until 1997/1998 they didn?t exist, and in ten years they rose from being valued at $0 to being valued at about £60 trillion (more than the GDP of the ENTIRE WORLD) they had to have been financed to some extent with profits created from the sale of the other derivatives the CDOs. Now the extent must have been vast cos there was not that kind of wealth around ten years previously ? you do the math ? now stop me if I am wrong, but haven?t a lot of those CDOs been shown to be worth nothing?? I now feel unable to predict what level house prices will stop falling at, but it certainly aint 10% my friend. Maybe they meant houses will be worth 10%.
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There's been a lot of discussion on the rights and wrongs of Ireland's decision to guarantee all bank deposits (any amount, retail or institional etc). Nobody, though, has commented on the number of institutions involved. This, though, is a big reason for the policy being implemented.
The legislation covers six financial groups. All six are heavily dependent on the domestic Irish market: they do not have huge international operations.
Is it not odd that a country of under six million people has so many domestic banks? And I'm being generous and including Northern Ireland as part of their market to get them to a potential total of sixmillion customers. The Republic's population is about 4.2 million, ie roughly the population of Greater London north of the river, which does not have one bank selling exclusively within its borders, I suspect.
Add to this the fact that the Irish banks all have the triple whammy of large exposures to domestic (Irish) mortgages, large exposures to buy-to-let (with secured properties not only in Ireland but all over eastern Europe), and massive exposures to domestic property development companies. The big-4 financial firms saw their share prices fall last Monday by between 18% (Bank of Ireland) and over 40% (Anglo Irish Bank), simply because the market realised that such over exposure renders them highly susceptible to catastrophic losses. Take a simple example. My mortgage (with one of the protected institutions incidentally) is priced at 0.80% above the ECB rate, which equates to 5.05% right now. EUR Libor is currently running at about 5.3%, so the institution is losing about 0.25% on a fully performing loan.
Far more frightening is the fact that banks (via developers) are offering EUR100,000 interest free loans to people to buy new properties, effectively putting non-performing loans onto the books on which they lose 5.3% from the moment the loan is made. Why are they doing this? Because they have no chance of getting the loans made to developers paid back unless they can get the properties built with those loans sold. They simply cannot afford the level of provisions required against those non-performing loans. Losing 5.3% on a loan is very attractive versus losing 100%.
The Irish governement's guarantee is nationalisation in all but name. The State has taken the right to appoint Board members and set executive pay. Effectively the State controls the banks. The plan lasts for two years. Expect to hear of one or more investment banks being appointed to assist the State decide on how to restructure the industry, and expect to see all of them (with one possible exception - Irish Life would be my guess) sold off to non-Irish banks before the two year life of the guarantee is anywhere close to its end.
It is the quasi-village shop nature of the Irish banking industry, and its near-total dependence on property finance right along the chain that has caused the State to have to step in and guarantee them. Basically, they have the problem of requiring external (of Ireland) funding of a predominantly domestic asset base. The market got round to focussing on the Irish banks last week, following their share price falls, and everyone realised that the external funding would very soon dry up and be diverted to less risky banks. Hence the guarantee which, unlike all other countries, covers corporate and interbank deposits rather than retail deposits which is the norm everywhere else.
Ireland had to do this, irrespective of whether the EU or anyone else likes it, otherwise the entire banking system would have become insolvent before the end of this week. It will not have the dire consequences feared by Gordon Brown etc. Yes, there will be some seepage of deposits from UK banks, but none of the Irish entities covered has a sufficient capital base to absorb more than a limited increase in balance sheet size, nothing like enough to put any UK bank in danger of having insufficient liquidity.
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147, 153 and 157 all very interesting and informative. Given your apparent closeness to the market, do you believe the volume of CDS is now falling closer to the value of the related debt or is there still a degree of speculative bubble - i.e. are CDS still being written for trade purposes or are they now dominated by creditors' business needs?
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PLEASE!... all non financial 'industry' readers remember that those 'poo pooing' the 'get rid of fractional reserve system' on this site all work within the banking 'industry' themselves......so in the immortal words of MRD 'they would say that wouldn't they'.....because they all know that most of them would all be out of a job......and a cushy little number at that.
BTW - this subject has been seriously debated in the House of Lords on a number of occasions in the last few years but has been undermined by the few power brokers that have all to lose.
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ZARDOZ3006 PART1
I have been trying to find out about historical house price corrections following previous booms and I have. The present housing upturn was about 5 times higher than the previous one. Both the previous recent house price booms in the 1970s and 1980s have returned to prior boom levels because that is how the market works unfettered. Interestingly after the 1980s boom, you can see the house price correction slow and began to stop at exactly the time of the dotcom bubble bursting. This was Mr. Greenspan?s work in collusion with government and it is amazing to see the folly of supposedly intelligent men ? hey when it?s going up I suppose everyone is happy.
Some people have told me that house prices would fall in total by 10% but this is at a time when they had already fallen by 12.5% as was reported on the BBC website this morning. There was a 2% fall this month By nature assets always undervalue on the down curve relative to natural growth which then stabilizes the market, produces confidence in the market and that is when the traditional big money investors used to make their money. Big bubbles are usually only created when demand outstrips supply and with government collusion produce artificially highly valued assets ? especially when people believe that they are making themselves rich by doing so. In this instance because some young Einstein created derivatives of our mortgages (CDOs) which could be bought and sold on the market, then you can see the impact at or around 1997/1998. This is a factor which we have never seen before in previous bubbles and is something that will make the fall harder and longer than we can imagine. I certainly don?t think that it will have a beneficial or neutral impact, and if you agree that it won?t you must also agree that it will cause the downturn to be much harder than would have happened in previous market falls. Based on the previous information, at this point, I would therefore say the value of houses will fall to rates pre-1996. I feel that this is a conservative estimate because taking aside the markets natural correction pattern which looks like it should jump back to 1997 prices I have only allowed 1 previous year of house price deflation caused by this huge financial disaster. If you think that I am being too optimistic let me know.
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ZARDOZ3006 PART2
Now let us consider the next layer of this crisis, the credit default swaps (CDS). These have only just come into play and will have impacts on financial institutions for the next 3 weeks or so. Surely, because of the huge amount of these CDS and the fact that up until 1997/1998 they didn?t exist, and in ten years they rose from being valued at $0 to being valued at about £60 trillion (more than the GDP of the ENTIRE WORLD) they had to have been financed to some extent with profits created from the sale of the other derivatives the CDOs. Now the extent must have been vast cos there was not that kind of wealth around ten years previously ? you do the math ? now stop me if I am wrong, but haven?t a lot of those CDOs been shown to be worth nothing?? I now feel unable to predict what level house prices will stop falling at, but it certainly aint 10% my friend. Maybe they meant houses will be worth 10%.
It made me think that in economic matters our misperception of a problem is relative to our personal risk. I shall explain. I have no risk in the housing market and because I have been fascinated by the scale of this disaster I have sought out widely available information from various sources. This information clearly tells me that the housing market will bounce back to levels they were at around 1996/1997. Even if we dramatically lower interest rates, looking at the graph in a year or so you would not be able to see the effect without a magnifying glass due to the enormous Rise and subsequent fall that we are experiencing. The scale of this is 5 times larger as seen on the graph than the dotcom fiasco. This scale is relative to everything. We will have equivalences of scale in the rate of bankruptcies, house repossessions, company failures and redundancies. That is just the way it works. Governments have restricted the effectiveness of their control on the economies of the world by creating this abomination in the first place and then ignoring the ramifications of their consequent inaction in controlling its upward movement.
Let me get back to that statement ? ?in economic matters our misperception of a problem is relative to our personal risk?. I am perceived as a doom monger, but only by people who have risk in the housing market. Testament to this is the fact that all the information that I have included in this document has been widely reported and widely available to anyone to read. Yet educated people are already wildly underestimating the impact this will have on them personally. It seems the more risk you have the less you perceive the dangers. This may be why there have been no further runs on banks. People refuse to believe the scale of this problem. When I discuss this information with people who have less risk in the system then they seem to agree more with the available data and take, in my opinion a more realistic view of the crisis. I believe that we are conditioned because of our own experiences to not rationalize facts correctly due to fear. Maybe we are using the ?flight? part of our fight or flight response, but it has been very interesting to watch this all occurring. I expect to see that when people are cornered in a few weeks time to see further runs on the bank and the ?fight? response will be much more evident.
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Two companies have reported their profits this week, Marks and Spencer whose diminished profits reflect the fact that their customers are feeling the pinch - it is noticable that their prices are constant or better value. Tesco have, in the past few months, greatly increased their prices on all the basics ( vegetable prices are very high dispite the high yield of many home grown items - eg runner beans due to a wet summer) my weekly shop has rocketed. "Value "items are now hard to find on the shelves. Advertising claims that prices are being slashed are just spin. When normality returns lets hope both companies profits are justly reflected.
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168
Yes, turn the sea of debt into an ocean of debt. A life on the ocean wave. Waving not drowning. Pass me another Harvey Wallbanger will you Harvey
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I wonder which of the banks' are due to publish annual accounts in the near future. I sincerely trust their CEO's are very careful about what they say and also look forward to some TRUTHFUL AUDITING. Presumably all the dodgy financial instruments and liabilities (and when they fall due) WILL BE DISCLOSED. If not, will there be a case to sue auditors?
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The gold standard, an end to the federal reserve system in the US, and the UK state going bust. Oh, and Austrian-school economics. It's good to see that licence-payers' money is being put to good use: this website now serves as a refuge for cranks and loons who would be ignored elsewhere. Perhaps this will facilitate a cut-back in the NHS's care allocation for these strange people, thus enabling the UK to stay solvent!
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A friend of my 17 year old son came in last night and said isn't it terrible about the banks! He doesn't have a pension, is paid in cash, doesn't have a mortgage - i told him to sit back and enjoy it.
Banks don't make anything. When you manfacture goods you create wealth. When you lend money on a credit card at 30% APR you just move money around. It is a mistake made by Mrs Thatcher onwards to think you could swap service industries for manufacturing industries and still create wealth and stability. All the recession in Britain proves is that Labour should never have got into bed with big business. bankers - may you all rot in hell!
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# 158
Why would anyone pay for your money storage facility? They can stick cash under the matress for free. Of course, it could get stolen from there. But then, it could get stolen from you. That's a risk for which I would want a return, let's call it an interest payment, shall we? And how would you store your money for clients? As cash? In which case how do you differentiate my cash from everyone else's? That's a key point, because if you don't differentiate it, then my money might be at risk if some other client of yours has difficulties. Without proper segregation of assets, my cash might be capable of being seized by the administrator of another of your clients in the event of their bankruptcy. So, again, I want a reward for that risk: a big reward as you're putting me at far higher risk than my current bank, for all its faults, when it puts my money in my account, and Joe Bloggs' money in his account. I'm at no risk if he goes broke.
If you're so sure of your idea, why don't you apply to go on Dragons Den, and let's see how much backing you get.
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Are CDSs the threat that RP suggests?
If they are literally "swaps" then one bank's loss is another's gain - but the losses in aggregate are not increased or reduced by moving them around.
So, OK if you are one of the players in this Russian Roulette you will have a keen interest in whether it is you or the other guy whose head the gun is pointed at when the bullet is fired. But are the rest of us merely spectators who don't care who 'gets it'?
Or is it perhaps the case that if any one major institution 'dies' there will then be a domino effect which will bring down the others?
My head hurts!
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#88, tripe.
> the dollar's scarcity value is ensured by a central bank making a credible vow
say no more. credibility is the one thing central banks don't have. you want to bet the world economy on a "vow of credibility"?
> the reserve ratio is deposits / cash. [...] provided a bank behaves sensibly and retains confidence,
say no more. confidence is one of the many things banks have not retained (along with the savings of their depositors, for instance). as for sensibility, I won't bother rebutting that (see RP's original post for an explanation).
> the capital adequacy ratio is [...] measures the ability of the bank to take losses
In full-reserve banking, the "capital adequacy ratio" is obsolete.
> if that borrower repays his debt, and nobody else wants to borrow that money, the supply reduces back to [$]100 again. so what?
So what if he doesn't repay? En-masse? That leads us to the crisis we are now in.
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178 - I don't work in te finance industry in any form but without fractional reserve banking we would have no modern economy and still be stuck somewhere around 1500, with banks that simply locked your money in a vault, after giving you a receipt, which might circulate as paper money, but obviously not much of it. No significant loans to invest, credit to finance trade, mortgages to build homes etc etc. Might suit some people I suppose but to me it sounds worse than RP's most lurid nightmares
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# 177
Don't really know what's happening to CDS - that's part of the problem! There can't be much new CDS being written simply because the general deleveraging and derisking would stop it, but there is definitely a ton of the stuff out there.
However, as has been written previously, the gross exposure doesn't really matter. The issue is any institution's net exposure to credit. In very simple terms, anyone who sells credit protection is really taking a bet that a corporate borrower can repay its debts. In a scenario of positive growth and low interest rates, that's fine, but what we've seen in the last 2 years is slowing growth (now negative in Europe) and rising rates. Hence the risk of default. AIG shows the risk associated with this at its best (worst?). AIG basically had a $500 billion bet that interest rates would not rise nor would borrower default rates rise above their historically low rates of the past few years. That's an awfully big bet. Look at it the other way. There were lots and lots and lots of counterparties who thought it was worth paying a fee to buy protection against those risks, and seemingly only one party (AIG) willing to take the opposite view. That should have been warning enough!
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@184 - tuairimiocht
Welcome Aboard! Glad you could join us.
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#178
I don't work in the banking sector or finance.
I can simply see that fractional reserve banking is essential to the modern world, as all credible economists agree.
Wide scale full reserve banking would be a recipe for disaster and deflation and recession far beyond anything already coming or our (reasonable) imagination.
Pretty sure the people who suggest this don't really understand the implications of what they're saying.
And I have no vested interest apart from a desire to see a workable economy for all
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anddrewh @ 163
sorry if i insulted your intelligence, but please do not insult mine.
financial institutions (banks, insurance companies, etc), as opposed to bog-standard corporates, are inherently leveraged, meaning that yes they do tend to go down very suddenly, particularly in a generalised financial crisis.
in this sense, i agree that there is a big problem with banks' gap risk on counterparty exposure. that is exactly why they have stopped lending to each other, and exactly why banks' cds spreads have blown up lately as everyone is trying to hedge themselves further.
however, it is also the case that most banks are not totally stupid about their counterparty risk management. nick leeson is a case of an appalling failure of internal risk controls. while i do not deny that a lehman blowup could lead to some significant losses in the interbank market, i think they will be manageable. i agree that an aig default probably would have been pretty catastrophic, but then i was not commenting on the insurance business, only on the interbank derivatives market.
the point i was originally trying to make is that the real risk inherent in the cds market lies with hedge funds. these entities are also highly leveraged (like banks) but they take very big net long credit risk positions (unlike banks). therefore, in a credit market blowup they are susceptible to (a) a huge drain on liquidity as banks demand more margin against existing positions, (b) the credit crunch as banks refuse to refinance existing lending that leverages their positions. given that banks have big exposures to hedge funds through direct lending, and real money managers (pension funds, etc) have exposure through their investment in the equity of hedge funds, the prospect of a collapse of the hedge fund industry is very frightening, but unfortunately also very real.
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For anyone who doesn't understand Credit Default Swaps there is a rather good BBC article explaining them at
http://news.bbc.co.uk/1/hi/programmes/newsnight/7506653.stm
I gather the global exposure is more like $300 trillion though equating to many times global GDP.
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@17.
There is categorically no such thing as a Black Swan, is there?
While I'd agree that the likelihood of the UK going bust is not high, you'd do well to note that the world is a little different today than when the events you list took place.
1 - GBP is no longer the world's reserve currency.
2 - the gold standard is no longer, and when it comes back - as it will when people realise that paper is worth nothing - you'll be reminded of Gordon's fire sale in 2002.
3 - The UK can't just pull in resources from the colonies anymore.
Will the UK go bust? Unlikely, but not as impossible as you seem to believe.
When it comes to the crunch, what have we got to sell? A whole lot of spreadsheet jockeys in the City?
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Dear Robert
As the Russian President has stated American dominance of the worlds money markets is Finished, and we all now know the blame lies solely with Wall Street and Thread Needle Street
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lsi-92
your comments do not really contradict mine. you are basically saying that the problem is excessive leverage and i agree. the root of the problem is that there is simply too much debt in the system
but in your somewhat ideological approach, what you are implicitly saying is that any leverage at all (at least within banks) is inherently bad. if you want to return to shariah anti-usury law, please say this openly.
leverage is like fire - it is not a bad thing if handled correctly. but just because fire can get out of control if mishandled doesn't mean we should just extinguish it altogether and live in the cold.
"So what if he doesn't repay? En-masse? That leads us to the crisis we are now in."
that is exactly the point. the world does not default en masse. even in the current crisis, the vast majority of borrowers are perfectly capable of repaying their debts. the problem is that there is too much leverage (i.e. insufficient capital) in the system. this means that when a spate of defaults does come along, like in sub-prime market, the system is not able to absorb the losses, and you end up with a chain reaction of bankruptcies. the liquidity crisis is simply a symptom of loss of confidence, which is itself a symptom of excessive leverage gone bad.
to go for a zero-leverage system is nuts. what you are saying is that the few lucky people who have cash should just hoard it. put it on deposit at a bank that will never lend it out. the problem with this is that the people in the economy who can create wealth through their enterprise are very rarely the same people who sit on vast piles of cash. if those with the cash cannot lend their purchasing power to those with the ideas, the economy comes to a total standstill.
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At the risk of being called stupid by bankRslicker I think the penny may have dropped as far as I am concerned
If Fractional Reserve Banking is the cause of too much money and credit because it allows bankers to create, let us say, 10 times the money that they have in deposits.
Then, when those deposits leave or loose value, the money created by virtue of their existence must dissappear ten fold as well.
No wonder everyone is wetting themselves.
As for letting you buy gold and silver and keep it under the bed, disaster for the banking system!
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benagyerek (#88) - characteristically measured and clear. Interesting to watch it praised by various others before the full-reserve zealots get around to taking their swipes.
I don't consider myself a zealot on this issue but I do, from a distance, admire the Austrian school, from von Mises onwards, and I have a couple of questions:
1. Surely fractional reserve banking refers to the entity issuing legal tender, that it (in our case the BoE) only keeps a small percentage of reserves (in our case 3%) against all the 'promises to pay the bearer' in the system?
2. Do you agree that, within the context of our present system, a 'credible vow to minimise inflation' must in future take into account asset inflation, including property, not just the RPI?
I appreciate your point about recapitalisation - what you (and/or Soros) propose in #153 certainly seems fairer and more prudent than earlier bailout ideas. But are stock markets this week telling us not to bother committing tax-payers precious (future) resources this way? JayPee28bpr's fact-filled summary in #157 seems to indicate that the private sector has already been able to care of quite a lot, to this amateur. With US voters reportedly 10-1 against the original bailout plan put before Congress, aren't we heading for calmer waters anyway - and won't we later look back with satisfaction at democracy operating at its very best?
Hmm, that depends on the House of Reps later, no doubt. Thanks again for the calm(ish!) tone and informative nature of your various posts
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leesielover @ 195
the only countries that truly go bust are the ones that borrow too much in foreign currency. as the uk government borrows predominately in sterling, it always has the option of printing more money to repay its debts, i.e. it can choose hyperinflation over default. as sterling is not on the gold standard, the amount of gold reserves is irrelevant to the uk's ability to meet its debts.
but this is all very hypothetical. the risk of a loss of confidence in the uk government's ability to meet its debts is still extremely remote. a tax on private holdings of gold for example should help.
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But looking at the positive side, all this will be doing wonders for our carbon footprint !
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Well said No 183!!
Can we assume that all banks' accounts have been passed by their auditors up to the present as being a 'true and fair view', or am I being old fashioned as usual.
"When you walk through a storm hold your head up high" I wonder how many auditing firms can honestly hold their heads up high, or will admittedly hang their heads in shame?
Whoever invented the 'no blame culture' must have known what was coming. Clever
b------s!!
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#135 - "So who asked for it?" - The receivers
"why was it accepted?" - Because dearest Darling had no choice !!
"what would have happened if it hadn't been accepted?" - The EU anti-competition commissioners will drop on Gormless Gordon and dearest Darling like a ton of bricks if they tried to go ahead without accepting this clause !!
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Why the continual negatives, where is the balanced reporting?
You make a big deal about the M and S report today (ranked 65th on FTSE 100)
Where was your report on Tesco yesterday (ranked 14th on FTSE 100).
BBC is better than most media but you must consider the language that is used in your reports. Currently, you are contributing to the economic malaise.
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Tell you what - give me $700 billion and I, as the one eyed king in the land of the blind, will sort this little mess out for you.
Yes that's right - as long as there is no threat of legal action and no oversight - oh yes and a clear indication that even though I personally have amassed $500 million tax free from this little debacle, I should be trusted with the wealth of your grandchildren.
$700 billion will not wipe the arse of this problem. There is not enough money, trust, goodwill, paper or ink in the world for any intervention to sort out this calamity.
The sooner the governments and financial institutions come clean the sooner we can dump the politicians and get people with real intelligence working on the solution.
Sorry for the rant - havng a bad day!
Sorry forgot - we all are!
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I'm glad this one has finally come out as to me it's the underlying infection putting spots on the faces of all the financial institutions.
I believe there are two key factors here, timing and net exposure.
If organisation A takes out a CDS with organisation B over a debt (say loan 1); B does not hedge that risk by taking another CDS with A, it would take it with organisation C?
Ultimately someone somewhere has a net exposure surely ?
It could be argued that C takes out a CDS with A over a completely different debt (say loan 2) , so it would appear that the net position is zero.
i.e. if loans 1 and 2 go bad (AT THE SAME TIME); then C pays B who pays A for loan 1, and A pays C for loan 2.
BUT.....
What if only loan 1 goes bad? C ends up with net exposure. That would probably duff their credit rating due to their inability to pay, and anyone who had CDS written against bonds issued by C would then start calling those in.
How it would unravel is anyone's guess.
Maybe I'm seeing this all too simplistically, or is this a fair reflection?
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With all the "gazillions" to be barrowed and spent, bad fradulant debts to pay, and the endless alphabet soup of names in government agencies, broken banks, funny money to prop up finalcial corporations, all the Pro and Cons of different politics and "rescue deals"--- It appears, there has to be, a "nameless gang " who controls ALL of this mess and the PEOPLE have nothing to say about it. How long do any of us believe an evil situation like this can continue? The worst is yet to come! The absurd part is that no one yet knows what the "worst" is?
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benagyerek @ 200.
Fair enough, but being able to print your way out of debt does not a solvent economy make.
As for gold - taxing private holdings would be theft, not tax. That's why coins are better than ETFs. Hold them and hide them. No one need know.
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Those who are prepared to accept risk are merely punch drunk, those who are not are in an extremely nervous state bordering on panic.
Restoring confidence in the banking system among those who will not accept risk and previously regarded their deposits as secure will not be easy.
Is this 1930, will 1933 seem like a walk in the park?
Defend your allotments and invest in soup kitchens.
Better still buy shares, they are cheap as chips and interest rates must come down making them even cheaper.
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Hmm, I guess we'll have to reopen the Welsh Goldmines, the Cornish Tin mines, and the Coal fields.
When labour costs have fallen far enough thro Inflation, the factories will re open too.
So, one big lump of Inflation on the horizon.
Regulation needs to be stronger to prevent abuse of the no lose shortselling system.
Except the real losers are the Pensioners.
And the Soup kitchens will probably be there for the Pensioners and other benefit recipients.
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For those interested in Gold, Sovereigns and half Sovereigns are still issued by the Royal Mint.
However, they do not have a set Value, but there is no legal reason why people could not use them to conduct sales and purchases.
Few people would wish to be clanking about with a lot of Gold Coins in their pockets !
Quite Heavy!
But you would only need a few for most purposes.
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It is fascinating to find that the people who are screaming for the tumbrels to bring the bankers to the guillotine for their "excessive payouts" and at the same time lauding NR quite simply forget that NR *IS NOW* run by some of the very same people that they are scream for !!
NR did not simply turn into some magically run system by the waving of Harry Potter's wand !! It still needed *bankers* to run it and the two at the top are both foreign nationals !!
Or are you people saying that some pigs are more equal than others ??
A lot of the noise going on here sounds me like the rabble during the French Revolution baying for the blood of their king and their aristocrats. What did they do next ?? They went and got themselves an Emperor instead !!
Is this what will happen to the British financial industry now ??
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Mind you a Proof Gold Sovereign is two hundred and fifteen pounds.
And the Proof Half Sovereign is one hundred and ten pounds.
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Excuse my lack of knowledge about politics and business and follow this idea-
Lots of people want to put their savings into the nationalised Northern Rock. Surely that gives GB a pot of money to use for investment and reduces the amount of tax to be raised?
Hang on, isn't that what National Savings does?
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A bit tricky to pay for bread and milk with Sovereigns !
Clear the shops change right out ........
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In the current bail out of banks and other financial institutions, it would seem that shareholders and taxpayers who are the ones picking up the bill while too many directors seem to be staying in their jobs and getting their full salaries and bonuses.
I would like to suggest that before any bank or institution gets bailed out, the firm?s main board directors all agree 'voluntarily' with government to take a 25 per cent pay cut, with the loss of all bonuses and extra pension payments. Also, the next tier of management takes a 10 per cent pay cut.
These conditions would apply three years, that is, no pay rises.
If anything, this is still a better deal than that which many of their employees are getting as an awful lot will be losing their jobs and going onto unemployment benefit.
If the directors cannot agree to these conditions they cannot get bailed out.
Let?s see which companies hold the good of the firm, and the nation, before that of their own self interest.
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'In the coming three weeks, payouts of hundreds of billions of dollars may be made - or at least demanded - to cover losses arising from the defaults on the debt of Fannie Mae, Freddie Mac, Lehman and Washington Mutual.'
Ahh, so THAT'S why the bankers/brokers/dirty politicians and camp followers are so eager to dump this in taxpayer's lap!
No way, Jose!
Showdown time in the marketplace, not our job to bail them out!
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208 Actually as an independant power both USA and UK could create more money (ie print money).
This in itself would only affect Inflation, if Wage control was abandoned.
However, the imposition of two percent pay rises on the Public sector, and the four and a half percent private sector rises, mean that Consumer prices would not be able to rise more than 4.5 percent.
So Consumer goods inflation would not take off.
And as House prices are tied into Wages, and inheritances, House prices would n't change much.
As with all things it depends on how the action is taken, not what the action is.
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190
Thanks - v clear.
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In fact, it used to be possible to buy Gold Coins in Bank branches.
Of course, Banks could be required to keep some liquid funds in Gold Coins.
A very old fashioned idea, but shortsellers wouldn't be able to wipe out physical reserves with electronic machinations !
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Paul Mason's latest blog on the BBC Newsnight section is worht a read. It's titled 'British GBP1.9trillion bailout denied. So what are they really planning?'
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#201 - "But looking at the positive side, all this will be doing wonders for our carbon footprint ! "
Well, as I've said elsewhere, it's a good job we don't treat the environment with the same short-sighted, moronic, lack of care that we have treated the economy, or we really would be in trouble!
So that's a relief.................I think.
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#152 - "GOVERNMENTS CAN DO WHAT THEY WANT." - Sure they can. Dr. Idi Amin Dada, President for life and King of Scotland did it all the time !! I'm sure our dearly beloved PM will be greatly pleased to be put on the same level as Dr. Idi Amin Dada !! After all, he is a Scot, too, you know !!
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So what do we do?
1) Leave our money where it is?
2) Send it to Ireland?
(Or some other far off land)
3) Buy shares, sell shares or buy a small piece of gold mine?
4) Take it all out and stick it under the beds?
None of these seem appealing at the moment but at least I didn't win 100 Million on last weeks lottery otherwise I'd really be confused and even more angst ridden than now and I haven't got enough money to worry about!
More questions than answers but someone must know...
So what do we do??
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This is better than Private Eye's 'From The Message Boards'. We haven't heard from Broken_Britan and Bogbrush yet.
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Robert,
It would be nice if the governments of all the countries affected could simply click their fingers a snatch an extra trillion out of fresh air.
Well, thats exactly what they can do.
All the money in the economy was generated originally out of fresh air.
They've been doing it in Zimbabwe for years.
Its not great for the economy, but it might get us out of this mess.
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Supercalmdown - no-one would wish to use proof sovereigns - they are special finish, collectors' items. The ordinary sort can be bought for £110-120 each, quite a handy amount. I will be seriously worried though if the retailers start accepting them in payment. Victorian values are all very well, but there is a limit!
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#157 - FYI, Warren Buffet is now America's richest person since "young" Billy Gates decided to give up running Microsoft and devote his time to philanthropy AND Vista bombed big time, affecting Microsoft's perceived value in the market !!
However, I'm waiting to hear what Carlos Slim of Mexico will do in the US market since he is now the world's richest man !! And he didn't get that way by being stupid. If we're lucky he might buy back Texas, New Mexico and California and kick out the gringos !!
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Can anyone explain why the dollar has been increasing in value in recent days?
It seems perfectly clear that the US economy is in financial crisis, the US national debt is increasing very substantially and yet the dollar is increasing in value! On 22 September the dollar was $1.86 and is now $1.75 to the pound sterling. Over the same period, sterling has gained about one cent against the Euro, so the dollar's stregth is not due to the weakness of sterling.
I hope someone can explain this!
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I apologise if my comments in 202 were deemed to be immoderate. That was not the intention. I would be quite willing for you to omit the remarks which you find offensive, from the text. However, I find difficulty in reconciling it with with the liberal use of the F...word and similar profanities on BBC television.
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Be the first to see our latest viral video - a satirical look at the Credit Crunch featuring Bush and Brown:
http://uk.youtube.com/watch?v=kQdNLFVdwfQ
Sit back, relax and forget about the recession for a couple of minutes.
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CDSs and Mr Peston's radioactive baby
According to Mr Peston its settling up time on CDSs relating to Lehman, Washington Mutual, Fannie and Freddie.
Now by just following financial events I knew that all four of those were considered iffy at least several months before their trigger events on the CDSs. I also understand that the CDS market has been active throughout.
So if there is an institution out there that didn't take the opportunity to cover itself properly, taking counterparty risks and lack of knowledge about where the CDS actually ends up fully into account I must ask why?
Are they just plain incompetent in the face of a known risk? Or are they just reckless gamblers with the institution they work for?
Or is there no radioactive baby and its all being overhyped to try to ensure governments are frightened into taking decisions favourable to the Banks?
I don't know. But I did notice that when the US $700 bn bailout was first proposed Hank Paulson said that it would be less effective if remuneration was restricted by it. That is the financial institutions would not participate if their head honchos didn't get their bonuses. This suggests they weren't expecting to go bust - there is no bonus next year if you go bust.
Oh, and when Congress said no they all stopped lending to each other. Hadn't been such a big problem before. Its certainly turned the heat up.
I know its all a mess and some are looking at big losses and as a nation we are looking at a much lower standard of living over the coming years. But I suspect that 2008 bonuses maybe behind some of the more extreme hype.
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Content censoring by the mods ?
Or perhaps it is simply that comments are disallowed about Brown's refusal to provide a reasonable guaranteed savings safety net, The refusal to act is of course contributory to cash flows across and out of the Country.
The Bankers can't be enjoying their cash deposit levels being unpredictable.
Similarly, depositors can't be too pleased with only being partially covered for compensation.
So it has to be a barmy idea for any large depositor/saver to not take steps to reduce their risk.
Hence instability will ensue unless he gets his finger out and gets the compensation level up to about 250 thou
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I see the fractional reserve supporters are making a comeback(on this blog at least!)
First and foremost,if this system was`nt the most disadvantagous for the majority of people,it would not be in existence today.
That`s why the "elite" are wealthy to such a mind-boggling extent.
Can a humane,fair,honourable system create multi-multi-billionaires?
Next,why don`t we talk about the fact that although the World(some of it at least) is prosperous(many would lol to such a description of themselves or their neighbours) ,how can EVERY government,company,average joe,be in so much debt?
Next,let`s talk about how wars were financed and by whom for the past couple of hundred years.
Lastly,why don`t we discuss the exponential growth of compound interest,and what effect that has on these debts?
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rdrake98 @ 199
i don't know in great detail about the workings of central banks or the work of the austrian school (other than a smattering of hayek). however i can tell you that there is a big difference between hard currencies (economies that can borrow predominately in their own currency) and soft currencies, and between floating and fixed exchange rates. reserves (which means hard currency reserves as well as gold) are much more important for countries with soft currencies and/or fixed exchange rate regimes.
a sudden loss of confidence in a currency is much more catastrophic (and therefore much more likely without the comfort of substantial reserves) in the case of hard currencies and fixed exchange rates. that is why (so far) the dollar has actually been rallying during the current crisis even though banking crises usually go hand-in-hand with currency crises.
despite this, i do think there is a real risk of a dollar collapse because of a loss of confidence/appetite amongst the large number of other countries that peg or closely manage their exchange rates against the dollar. but that is a separate matter.
i don't think it makes sense to include asset prices in rpi, as stock prices and flow prices are fundamentally different (e.g. the latter largely conform to classic models of equilibrium, whereas the former do not). i think asset price bubbles are a function of excessive systemic leverage, and the best tool to deal with them is not interest rates, but instead better regulatory supervision of all forms of leverage (bank capital adequacy, derivatives, hedge funds, private equity funds, SPVs, insurance, etc). having said that, greenspan does share a lot of the blame for inflating the credit bubble by setting us interest rates so low in the earlier part of this decade.
i agree with JayPee28bpr @ 157 that the market is beginning to differentiate now, and this marks a healthy development in the crisis. however, i think the market is wrong to do this, as there are still plenty more things to blow up and cause as yet unidentifiable losses in the system - namely junk bonds, hedge funds, lbo / private equity, and credit card / consumer debt. have a look at the links in my post @ 24.
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Robert, like your reports: they're always at the cutting edge of developments.
I have a question though, based on the following logic:
1) People borrow money from banks, realising money they hope to have in the future into money in pockets now.
2) That money is "made up" money banks never had in the first place. But in selling the debt, banks have more "assets" and are worth more.
3) The insurance on the debt is underwritten by made up money that insurance companies don't have, but they don't normally need to produce unless things fail.
And in selling the insurance, insurance companies are worth more.
4) People spend their money, pushing asset prices. Things are worth more.
Howeevr, money that they hoped to have in the future, they now no longer have, or they can't have it quickly enough. They go broke.
5) Whole things feeds down. Banks "assets" are worthless and makes insurance claim. Insurance company now needs to pay out money they never had, and go bust. Banks can't get money that never existed in the first place, and goes bust.
So by that logic banks should never have been that valuable, nor insurance companies. The economy should never been valued so highly, because it was simply assuming a future value of what you hope to have, into value today, which is a bit daft.
The whole thing is a hollow shell. Rather like a gambler putting £10 on a race horse at 10-1, then declaring he's worth £110 pounds?
Is that not why it is so difficult to put a value on the losses, because we have put a tangible value on something that is really imaginary? With the gambler, he still think's he worth £110, because he still expects to win, but to everyone else, he's worth nothing.
So the question is this: won't the the US Treasury's Septic Bank simply legitimise the emptyness into something, thus condemning the current generation of taxpayers into working for that future value, when in fact it was imaginary all along?
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busby2 @ 229
yes, i agree - this had me stumped for a while too. some of it is has to be a recognition that the financial problems are potentially just as big in the uk and parts of the eu as well. but i suspect a lot of it is because the main net buyers of dollars - i.e. china, japan, uae, singapore, et al - do so for political rather than narrowly financial reasons. will be interesting to see how long it lasts..
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#215 - 20+ years ago, when I was in Italy, they gave change in sweeties !! I suppose, the shops will now give change in tins of baked beans !!
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Look, we all know that money doesnt actually exist.
It's only a system.
A system of barter, and to make us work.
If all western governments got their heads together to "refinance the system", the problem would disappear.
BUT THEY HAVE TO DO IT TOGETHER.
We'll have to learn lessons abouy mis-selling and over-pricing property later.
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#74
"Has anybody noticed that while the Stock Exchanges throughout the world have fallen during the last 2 days, the LSE has continued to make gains. Who says there is no confidence in Gordon Brown and Alastair Darling's handling of this crisis. It's about keeping your head whilst all around are losing theirs, and being men, not chickens."
What gains? The market fell badly today. It is always dangerous to take a position at a specific time of day and make this type of statement. You should certainly not use a two-day period to support your argument. It is more realistic to look at the FTSE from 02 May 1997 to date when the current reign of terror began and compare Gordon Brown's "vote of confidence" from the markets in comparison to other European and world indices. I don't think you will find any consistent outperformance in the case of the UK indices to support your contention. No great "vote of confidence" for Gordon from this source.
As regards the Kipling bit about "keeping heads", what about selling all that gold at the bottom of the market; what about spending all the money in the years of plenty so there is no fiscal flexibility to support the economy when the "bust" arrives, (no, he didn't abolish "bust"), and what about the panic measure of throwing around billions of pounds in tax cuts prior to the Crewe by-election to try to mitigate the impact of the 10p tax fiasco?
Keeping his head? For the good of us all given the damage he has contributed I suggest that his head should be placed on a pole on the Tower of London. That seems the proper and traditional thing to do. THAT would improve confidence.
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No one has lost any money on Deposit with any UK Bank.
So far the only losers have been the Shareholders, the Pension Funds, and the Staff who work at the affected Banks.
Anyone with under 35000 pounds on Deposit has absolutely nothing to worry about.
Anyone with more, just needs to spread it around a bit.
Or buy Gilt edged stock (Treasury Bills).
Simple, straightforward, and no problem.
I still think the arbitrary Nationalization of B and B after its brutal shortselling by hedgefunds was outrageous.
But hey, my opinions of of no consequence.
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Robert has posted a new blog btw
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I was just wondering what the real effect of this lack of cash really means.
To me, it means things like new houses and offices NOT being built. To the Country, it means hundreds of thousands of workers in the building trade being thrown on the Dole.
To various businesses that need those same building workers as customers, it means an order department phone that no longer rings. If there are no longer houses being built, then who needs all the mortgage workers and to be honest all the banks that they work for.
If there is nothing to lend and nothing to borrow, then we don't need the banks or any of you in the Finance Industry. So you had better get your act together and start lending money.
Massive unemployment rates are now almost guaranteed. Students, for example, may think twice about running up massive student loans only to find no work when they finish.
The banks have lost roughly 10 years worth of capital. That's how long it took Japan to recover after their own financial earthquake so why should we be any different. 10 years, get used to it.
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It staggers and amazes me that no one on this blog has realised that the humble post office is linked on its savings products with the Bank Of Ireland. Saving capital and saving a post office.. the good guys do win after all!!
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benagyerek @237
Thanks for the reply to my post 221.
A huge number of countries hold enormous amounts of dollars in their reserves. They would lose big time if the dollar fell in value, so are they supporting the dollar in this time of financial crisis? However if I held large quantities of dollars, I think I would be very tempted to hedge my position by buying other currencies, gold, oil etc.
All in all the strength of the dollar - it is nearly at the highest point for one year against sterling - seems quite illogical.
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busby2 @237
Quite - this is why China etc will not dominate the world just yet - they have too much committed to assets in a potentially devaluing currency, instead of investing them productively at home and alllowing theor own currencies to appreciate, thus increasing their people's wealth and buying power, which would boost trade all round. this strange system where US borrowing is funded by the savings of the much less affluent chinese can not go on much longer.
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benagyerek @235
Thank you once again for the considered response.
I wasn't advocating asset prices being included in RPI. I was suggesting that asset inflation is part of the inflation picture that a 'credible vow to minimise inflation' must in future take into account. By (partially) blaming Alan Greenspan for keeping interest rates so low you are I think agreeing.
The rest I want to think about. There is a problem with the Peston blog (and others, but Peston's case is currently the most extreme) that new threads quickly arise and continuity is lost. (The technical fix for this is, in the longer term, the integration of wiki concepts with blogs. But I digress into something I really find interesting!)
So, if I have more to say this time, having looked at the links in #24, as you suggest, I warn you (and others) that I will come and find you in the latest thread in which you are participating, rather than continue here.
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Just how good or bad things are at AIG can be seen from looking at Berkshire Hathaway Inc q-10 filing to the US SEC dated 31/3/03.
http://www.berkshirehathaway.com/reports.html
This statement give interesting details of the investigation by Federal authorities concerning accounting irregularities between AIG and a Berkeshire Hathaway Inc subsidiary.
Subesequently, Officers of both companies have since been convicted of various offences.
So if those holding CDS which are guaranteed by AIG may start to wonder if they will be able to rely on AIG being there when they are most needed!!
The fact is AIG and other insurers were taking the view that the bank backed CDS they were insuring would not fail, precisely because the catastrophic nature of such failures would drive government intervention, in order to salvage the financial system.
There is a net credit exposure with mortgage backed CDS's which rests with the parties to the issue.Their risk is supposedly mitigated by the insurance cover they bought.
Well welcome to the real world guys..like all insurers, they are rarely there to give you the protection you thought you had bought!!!!
In practical accounting terms, the loans and underlying assets are transferred to a special purpose vehicle (SPV), leaving the originator to manage the loans to maturity on behalf of the note holders. In default they have an obligation to replace the bad loans or redeem the notes at an appropriate value. I am assuming that since 'legal' ownership of the asset is transferred to the SPV, the bank accounts for the capital receipt as disposal at net book value. It retains a contingent liability to make good any default or redemption, but presumably the Directors would make appropriate statements about this liability in their annual report and accounts.
The reluctance of wholesale funders to make capital available for new lending is presumably because the apparent demise of AIG et al and those investment banks to be able to honour their obligations means that the mortgage banks pick up the tab. Suddenly the liability is there but with no asset to net it off against.
The extent to which asset values and therefore loans were over stated together with falling property values will be hitting Investors hard. At both ends of the scale retail savers and those with pensions are hit by the same failure.
Whilst not being too radical, it might be more prudent for those Investors be asked to convert their notes into stock in the banks.
Whilst it may not be an easy task, it would give savers and other investors at least a chance of salvaging something. At the same time, it would strengthen the banks position and ensure continuity and market stability.
As an encouragement, perhaps the deposit guarantee could be offered to those banks/investors who agree the asset swap?
This solution would not require further public capital and would hopfully bring new management into bank boards, that could bring a sense of order and prudence for the future.
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More of a question than a comment.
Since the traumatic drop in the TSX last week we have all been watching anxiously at what is unfolding but what I and am sure other lay folk are wondering is how Merril can still have so much clout and pull a buy rating on Potash Corp (http://www.cbc.ca/money/story/2008/10/02/markets-drop.html ) .
Are they shorting P. Corp and is this how finacial institutions control the markets?
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Sorry, I should correct my last post by telling people to look specifically at Bekshire Hathaways 1st quarter 2008 financial results and the Q-10 SEC filing dated 31/3/08.
The section under Legal proceedings makes interesting reading!!
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Re: A whole number of people
According to my dictionary the word "Liability" means: "a financial obligation, a hinderance or disadvantage"
So, if a deposit is a liability (which I agree is the technical definition) then what is the problem with people moving their deposits out of the British banking system. Surely a case for joy, celebration and the payment of yet more bonuses.
So all those who see no problem with Banco Santander making off with 20 billion of BB deposits are presumably piling into bank shares and just hoping that the Govt. doesn´t sell them down the river by offering any additional depositor protection.
Maybe you should think of lobbying to get that that is there removed - speed up the transfer of liabilities to the Irish, that´ll show them.
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re: 53
Get most of it out now! RBS won't be around in its current form much longer.
Alternatively, you could try to ride out the storm and hope HM treasury steps in.
Probably your deposits will be safe, with two Scots 'in charge' at the UK treasury, RBS (the Queen's bank, re: Coutts) deposits will probably be 100% backed, but in the current climate don't 'bank on it'.
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#130 - Good link! Lol!
Another quote:
"The great thing about derivatives is that short of a major investment bank failing, there's very little systemic risk involved with them."
Unbelievable!! Here we are with 3 out of the big 5 investment banks crashing and the other 2 have desperately run for cover as they wipe their hands of blood!!
I am amazed how (and it is clearly evidenced on this blog/comments at times!) people within the industry who are soo caught up in, and brainwashed by, the (clearly flawed) system have no grasp on reality!
Systemic ostrich impressions abound!
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Don't make the people who caused the banks to fail redundant if the government takes them over. Dismiss them for incompetence or gross misconduct.
Above all, those that caused the banks to over extend should suffer. Directors and Managers should be overseeing what is going on, in any business. If that business fails they are not redundant they are at fault, and administrators or the government should dismiss them.
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The potential for a big bang when the true value of the CDS and the 100% and 125% mortgages they covered is understood seems to be very high.
If I understand it correctly, when CDSs were originally packaged up and sold they were supposed to have three layers of risk and be constructed a bit like a christmas cake, with the fruit cake being the most sound, and least risky, the marzipan layer being solid but not quite as sound as the cake and the icing being the most risky of the three. These products must have been so configured originally for a value to be agreed between the seller and the purchaser.
It seems likely to me that in the gathering of momentum around the world for banks to buy these products because a lot of profit was being made from them, that at some point there was a change in the configuration making the icing even more risky, the marzipan being more risky and so on until, in the feeding frenzy of demand for more CDSs they became largely icing and therefore very high risk.
Human nature, pressure from shareholders to maintain profit, and pressure to do well in the market would have tempted the banks to buy but obviously neither they nor the regulators here or in the US checked on the value and provenance of the CDS products regularly to ensure integrity of product and correct valuation.
Were all of these products underwritten then there is a lot more we wait to find out and many more interesting but black days; but were they not, I will be interested to see at what point regulators did not get involved in their role of regulation of these and the finance sector.
If Robert can lend a little light on these thoughts it would be much appreciated, as is his understanding and clarity of writing which has made sense of a very difficult time.
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TWO THOUGHTS-
[1] THE MAFIA HAD BILLIONS AND BILLIONS OF DOLLARS FROM DRUGS TO FEED INTO BANKING SYSTEM. SURELY THE BANKING SYSTEM IN USA [FROM WHERE MAIN PROBLEM ORIGINATES] HAS BEEN INFILTRATED AND OVERWHELMED BY THE
MAFIA
[2] ALL CENTRAL BANKS MONITOR BIG TICKET WIRE TRANSFERS OF THE ROLLED UP SUB PRIMES BOND TYPE. EVERY WORLD LEADER WOULD HAVE BEEN INFORMED WHAT WAS HAPPENING OVER LAST TEN YEARS > WORLD LEADERS ARE JUST AS GUILTY AS BANKERS>
ALSO WHERE HAS ALL THE MONEY GONE?
SWITZERLAND? THEY ARE VERY QUIET !!!!
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