Why hedge funds are crying
It may be a case of shutting the stable door after the thundering herd has bolted, but law and order is being brought to the wild wild west of global financial markets.
G Brown will, for example, in the coming days put on his Wyatt Earp costume, and will ask the financial gunslingers to hand over their weapons.
A huge and totemic encapsulation of the imminent arrival in town of a new breed of marshals and sheriffs is buried away in an article in today's Wall Street Journal.
It's an excerpt from an e-mail sent on April 12 2008 by Richard Fuld, the somewhat tarnished former chairman of Lehman, the investment bank whose collapse last month brought the global financial system to the brink of meltdown (the e-mail was uncovered by Congressional investigators who've been examining Lehman's demise).
In an message to Lehman's General Counsel, Thomas Russo, Fuld summarised a conversation he had over dinner with the US Treasury Secretary Henry Paulson.
According to Fuld, Mr Paulson said he wanted to "kill the bad HFnds + heavily regulate the rest."
Crikey.
No wonder "HFnds," or hedge funds as most of us know them, are a teeny bit anxious at the moment.
After years of stellar performance, many of them (but not all) have suffered serious losses in the past few months of extraordinarily volatile markets.
Their increasingly risk-averse backers are asking for their money back.
And the likes of Paulson - who you might think would be on their side, as a former chairman of Goldman Sachs - apparently wants to slaughter the cowboys among their ilk and put the rest in shackles.
Of course, we only have Fuld's word for this.
But my own conversations with politicians and regulators are indicative that the tide has turned massively against this trillion dollar industry.
The authorities on both sides of the Atlantic have belatedly noticed that hedge funds' speculation in unregulated markets - such as the mind-boggingly huge credit-default-swaps market - has exacerbated the instability in regulated markets, notably stock markets.
They've belatedly noticed that hedge funds have vast amounts of power to decide the fate of banks and other financial institutions of central importance to the functioning of the global financial system - and yet there's almost no formal system for holding them to account for the use of that power.
And the authorities have abandoned their staggeringly naïve view that hedge funds are the girl guides of the financial community (I kid you not), because of the near-truism that when hedge funds fall over, they tend to hurt mainly their well-heeled backers in a direct sense, rather than millions of ordinary savers or taxpayers (I say near-truism, because the 1998 LTCM debacle notoriously precipitated a financial markets tsunami).
The point about hedge funds is not what happens when they make big booboos.
What matters is whether their activities make the financial system more or less adept at allocating capital in an efficient way, to the long-term benefit of our economies, and whether they enhance or undermine the robustness of the financial system.
As economic boom turns to bust, because of a systemic malfunctioning in the financial system, that's moot.
A few far-sighted hedge funds can argue that they were the good guys, that they shouted from the rooftops (through their profitable trading strategies) about what was going wrong before it went wrong (and more fool politicians and regulators for ignoring them).
But the industry as a whole hasn't even begun to address the central charges against it: namely, that it helped to stoke up the credit bubble by providing a market for toxic investments; and that it has brought disorder to the puncturing of that bubble, through the poisonous combination of deliberate strategies to destroy the credibility of weaker financial firms, and through massive automatic sales of assets in a falling market.
Proving that they've enhanced the general good, such that they protect themselves from being regulated into a dull and lifeless industry, may turn out to be somewhat more challenging than the trials of Hercules.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~21~RS~)
Comments
Sign in or register to comment.
We may have lost confidence in the bankers and the markets, but do we really trust politicians to perform better.
You just know this isnt going to go well.
Complain about this comment
Regulation, such as the CRA in the US and the Bassel II accord over here, caused the problem so more regulation will cure it?
Complain about this comment
The wisest comment I've seen during this crisis, was on an Andrew Neil special broadcast on News 24, the week before the vote in Congress.
Some bloke in Hong Kong, former chairman of Merrill Lynch, or one of the other US banks, looking a bit cheesed off as he was 5 hours ahead of us and he was stuck outside in the cold...
Anyway, he said that what the market needed in future were more contra-actions. Which I took to mean, if its a Bull market do things that are more consistent with a Bear market and vice-versa.
The idea being to keep the market stable.
As any student knows, complex systems need feedback mechanism and restrainers to keep them stable.
Clipping the wings of the hedge funds would therefore seem to be a good thing, as it'll stop one of the processes that drives the stock market in whichever feverish direction its headed, rather than restraining it and dragging it back to a more rational position...
Complain about this comment
I think it's the toxic assets that are the main problem. I'm sure that Andy Hornby and Sir Fred Goodwin must now realise that, as assets become hugely abstract and immensely intertwined, they become impossible to value properly. And, as I'm sure they also now realise, the assumed value of a thing should go down (not up!) when it is impossible to get a good fix on its worth.
You don't need a "financial abyss" to learn these things - a bad experience with a used car dealer is enough for most people. The problem may not be hedge funds, but youthful energy and inexperience. To fix this, bring in some grey beards, and sack the yuppies, please. Pretty please?
Complain about this comment
There is noting wrong with destroying hedge funds with regulations. If hedge funds have broken the law in the past they should be prosecuted, might be the right time to start investigating the funds.
Also this might be the time to tax excess remuneration. Its not fair to have supper rich not paying taxes and almost all the tax burden falling on middle class.
UK should move back to industries from banking as this type of banking will destroy this country.
Complain about this comment
its ok everybody iceland and the government are working day and night to solve the banking crisis in iceland(the one that never existed 11 days ago) wow that really does fill me with so much confidence.!!!
Complain about this comment
Robert , Bankers have abused their power by asset stripping cash in the way of bonus payments and leaving an essential industry collapsed .
Oil companies enjoy the protection of HMG and the infrastructure that goes with it to enjoy spectacular profits. They are abusing their position and destroying the financial stability of HMG by not passing on oil price reductions.Is it not time now to part nationalise them in a similar way to the Banks.
Complain about this comment
Hedge fund didnt cause the problem - they were, like so many others, just parasitic on the market.
The problem was one of accounting fraud, or pyramid selling or fractional reserve banking or whatever you want to call it.
The massive growth of the financial system of late was a myth. A thousand people claiming ownership of the same £10 does not make £10,000. But thats what the markets thought it did.
The stock market in this country should be nearer 3,300 or so and will get there no matter how much money the government puts in.
I beleive there really is a case for criminal charges against accountants who reported liabilities in the profit column. They are ultimately responsible for this correction.
Complain about this comment
yes #7 nationalize the oil cpmpanies and while your at it the railways as well,and then how about treating elderly people with some respect and scrap all their heating bills in the winter. the government soon found £100bn when it suited them.
Complain about this comment
It would be useful if we could be reminded what the terms of reference are for banks operating in the UK market and be reminded what each bank's original mission was when founded.
The current strategic objective has been to stabilise the banking system. Before we go regulating let's stand back and review the real purpose of our range of financial services.
We need places of safe cash deposit. We need sources of realistic funding. We need limits on the uses of cash deposits for profit making by bank so that their prime responsibility is honoured. We need a total separation of straight simple banking from investment gambling.
We need to reward companies building for the long term for the benefit of the UK and its people.
Before we go looking for whipping boys, we need to be clear about the specific objectives for the UK right now. We can sort out the bad boys and girls later.
Complain about this comment
One topic which nobody has as yet mentioned is the future of venture capital.
Do fellow bloggers believe the availability of risk equity capital is going to get better or worse?
Please note I'm not referring here to private equity companies which in my humble opinion should be erased from the planet for having created absolutely nothing new.
Complain about this comment
This article sounds like so many other "kill them all and let God sort out the good ones" propaganda !! Hedge funds will not go away !! The better ones have and will operate in climes that are more friendly but properly regulated. The failure is not the hedge funds per se but in government regulations !!
So long as people have too much personal wealth to manage personally, whether they are too busy making more or whether they prefer a more knowledgeable person to do it for them (for a fee, of course), hedge funds will exist. Nowadays, there is an even more powerful form of hedge funds called Sovereign Wealth Funds, set up by rich governments, that operate in the same manner.
Unless Gormless Gordon intends to declare economic war with those rich nations and wipe out UK's economy at a stroke of the pen, he would do well to, not only seek out the advice of wiser and cooler heads, but actually *ACT* accordingly. However, knowing his track record, he will make a big show of seeking advice and then act totally contrary to the advice given !! He's done it time and again !!
On another subject, once upon a time, RBS was nearly as big and powerful as HSBC. Now RBS is extending its begging bowl in all directions while HSBC is sitting pretty. I said so last week and I still strongly suspect that HSBC has the ability to tap into lines of credit from the Far Eastern Funds that RBS, in its infinite wisdom and hubris, has failed to develop !!
While HSBC is rapidly and intensely developing its forays into the China market, RBS is suffering from massive indigestion and heart burn after swallowing a too large chunk of ABN AMRO !!
Whom the Gods wish to destroy, they first turn into over-proud bankers and politicians !!
Complain about this comment
Another issue is regarding investor confidence, driving bank share prices down and so-called nationalise happened to NR and Bradford & Binley and even happening now by nationalising more banks will once for all completely utterly destroy the stock market and investor confidence in the heart of UK economic life. The hourable thing GB, AD and this government to do is coming out clean and say an apology to share holders and investors, after all these investors are the real rock of British economy, the investors are both tax payers and investors who day in and day out driving the UK ecomony moving forward. Rob their shares and nationalise banks without paying proper conpensation to share holders will totally destroy investor confidence. If the government come out tomorrow morning and announce that they will properly pay conpensation to Northern Rock and Braford Binley share holders, then I can say the market panic will disappear and confidence will return in no time.
Limit and regulate Executive pay and boardroom bonuses a resounding 'YES', penalise investors and ordinary share holders a resounding 'NO'. The government must be act pretty quickly to address this issue and lift the ban on all the banks concerned, otherwise the UK economy will totally collapse in the next couple of weeks.
Complain about this comment
I read in the FTfm a very good article that said that Hedge Funds had an enormous quantity of share they had to sell and that was why the equity markets were falling, then there was an enormous rally!
So whats happening? And if they are still being forced to sell, won't the markets continue to fall further?
Complain about this comment
The two hedge funds that piled unto Northern Rock towards the end of share trading are certainly crying now.
... and good! Vultures!
Complain about this comment
The one certainty in all these events is that hindsight will always be 20/20
And this applies to all walks of life!
Complain about this comment
a lot of hedge funds were truly irresponsible.
a very typical attitude was, when asked what assets they held, to respond that they didn't have a clue, but that didn't matter so long as they generated a good return.
a typical investment by one of these funds was to enter derivatives that generated fast short-term profits but exposed them to a "small" risk of serious loss. so for example they were big writers of credit default swap protection and of put options. exactly the kind of contracts that are now deeply underwater, meaning the hedge funds are having to liquidate assets to meet bigger and bigger cash margin calls.
most hedge funds do not disclose to their investors any details of their investments. they marketed themselves to investors on the basis of (a) they have a great track record (fuelled by the credit bubble), (b) they are super whizz kids, and (c) their fee structure (where they take 20% of upside return) incentivises them to outperform (and to take stupid risks).
unfortunately more and more of their investors were "real money" managers like pension funds, mutual funds, insurance cos and unsophisticated banks. given the usage of leverage by most funds (at least 2x leveraged), there is a real risk of another ltcm - i.e. hedge funds going bust and wiping out not only their own investors but also the banks that have lent them money.
this is a slow-burner issue. most hedge funds allow investors to withdraw money weekly or monthly (or sometimes even quarterly). but withdraw their money they will, and every $1 of equity withdrawn means $2+ of leveraged assets to liquidate and $1+ of borrowing to repay. all of which means there will be continued downward pressure on liquid assets (like the stock markets). it also means it may be a few more weeks before we see our first big hedge fund blowup.
fun times..
Complain about this comment
#10 Excellent summary and advice. Too bad, that the unwashed masses are baying for anyone's blood to salve their own shortcomings.
If those same unwashed masses had refused to borrow 125% mortgages, these funds will have nothing to trade with. If the then heroes of the unwashed masses, the barely educated barrow-boys who masquerade as "investment bankers", had their wings clipped by wiser heads instead of being allowed to re-package toxic assets as good ones, these funds will also not have anything to trade with.
These same people also to fail to realise that Share ISAs are also similar funds !! Are they going to ban Share ISAs from now on ?? Pension funds are yet more of their ilk !! Are they to be banned too ?? Yet both these funds have also contributed towards the market turmoil !!
Complain about this comment
Love your mixed metaphors, Robert: especially Gordon Brown as Wyatt Earp, and hedge funds as Girl Guides!
A little ray of sunshine amongst the general gloom.
Complain about this comment
I'm sure G Brown will wear the appropriate costume. Err is it trick or treat soon.
Complain about this comment
MadTom1999 #8
I assume you will have seen this video entitled "Money as Debt":
http://video.google.com/videoplay?docid=-9050474362583451279
It is a real eye opener!
It contains the following quote:
""Permit me to issue and control the money of a nation, and I care not who makes its laws"
Mayer Anselm Rothschild, Banker"
Reassuring isn't it;-)
Complain about this comment
could somebody please help me. At first I was under the impression that the sub prime lending was the cause of the problem, but "The credit losses associated with sub-prime have come to light and they are fairly significant...Some estimates are in the order of between $50bn and $100bn of losses" (Ben Bernanke, Chairman US Federal Reserve, speaking on 20 July 2007) does not come anywhere near the amounts of money now required for bail-outs etc.
Is there a good article explaining clearly how this relatively small initial amount of money led to the huge amounts now needed to save the financial system.
It seems to me too easy to blame the sub prime problem, when apparently (according to recent articles like this one) the real problems are debt trading, hedge funds etc etc. However, I would very much like to read an informed article explaining in detail how the present financial crisis has evolved (I have seen the 'cartoon' bbc timeline but would like more meat on the bones to get a full picture).
Many thanks for any links
Complain about this comment
#17 Quite a few hedge funds are leveraged far higher than the 200% !! If the hedge funds are liquidating massively and the prices are still rising, then it could only mean that the Sovereign Wealth Funds are stepping in to grab assets at fire-sale prices !!
I think that in the coming years, the knowledge of Mandarin, Arabic and Russian may be very profitable to its owners !! The value of Turkic-derived languages may also be profitable as Kazakhstan, Turkmenistan and other central Asian nations discover the need to manage their oil and gas wealth !! Iceland will probably have Russian as a subject in their schools, just as English (or the strange Trans-Atlantic dialect, thereof) was a subject there.
Complain about this comment
Robert, if you believe that,you'll believe anything.
There are only two things wrong with Hedge Funds.
One, they are Masonic in their secrecy- and all capitalisation of politics, government, business and institutions must be completely transparent.
Two, they represent 50% of FTSE trades on behalf of 0.2% of investors - all of whom self-define as already monumentally wealthy.
The idea of Bourse capitalism was NEVER to produce a tiny risk-averse minority of unregulated plutocrats sitting inside gated communities.
Broader vision needed, here - as with most things today. www.notbornyesterday.org
Complain about this comment
In the world of the Web, people are familar with the hackers Distributed Denial of Service attacks, which can effectively stop a web site from functioning.
It is often accompanied by a blackmail attempt.
It did occur to me that it might be possible for hedge funds to operate in a similar manner, that is, collude to simultaneously attack a stock, driving down its price until all sorts of unpleasant thresholds were triggered and thus make an (unhealthy) profit.
If this has been happening, then maybe it is time for the 'hedgies' to be reined in.
Complain about this comment
When Myron Scholes and Robert C Merton were winning their Nobel prize in 1997, everyone with serious money wanted to be in Hedge Funds Highly leveraged vehicles in high risk markets which just can not cope when the market converges and points down.
So what's different this time? What regulation was brought to the Hedge funds post the Asian crash of 98? Asia is a constant property bust waiting to happen. As for transparency in Chinese markets, well give me a break. I agree Mr Peston regulate the hedge Funds but you didn't make a great case previously. All I can remember is a 'what a scoop' these guy's are earning article, by you. In it there was some wishy washy worries on avoided taxes by Hedge Funds and the brain drain into them. Can you think of such a dominant industry in Britain's modern history that will leave no great mark on the landscape? Seems that all you thought about was 'charidy' largesse. No real analysis.
What areas do you need to regulate? I would argue shorting should be allowed and unfettered in the markets. Sure maybe there should be a mechanism whereby banks are protected during a prolonged compression of price. But if we didn't have it we'd still blindly have all this toxic debt on the balance books and Hedge Funds could go again just like after LTCM.
For such an excellent business journalist you keep waffling on about Hedge Funds undermining financial institutions. I'm sure underhand techniques have been used buit how does shorting collapse HBOS' shareprice when only 3-6% of shares are shorted? It doesn't does it in the case of a massive bank, there is only catastrohpic downward pressure because of the bank's suicidal business model.
Mr Peston I enjoy your journalism but a little less scoop/hyperbole and a little more considered responsibility towards the markets and us. Then hopefully when the next bust in Chinese property comes to the fore our financial instituitons won't be in it up to their necks. Will you be questioning them over the next ten years if we have the good times again?
Complain about this comment
#22 I suspect that he(or she) who writes just such a knowledgeable article will sell it as a study paper for lots and lots of money !! Such is Capitalism !! Knowledge is money and money is power !!
As our Trans-Atlantic comrade are fond of saying - There ain't no such thing as a free lunch !!
Complain about this comment
The 'dead cat bounce' has been and is now petering away.
The indexes will now go down even further - failed CDS's and derivatives are going to be the killer blow that no amount of gvt money can stop.
The charts have a horrible similarity to 1929 into the 30's - let's hope we can avoid the 1939 scenario.
The smile will be permanently removed from GBs face by the end of the week.
Although Fri 10th was the CDS deadline for Lehmans 400 billion of debt - I think about 350bn is leading to CDS/insurance claims - there is a 2 week deadline for the debts to be paid! By Fri 24th the CDS pyramid will come crashing down and the indexes will hit new lows, with some be shut for years!!
It's going to be horrible!
Complain about this comment
The Bank of International Settlements has recently reported that global outstanding derivatives have reached 1.14 quadrillion dollars: $548 Trillion in listed credit derivatives plus $596 trillion in notional/OTC derivatives.
These July '08 numbers seem to be a lot higher than often reported upon.
Complain about this comment
The issues is not hedge funds per se, but in the use of derivatives to get around normal capital requirements. The trouble with derivatives is that they are unregulated and have an ability to 'blow up', inflicting massive losses on entities that are then insolvent and unable to meet their obligations. The effect of this is that their counterparties - other hedge funds or banks - are no longer hedged, and incur similar massive losses; this goes on and on until large numbers of institutions become insolvent and the market freezes because nobody knows which insitutions this will be. No wonder Warren Buffet called derivaties 'weapons of mass destruction'.
The target should not be only hedge funds - it should be on the unregulated and dangerous derivatives industry in which entities 'pick up pennies in front of steamrollers' knowing full well that they can't pay out should their bet go wrong.
Complain about this comment
#13 "The hourable thing GB, AD and this government to do is coming out clean and say an apology to share holders......"
The Police may have been inadequate in the face of the amount of crime being committed, but it was the bad banks, hedgefunds, and speculators who were the criminals, not the government.
....."Rob their shares and nationalise banks without paying proper conpensation"???????
When B&B was nationalized it's market value was nil, because the value of its assets no longer covered its liabilities. NR slightly more complex but basically similar. The NR crisis was not caused by unjustified rumour and panic, but because it was going to run out of money. For both "banks" borrowing medium term to lend long term turned out to be a disastrous business strategy.
If the failure of these companies would not have had so many catastrophic knock -on effects, they would have gone into receivership, rather than being nationalized. But in either case, shareholders are at the bottom of the queue get little or nothing. That's capitalism - if you don't understand or like it, put your money in National Savings!!
Complain about this comment
alphaGlen (5)
tax excess remuneration.
Who will decide what constitutes 'excess'?
And what will stop these people taking their squillions of pounds/euros/dollars and dumping them into an account in the Cayman islands or Liechtenstein, where the writ of Revenue & Customs doesn't run and tax can't be collected?
I know that it's an old argument, it goes hand in glove with the non-dom question, but it's a valid one. Without currency controls you cannot prevent this happening. Impose currency controls and kiss goodbye to the City and all the money it gives up as taxes to Government to build schools/ hospitals/ prisons, etc.
It's a dilemma very well explained by none other than the owner of this Blog, Mr. Peston, in his recent book about 'Who Runs Britain'. (I have no connection to Mr. Peston)
Indeed I personally take some exception to his conclusions. Most public sector capital projects since 1997 have been funded under the expensive delusion that is PFI, not by capital expenditure from the Exchequer. So the Treasury weren't spending tax money on capital builds. (Begs the question as to where all that extra money DID go, doesn't it?).
And he contends that if we try to tax these financial big guns (who pay little or no tax)they will take their ball and play somewhere else, which would be detrimental to the economy. But if they pay no tax what is the Exchequer actually losing if they depart? They can go and not-pay-tax elsewhere.
There is a major contradiction here. Either they DO pay billions in tax, so the Govt. is grateful and doesn't want to make them flounce off elsewhere. Or alternatively they hardly pay any tax at all, in which case the Govt. can TRY to tax them, which will result in their relocation (supposedly) and the Govt. won't get the tax revenues anyhow.
Either way the nation is no better off.
WR.
Complain about this comment
alphaGlen at 5
tax excess remuneration.
Who will decide what constitutes excess?
And what will stop these people taking their squillions of pounds/euros/dollars and dumping them into an account in the Cayman islands or Liechtenstein, where the writ of Revenue & Customs doesn't run and tax can't be collected?
I know that it's an old argument, it goes hand in glove with the non-dom question, but it's a valid one. Without currency controls you cannot prevent this happening. Impose currency controls and kiss goodbye to the City and all the money it gives up as taxes to Government to build schools/ hospitals/ prisons, etc.
It's a dilemma very well explained by none other than the owner of this Blog, Mr. Peston, in his recent book about Who Runs Britain. (I have no connection to Mr. Peston)
Indeed I personally take some exception to his conclusions. Most public sector capital projects since 1997 have been funded under the expensive delusion that is PFI, not by capital expenditure from the Exchequer. So the Treasury weren't spending tax money on capital builds. (Begs the question as to where all that extra money DID go, doesn't it?).
And he contends that if we try to tax these financial big guns (who pay little or no tax)they will take their ball and play somewhere else, which would be detrimental to the economy. But if they pay no tax what is the Exchequer actually losing if they depart? They can go and not-pay-tax elsewhere.
There is a major contradiction here. Either they DO pay billions in tax, so the Govt. is grateful and doesn't want to make them flounce off elsewhere. Or alternatively they hardly pay any tax at all, in which case the Govt. can TRY to tax them, which will result in their relocation (supposedly) and the Govt. won't get the tax revenues anyhow.
Either way the nation is no better off.
WR.
Complain about this comment
After being told there was no link between the oil prices and the speculators it is I suppose only coincidental that as the speculators have had to cut and run the price of oil has dropped sharply
Complain about this comment
Robert, you normally write intelligent stuff but the penulitimate paragraph of this piece is off the mark.
The investment banks created most if not all of the "toxic" assets (even if some funds were buyers of these), and perhaps you should use the word "forced" rather than "automatic" to describe asset sales in a falling market. Many funds will be forced to sell more assets over the next few months due to redemptions.
Complain about this comment
This comment was removed because the moderators found it broke the House Rules.
Regarding oil excess profits;
Let's suppose that a company pumps oil from the ground and sells it on an open market. The dealers and speculators on that market inflate the price that they are willing to pay to the kind of extravagant levels seen this year. So that company now has massively inflated revenues and huge profits.
The cry of tax their excess profits goes up from many quarters. But they weren't involved in bumping up the price, they were just the happy beneficiaries from someone else's wheeler-dealings. Why should that have to pay some elevated taxation because of that? It's like taxing Apple because they make iPhones that sell for high prices. Or taxing Government because the heads of Quangoes are paid way too much.
And the question can be asked again; Who decides what constitutes excess?
WR
Complain about this comment
#28
"The smile will be permanently removed from GBs face by the end of the week."
Oh no it won't, if we really do go in to a 1929 plunge and 1930s like depresion then he will have all the tools and popular support he needs to wipe the smirks of the faces of the bankers, speculators and hedge fund managers as well as the Tories by postponing the next election by forming a 'National (Emergency) Goverment".
Free market capitalism will have consumed it's self in it's own acidic bile, not just in one country but world wide - the future will be capitalism but not as we have known it for at least 30 years, back to the future we shall go...
Complain about this comment
Whilst i agree with Roberts overall analysis, i fail to see just where or how any British government could possible find the sort of figures for bank bail - outs being bandied about without printing money - lots of it. This is in itself inflationary and will cause the £ to fall further sucking in more and more expensive imports. We need to start rebuilding our finances from new manufacturing and stop relying on the City of London and insurance in particular. Any world downturn with our markets in the state they are in will surely make Britains recession longer, deeper and more unpleasant than say Germany or USA.
For this the New Labour project and the miracle of the end of no boom or bust is as Shallow as the Cabinet led by one Mr G Brown.
Complain about this comment
Where is the erudite individual who will explain that it was our own venal and corrupting greed in borrowing on credit cards, loans and mortgages on massively over-valued houses which caused the bubble in the first place?
One can contend as to whether it was our demand that created a mania amongst the lendings institutions for doling out huge sums whilst ignoring any risk.
Or whether they created that market by encouraging us to borrow the money which they were willing to lend out cheaply.
In truth its probably a mixture of both. But we love to scapegoat someone else, don't we? If these bankers, hedge fund managers and private equity owners are making colossal sums for themselves then we can blame them for the storm, ignoring our own part in fueling the boom.
After all, none of us likes to take the blame ourselves. Do we?
WR.
Complain about this comment
No market of any sort can work without "arbitrageurs" (in the broadest sense) - i.e. people who buy whenever goods are being priced too cheaply and sell when they are priced too high. And in the finance industry it will never be possible to really distinguish between "arbitrage" and "speculation" - all we can do is lump the two activities together and call them "proprietry trading".
So the only choice is whether we want "propriety trading" to be the preserve of banks (in which case, if they get it wrong, then we lose our savings, liquidity, and the whole financial infrastucture that sustains our economy) or of hedge funds.
Much better if banking is left to banks and if trading is left to hedge funds.
Complain about this comment
Governments might not get there in time to regulate hedge funds. It might happen that their demise will be self-inflicted. One of the main principles of hedge funds is their ability to generate "absolute returns" - a positive return on an investment in rising or falling markets, through leverage if need be. This claim has been rubbished by the events of the past year.
Complain about this comment
#40
I assume you were asking that of politicians and commentators etc and not this blog, many comments have been posted over the last few weeks that have pointed out just that thing.
Complain about this comment
I think that Hedge Funds turned to high yielding toxic debt, interest rate swaps and other exotic instruments when nice easy vanilla trading on inside information became too hot for them. If I am right, they will wither on the vine.
Complain about this comment
"But the industry as a whole hasn't even begun to address the central charges against it: namely, that it helped to stoke up the credit bubble by providing a market for toxic investments; and that it has brought disorder to the puncturing of that bubble, through the poisonous combination of deliberate strategies to destroy the credibility of weaker financial firms, and through massive automatic sales of assets in a falling market."
Let me take this statement apart.
The vast majority of hedge funds are equity specialists. How did they inflate a mortgage lending bubble? Beats me, they sure as heck weren't demanding MBS in any significant volumes. Yes, there are some specialist fixed income funds who were engaged in this market.
But they were a tiny minority of the hedge fund industry. And some funds, like John Paulson's, were way ahead of the game in foreseeing the collapse of the MBS sector.
Deliberate strategy of destroying weaker firms? I dare anyone to suggest no hedge fund manager spread a malicious rumour about, eg, Bear or Lehman. But hey, Soros lost millions investing in Lehman, RAB lost millions investing in Northern Rock. So the impression that hedge funds engaged in a co-ordinated and frenzied attack on vulnerable firms is nonsense - what many did recognise was a bear market on steroids, and bet on a rush for the exit. But not all, not even Soros.
If the idea is that hedge funds accelerated this stampede and are therefore to blame for the crisis, we might as well ditch the market system as a whole. Were there hedge funds back in 1929? During the South Sea Bubble? During Dutch Tulip mania?
Basically, you do not need hedge funds to create severely dislocated markets. If anything, hedge funds help correct dislocations more rapidly than would otherwise be the case.
And the massive automatic asset sales? Okay, how does this come about. As I mentioned, hedge funds generally are equity focused. The other thing about them is they are typically highly leveraged. Investment banks provide this leverage. The dumping of assets comes in one of two ways - firstly, it's a bear market, and that's what traders do. Sell. Sad reality, that. A catalyst for the pace of the decline is that investment banks, themselves having to deleverage, pull funding previously offered to hedge funds. So hedge funds have to sell even if they didn't want to.
Remind me, who's putting fuel on the fire?
I am not about to say that hedge funds are wholly blameless, but the thought they are prime culprits, the so-called "spivs and speculators" who brought the financial system to the brink is crazy. Some hedge funds won, some lost, like all the rest of us.
They are one section of a thundering herd of financiers, the herd as a whole perhaps needs to be corralled, not just the section that no-one else understands.
That said, the hedge funds need to pull of a PR miracle. A few months back they were supposedly to blame for the oil spike, now they are to blame for the cratering of the entire financial system. There is seemingly no "outrage" for which they are not to blame these days, and as they (unlike banks and insurers) weren't able to jump into bed with politicians, I guess they will end up getting blamed for the whole shebang.
Complain about this comment
copy that, # 40
"Where is the erudite individual who will explain that it was our own venal and corrupting greed in borrowing on credit cards, loans and mortgages on massively over-valued houses which caused the bubble in the first place?"
If indeed you're right it was simply the housing market (and the USA housing marker really, so I understand; there was no housing problem in the UK big enough to trigger the credit crunch as far as I know).
Maybe I just have more social conscience than some but I think the greed in that context (in THAT context, note) was the eagerness to repossess houses rather than work out deals that folk could afford, thereby keeping a roof over their heads and assuring some level of expectation that the house would not fall into ruin and be taken over by rodents.
There is little to distinguish the UK bank/building society approach to that issue and unfortunately it's going to kick off in its usual ghastly way just like the 90's - with lenders (and courts) wagging their fingers at the poor stricken householders and saying 'you over-borrowed'.
You may say there are many who over-borrowed. Well, if that is so then both parties are equally culpable and equally at risk and this is no time for getting cocky about it.
I do wish someone in government would get off their backside and look into this.
GC
Complain about this comment
As LTCM, in 1998 leveraged it's capital of c. $2.5 Billion by a reported 40 times I am sure blog 17 is likely to be wrong when it states a leverage of only 2 for the current Hedge Funds (HF).
Regardless of the actual gearing/leverage it is certain that HF's have borrowed lot's of money and it is at risk.
How much resides within the soon to be nationalised Banks is what I would like to know?
And if the government does not yet know an exact picture of the liabilities of the UK Banks, why oh why has Prudence Brown
committed our future to these institutions?
I note last week it was going to be only £25 Billion in direct preference shares, we all know this week it is already a mere £37 Billion and rising.
Last week the Bank directors would not get bouses, then it was not to get cash bonuses.
Yesterday one Banker was quoted in either the Guardian or Times as saying that they would get bonuses but as share options, as though that was not getting a bonus, his gall is truly scary for the taxpayer!
I am sure they will also stuff their pensions and other invisible benefits (to you and me) to our detriment.
Remember share options when exercised dilute existing shareholders.
Already there is a groundswell of lobbying for the Banks to be allowed to pay dividends making the taxpayer even more at risk.
Finally the site of Prudence Brown taking 'the glory' for his 'innovative and fresh look' solution to the banking crisis, which he insisted should be copiedby the rest of the world, well his wish has come to pass and thus leaves the UK again near the bottom of the same pile as an attractive place to invest for the rich but excluded countries who did not participate at the G8.
(Because of the Uk's enormous government and personal debt burden).
P.S. Was I the only one who thought the sight of the G8 leaders trying to portray themselves as in control when they are the by far the most indebted indusrial nations was truly risible. Don't they know it is the person with the gold that makes the rules not the beggar?
Complain about this comment
I sympathise with you Robert. 'Why?' you ask. Because you have to report on the facts as you see them but in a manner that will not cause undue panic. The empire is on the verge of complete collapse but you need to keep smiling on through. Bottom line: the UK and the Western World is broke and is fidgeting like a freshly shot corpse. Apologies for the tasteless analogy. The only way through this mess is to go through it and speak constantly with family and friends - the politicians are now redundant, as they have been for a while. Economic doctrine counts for nothing - survival is all that matters now. Sorry to be so gloomy but quite a few of us are stocking up ready for the long freeze. 21st Century life will not be about celebrity or materialism, it will be about basic values and simplicity. Maybe it will be good for society? I hope so.
Complain about this comment
It's interesting this dead cat bounce analogy. Don't most cat's survive if they're dropped from enough height? All these doom mongers might be right but you'll be a little dissapointed if your metaphor means the cat lives.
Doom. Doom. Doom. Doom. Doom. Doom.
Complain about this comment
I think the quote to beat them all was one from George Osbourne - and yes, this is the same shadow chancellor George Osbourne.
"Laissez-Faire economics is dead"
Talk about the world on it's head.
This is after David Davies defended the right to trial before detention (48 days)
Meanwhile Labour have defended and supported the banks and effectively propped up the system.
I am confused - have I been in a coma?
Is this the reversal of polarity that Nostradamus talked of?
Complain about this comment
The oil price?
It's down because demand is down by about 1m bbl/day and growing.. That's a consequence of having a recession, near recession or whatever you want to call it...
Watch now for cuts in new oil/gas projects as oil companies try to force the oil price back up...
We've nationalised the banks (almost) now we need to nationalise the oil and gas companies..
Complain about this comment
No legal banking and brokering without transparency on all levels. That is a general conclusion, no need to focus on hedge funds alone.
And the most important level of transparency to achieve is the ultimate ending of tax havens.
No regulation from whomever and wherever will work, as long as there is any possibility to make your dirty business on a tropical or a channel island.
So, in my opinion, there is much bigottery in the statements of the politicians, espacially in the USA. If you take in perspective, that you must be wealthy or need to have very wealthy friend to fund a campaign in the USA, you come to the conclusion, that many of the top politicians in the USA have money and companies themselves on some island.
And I'm sure, that many of your british Lords and members of parliament have their money on a channel island, many french politicians in Monte and many germans in Liechtenstein.
The only, but significant difference: in Europe you must not be rich, to have political success. That means, the chances are higher, that it's not the majority.
Complain about this comment
Nothing wrong with Hedge Funds per se; what I do have a fundamental problem with is the concept of shorting ... or selling something that you don't have in a falling market so that you can make money on the difference. What's the problem here? It exacerbates an already bad situation for the market ... and if you get enough shorters, you create a self fulfilling prophecy. "But how else can we make money when the markets are falling" comes the cry. Well tough. You sell what you've got, and do your research to work out where the real value in the market is ... not destroy what inherent value remains in the market. The markets are not there for speculators to make money ... they are there for investors and industry to make money. If Hedge Funds want to make cash in falling markets, got to Ascot or Aintree. They'll do less damage there.
Complain about this comment
If governments want to take care of Hfunds they should ban short-selling with immediate effect and in relation to all markets. The immediate effect would be to see some Hfunds - and the banks over-exposed to them - go bust, but then you would see stability return to stockmarkets around the world. It is the ability of Hfunds and others to sell stocks they don't own - and never have owned - which is causing so much market instability.
Complain about this comment
Oh well, another naughty section of the financial sector bubbles up-and bank shares are going down again!
Is this a smoke screen to divert attention from the banks and the missing balance sheets and off book debt?
Bit like one sensational headline is supplanted by another then we all forget the first bit! Are we all being manipulated here?
Complain about this comment
46 - Do you not think in that case that it would have been better right at the start of the mortgage process for the lenders to sit down and discuss whatt he borrowers could afford to pay?
I know, here's a really bizare idea, how about by an industry-wide formula enforced by legislation?
The lenders have got to take responsibility for this sub-prime mortgage mess. Most people who have them are a bit dim and naive when it comes to finance. That is why they go to see 'specialists' and 'experts' (known as morgage brokers). If these specialsts and experts tell them they can afford it, then they believe they can.
Perhaps we should stop referring to mortgage brokers as specialists & experts and refer to them as obvioulsy what they are.
Perhaps they should have a disclaimer on all their adverts and paperwork such as-
"Warning - May state deliberately misleading garbage in an effort to get you to buy what you can't afford. Offering a mortgage is no indication of your actual ability to pay."
Complain about this comment
~22 m_wils
I am not a banker or economist, but here is my understanding of it:
First of all, $50-100bn was an underestimated amount. At the time, nobody knew how many subprime loans had been issued in total. Rel sum is approx $500bn. Things were more complicated as companies had broken down the loans and repackaged them with prime ones, then sold them on as colladerised debt obligations (CDOs). Other companies had such liabilities hidden from the bottom line, and we are only now finding out about them.
The result of the repackaging was that, when a subprime loan was defaulted, the whole CDO went bad and had to be written down. So the initial toxic subprime exposure bled into other assets.
Also, what the clever (sic) investment banks had done was take out insurance against the loans going bad, called credit default swaps (CDSs). But when all was going well, they saw another opportunity: CDSs had a margin built in. As long as the loan was good, they could also sell that product / trade it in the market and make more profit. When the loans went bad, this multi billion dollar market also got wiped out, hence more losses. And down goes AIG, the issuer of many CDSs.
Furthermore, as banks had more open debts to cover after all the writing off of assets, their balance sheets started to hurt. Credit agencies (that had been so kind to them for years) now downgraded them. Which meant thet they needed more collateral against their debt. Which obviously they could not produce, as they were over-levereged at 30 or 40 times their actual market capitalisation. So they started going bankrupt.
And don't forget that banks lend to you and me on a long term basis, e.g. a 5-year car loan or a 20-year mortgage. But in the money markets, they borrow money from the bigger banks and funds every 3 months or so. When it was time to refinace their debt this year, many found that the interest rate was higher, or more collateral was needed than before, which again they did not have.
A perfect storm.
And people think it's over? It has not even begun. Some wrongly assume that China will keep the world economy going. Nah! Without western consumers buying its products, China is next to collapse. Mining companies are already saying that demand for metals has falled dramatically there. No more growth from there.
With the west in recession and China not producing, demand for oil drops and its price goes from $147 to £78, maybe less. And with middle eastern countries counting on $100+ oil to keep growing and pay for their budgets, they are next to hurt.
Please others correct me if I'm wrong.
Complain about this comment
Hey Robert, love to see it happen. Does this mean that the authorities are going to 'trim' the hedges???
Complain about this comment
To join the Nick Robinson I told you so brigade.
Regular readers will note that I sadi that this was a dead cat bounce two days ago.
Smug Look
Complain about this comment
What truly shocking comments! Little wonder US Treasury Sec Paulson would like Hfunds killed off, but isn't it a case of killing the messenger if you don't like the message?
Hfunds simply offer a more flexible investment approach in their ability to leverage themselves and benefit in falling markets - without them the asset price bubble may have been even larger!
The real cause to all this mess was - and still is - the availability of cheap & unlimited credit, a result of government policy seeking perpetual economic growth. From the bursting of the Japanese asset bubble in the 1980s when the BoJ printed unprecedented amounts of money which, via the 'carry trade', found itself overseas seeking higher returns in US securities markets, the reaction by most countries facing asset bubbles has been to expand credit further.
Excessive debt and its encouragement are to blame for the current financial problem and for as long as governments choose to penalise the savings versus borrowings, the situation will persist.
Complain about this comment
Transparency will be one of the results of the current crisis and hedge funds, private equity and off balance sheet traders will no longer be able to hide behind a cloak of secrecy.
It is a nonsense to claim that disclosure of positions will reveal trading strategies and thereby hurt performance!
Complain about this comment
#38 - good point!
I meant his smile will be temporarily wiped. I read an article in The Times afew days ago that suggested GB was lining up for a war style coalition cabinet/government to try and save his sorry bottom!
If that is to happen he will have to resign first and have no part of said coalition, as suggested by the author (i forget who it was now).
Oh dear.....it's still going to be horrible!
Complain about this comment
"Laissez-Faire economics is dead"
I don't think we ever had them, if we did, every bad bank would have been allowed to fail without government intervention. The Austrian School make some good points on this.
What we have now, is what we had all along, Socialism for the rich, Capitalism for the poor.
The power stays where it did all along, as far away from the people as the elite can keep it.
Complain about this comment
#51
I don't even think Attlee could have nationalised OPEC!
Complain about this comment
#49 Slight confusion over the timing of the death!
The cat dies first THEN falls off a very high roof, thus it bounces when it hits bottom, but it IS STILL DEAD, it can only come down from the small bounce and it will STILL BE DEAD!
It will be resurrected over many years, but it will be a very different beast!
Complain about this comment
#45
Are you thee "Eddie George" (ex of the BoE) or another Mr E George?
Complain about this comment
didn't RAB invest tons in Northern Rock just before it got nationalised.
Complain about this comment
Oh Robert, you should know better ...the biggest fall in the markets came when the hedge funds were banned from shorting.
Blaming hedge funds for the current problem is like blaming maggots on a corpse for the death - they are just taking advantage of a situation. As i have said on many previous blogs Gordon Brown is great at taking credit and bad at taking blame, saying the hedge funds are the reason for this market situation is just laughable, it is the past ten years of misrule by the governments that basked in the glory of ever rising house prices and ever rising debt. Now is the time to pay and pouring money into banks will not solve the problem, repeating the mistakes of the past is no way to solve the problem.
Complain about this comment
This is an unfair snipe at the Hedge Fund industry (and know I don't work in the sector).
To condemn an industry (or to imply that others are condeming the industry) based on an excerpt from an email about a dinner conversation is an easy swipe.
If the 'central charges' against the hedge fund industry are that it helped to stoke up the credit bubble, then they are minor charges.
The hedge funds did (and do) what is allowed, help pay people's pensions and by investing money in their businesses they take a hit if they make a mistake.
Perhaps you should focus more on the 'central charges' against the public who should have said 'no' to borrowing cheap without understanding the risks.
Complain about this comment
Credit is printing money by other means?
Governments embraced monetarism in the 1970's and (more or less) have stuck with its central ideas, but wrongly thought their monetary control was working - when in fact it was the BRIC economies that were controlling our inflation?
In other words monetary policy was, in general, much looser than it would have been without the 'BRIC' effect?
If I am right then, without this loose money, the last 15 years or so in the developed world would have seen massive deflation (as in the late 19th century) rather than the steady but low inflation (with the odd bubble in real estate prices in some countries) that we in fact enjoyed.
Will the end of the hedge funds as an active force to promote credit creation now mean that deleveraging (and so negative monetary 'growth') will gather pace, so that asset (and consumer) prices rejoin their long-run trend line?
And, if so, what does this imply for formal monetary and fiscal policy needs?
Complain about this comment
Gordon Brown [mesmerelerado]over taking banks, is like Foinavon winning the grand national from behind in 1967,with the other stall ion type banks toppling eachother and their riderrs at the biggest beechers brook hedgefunds
To GB's credit, he always tried to concider the Nations future ,soon after becoming chancellor he forced the oil industry to collect gas instead of burning it off in, their rapacous desire to get at oil profits more quickly .
Complain about this comment
Could it be that Gordon Brown's economic policy of the previous decade was actually to give all the banks, hedge funds etc enough rope to hang themselves, so that no one would complain about starting a period of nationalisation, starting with the banks, and then moving onto utilities, transport and energy, until everything is back under state control?
If it has been, then he is a genius and I will throw all my support behind him (except in Scottish Parliament elections). 21st century communism - I like it!
Unfortunately, I have a feeling he really was just seduced by big businesses.
Complain about this comment
Your brief but accurate summation outlining the way that hedge funds can and do deliberately unsettle the money markets, because of their size and manner in which they operate, goes someway towards explaining what is wrong with certain aspects of the money markets and why these funds need to be more tightly regulated and better controlled.
These funds appear to be managed by unscrupulous and unprincipled people who know their way around the financial markets and can use huge sums of other people's money in an underhanded way to disrupt the (money) markets.
These people have no long-term statergy or business plan other than to make as much money as possible, by short changing as many businesses as they possibly can, for as long as they can.
Complain about this comment
What would have happened to the shareholder’s stock in NR and B&B if the normal processes had been applied and these companies had been left to go into administration?
Would the sale of assets(mortgage securities) been enough to pay off all the creditors (savers deposits)?
Would there have been any money left to pay to the shareholders?
Why as the lender of last resort did the BOE not have the 'balance sheet' to provide the required liquidity to NR but can now find more than that amount to provide £200Bn of extra liquidity?
As these companies have not yet become insolvent or gone into administration, do the shareholders have any long term claims to be compensated in the future?
Thus far shareholders have been the only victims of this crisis. The bankers have kept their bonuses, the government has obtained company assets at fire sale values under circumstances it created, some cynics might say manipulated.
I think we have underestimated Mr Brown’s cunning in this episode, he will have realised that at some point banks would need to seek government intervention, moreover created the circumstances (along with BOE) that forced the banks to seek intervention i.e. not providing sufficient liquidity, not doing enough with fiscal policy to re-invigorate the housing market and thus return confidence to the wholesale money markets, deferral of responsibility on monetary policy within a framework that doesn't allow consideration of economic growth and then imposing capital ratio requirements at a time when achieving these ratios was impossible.
M Brown has either been completely incompetent in allowing the financial system to reach the brink of complete meltdown or he has been the ultimate opportunist in obtaining assets at bargain prices through the power the government holds with respect to the financial system.
It is for us to decide when we get the opportunity.
If the government nationalised in entirety the banking system, we would, in effect, be living in a communist state. Is this the ultimate objective of our leader, maybe the suggestions of Stalinism are not that fantastical.
Complain about this comment
#50
Socialists have always tended to be in favour of mega-businesses since they can use them to control the economy. Hence Socialists will tend to ramp up pointless regulation that only big businesses can readily afford to implement whilst simultaneously reducing the direct economic regulation of them. They will seek to control these mega businesses by patronage and favour (peerages etc.).
There is no doubt that smaller businesses that have been struggling with the costs of the regulatory burdens imposed by this Government will have to be the salvation of the UK economy - and for them to be able to do this we need to lift the burden of "social regulation". At the same time we need to tighten economic regulation - and this will hit the mega businesses.
So George Osbourne's statement is not so incongruous - he will impose economic regulation on the mega businesses that need to be regulated - but hopefully he will combine this with reduced social regulation.
And as for David Davies - well it was hardly difficult to be less authoritarian than the current Government!
Complain about this comment
What the government should stand accused of lying about the necessity to everyone. According to them it was acceptable for the companies of the 4000 BANKERS EARNING OVER A 1000000+ to have advantageous corporate taxes because of what was brought to the economy.What was stated is that if they are not given what they want 'ALL THIS TALENT WILL GO ELSEWHERE'...What has been proven with flying colours is that these people have no talent...just egos and remorsless regards at gambling other people's money. If 90% of that cream crop of bankers is not out of employment within the coming year, absolutely no lessons will have been learned.
Complain about this comment
re post 71 Gordon Brown was 16 years old when foinavon[named after a scottish mountain ] won the grand national ,due to all the other front runners becoming spooked, slowing down and toppling their riders as they came into the fence now named the foinavon fence .
Gorden got over the psychological barrier of central banks not running pirate banks,thus turning them from profiteers to privateers
A giant leep for Gordon, a step back for bankind
Complain about this comment
One question which I have not seen answered in the last few days is this:
Where did the money come from that the government is using to bail out the banks and get credit moving again?
It must have either:
1) come from reserves. Does UK PLC keep that much money in reserves?
2) been borrowed.
If was borrowed, as seems most likely, then borrowed from whom? Not from the Western banks that's for sure. So who does that leave? China and the Far East.
Complain about this comment
#62
"If that is to happen he will have to resign first and have no part of said coalition, as suggested by the author (i forget who it was now)."
No he (GB) would not need to resign on the formation of such a coalition government, Chamberlain was only replaced because he had lost the support of Parliament, not because he or Parliament had decided on the formation of a coalition.
Complain about this comment
One might as well blame the silicon chip as without the calculating power of computers it is unlikely that the hedge funds could have been able to function at all: too many calcualtions required in a very short space of time.
This can only be a marginal activity and it is a wonder that it was allowed to become so big when it did. The cutting, slicing and dicing of perceived assets in order to make a profit must have been incredible. It is amazing that nobody asked sensible questions as to whether this was a useful way to spend one's time.
To my mind the hedge-funds are the living proof of the failure of regulation. After the LTCM fiasco the regulators should have moved in wholesale as disaster was only avoided then by liquidifying the market with cheap money. We all know how that finished up, don't we!
There is only one way to earn an honest living and that is to provide something -either a product or service - which is useful to the individual and of value to society at large. I can appreciate that boring banking falls into that category but institutionalised risk-taking has no role in a civilised society.
If people like taking risks then they can join the SAS and be useful to the rest of us who like something more routine.
Complain about this comment
On the question of whether or not the government, BOE and FSA are culpable in this mess, you need to answer the following questions:
If the actions taken with the provision of liquidity and the underwriting of interbank loans had been carried out a lot earlier would we have reached this crisis point of potential systemic failure?
If capital ratio requirements had been imposed during the boom period would we have seen the unsustainable boom in credit?
Should macro economic policy have addressed the problems with the balance of payments which has in effect meant that we have imported all this debt from sterling surplus?
Does the tri-partite system for financial regulation and macro economic policy work and deliver the objectives of financial and economic stability and steady economic growth?
If you arrive at the same objective conclusions that I do it is clear that those authorities are more than responsible, and ultimately as the chief architect of all these policies, systems and structures Mr G Brown should be made accountable.
Complain about this comment
The government has defended its investment advice to councils who deposited £858.3m in Icelandic banks which later failed.
Communities secretary Hazel Blears said the guidance had been "prudent and sensible" and that none of those affected would "struggle" to pay staff.
If thats prudent then I'm the Queen of Sheba.
Still it does Explain Gordon browns record if he agrees with this version of prudent
Complain about this comment
#59 - pot_kettle
...sorry, you'll have to do better than that...
I saw a post last week (I can't remember who it was) that said....
Government announces bailout Monday, shares rise - and then fall again Tuesday..
A day early for the fall - but pretty accurate.
Do you think Gordon Brown is finding time to post on here?
Complain about this comment
Drug Dealers. Eliminate one and two more pop up in their place selling cheaper and differently packaged products.
Money is THE drug to have.
So no Mr Peston. I think regulation (heavy-handed forcing transparency) is a no-no.
Trim the hedges, cut the branches and new (off)shoots will grow outside the borders. The additional light from trimming will stimulate the growth of new variageted weeds.
Honestly Mr Peston, we all need UK Plc to be No.1 for finance (we have no manufacturing or innovative base left). So, hands OFF regulation....
To. Pot_Kettle, Bit early for smug looks.
To. DocGloom, ha ha, & I expand your analogy.
This is not over yet, there are many debts to be paid and unwindings to come. Game of Domino's anyone?
Complain about this comment
White_Rat #32, You said:
"And what will stop these people taking their squillions of pounds/euros/dollars and dumping them into an account in the Cayman islands or Liechtenstein, where the writ of Revenue & Customs doesn't run and tax can't be collected?"
I expect sometime, in the not to distant future, governments will have to re-introduce (suddenly of course) capital controls and stop money moving international!!!
Complain about this comment
I worked for 5 years as a credit risk manager at Lehman, and I can assure you the writing was on the wall years before a hedge fund ever went short.
It was Dick's own acceptance of the massive proprietary risks that ultimately caused the fall.
The shorts merely pushed down the share price to its correct value. Zero.
Complain about this comment
I still think the main problem is leverage. Ordinary Joes with their £15k savings (when not in exotic heavens such as Iceland) are the only owners of real money: so reduce the allowed leverage factor to 2 or 3 and you solve most of the problems.
Guarantee the fundamental services first: NHS, pensions, education, sustainable growth. Is this socialism or communism? No, it is not... it's simply common sense, it's the world of real economy. Can real economy become finance? Maybe... have a look at the Ethical Banking system.
Complain about this comment
re post 69 Yes indeed hedge funds did fill pensionerds pots with their Strategicaly Hyped Investment Tranches [seemingly preferable to a straight flush at the time]
Complain about this comment
This "G Brown" guy sounds like some sort of rap star. What's wrong with "Gordon Brown", "Mr Brown" or "the Prime Minister"?
Complain about this comment
two hedge funds walk into a bar..........
Complain about this comment
Any ressemblance between Richard Fuld and Elmer Fudd is entirely circumstantial. What's up, Doc? is therefore the cry of Buggs Darling...
Complain about this comment
I would remind tose of a classical bent that the labours of Hercules included cleaning the Augean stables, a phrase which has oft come to mind of late.The task was achieved by rerouting the rivers Alpheus and Peneus through them: the financial equivalent will be founding a clearing centre for all derivatives.
Complain about this comment
Hi Rob,
Fuld needs a scapegoat to provide an excuse for his complete incompetence doesn't he?
For the record, the reason why Lehman fell is because of exceptionally bad risk management and the inability of their useless managment team to take a hard look at their balance sheet and make the appropriate writedowns.
Lehmans opened their books to scrutiny - in the hope of finding a buyer and what did buyers find? CDO's which were still being valued at 80% book value when companies like Merrills had taken 80% writedowns.
No wonder Lehmans failed. As for the continued arrogance of the man, (Fuld) it beggars belief!
Complain about this comment
We hear of 37 Billion pounds being allocated to certain banks. Can someone out there kindly explain how much 37 Billion actually is. In other words, how many zero's follow 37?
Complain about this comment
No one seems to have mentioned the prime-broker/hedge fund dichotomy...Most HFunds are populated at a senior level by ex senior banking execs using their old chums and their old banks for competitive advantage...Look at the John Paulson Story in the States...coincidentally, his fund's made as much money in a year as Bear's write-downs. Yes folks, Bear was his Prime-Broker (and he was an ex Bear employee who also had Greenspan as an advisor. Nice). There are countless other examples that could be looked at in terms of hedge funds getting away with murder and having less or sometimes more than transparent relationships with their prime-broker.
Essentially, hedge funds have gained significantly from a lack of standardization in the pricing and valuation of instruments. They have benefited from the lack of reconciliation on the valuations of assets between the various interacting entities involved in the trades. Instrument valuations have never been compared to those of prime brokers, of administrators, of custodians and of hedge fund managers. This has produced differences in the true value of the traded products. Additionally, there has been no agreement as to how much error fund managers are able to justify when pricing their hard to value instruments. This liberty has enabled them to tweak asset valuations by 1% to 2%, sometimes more than 5% per month cumulatively, to reach extreme returns of between 350% - 500% from fund inception up to the present day.
That's the crux of what needs to be looked at (and remedied) from a regulatory point of view.
Complain about this comment
A lot of the coverage and comment on this issue shows an almost "lynching" mentality and largely shows a complete ignorance of what hedge funds actually do. However given that these are rich, secretive sorts they seem a popular target.
In the large part hedge funds are not involved in "gambling" in the popular sense. Most of the strategies are mind-numbingly tedious statistical methods designed to give results over the long term rather than short term punts. Problems arise when working in illiquid markets and one strategy or funds actions begin to impact the market price. (Leverage further exacerbates this issue)
The near meltdown due to LTCM was caused by LTCM becoming the dominant player in the market for emerging markets debt. Meaning that when they closed positions (because their banks required more collateral) this reduced the market price and reduced the value of all of their other positions - requiring them to liquidate more positions. it became a negative loop.
The answer is of course to regulate hedge funds, this could be using simple methods:
1) Reducing the amount of leverage they can use.
2) Limiting how much of the market that they manage. For example: A HF with 35% of the market in a particular instrument will impact the market price with its actions (government should take note with the LTSB/HBOS merger = 30-35% of the mortgage market)
3) Increase the skills base of the FSA enabling them to work with an regulate individual strategies.
The most popular regulation seems to be that we should ban bonuses and performance related pay. This is of course complete non-sense, if anything we should introduce performance related pay into all aspects of the economy particularly in the public sector. What is required is actually performance related pay. For example footballers get paid whether they play or not, a HF manager is paid if they perform.
As a final note; The cause of this crisis sits with one group of people who have done their best to avoid all blame and even turn out as martyrs and that is quite simply ALL OF US! We didn't have to take out 125% mortgages, no-one forced us to spend billions of pounds on credit cards, we decided that a house was a great investment and pushed prices up, we invested in Icelandic banks that we knew nothing about on the basis of on advert in the Telegraph.
Complain about this comment
The main phase of the 'credit-crunch' began about three weeks ago and the indications are that things will get much worse.
Recent pledges made to banks by various western governments are, in reality, open-ended. This is now almost a war situation.
Banks and 'the enemy' (debt fuelled toxic off balance sheet sewerage & its originators), are inseperable. Next, to meet immense, almost 'black-hole-like' liabilities, more and more reasons will soon emerge to inject more and more public money to cover these liabilities.
The CDS situation is ready to explode when payments are called in and the actual bills arrive with insurers.
Months more of this turmoil is still ready to unwind. Don't drop your guard yet!
Complain about this comment
#49.
"It's interesting this dead cat bounce analogy. Don't most cat's survive if they're dropped from enough height? "
Not if they're already deceased, like Polly.
Even a dead parrot, when it hits the bottom of the cage causes a seedy-guano bounce event. Moreso if the fine feathered stiff loses it's grip from those higher perches.
Complain about this comment
How can Alan Greenspan be allowed to advise Gordon Brown and the America Hedge fund Paulson who has made billions out of shorting the British banks. Haven't we got a conflict of interest here?
Complain about this comment
#81
The designer of the fiscal system is the guilt person, so if anyone is responsible it is either Friedman or Thatcher, depending how strictly she followed the teachings of Friedman.
Complain about this comment
@98
Polly only stayed on her perch so long because Gordon Nailed her there forcing an interest rate cut in 2005
Complain about this comment
#82
"If thats prudent then I'm the Queen of Sheba."
Then you are the Queen of Sheba!
The advice was to maximise their returns, not abandon due diligence and invest in known risky markets - how come Brighton and Hove and others withdraw their deposits when it became clear that Icelandic economy was in a bad way, or simply when the apparent return (interests rates) were simple to good to be true without very high risk?
Complain about this comment
#84
re money is a drug
It's one thing to have drug dealers it's another having them inject their drugs on unsuspecting victims...
Complain about this comment
#101
No, Brown only inherited Polly, like Blair and Major before him, the person who well and truly nailed this country was Thatcher, not only did she put in place Polly (nailed firmly to the perch) but went about destroying with the up most glee most of the UK real wealth generating industry - whilst it's true that UK industry had become some what pot-bound, due to both management and unions, most gardeners would re-pot the plant and not just throw it on the compost heap as Thatcher did in the 1980s.
Complain about this comment
Warren Buffett warned us years ago about the damage the Hedgies could do to the market. Whether or not they are partly, largely or not-at-all responsible for the near-catastrophe in the banking industry is beside the point. Someone is to blame and this group is believed to be full of greedy porkers.
In current circumstances they are ideal whipping boys. The general public will enjoy seeing them severely punished and even banned from practising their strange arts. One thing is certain, few will feel any sympathy as they burn - deserved or not. Politicians would love to shift the blame onto them, so it could well happen.
Complain about this comment
@104
You need to look at history with a less biased veiw.
Brown is the one who dergulated the markets when he set up the tripartate arrangement and set up the FSA.
Lack of regulation is to blame for our plight and that is directly linked to the FSA that Brown created.
You will note that France arent up to thier necks in this like we are because they have the same capitalist system but htey hhave effective regulation. Thats not to say they dont have some exposure, because they do but they have on factor 50 and we had on cooking oil
Complain about this comment
Robert, the HF piece is very interesting, but there is more to the novel investment marketplace than meets the eye.
As a Big Hint, can I suggest you revisit commodities investment and price inflation, certainly since mid 2007 to date ?
You will note how remarkably sensitive commodity prices across the board have been to the apparent dwindling in demand in the global economy in Sep/Oct 2008.
You may wonder why orders shifting downwards have impacted 3 month and more pricing. And why such reductions in wheat compared with other staples such as oil ?
I could speculate further, but I suspect you may conclude we have already seen way too much such activity ? When such "investment" impacts the global economy as much as commodity price shifts have in the last 18 months, dare we term this reckless too ?
And I wonder how risky these guys were if the bust has made all this paper evaporate ?
Call Lehmans, I want 10 pence a litre refunded for the last 6 months . . .
Complain about this comment
The problem for the banks and governments is that there aren't 10 trillion people on the planet to socialise the losses to and dilute the pain regarding the impending CDS tsunami. The CDS unwinding will start very soon and it will initiate a domino effect causing countless western institutions and hedge funds to ultimately fail. Lets face it, the derivatives market has created a (de facto) shadow banking system....except the shadow is ten times the size of the worlds economy. Its completely off balance sheet and has gone unregulated for two decades. It has been leveraged to mind boggling factors of global GDP. The only people who could have stopped this melt-down scenario were the ones who were profiting the most..... they thought they were in control of this monster......but clearly they were not! The Lehmans failure was the catalyst to this unfolding (and unwinding) economic disaster.
Has anyone else noticed the fear in Paulson's face of late? A master of the universe would not get on bended knee unless the situation and consequences were truly diabolical .....it's why everyone jumped on the Brown/Darling bandwagon.;...its because they are all so desperate for a solution. But it's all doomed to fail. Capitalism is eating itself.
I only hope there is a way of insulating the real economy from the delusional one?
Complain about this comment
#96 Rowan_P
It's too late!
Complain about this comment
Professionals in the market, like me, are getting fed up with the scapegoating of hedge funds...One of the main reasons for the massive swings in equity prices goes back to the de-regulation of the market. Good practice was for accredited brokers (and, after 'big-bang', jobbers too) to pool together orders (both buy and sell) and execute them with diligent discretion, to their best efforts and, importantly, whilst maintaining an orderly market....However, there is no control over the 'morons' (to quote Rio Ferdinand) that have access to DMA machines, Whether these traders work for authorised investment funds, or trade for themselves from home they contribute to the herd mentality and thrive on rumour-mongering. Computer trading makes it possible for hundreds of thousands of more 'tickets' per day (= booming fee income) and, no wonder, the Stock Exchanges have encouraged their ascendance. Whatever happened to 'Dictum Meum Pactum'?...Regulate the way that orders are transmitted to the Stock Exchanges, to bring volatility back down to earth. Anyway, coming back to hedge funds; most are run fairly & professionally and they provide a service by effectively regulating company share prices. If they are over-priced, they will sell, for example. Many run market neutral strategies and they have been unfairly hurt by the ridiculous short-selling ban.
Complain about this comment
This comment was removed because the moderators found it broke the House Rules.
#106
"You need to look at history with a less biased veiw."
That's a tad rich! I'm not the one who is only looking at the last 11 years of 'monetarism' rather than the last 30 plus years.
If you look at political history you will see that Thatcher was in power in the 1980s when the financial 'Big Bang' took place, had that event not took place (the first deregulation) many if not all the old checks and balances would have remained and any changes since would have been carried out in the old mould and not Thatchers brave new 'world order' of finance.
I'm not saying that Major, Blair and Brown have not made mistakes but they would not have been able to have made them m had Thatcher not changed the very way the financial markets work. Please stop selecting sound-bites of history.
Complain about this comment
#106
Further to my other reply
Sorry but re reading your comment re France, you simply do not know what socialism is, I'm actually wondering if you are another who things that socialism = communism! France is in a stronger position at the moment because it has a totally different banking system - more like what we used to have than the 'free market approach that we have now - and what is more France is far more 'Socialist' now than the UK has ever been.
Complain about this comment
Good luck regulating them.... Most are offshore LLCs.
Complain about this comment
#112, flogging a dead horse again....
As Lord Melchett said "A sheer bloody refusal to stare facts in the face will get us through"!
Exactly what checks and balances would still be in place? Big bang was about opening the closed shop to outside competition and ending fixed commissions. Apart from a sort of impetus to find higher margin business, care to explain EXACTLY how that led to a real estate asset bubble in 1998-2008?
Again the FACTS are:
There was a real estate and asset bubble under thatcher and she and her successor moved decisively to end it. Brown didn't.
PS French banks were leaders in equity derivatives and tax arbitrage. It is just they are protected from external predation by a protectionist government. Also note that the French didn't have such a huge asset bubble to burst as the UK.
Complain about this comment
And just to show how things won't change at all really, the go ahead was given yesterday for a 50% increase in flights from London City Airport - for those not close to Canary Wharf, LCY is the choice private jet gateway 20mins from the City for all those bankers to take their dividends off to their villas in Tuscany. If that isn't hypocracy I don't know what is?
So much for joined up government.
Complain about this comment
#102, The icelandic issue was brought up.
In a written question to the government in July, Lord Oakeshott - Liberal Democrat Treasury spokesman - asked: "What steps [have] the United Kingdom financial authorities taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom?”
Lord Davies, for the Government, replied that there was no concern about the liquidity or capital base of Icelandic banks operating in the UK.
If the government was not concerned why would the local councils be?
Complain about this comment
Non of us yet know how this will all unravel. This is not the time for knee jerk reactions. I notice the Americans have followed our lead on recapitalising their banks but with far less restriction. I suspect they want to give themselves the best chance of recovery for the start of the next economic cycle so they can be a phoenix from the ashes. Lets make sure we don't go and stifle the UK economy so it misses a new wave. The big question we need to be asking is not who to blame but how we can prepare our financial system to support and take advantage of a new cycle.
Complain about this comment
Robert, in the same pack of documents (publicly available) there is an e-mail from Dick Fuld in which the Lehman management become very sure that it was GS driving the rumour-mongering and short-selling on Lehman stock, and led to the collapse of Bear.
People may have different opinions about hedge funds, but it seems that one investment bank blamed not a hedge fund, but another IB for its share spiral and ultimate collapse.
Complain about this comment
In support of Leo Panthera and Ian West (blogs 53 and 54), and against jolo13 (blog 68) as the markets crash 8% today, having risen 5% yesterday, I would just ask why the focus is not yet turning on regulating Hedge Funds? The world’s politicians can sit around tables, nationalise banks, pour billions of taxpayers’ money into the system to try and stabilise the ‘market’. But the ‘market’ is a set of all-powerful hedge funds full of shorting speculators who buy buy buy one day and sell sell sell the next and couldn’t give a monkeys that the world is looking for stability. Having sorted out the banks, it’s these people we should now turn our attention to. Jolo 13, we need Hedge Funds to take a responsible position at this time and not ‘just take advantage of the situation’. They’re only doing their jobs! Where have we heard that before? ‘Maggots on a corpse’! Lovely analogy. Except it’s incorrect. This body is still alive but stricken and these unspeakable, irresponsible people are feeding off it, pushing it to death’s door (as more and more lifeblood is pumped in for them to suck on). This is in nobody’s interest. It’s as bad as war profiteering. They’ve brought it on themselves, so Hedge Fund regulation is coming, offshore or not. Thank Gord for that! It’s what government is for.
Complain about this comment
#57, you are wrong in some matters.
These products are perfectly simple. Money comes in from a collection of assets - either mortgages or bonds or credit card receipts - and pays it out as interest. If less money comes in because some of the mortgages default then there is less interest paid. It is that simple.
The face value of the Asset back securities is several trillion USD.
The issue is that these products are marked to market in real time. As they are being sold the price goes down and the "loss" goes up. In mark to market terms, the originally guesses would be correct but as the market declined further more the losses mount.
The CDO doesn't go bad if the subprime loan defaults because CDOs are made up of thousands of loans. The point is that one or two WILL default but on average enough won't to keep coupons high enough.
It bled into other assets because as accounting losses turned into cash losses and as interbank borrowing dried up people had to raise money by selling other assets driving prices down.
CDS are unrelated to CDOs. The tangential relationship is that some of the underlying assets might have some default insurance to bump up their credit rating. The issue with the CDS is concerns about counterparty risk, ie that you will claim and your underwriter cannot pay out. The ONLY regulatory change that would have helped here would be mandatory clearing for OTC products.
The issue for someone like LEH is that they utilise short-term debt to cover day to day trading. When they can't borrow they have to sell other assets and cannot trade. People stop trading - because settlement is not real time - and the bank dies.
Banks also issue long-term debt too. They cover their short-term trading with short-term borrowing. But most of their trading is short term.
China has a far worse liquidity and asset bubble issue than the the West and the Gulf states count on high oil. The West will come out of this, I wouldn't bet on communist china or islamic republic of Iran doing so....
Complain about this comment
I think the HFunds are far too clever for politicians and Regulators to worry too much about Paulsons's "threats"
Complain about this comment
Hedge Funds were fine until they played with money lent to them by the banks- against what I must ask- and their high returns tempted ordinary institutional investors to put their clients' money at risk so they could earn bonuses for themselves. Hedging is a very important part of international finance- in particular allowing farmers throughout the world to plant crops with a hedge against ruin- but they went too far- like many others and we all pocketed the cash if it was there. Hedge Funds and big money speculators exploit policy and regulatory weakness and that is fine until they get carried away so much that they can bring the house down. The only rule I think that will work is that Hedge Funds can only operate with capital not debt and no organisation can take a position with a risk - individually and collectively greater than that capital. In the old days Jobbers closed their positions each night- that would be difficult now but we must have a mechanism for limiting the quantum of risk taken on and the time the risk is present.
Complain about this comment
It would be very good if they disappeared altogether, but that is probably too much wishful thinking.
Complain about this comment
#115
Trying to rewrite history again I see, so in this brave new word of yours Thatcher was never the British PM between 1979 and 1991.
Yeah, right....
You really don't get it do you, all the reforms since 1980 would not have occurred in the way they have, there would be little in the way of mortgage industry, all building societies would still be mutual, there would not be share speculators dealing from their spare (now called the home office...) bedrooms...
Complain about this comment
#116
Just because the LCY airport can acomidate 50% more flights it doesn't mean that there will be 50% more flights, it's like telling a sports stadium that their capasity can increase by 'X' number of spectators - it doesn't mean that 'X' number of extra spectators will turn!
Complain about this comment
#117
But what about two weeks ago though...
Complain about this comment
The Gordon plan has bought some time and restored some order to the financial world but the grief and turmoil in financial institutions harbingers a worldwide recession of what scale nobody can be sure of but a Keynsian vicious downward spiral is at work. I think that contingency plans should be drawn up for a very large recession. Job creation, well in fact there is an obvious job to be done, a global job to organise ways of producing clean efficient energy for economic and for environmental reasons factories in the desert powered by the sun more energy efficient transport networks a n internationally coordinated nuclear energy plan as well as the disposal of nuclear waste etc. It may be necessary to employ armies of people in this effort including the statistical skills of redundant bankers, which will help to break the financial viscious circle and mean that when the world recovers it will have an economically and environmentally sustainable infrastructure so that prosperity will be more sustainable and perhaps poverty history.
Complain about this comment
It is surely apparent that modern communications and information transference have become so fast and efficient as to enable compression of the wavelength of economic (and many other) cycles, such that the relative change in amplitude (which seemingly does not change) is much more acute. I submit that in using modern communications technology to profit by (and so correct) pricing discrepencies, hedge funds are nothing more than a symptom of the market; that hardly makes them a cause.
Complain about this comment
I think Robert has got it about right. I cannot see how HFunds are good for economies. We don't have Free Markets and if we set the ssytem up so that only the wealthy benefit at everyone else's expense, then we are in dire trouble.
My suggestion for post crisis banking can be found at http://www.dingoes.org.uk/forum-view.php?thread=19.
Hedge funds and other leveraged devices are dangerous for the economy has a whole especially in the hands of private investors focused on personal gain. Even Fractional Secured Lending gives more to thoese who have. So lets go the whole hog and nationalise the banks and create an international system where only the authorities and leverage debt.
Complain about this comment
#129
Thats a bit like trying to claim that the 'drunk-driver' is not guilty, that it's the fact that alcohol is available - In other words many use the same communication and information systems you cite to trade on the markets responsibly, in the same way that many drink alcohol responsibly but a few don't.
Complain about this comment
#94: In American usage and modern (since the mid 1970s) British usage, million = six 0's, billion = nine 0's, trillion = twelve 0's.
If it helps you visualize, £37 billion is a stack of pound coins reaching a third of the way to the moon. What do you mean that doesn't help? OK, it's 352,000 tonnes of pound coins.
At thirty tonnes per truck, that's about enough to fill two lanes of the M11 between London and Cambridge.
Except there are only about 1.5 billion pound coins in existence.
Complain about this comment
The heart of the entire thing is the concept of value ... we have let people who understand the price of everything (but lack completely any concept of value) run the world for the last few years.... the accepted wisdom was these people were valuable, indeed invaluable to the smooth running of the system.
You couldn't move for legions of analysts debating the ins and outs of what Goldman Sachs , or Lehman felt was a fair price...or the market price; of this deal, or that Re-financing.
But this entire system was flawed and so what happened---er---happened and suddenly we find lots of this stuff was of no value at all.... Lots of these people have gone and the ones that remain have stopped doing what they used to do, and all of a sudden I'm rubbing my eyes and wondering what it was all about
I wouldn't dismiss any other person out of hand as being of no value,.... but am I the only person who hears the analysts and market gurus left standing and finds I don't quite value ANY of their views today as much as I did last year.
I already miss reading the FT guys, listening to the experts on Wake up to money, and watching the market analysts 'speaking to us from the City'and what have you, and thinking it all meant something important ... just doesn't seem to have the same value anymore now..not at any price.
Complain about this comment
Ah I understand now. Thankyou those who answered my dead cat ruminations. Shame cat's don't bounce from a great height, but maybe they do if they star off dead and bounce off dead.
Complain about this comment
Its easy to turn on the City boys and their hedge fund brethren but I still believe that the catastrophic losses caused by a massively overheated house market lie at the bottom of the mess we find ourselves in (sadly we are only just learning how overheated the market was in the UK, so expect more bad debt to arise soon). When I returned to this country 18 months ago with £350,000 of savings from 11 years of hard work abroad I made the mistake of following the advice of all my friends and I sought to join the house market gravy train. And I did it in the conventional way and leveraged myself (to the tune of £650k). The building society wasn't too reckless because this only represented 3.25X my £200k salary. My £1m house purchase doesn't look too clever now. My neighbour just sold for £800k and I can't help thinking that prices will fall further, e.g. to £700k. That means I have lost most of my savings. I don't blame the hedge fund managers. I blame myself and all those that helped to make ordinary people believe that house prices could never go down. Because most of us were guilty of buying into this myth (including Dick Fuld and Henry Paulson) we prefer to avoid the truth and instead blame some wealthy hedge fund managers, or if you are a wealthy fund manager like Jon Moulton you blame the equally guilty Gordon Brown. Bottom line is we all got this wrong and piled into real estate and leveraged our bet and insured our bet and double up again. No wonder we have to take some pain now.
Complain about this comment
some things just never change and lessons are never learned.....
I know someone who is looking for a motgagw, went to an estate agent and they keyed all the info into a search programme.
She was told that her and her boyfriend could get a mortgage for £120,000-she earns no more than £20k a year, and him £17k. How is that showing restraint of lending!!!!
This hedge fund business-more rhetoric to divert attention!
So why was the ftse down today?
Complain about this comment
Now pay attention at the back...
Lots of very intelligent postings - but for Mr Everyman, I thought explanation of the basics was in order.
If you were to set up as a Bank you should follow a very basic rule:
For every 4 depositors (people depositing their savings) there should be a maximum of 1 borrower (a person who you lend money to)
E.g. 4x 1000 saved = 4000
Maximum loaned = 4000
If you were a normal business, those savings (on money in) would be ASSETS. Money borrowed (out) would be LIABILITIES.
Banks see, and more importantly, account for it the other way round.
Money on deposit = LIABILITIES
Money on Loan = ASSETS
Furthermore, some money on loan is in return for a stake in what the money is being used for (obvious example - the value of a property)
PIKE! - STOP FIDDLING (inserted to maintain your attention in this post)
Clarity can only come when the Banks show total transparency and divulge (allowing a straight comparison):
Money on deposit
Money on loan
Value of security against loans*1
Value of "toxic assets"*2
*1. If this is UK property, this is currently going down)
*2. Toxic assets (these are the things that no-one can value at the moment - because there is no market for them - like a Showaddywaddy album in a roadside stall in Beirut)
Finally, they need to advise one last piece of information:
In case of emergency, our Insurers are...
Carry on
Complain about this comment
While all you Homeowners were sleeping in your beds. The greedy bankers were gambling on unregulated volatile subprime markets in the USA with collateral backed by the asset security of your home. At no time did you give any Bank, Building Society or any Institution authority to under mine the financial foundations of your home. In principle and in law, what the unscrupulous Bankers did was UNLAWFUL, inter alia.
Complain about this comment
Robert, hedge funds are going out. Here is my reasoning for the likes of me who have simple honest minds.
The money in the system comes from two sources:
A - serious investors who wish to secure their own or their clients' capital and who require an income;
B - gamblers who wish to make a fast buck without working.
When gamblers win (which on balance, if they survive in the game, they do) they take money out of the system. The money comes from A.
This, in my opinion, defines a criminal activity.
Complain about this comment
Many are blaming politicans for this mess! the consulation we have (at least in the west) is the fact we can show our opinions via the ballot box !its a pity we cant do the same regarding the "bankers !it seems strange that a few people with such power are by and large completly unacountable to the mass of the electorate !it seems democracy has its drawbacks !
Complain about this comment
#125, man you can't even get your dates right. Thatcher left in 1990.
Facts are facts. Look at house price growth under the Tories from 1979 to 1997. Look at it under Brown. It is not a subtle difference it is several orders of magnitude higher.
Again simply asserting over and over and over that it is Thatcher's fault don't make it so.
Complain about this comment
#140, bankers get voted on every second in the stock value of their banks. Whereas we are stuck with Gordon the "miracle chancellor" for another year or so
Complain about this comment
#139 and i thought doing something illegal was what defined "criminal activity"...
Complain about this comment
#126, why you think their situation got better?
Complain about this comment
#141 though 144
History twisting again...
You still can't accept that this mess was caused by the fiscal system put in place by Thatcher, she is to blame, she is like the architect who designed an unstable building, sure Major, Blair and Brown have been brick layers but they have been working to the plans of Thatcher.
Complain about this comment
#143: I take your point. It would have been more accurate to describe this non-investment activity as immoral or unethical rather than criminal since it appears not to violate any law.
There is another test of antisocial activity, which is to ask: "Can we all do it? What will happen?"
If you win at a casino your profit comes from other gamblers. Fair enough, they know what they are doing, they have agreed the rules. But should investors, bankers and gamblers be in the same house?
Complain about this comment
Dear Robert, as the stock markets are falling
it means that shareholders are selling stock.
That being the case, who can possibly be buying all these stocks which are being off-loaded ?
Complain about this comment
#145, because the facts simply do not support what you are claiming. Vague assertions that "encouraging people to buy houses" or "Big Bang" or "not making stuff" led to this current appalling British economy is nonsense.
If you really could back up your claims you'd be able show a **specific** action in "Big Bang" and **how** it led to this crisis and back it up with data. Yes there was a bubble in house prices under Thatcher but she and Lawson and Major moved DECISIVELY to burst it. Kinda the OPPOSITE of Brown.
But that is because there was real growth and a real economic miracle under Thatcher and the latter part of Major but it is all been smoke and mirrors under Brown.
Complain about this comment
#148
Political history proves you wrong.
Had Thatcher not put the fiscal policy in place that she did nothing that followed would have occurred. QED.
Complain about this comment
#149, so that is a "no, I can't back my claim up"?
Complain about this comment
There is not enough money in the whole world to back the CDO's, credit default swaps, along with SIV's that are out there now that are insolvent. How all this mess will be sorted out is the question. Any ideas?
Complain about this comment
Another REWARD FOR FAILURE? The Times reported that the ex MD of Northern Rock, Adam Applegate, is being paid some £70, 000 a MONTH as a a consultant.
Now the co. went bust and was nationalised. So it's MD gets a juicy consultancy. Definitely not a reward for failure I suppose. Surprised that this has not hit the headlines as much as Fred's Pension from RBS!!
Complain about this comment
View these comments in RSS