Insurance that worsens crunch
An essential element in the government's forthcoming package to stem the pernicious shrinkage of credit in the economy will be measures to compensate for the devastating impact on many companies of the withdrawal of trade credit insurance.
That probably sounds deeply dull and technical. But please read on, because this stuff matters to all of us.
For smaller companies, the importance of trade credit insurance is often that they can't borrow from banks, unless they've insured their sales to corporate customers.
The banks make this stipulation because it absolves them from having to assess the credit-worthiness of their borrowers in detail - because at least part of the credit risk has been laid off to an insurance company.
So the availability of such insurance is literally a matter of life and death for many businesses.
Woolworths is one of the more extreme examples.
When insurers would no longer provide cover to Woolies' suppliers in the autumn, that was the penultimate nail in the coffin of the ailing general retailer - because suppliers insisted that Woolworths pay cash upfront to them for orders, which meant that Woolies was forced to draw on its borrowing facilities, which in turn took the retailer up to the limit of what its bankers were prepared to lend.
And the rest is the sorry story you know: the demise of a historic high street name that was forced to liquidate everything so that the bankers could get their money back.
The point is that trade credit insurance is central to hundreds of billions of pounds in trade and the provision of finance to companies of all sizes.
When it's withdrawn, as has been happening for months, small companies are unable to fulfil valuable orders placed by big companies and those bigger companies lose access to vital supplies.
So a rational decision by insurers to scale back their cover on sales to companies perceived as vulnerable to our economic contraction is rippling through the economy in a damaging way: cover is being withdrawn because we appear to be in a sharp recession, and its withdrawal is making that recession significantly worse.
Part of the problem is that the insurers seem to me to have massively underpriced the cover they provide. Just as banks charged ludicrously low rates of interest during the years of the credit bubble, so the trade credit insurers insured hundreds of billions of pounds of trade for tiny premiums.
According to statistics from the Association of British Insurers, there were £334m of premiums written by the insurers in 2007, covering £282bn of sales by British companies.
Or, to put it another way: insurers were receiving premiums equivalent to the turnover of a medium-size business to protect more than 20% of the output of the entire British economy.
Scary or what?
Those aggregated premiums were equivalent to a minute 0.1% of the sum insured - down from 0.26% in 1995. Which would only make economic sense in a world where there are never recessions.
One illustration that the premium was too low is that claims received by insurers in 2008 are likely to have been rather more than total aggregated gross premiums received in the previous year, extrapolating from trends in the first nine months of the year.
But the insurers have been protecting themselves from the worst losses by simply withdrawing cover for new orders to companies seen as weak. In other words, unlike insurance provided to you and me on our homes, for example, the trade credit insurers have been able to withhold protection as soon as they detected stormy conditions.
To restate the painful paradox: insurance designed to give confidence to companies that they would be paid by corporate customers is being scaled back in a way that's magnifying the woes of businesses big and small.
What's to be done?
Well, in France, a new system is being implemented whereby taxpayers are sharing the insurance risk with private-sector insurers on supplies to viable companies.
And I would expect the Business Department and the Treasury to implement a similar system of co-insurance by taxpayers.
But that can only be a short-term solution.
In the longer term, the supply of finance to small and medium-size businesses has to be overhauled, so that the viability of those businesses is no longer dependent on insurance that's only available when the sun is shining.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~40~RS~)
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The problem is the abuse of the supply chain by big business, particularly in a a downturn.
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The French scheme may well be adopted in the UK. However, the scale of business failures this year will be at such a level that it is likely that the insurance companies will leave the market completely.
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An interesting blog indeed Mr Peston.
Insurance is only as good as the Insurer... Insurers need to have clear models of risk...and we should see that these are in the Public Domain. Same could be said for the banks' models really.
But the reality is that these institutions hide behind Proprietary Licence as a reason for not putting their models in the public domain. I would suggest Public airing, Public discussion...everything in the open. It would make for a world in which such models can be challenged and amended. And audited too.
For example : I tried a few times to have the RBS publish their risk/valuation 'mark-to-model ' models for CDOs and other instruments. The excuse was always the same...'our' models are not in-House but imported into RBS under licence. Under the licence agreements we cannot put such models into the Public Domain.
How robust were such models we cannot tell by scrutiny of the models themselves. What delights of higher mathematics they entail we cannot tell. SECRECY, SECRECY, SECRECY...
overpaid Maths DPhil Boffins working goodness-knows where, blinding Risk Management Committees with spectacular symbols written down in a way to stultify even the most savvy City Gent.
If the difficulty of defining 'risk' is hard enough for the Financial Services Industry to manage, how would Gov't fare any better ? By picking up blank cheques to sign?
If risk cannot be defined adequately THEN how in the Heaven's name can it be costed ?
The appetite and ability for risk assessment in many parts of commerce and finance is already diminished. That is a structural problem . I see no signs of public debate on this issue at all.
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So UK trade credit insurance is geared 1000:1, useful factoid. I had wondered about that. Are they running exchange risk too? Did they put the premiums into asset-backed paper?
I would imagine with gearing an order of magnitude higher than forex, any sudden jolt might cause a sudden shortage of capital. And they would like some. From us. Because we need them so much. Yes?
We are in fact, being asked to pick up the costs of corporate insolvencies (of which there will be many) and make the creditors whole (costing some small percentage of £334bn per year by the looks of it).
Robert, we are getting tired of hearing this.
Co-insurance of food and medical supplies - OK. We are going to need that.
The rest - NO. You expect us to underwrite the insurance on plastic cutlery?!
I have a suggestion for lenders and insurers everywhere. How about you charge what the risk really costs? Tomorrow. Cover your costs in the price of your services. How long do you expect to get away with keeping your costs secret and billing them to the taxpayer?
I have a suggestion for traders. If you want the goods, deal with the suppliers. If you do not, you will be volunteering yourself for a Zavvi, which lost theirs. Capacity has to be cut somewhere, and you will be doing someone serious about staying in business a favour.
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I forgot to add, how about enforcement of invoice payment terms? Auditors signing off on accounts where suppliers are routinely being paid several weeks late are validating the practice in their professional capacity, are they not? Is the FSA OK with this?
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Trade insurers withdraw credit limit protection from risky highly indebted companies (eg Woolworths) for good reasons. It seems to me that Gordon Brown is going to lose us taxpayers a few more hundred billion pounds when these companies it guarantess loans for fail due to consumers not being able or willing to borrow any more for purchases.
When will people understand that this crisis is due to consumers and businesses being maxed out in their debts that they could not afford to borrow and spend any more? Gordon Brown's destructive illusionary debt fueled growth reached its peak and plaeau.
Thanks to Labour high borrow and spend policies, the now VERY painful market correction of deflation and depression has to be allowed to happen.
The alternative that Gordon Brown is pursuing of money printing and encouragement of further debt instead of saving will only lead to hyperinflation and complete monetary collapse together with the end of our civilisation.
We need to create wealth by saving and not to destroy it by allowing printed money and reduced interest rates to create hyperinflation.
Money in bank accounts is not money wasted since the banks lend it for investment growth purposes to those they believe CAN repay it back. Replacing savers money for government loans to the banks that itself is borrowed or printed will just make things worse.
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Umm, I hope this doesn't seem too crazy or radical or anything but -
Why is everything being done on credit? What happened to companies actually, you know, buying their stock and selling it on for a profit?
Why is debt involved in this equation as a routine part of business rather than a last resort?
Then there wouldn't be the need for insurers like this, except in difficult circumstances.
It amazes me to find out exactly how much of everything is run on debt, and how much that must push up the prices of goods and push down on the profit of the retailer.
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#3:
Every time I encounter a reference to proprietary models, I remember Madoff using them as a shield. Assuming the worst is easier and saves time compared to really thinking about it. It might not be fair, but hey - trust is a crazy beautiful thing, never about fairness.
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The real change that sadly needs to come is a change in the political system. We the public are stupid and greedy, and though we know booms and busts are historical part and parcel of market economies, any hint of Crash Gordon burning more money with VAT giveaways and the like, and his opinion polling shoots up.
There is a vested interest for any GB political party to throw money away in its 4th or 5th year, and the great Nu-Labour giveaway has coincided with the death throes of Crash's government.
We are not entitled as the british populace of 2009 to spend even more money which belongs to the workers of 2011, 2012, and beyond. That is exactly what Crash has been doing by raising the debt.
The spectre of Malthus has not been raised over GB, but humans, as a species, are prone like all others to overpopulate, overbreed, until pestilence, disease, wars and death provide natural checks and balances to us. Our bodies tell us we are hungrier than we really are, to encourage more food to be eaten (as a store for when there isn't food for the day). We always want more - more goods, more services, more consumption, less working hours, less work. We as a species are heavily flawed.
The political cycle needs to be scrapped, because it is an utter disaster for GB to have a dying government throwing away cash which belongs to future taxpayers, and ironically according to the polls, actually receiving better polling as a result.
Any sensible party won't be elected. The government of every day and age has a perverse incentive to inflate bubbles, and stay in power for extended terms. (nu-labour, 12 years and counting). If the country had been run in our own interest, this bubble would never have happened. Instead blind-eye mania won the day.
Its all so damaging, and so sad, and I cannot believe we are so crazy as to actually tell pollsters how keen we are all of a sudden on Crash Gordon now that he is burning money on VAT giveaways etcetera. The government already has a massive hole in its books, and losing another £12.5 billion is just financial lunacy.
The housing market has to be allowed to fall back to its long term trend of house prices being 3.5 times income. The more delays and giveaways to keep people in homes they couldn't afford, the longer this recession will go on for.
As for Robert Peston's latest piece, what seems clear is that (a) the models for calculating risk aren't very good, otherwise (b) insurance companies would still be quoting fair prices for insurance. The problem is that the risk of default is high, so the premium they have to charge is high. Instead what seems to have been going on is that insurance companies have been cherrypicking virtually zero-risks, and just taking the money from that. The fact is there is a fair market price out there for every single company/product, and it will add on a massive cost to all businesses in these recessionary times to pay for it.
Gone are the days of ultra cheap insurance, if you want it you have to pay for it, and its going to be very, very expensive. The main article itself suggest a return to nice cuddly ultra tiny slivery cost insurance, which is impossible.
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#7 (Gothnet) - I can provide a partial answer. It's a combination of two factors.
One is the extension of payment terms which #1 (glanafon) refers to - retailers reduce their capital requirements by paying their suppliers later.
This combines with an unfortunate phenomenon which is intrinsic to all insurance markets - called "adverse selection". I have written an explanation of it at the following address:
http://www.knowingandmaking.com/2009/01/credit-insurance-trap-for-uk-retailers.html
There are two paths from here. One is to let lots of retailers collapse with all the knock-on effects that will have. The other is more radical but could work a lot better - details in the article linked above.
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How did we come to be a culture (on both sides of the pond) where businesses believe they have the divine right to conduct business without risk? 'Profits are for us, risk is for the other poor schlubs in the transaction!'
The corollary idea is the idea of the divine right of management to profit, at any cost to investors, customers, employees, the general welfare.
I have lost count of the number of 'executives' in my industry who have made a life's work of placing themselves into the stream of cash associated with the creation and delivery of the product, skimming a bit at every turn, coming and going. It became so common that we became innured to it, like the wallpaper in the hallway.
Of course, now that that particular industry has shrunk by about 1/2 to 2/3's...well, we're noticing that no one sells insurance to those exposed to that particular risk.
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Has anyone noticed the Government are gradually taking over running everything, bit by bit. Has new Labour become old Labour by the back door? Did Flash engineer all this or just an opportunist who is seizing the moment?
At a time when just about everyone is trying to reduce their debt the government are borrowing ever more to buy into anything that will eventually turn the UK into a communist state.
Of course it is being done in the name of ensuring we keep our jobs, homes and prosperity. Where really HMG are bit by bit getting our houses, they are creating our jobs and the prosperity is only an illusion anyway.
If you now re-examine what Flash has been doing you may discover a logic to all his madness and maybe he is not so mad after all.
So instead of trying to second guess when the election will be you should consider when the emergency powers will be invoked to suspend Parliament in the name of preventing the complete collapse of the UK.
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Is this type of insurance something new? In 30 years of running businesses in the UK I don't recall anyone asking for it from me. No-one had the cheek to ask, perhaps, knowing what my answer would be?
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I am involved in credit insurance in two forms in that firstly many of my suppliers credit insure their debt for supplies to me until their invoices are paid.
The credit insurance level a business can justify depends on several factors such as how long the company has traded, is there any negative financial information such as CCJ`s registered against it, but mainly on the strength of its trading accounts/balance sheet.
Therefore a trading company may likened to a cake because only so many slices of `credit` can be justified depending on the last financial set of accounts filed at companies house.
Secondly, I in turn insure most of my customer base in case they fail in business and then I can claim 90% or therebouts if the conditions of trading are met.
The levels of credit per customer/company are decided by the same underwriters who failed to predict the country called Iceland was in serious financial difficulties mm....?
My solution would be to issue a mandatory credit period for all business of say, 30 days from date of invoice instead of the crazy amounts of credit that are floating around the commercial operations which really amount to unsecured long term loans, don`t they?
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At 01:13am on 12 Jan 2009, Amused2Death wrote lot of Common Sense, with the crux of the matter being that to have discussions, transparent and open and in the Public Domain, rather than behind closed doors as if in Conspiracy Mode to Continue Conning the Public and keeping from them the Truth of what it being discussed,[and was not Chequers hosting such a gathering this weekend] will allow for a global consensus in Knowledge to prevail rather than a band of right dodgy fellows issuing a statement which one is fully expected to follow/accept.
The problem in such arrogant pronouncements is that the reasoning for the words shared is not shared and therefore the underlying motives and hidden agendas, which are sought to be maintained and which are the cause of all the calamities, are invariably still present, draining the System of its Vitality to feed a Parasitic Core in Terminal Decline.
Someone else once said .."It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford .....and for Governments not to change the System rather than jumping into its revolving bed like some impressionable star-struck groupie to be used and abused and thrown out after a short time, to make way for another wannabe Fooled Again by a Star-Struck Fool, makes them complicit and guilty in the first degree to the Charge of Conspiracy, as Active Accessories condoning/concealing deeds, which would induce and produce Popular and therefore Lawful Revolution .... which might also be considered as the Conspirators holding up Evolution for their Pound of Flesh, and Feather Nest Advantage in Monetary Profit and Gain. It is however a Game which they have Played which has now been Hacked/Cracked, and the Code which is broken will Guarantee Increasing Rapid [Exponential] Catastrophic Meltdown in the Systems which would try to retain and maintain it for the Obscene Benefits which its Heads Enjoy for Nothing, rather than Fix it with a Completely New System, which obviously will be Bought In by the Failing System,if they would wish to still have a Modicum of Input to ITs Beta Open and Transparent Workings.
Explaing how the System works in easy, and when it is corrupted to Server a Gaggle of Gannets rather Golden Egg Laying Geese, are the Gannets hopelessly exposed and easy Prey to be Simply Popularly Replaced with Universal Support for a Complete and Radical Change, Guaranteeing their Demise and Re-Energising and ReCapitalising the Intellectual Property Industry/Financial Sector/Dream Factory.
The SMART Banker/Politician [and some may consider that an Oxymoron], buys in New Codes and Systems Programs to Replace the Hacked and Cracked Program for a New American Century.
The Enemy is within and thinks to Run the System and Humanity for itself. However, the Times have AI Changed and the Natives are more than just Restless, for they have been Stealthily Active and now they have the Keys to the Locks on the Vaults and they can bring the whole Ponzi Edifice Crashing down, burying all who would step forward to Champion and/or Defend its Corruption and Perversion.
This is an interesting short read which throws light on the problems which no one is addressing but which are the Root and Branch Cause of the Disease which Plagues and will Quickly now Destroys the Self Service Sectors of Governments and Bankers and the Business of Quaint Religion ......http://www.jesus-is-savior.com/Evils%20in%20Government/Federal%20Reserve%20Scam/quotes_on_the_federal_reserve.htm .... all of which doctor Reality to brainwash the Impressionable with an Old View. But whenever you realise that we are so easily Programmed by what we are told and shown, and what we are told and shown to believe in the future is so easily redesigned to educate and instruct a corrupt and perverse "leadership" to fund and invest in a New World Order System v2.0 ..... with IT building it Transparently in Virtual Space and Cloud Layers so that it is always available to All in Power and Control Systems and also IT has it Secured from Abuse with its Higher Cloud Control Layers being Accessed via Virtual Competence and with Assuring Transparency also delivering the Insurance Element to AIRevisionary ProgramMIng.
And if it is not Provided by any of the the Present Establishment Incumbents then they will have proved their Worthlessness and will be summarily dismissed as being a Destructive Selfish Irrelevance and Unacceptable Future Burden on Humanity and Society, which they should be rebuilding with the Flow of Wealth Streams rather than them Banking them for, as we have seen personal paper fortunes, easily lost with the leaking of cracked codes/dodgy deals/crooked capers.
Clean Up your Acts and Deliver Wealth to Society Builders/AIdDream Makers, and the World and his Dog will beat a Path to your door, for the Keys which Unlock the Passion.
cc .... Dear Darling, Prudence ...Re the Grant of HyperRadioProActive Funding Streams and XSSXXXX Code Instruction for Binary Manipulation of Human Perception.
Robert[Peston], with everyone and anyone who may be able and enabled to distribute multi-million pound funds, hiding away in the dark shadows with no obvious means of direct communication, [which you will have to concede is probably by arrogant dumb design] perhaps you could advise on who one targets and puts on the spot for it is not the case that money is not freely available, for we are constantly being told that billions of notes are, and they have been so invented to be so available, so who decides who is worthy of patronage and favour of an invented from thin air commodity, for I will have no problem in spending a not inconsiderable sum more than just wisely but also to greater benefit in a Neureal World Order Program which Allows AI and ITs Good Beta Governance to Deliver Needs and Feeds/Prosperity and Comfort to All, Virtually from CyberSpace.
And would anyone care to Put a Realistic Price Tag on that Facility/Faculty, or would seven sevens for C42 Quantum Control Systems Technology be a very Reasonable Initiating Deposit/Credit on Current Working Account?
Ps ...As SurReal and Unlikely as the above may be, one would be doing oneself a grave disservice to Not Imagine/Not Think that it is a Real and Viable and Valid Proposal to the System and its Petty Cash Controllers.
And just to give some added emphasis to that assertion, you can be assured that this blog entry/Transparent Thought Submission will also be sent directly to HMGCC although sadly, and it is hard not to be cynical and say how bloody typical of the scared rat caught in the honey trap, not its Sub-Prime Ministerial No 10 Channel ....
"Email Number 10
We have decided at this time that it is important to take another look at the E-mail Number 10 service to ensure that it meets the same high standards as the other content and communication measures that the website delivers.
Unfortunately, this means that we will be unable to replace the service as quickly as we had hoped, but we aim to have it up and running as soon as possible. Please accept our apologies for any inconvenience caused." .... http://www.number10.gov.uk/footer/contact-us
Will someone please tell Labour to stop digging their Hole and start Thinking afresh with New Thinkers and HyperRadioProActive Tinkerers/Fine Tuners on Board and Leading in their Fields.
What is there to Lose other than Entrenched and Entrenching Ignorance?
And all of that is a True Story for the BBC to Follow and dDevelop if they had any Real Creative Direction from the Top or from anywhere within, for of course, it can easily be subverted to Server any Cause dictated to it from Department Heads with its Generous Guaranteed Public Funding Streams.
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Dear Robert
Do not talk to me about insurance
I have just recieved from the Fianacial Ombudsman Service a settlement with my Bank, over "MISS SOLD personal protection insurance."
The sum is £4700-00 over five years,
In context this is yet another sub prime issue, as the cost could be horendus, to the finacial industry and especially Insurance Companies,who have yet to be xposed for their deals ion the money markets.
The mind boggles at the cost of commercial insurance, "How sub prime is that"?
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#12
It's not that HMG is taking over functions, it's that the functions are being dumped by those who should be doing them. We're headed in the direction where the banks will be charging the Treasury the earth for doing absolutely nothing. For myself, it's astounding watching what's been going on for the past few monthsm seeing the amount of grief the Treasury gives the Civil Service for their projects. Like the old King for a Year, the banks're living high on the hog before the rug's pulled.
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Hi Robert,
Can you keep us posted on progress of the Banking Bill please?
Specifically, the Government's proposal to remove the clause in the law that requires the BoE to publish its weekly balance sheet?
This is important, since it means that the Government could simply print more money (as euphemisms go, "quantitative easing" is right up there) and we would not need to be informed by law.
I cannot for the life of me think of a practical motivation for doing away with this legal requirement of the BoE, which obviously means that suspicion is all that remains.
See you in the pub.
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Let's rewrite the rules and ban this form of insurance, making banks bear the risk of loans. No more laying-off risks.
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The pre-payment point is even more significant than the insurance issue: pre-payment is starting to be demanded in areas where trade credit insurance does not feature at all. This will change the very structure of trade and capital.
In turn, both of these are just two of the painful outworkings of a drawn-out collapse: the dominos fall much more slowly than most people imagine.
It's hard to see a way out for Brown, other than a snap election before yet more of the inevitable pain is felt.
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Is this why loans are repackaged and sold on? Insurance will be required even more in the current climate.
There are several bubbles occurring at the same time such as levels of spending, borrowing / credit, investing, speculation, risk, property.
Is there any correlation for the same businesses and individuals for causing more than one bubble at the same time
e.g. the person who spends too much, borrows too much, then invests and takes risk to recover the money and has a big mortgage
Nobody know the full levels of borrowing occurred with other institutions e.g. Someone can have a Bank Overdraft, 3 separate loans, 10 credit cards, and apply for 3 more loans with different companies at the same time
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And the price which HMG will ask for the premium?
If as usual this is a hint from Robs' mate Alistair then presumably the figure will be significantly higher than the 0.1% rate implied as being the current 'market' rate.
A nice little earner to replace some of the lost city tax revenue?
This system however as it is to be implemented in France relies on there being a maximum credit period of 45 days which is being introduced (intra country) at the same time.
This reduces the risks associated with covering credit for the ludicrous terms imposed by many corporate behemoths on smaller suppliers (90, 100,120 days).
Unless this generally positive move is clearly defined and a clear maximum credit period defined in law (45 days?), then all that will happen is the private insurers will retain on unsubsidied lower terms the negligible risk business and all the unknown/high risk business will be underwritten by this arrangement with their customers pushing for longer terms ("well you can get cover now so you can get more money from your bank can't you, so just extend the terms another x days - i.e. more working capital provided to larger business by SMEs for free).
A simplistic view would be to permit a company only to obtain credit to the same term as they provide to their customers.
3-4 months to pay your weekly shopping bill anyone?
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#7
Yes, the pervasiveness of debt financing is impressive, also the refusal of any large organisation to actuually take any risk, or to assess risks themselves - every risk must be insured, credit rated, underwritten, laid off somewhere else etc. Until a few months ago, I had naively imagined that business was about taking and managing risks.
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#15. amanfromMars
'I for one' thought I recognised the distinct writing style, it was confirmed by going back up to see who posted it, your insights may prove to be most useful.
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The more you borrow the higher your credit rating.
Borrowing money to invest in shares is a bad idea.
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The problem with mandatory payment periods is that these would only apply within the UK - therefore it would put exporters at a disadvantage as they would have a mechanism under which they would be forced to pay within 30 days without a guarantee of receipt of funds.
Secondly if this caused exporters a problem then one answer may be to start buying from abroad (depends on how legislation is worded) which again would disadvantage the UK.
Remember that whilst the exchange rates are currently in favour of exporters this may not continue forever and unfortunately if legislation like this was brought in it is unlikely to be revisited when the exchange equation turns against us.
Exporters have suffered for the last few years due to exchange rates making us uncompetitive against the US and the competitivie advantage we now have should not be hindered but encouraged and invested in.
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#13 I'm with you on this - surely when you run a small business and extend credit to customers you expect that a small percentage, for whatever reason, will be unable to pay at some point. This is a normal part of being in business - the proprietor expects to take the risk, not some faceless organisation / insurance company who will no doubt find some way in their small print of not paying when push comes to shove and the customer defaults.
Bob's got a point about credit insurance generally - it could prove to be the next time bomb waiting to implode.
Time to return to a simpler economic model which excludes the parasitic insurance industry.
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Re credit insurance itself - just another 'fear' insurance - typical of insurance that when its needed its being withdrawn - just like banks - give you an umbrella when the sun is out but once the grey clouds start gathering they take it back.
If the premium v risk ratio is correct in the article then its just another clear sign of incompetence within our financial bodies where people have based a model on boom forever - whilst I don't really think any political party is going to get us out of this with a magic wand I wonder if GB is not liable in some way personally for all the erroneous business models based on boom forever - surely he has made numerous quotes in the past about 'no more boom and bust' that would mean business leaders could argue they had run their businesses based on his 'guidance'???
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#11
If it weren't for the taxman, the system would be a zero-sum game at worst. For that reason, there's no need to gross-up the risk by not laying off the risks to each side against each other at arm's length, it oils the system and kept bankers in employment, as long as they remained honest. Now that's broken down, it becomes a negative-sum game because they introduce another level of risk into the model.
People like Neil Record (who first introduced me to AC) circumvent the system by cutting the banks out of the system. It is to be encouraged.
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... and people wonder why we dislike insurance companies.
Insurance you can only get when there's no danger of making a claim? Ridiculous!
Sort of like borrowing facilities that are only extended to people who don't need the money!
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So in France (as here soon) the public are not only responsible for lending the money (replacing banks) but also insuring against losses (insurance co)?
If the same happens here, why don't we just build the thing ourselves too and do away with all banking and business?!
This really has gone too far now. Banks have failed. Fully nationalise them, sell off assets and build a better, smaller system!
The strong businesses will survive, some weaker ones will too (with help from "fairer" banks) and the weak ones will fail. As it should be.
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Yet another story detailing how we will have to bail out the financial system because the model they are working to is broken.
Take this story: Bank Bosses Discuss Mortgage Plan http://news.bbc.co.uk/1/hi/business/7823132.stm
Here, the Government are set to step in and guarantee mortgage lending, even though it was their own broken model that bankrupt the economy. So they intend to re-invent the crisis by attempting to prop up the housing market. However, this isn't because they personally care about the average homeowner; no, it's because they don't have another plan, and will do anything (at any cost) to keep themselves in power.
So what does this say? To me it says, "be feckless, borrow beyond your means, and don't worry because you're buying into a one-way deal underpinned by Government policy". As far as the Government is concerned the only way is up for house prices – resistance is futile.
I just feel for all those careful people that waited for the natural course of market forces to take place, it seems like there is no place for them in our economy. Just like a casino this is a rigged game, in favour of the house – the Government.
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This is precisely what I have been warning our directors about: credit insurance is only as good as the ability of the insurer to pay up.
Years ago when I ran customer service operations we never had credit insurance. We used our commercial acumen: usually pretty good. New customers who did not understand could get a bit bolshie over being asked to pay up front but that was the way of the world.
I never quite understood why commercial credit insurance became so common but the risk now has reversed: because the customer's credit is insured there is less reason for the selling company to keep a proper eye on the condition of their sales ledger.
Perhaps there are more risks being taken because of trade insurance?
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The growth in Trade Credit Insurance and it related Invoice Discounting are essentially about providing liquidity to business that have insufficient funds in working capital to fund their trading activities.
In the last decade many private equity investors and other realised that by extracting the working capital from companies and forcing them to rely on insurance and discounting they could make money. This has happened widely in medium sized businesses. (It happened in all of the downturns that I have seen.)
Now, this works fine in an expanding economy, but come a recession or in fact a downturn of any sort and even worse a general drying up of liquidity, the whole process collapses. This leaves the private equity 'investors' (asset strippers) with a large profit and no responsibility to provide equity funding to the companies they have asset stripped to replace the working capital that the companies used to have.
So now the government is having rescue the companies that have been asset stripped, but the asset strippers get away with the loot - just like the bankers. However I do not see much alternative - but I do think that those who got the companies and bushinesses into this situation (being without working capital) should not be allowed to get away with it!
I am however coming round to the idea that letting bankruptcy take its course will be better for all of us! (now that we own 43 % of Lloyds and 58% of RBS!)
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There is a major retailer active today. Set up a long time ago. Innovators in their own way in the early days. Still boast about stuff done in the early 20th century, although nothing to do with anybody working there now.
Originally tremendous intergity. Paid suppliers on the nail. My word is my bond etc. Gave the customer a good deal. Also known for innovation in worker welfare. That business today bears no resemble to the original even though it still trades on the reputation of the original.
They have sucumbed to the modern accountancy model of exploiting the supply chain, stripping capital to prop up profit and share value, effectively asset stripping whenever possible. You can only do it once and then the system is bare but there is no incentive to put capital back into the operation, you have to run on empty from then on. To put capital back in damages profit.
In bad times they can only exist by the supply chain involuntarily supplying further capital. They would deny it but that is the truth. They pay when they feel like it, or in really bad times when their bank allows them to issue a cheque. The idea payment can be only weeks late in a downturn is laughable. They are not unusual. That is the central problem, this insurance mechanism is only a tool to try to hide the problem. That is now a common behaviour. Failing business models leaning on anybody and anything they can.
Business has ultimately to be based on trust, the idea a insurance policy will save you is quite wrong. The minute you enter delays in cashflow and a potential litigation or a potential insurance claim enters the scenario you are in trouble. Trust has gone.
The system is deliberately stretched - by people who add no value - to the point no where there is no safety factor. It is totally wrong to suggest somehow in the text that Woolworths was somehow a victim because of insurance availability. Woolworths failed because it did not have a sound business model. People did not want to buy there in sufficient numbers. Woolworths ultimately pushed their suppliers to the point something had to give.
Personally having dealt with this beast and others like it in the past there is no way I would want to deal with it again or recommend anybody else deals with it. We do something more rewarding. The only sane thing to be as a supplier how ever big or small is not to supply this sort of entity.
Effectively that is what the UK public and the body corporate are demanding though they do not realise it. The cessession of trade. Anybody who believes insurance is a remedy for a lack of trust is quite frankly mad.
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well... its all coming out of the woodwork now.
I wonder what will be the next shining example of British world leading excellence in business and finance.
How many more UK economy coffin nails can we take and still have people here say it is all due to Roberts doom and gloom?
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Isn't this just another case of the bank's trying to absolve themselves of any responsibility?
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I wondered how long this would take to rear it's ugly head.
Dig a little deeper-insurance companies have their underwriters telling them what is acceptable risk.
Credit insurance has been contracting for sine months. Funny how it takes the failure of a big retailer to bring it to the fore!
Removal of this forces companies to ask for upfront payment. Again, this impacts on cash flow.
Cash has, and always will be king.
Trouble is, even those companies with cash reserves will see these depleting rapidly.
And what of massive companies forcing payment terms of 90 days plus settlement discount.
This practice should be outlawed.
If a company's terms and conditions state 30 days and a customer accepts these (even tacitly by buying the goods in the first place) then they should settle in this time. End of story.
The only discount offered should be early settlement discount offered by the supplier.
How dare these big companies think they can dictate terms when they are a customer!
If all bills were settled in 30 days, there would be no need to insure debts!
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Possibly off thread, but looking at the minute fraction of the Llouds & HBOS rights issues subscribed to by current shareholders, isn't this a truly devastating vote of no confidence in the merger, worthy of a blog of its own?
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There is some confusion nearly everywhere regarding risk and the pricing of risk or risk premium.
What most commentators and correspondents refer to as the risk is actually the crystallisation of the event.
Risk is a function of the impact and probability of an event, whether positive or negative. i.e. if an event is very likely and its impact is high then the risk is great and the risk premium should be high. Essentially, there are four quadrants each showing degree within them, viz:
1 high impact and high probability, the worst case if negative the best case if positive.
2 high impact low probability, could be the black swan but hurts badly when it occurs.
3 low impact high probability the regular minor niggles if you like
4 low impact low probability the best and least painful.
The management decision whether to pursue a course of action should examine the business objectives (control objectives in another sense) and put mitigating controls in place, one of which could be trade insurance. Doing nothing is an option as it can increase reward. So is hedging, reducing the downside at the potential cost of reducing the reward.
The mitigation/insurance should be calculated after careful analysis of the above.
Unfortunately pricing has ignored/forgotten the four tenets and in the race for profit, the premiums had fallen. What we are seeing is a correction, in the form of market withdrawal, which will result in raised premiums in a free market or artificially low levels in a controlled market. The artificially low levels will of course result in greater losses to be paid for by the usual fallguys, us taxpayers.
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It strikes me that much of the structure upon which our prosperity, health and welfare depends is inherently unstable.
Aircraft design varies between civil craft and military craft. The wings of a passenger jet are angled upwards. That way, should the plane bank, the pressure under the lower wing will be greater, as it's nearer to horizontal. This tends to right the plane. A fighter, by contrast, will have wings angled down. A change in banking angle increases pressure under the outside wing, pushing the aircraft to bank further.
Many of the models we run are like that second craft: any feedback on instability will tend to make them less stable. It doesn't take much for the market to flip on its back. We have (had?) the equivalent of that Eurofighter, where the controls were so sensitive, you needed a bank of computers to continually and continuously adjust parameters or it would tear itself apart. And THIS is what we relied upon to keep us from poverty, disease, homelessness and death.
We need a system with closed loop feedback, where the failure of the system would enact parameters to encourage its success, not where the key factor in the success of the model is our confidence in its ability to succeed. We need a steam-engine governor, not a flip-flop switch.
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I find the psychology of the current financial troubles rather interesting. There was me thinking that insurers were calculated risk-takers and that we lived in broadly pessimistic times (compared with the post-war optimism of the 50's and 60's). Now I am gradually realising that I was surrounded by wild optimism and that I may have to re-style myself as a relative realist. Perhaps optimism and money don't mix.
What do amateur economists think of the idea of a 'Bank of Ideas'? http://thedailycrazy.wordpress.com - with less money around I think we should look at banking and lending other things....
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Let the debt ridden companies fail and allow their competitors to take them over! Why does this government insist on helping the stupid?
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Insurance works only for risks which are independent and which can be pooled - insure the lives of 1000 people from across the country and there's a very good chance that, say, 5 will die each year. From the insurance providers point of view, the risk is stable (even though it isn't from the point of view of one of the lives insured).
Trade credit insurance, though... and similarly insurance taken on corporate bonds to protect against default... is trying to protect against risks which aren't independent. If a recession starts, every company struggles and the insurance company has to pay out on every policy... and it simply goes bust. So the insurance is, in fact, worthless... and the sooner investors realise this, the sooner we can put these useless products behind us and get back to responsible underwriting.
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12,
I posted as much a long time ago, I also coined the phrase ‘Socialism by stealth’ ;-)
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43
Silly question, the government is helping themselves; the congenitally stupid.
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The petition originated by Alex Wallace asking for GB to resign has attracted 907 signatures so far. The petition runs out on 15th Jan 2009. Get cracking and add your name to the list, - now. Let's show them what the majority think of this aweful bloke and excuse for a government.
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Someone told me recently that the credit card companies would probably start to foreclose on their loans to help make up their shortfall, and that this could happen within this financial quarter.
Can anyone substantiate this, please?
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I still find myself wondering more about the insurance the insuring company has taken out against its own possible failure via, I presume, Credit Default Swaps.
As Robert Peston says, to charge a few hundred million for hundreds of billions of cover can't make sense. But equally to have hundreds of per cent more coverage via CDS than there is real money to cover that potential debt equally seems crazy.
As ever I complain that so far as I can see we are no nearer to understanding why nobody saw these problems coming and why in the future we will succeed where we failed so dismally this time.
Confidence won't return in my world until there is credible reason to think the problems have all been identified and issues like regulation, credit risk analysis and the instruments used are all fully resolved.
The VAT stimulus and Labour spin only delays real recovery in my world.
At least Obama is coming.
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You can find the petition here,
http://petitions.number10.gov.uk/Fianance/
Just look for the correct petition by Alex Wallace ending on 15th Jan.
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The Business models are not broken they are about 90% correct and need to be fixed to stop people exploiting loopholes.
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On the subject of insurance, I have just read about the 20% cut in Friends Provident's with profit fund, which I shall be drawing in October of this year. Just how long are we going to be conned by one government after another concerning private pensions?
If you had have paid in £50 per month for the last 25 years you will now recieve £29,000 instead of £34,000 that you would have recieved last year.
I have looked at annuities, and for a 65 year-old male a RPI annuity without a five year guaranty, which is as close to the terms of a state pension as I can find, will get about £1300 a year pension - assuming annuity rates don't fall with the base rate. This is less than the extra a 65 year-old can get in a state pension, if they do not have a private pension and less than £6,000 in savings.
What a bloody waste of investment!
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Most small businesses that I have worked in never insured against customer payment failure. One knew the risk, (the word Ltd at the end of the company's name was a clue), and business was conducted on the basis of trust. (Isn't the City's motto "My word is my bond")
Sure, one got burnt occasionally, but it was rare and I'm talking of experience over 40 years. It was possible to "factor" invoices but the cost was high, (min 3% of invoice value, not your 0.1%!) and the factoring companies, usually arms of a large bank, also wanted to cherry pick the type of invoice they would handle. Curiously enough, whenever we got burnt, it was with companies who had good bank refs and guess who was first in the creditors queue-the bank that had given the good reference.
Business is a risk, so if you don't want the risk, don't join up!
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I see the red herring of legally enforced invoice payment has come up. Yes I agree that the mainland continental model of a fixed payment model is worthwhile. In fact due to the behaviour of businesses in the 90s it was quite heavily promoted, only to be left to whither as a concept by HMG who would have had to do something.
It has some value in that it offers resistance to what can only be described as bad practice. However it is not a solution. A business effectively bankrupt (or more correctly just this side of bankruptcy because trading under those conditions if fraudulent) cannot pay. Its bank will not give value to cheques issued. Simple as that. You can even have the situation that the business goes intothe bank and negociates a issuing of cheques. Such cheques are then issued, and can even be 'cleared', which actually does not mean anything, only to then not be given value. You can even have discussion and tripartate agreement and go around the loop a couple of more times before the cheque is declared dead as a doornail.
A man in debt will always lie, he has no option. Cant remember the source, somebody noteable, but it is apposite.
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Oh how Crash Gordon must still be rueing his decision not to have called for a general election in the autumn of 2007...that's when he well and truly BOTTLED IT.
Now this man, with the deepest of flawed characters, can only think of the idea of spending his way out of a financial disaster...and in the process drown this country in a sea of debt whilst trashing the currency. A desperate policy of crash and burn that is simply an attempt to save his morally bankrupt party and his own pathetic personal legacy. The UK is heading for BANKRUPTCY.
This man even had the bare faced cheek to write a book about COURAGE.
http://www.guardian.co.uk/books/2007/may/26/featuresreviews.guardianreview6
If he had just one iota of courage he would do the right thing and stand down (for the sake of the country)...but of course, so flawed is he...he will not do it... because it takes someone with real courage to admit when they are out of their depth and let somebody competant take-over.
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I haven't quite got my head round the high interest rates hyper inflation heading our way about end of 2009/early 2010 as described by many posters, not today but regularly over last few weeks.
1) Why will this happen?
2) If it is just because of our weak currency then will it affect prices of UK things eg locally produced food?
3) If interest rates go up to try and control what will happen to house prices in these hyper inflationary times? Seems to me that if none of us have any money and interest rates are high and there's no credit then house prices are not likely to go up? But then again all other things will find it hard to go up too?
4) If we can't afford to import things then does the UK have sufficient basic food production to survive? (so no more mangos but we'd still have apples for example, no more tea and coffee but we'd still have water, no more Danish bacon but we'd have UK bacon etc etc
If someone could just briefly explain it would help me understand where we are heading (PS please don't post to tell me we're heading off a cliff into hell etc - I know this already!).
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Post 35 Glenafon there is much that is true in what you have said and i think I know of the entity to which you refer.
The trouble with so many business models including the financial ones in particular has something to do I believe with software.
Software has made things appear too easy, and there has been a sort of slavish obedience to it's parameters.
Far too many businesses don't have any capital at all and rely on credit letters to finance their operations.
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This problem arises, as with credit default swaps, essentially through systemic abuse of the concept of insurance. Insurance does more than spread risk (it can do nothing to diminish it). The effect of pretending otherwise is one of the key tricks that has empowered duplicitous bankers and all the other other swindlers to enrich themselves by crashing the system.
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51 kikidread
If it only works 90 percent it is not working. Are you 90 percent alive. : )
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"Let the debt ridden companies fail and allow their competitors to take them over! Why does this government insist on helping the stupid?" .... #43
bodgitt,
Because, and there is free choice in this, they either feel most comfortable captaining the stupid vessel fleet [aka being at one with] or are press-ganged into supporting it, which would have us hunting for the Shipping Agent/Puppet Muppet with such Toxic Waste/Explosive Ammunition/Sub-Prime Cargoes for Sale and Sail/Import/Export with Negligent Discharge and Irresponsible Malicious AforeThought rocking their Boat.
Neither of those two options display any notable or worthy Leadership qualities and the thread here is cordially invited to identify where they would see [Imagine, and it's true] the core problems being housed/preserved and protected.
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Not on the insurance track, BUT, can anyone comment that when the new superbank comes into being, if there is a branch of Lloyds and a branch of HSBC in the same town/street, as there is here, which one is likely to close?
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As someone who runs an SME I am very familiar with this issue and in my opinion it is a bigger problem than the banks pulling credit.
Every business relies on non interest bearing debt for part of their working capital from their suppliers as they in turn give non interest bearing loans to their customers all this is the process of normal trading terms. In my case the credit I get from my suppliers is about 50% of the credit I give to my customers the balance being made up of working capital from the banks.
To take away the credit given from suppliers just because some junior underwriter does not like your industry sector is causing the wjole process of trading to sieze up as the only alternative then is to pay cash in advance for raw materials, not a viable option for many companies.
I could list on here many of the major companies in the UK on whom no trade insurance is available and you would be shocked.
This would not cost the government a hundreth of the amount they are pumping into the banks to underwrite trade insurance and yet would have a far bigger effect on keeping industry going.
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It used to be the case that the state insured all export credit. It was a government department called the Export Credit Guarantee Department. There's no reason why it shouldn't be done again, and extended to domestic credit. What's so wrong about us, the people (through our elected servants, the government), helping ourselves (through our industries, in which we are all shareholders through pension and life insurance funds) to stay alive and successful?!
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My post at number 50 has been moderated. I was only telling you all where to find the petition for GB's resignation. You can find the info on RP's blogg - our banks have to lend more, post 198.
Get signing
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Re CREDIT INSURANCE
Its been more or less impossible since
last september over 4 months ago.
If you are prepared to pay the premium
will the Insurer pay the CLAIM there
are seriously SOLVENCY ISSUES HERE
TOO.
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I think that some common sense is required here.
Credit insurance is an annual policy and pays out on a claims made basis - once the year is up the insurance company offers terms (or not) for the next year.
So yes the rate for credit insurance has been very low - reflecting the 'boom' times, however insurance companies will be altering their terms to cover the increased risk (and claw back losses)
This is unlike CDO/CDS which are to all intents and purposes insurance contracts (which were 'underwritten' by organisations who did not have the resources to pay the claims if they occurred) - which have been written for a long period and do not have the flexibility to cope with changing market circumstances.
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Re 51: kikidread
"The Business models are not broken they are about 90% correct and need to be fixed to stop people exploiting loopholes."
I'm sorry but I have to disagree. How can an economy based on ever increasing house prices be a fully functional model? Furthermore in the world of software engineering it is often stated that "80% of the problem exist in 20% of the code", as such is 90% good enough?
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#12.
When this government came to power in 1997, I believe that there wasnt a single member of the cabinet who, when at university, wasnt a member of the communist party.
Not sure on the ratio today.
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@20
yes the dominos are still falling but the banking one as not that many months to go now.
@21
I said back in oct 51% of all world banks assets are toxic. They just dont know yet.
@34
Yes banks should of been left to go bankrupt. All they have been doing is casing the problem. instead of getting in front of the problem. A bank fails, the goverment put in billions but then the bank still fails to do the jobs its meant to do. so what is the point? money should of been put into the better banks i.e. HSBC not only to cover the toxic debt it has but also to let it lend more. Germanys second biggest bank was nationlised a couple of days ago. a good few months after alot of the banks had failed. I think that 3 months ago that this banks assets looked rather better then, than a few days ago, in other words perfectly good assets are turning toxic.
And before anyone replies i know that letting the banks fail would of made things seem very bad, but the goverment could of protected savers money. instead of protecting banks jobs. when it is very clear that these people are now being paid for nothing as the bank is unable to function proply.
may i also remind people that many banks failed in the great depression and where allowed to.
its my opinion thats all and i know some will disagree.
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er, hang on..
let me get this straight. Banks won't lend to businesses that don't have insurance to cover the repayments of a loan. Where is the risk in that? On the applicants business. OK, not particularly ethical but hey, at least it means that the banks CAN lend money to those with insurance at nearly no risk so no problem from the banks side.
So.... Why are we so obsessed with getting banks to lend to businesses when we should be pressurising insurers to insure so that the banks can lend.
Alternatively, the banks can go back to the way it used to be... accurately assess the risks by performing a due assessment of the applicants income stream and business plan and actually lending them what they can afford to repay, rather than the riskiness of lending them what they want. Oh, and don't forget the use of collateral such as your house. The bulk of risk should be with the borrower, not the lender.
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59. At 10:23am on 12 Jan 2009, glanafon wrote:
If it only works 90 percent it is not working. Are you 90 percent alive. : )
+
there's not a problem that we can't fix,
we can do it in the mix
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I really do not think we need to be doing more scaremongering here.
If the risk is too high the insurance companies will up the premium or reject it...whatever happens they will load the next premiums next time or for future customers....or they will say they were not provided with accurate info and not stump up....I do not think insurance companies need to be given any more ammo to raise their premiums .We do not want a run on insurance companies,do we ....Robert, you do not want that do you?
Because something is theoretically possible it does not mean it WILL happen , and insurance companies know better than anyone how to manage risk....they put in so many clauses it is not worth having half the time.
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Some excellent comments on the risk issue. For my part the assessment of risk should not be a static single act no matter how clever the maths.
One wonders if these professional organisations bother to carry out sensitivity analysis where the consequences of unexpected or even improbable events/changes are analysed and early warning factors are determined. I suspect such operational research models are rarely used.
Had the government used such an approach on the level of corporate and personal credit in the economy it may have been able to spot the looming crisis earlier.
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Yet another thing that will have to change in the futrue....
Any one yet bothered to look at what life will be like when we come out of the other side of this mess...
How much borrowing will be available to businesses and how much for mortgages? What are sensible interest rates? How much can you expect to earn in the financial services industry? How much disposable income will there be? etc, etc, etc.......
Because we seem to be spending an awful lot of money on the basis that everything will be as was –
AND IT WON’T!!!!!
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can someone explain to me why suppliers are having to insure against customer payment failure ?
Surely,
a supplier should have to insure against his own failure to deliver.
a customer should have to insure against his own failure to pay.
The insurance would then be there to fulfill the obligations of each side of the contract.
At it's simplest, no insurance is needed by either party, supplier has item in stock, customer pays c.o.c.
More complex deals require milestones from the supplier and stage payments from the customer.
I'm not sure as to why a widget supplier also has to be credit supplier and insurer (aren't there already established industries that provide these).
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Seems to me that a 0.1% premium is about right if the insurer can exclude new orders once he detects a recession coming.
I can also understand why small companies were happy to pay such a small amount for worthless cover if their customers wanted them to.
Obviously it would be stupid for taxpayers to give cover in a blanket way because the small business would just go bust with bigger (taxpayer guaranteed) debts.
If cover becomes unaffordable then I cannot see why the person who benefits from the cover (the larger business) should not pay the premium.
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In 9 years of running a company I have never asked for or been asked for credit insurance.
We would base our trade on local knowledge. In those years only 2 customers have failed to pay their invoice.
Too many folk are obviously not capable of running a company, I suspect they all watched Wall Street and wanted to be Gordon Gecko.
Companies by the look of it have had the life sucked out of them and lived on credit
Those companies will have to be let to fall. It is not that hard to run a company well, so how these people failed is beyond me.
Another thing I would do is enforce the law as regards to payment of invoice. The large companies take it as read despite the conditions of sale, to pay you after 2-3 months.
Too many customers seem to think we are a bank that will allow them free credit for months on end.
Maybe these companies are getting the business on the basis that they extend these lengthy credit terms, which again means its not worth doing.
I'd sooner turn a contract down and have done on many occasions, If I think I won't get paid on time
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One further thought- how come Woolies needed credit insurance when it sold its goods for cash and bought on credit? Unless the stock was slow moving, surely it got paid well before it had to pay its suppliers? The same presumably applies to other retailers
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Moderator-please delete my post 78-its erroneous!
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Supporting credit insurance is probably a good thing but not strictly for the reasons that Robert suggests. Insuring against your customers going bust is a wise precaution, but the fact that it was completely mispriced shifted all the risk from small businesses to the insurers. You cannot blame the insurers for wanting to spread the risk or for asking for more money if the risks increase.
All those small businesses could have continued to supply woolworths if they chose to without demanding up front payments. Nobody has to have insurance and the perception that you must have it changes depending on price and whether you are prepared to accept the risk. Were the insurance companies wrong to say the risks of woolworths failing were so high that credit insurance was withdrawn?
I doubt whether artificially low government credit insurance would have done more than delay the inevitable at great tax payer costs in the case of woolworths, but the government may have a place in helping the situation. Sharing a limited amount of risks to allow businesses to adjust to the correctly priced insurance premiums makes sense. It allows price differentiation and gives a proper exit strategy and could be extended to help transportation trade credit guarantees.
I still have no idea which are viable companies and accounting and auditing rules are tightened up so we have a clear picture then any packages aimed at the viable will no doubt end up distributed to the non viable, giving perverse incentives where the non viable but the viable out of business.
The fact that Robert mentions this suggests decision makers are considering this and I can only hope it will be with a light touch spreading the risk and alleviating the worst of the premium rises, rather than heavy footed skewing the insurance market and continuing the gross mispricing of risk. At the end of the day a functional insurance market may be more important than any single individual company. The obvious question to ask is why don’t we get businesses to pay there debt within a month in which case a large portion of the problem disappears.
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Re 56
Interest rates will rise because there is a lot of debt out there. The effect at present is that savings interest rates/mortgage rates are biased 1 to 2 percentage points above bank rate. GB is in debt more than other countries. Our currency is falling which will lead to inflation as we don't make anything any more (and interest rate rises to support the currency). If we go to the IMF for help, interest rates will rise again.
House prices will probably fall another 10%
and then stay at that level +/- 10% for ten years. Like they did in 1990. That much is good news as first time buyers have a fair chance of affording somewhere to live, renting or buying being equally sensible.
Share prices will (broadly) rise as inflation kicks in.
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The basic of credit insurance are that a goods or service producer will sell their product to a buyer. The buyer will request a period of time after receiving the goods in order to arrange payment. The producer runs teh risk that during this period of time the buyer will default and the producer's balance sheet will have to record an impairment (affecting profitability also).
A buyer will amost always request some form of credit period and market forces dictate that producers offering teh best longest/best credit terms will gain market share.
The alternative is to ask for payment prior to receipt, which unless paying for groceries at teh till is not the way in which most business segments operate.
This being the case, even small producers whose balance sheets were not large enough to run the risk of a buyer default (but nevertheless needed to offer credit terms in order to compete) would ask for either a bank guarantee from the buyer or purchase insurance against default from that particular buyer from an insurance company. As most buyers do not want to organize bank guarantees if they do not need to do this if buying from another producer, the insurance option became commonplace.
This type of insurance is used at al levels of business, from small agricultural producers to multi-million ship and aeroplane manufacturers. The insurance companies offering this type of insurance run very sophisticated models and have made money pretty much every year for the last quarter century or so - thereofre it is not merely a question of their pricingmodels beiong wrong. Although the reality is a little more complex, the essence is that they decide how likely it is that a particular buyer will not pay a particular producer when their billis due. It is worth noting also that although at this point the insurer will replace the buyer's outstanding payment onthe balance sheet with the claim payment, the insurer has extensive means to continue pursuing this payment which is now owed to them - and they are often quite successful.
Due to the sensitivinty of the models run by the credit insurance companies, as soon as they get a sniff that they could be writing loss making business, they can put a stop to it. There are annual contracts available but these tend to be prohibitively extensive.
The issue is that if a credit insurer is not willing to underwrite the creidt provided to a certain buyer, then the producer must decide whether it is worth running that risk themselves. If not, then they will not sell to that buyer (Woolies). This is real market forces at work and, rightly or wrongly, should ensure that secure and well run/capitalised comapnies survive whilst less secure companies fail, thus preeventing the continuance of unstable companies which could lead to much bigger problems in teh future (the bubble scenario).
Whether it is right for a government to underwrite the credit where an insurer will not do so depends on whether the current market conditions are so anomolous that even good companies are failing. This is for the "intellectuals" to debate but I doubt whether a one-size fits all approach would be appropriate.
And for those who believe that the models should be public information - the majority of the data that the insurers use is in fact publicly available information. However they will spend a lot of money on interpretting hat information andcreating of proprietary software. To publish this information would be suicidal as any other would-be insurer will use the data and as they will have avoided all of the expense associated with creating the data, they will undercut teh original insurer substantially. This will not happen and I doubt that legislation in Europe would allow such companies to be forced to publish such data anyway. I think there needs to be some separation between the models used by producers in order to price their product correctly (pubs and jewelry shops and any other company will always have a pricing model) and the "models" used by finance houses to read the markets - they are completely separate processes but share the same nomenclature.
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Why not make trade credit insurance illegal? Then the banks cannot demand it and the taxpayer cannot be asked for it either. After all we have just given the banks armloads of money and if they don't lend it to someone they won't make any money on it. Oh and reduce the overnight Bank of England rate to 0.01% so any 'spare' money earns no interest.
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Re 74: thinkb4
"Any one yet bothered to look at what life will be like when we come out of the other side of this mess..."
I totally agree with your sentiment, where is the vision, what is that aspiration? How does the Government see the financial system operating in 2 years time? They buy into the banks and state that lending levels are to return to 2007 levels, then today, hidden at the boittom of the following report, it is stated that:
http://news.bbc.co.uk/1/hi/business/7823132.stm
"The BBC has learned that neither the banks nor the government are aiming for a return to the levels of lending seen in 2007 - described by a senior banker as "heady" - nor do they want to see a return to banks relying solely on the money they get in from savers. That would lead to a collapse in house prices."
Their complete lack of consistancy resulted in the following petition:
http://petitions.number10.gov.uk/LendingReform/
It's about time the Government started to think strategically rather than just stamping out the closest fire.
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re. #56 grimupnorth
Crash Gordon thought if he got Merv. to lower interest rates, the credit crunch would be eased because borrowing would be cheaper.
He forgot to beat the banks about the head so they would pass on the lower rates.
Crash didn't realise that most of us have been coping fine with base rates at 5%, only the buy-to-let market and reckless over-borrowed companies (and useless banks) were causing the problem. And you wont save most of them.
By lowering interest rates, he has destroyed the currency and raised import costs. He has also encouraged foreign investment to scarper or stay away. He has also wiped out all momentum for savings (effectively zero % interest).
The banks really only wanted incoming funds to shore up their books, and big loan guarantees from the Govt. That would have bought them the time they needed to think up a new ruse to rip their customers off.
All Crash's plans -developed on the hoof, have been poorly thought out. His latest plan is to devalue everything and re-calculate all assets and debts using a hyper-inflated cheapo pound.
And don't listen to anyone who tells you that quant-easing isn't printing money -cos it is. New subtle spin from Whitehall... of course it isn't, it is CREATING money.... ker-chinggg, er not actually printing it.
Your pound is going to be worth 70p, your granny is going to have to live off her capital, and your house may just hold it's cash value, just that the cash is down by 30% in real spending terms.
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When a company like Tesco's extends the time they will take to pay suppliers from 30something days to 75 with out a by-your-leave, it should come as no surprise to find that this countries SME's are floudering.
No politician, least of all Our Glorious Leader has necessary nounce or will to grasp these economic nettles and deal with them in a way that is inovative, decisive and as best that can be managed... consensual.
In short... we all doomed!
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Private Equity and Asset Stripping in Simple Terms....
Joe Manufacturer makes crystal widges. The raw material and energy costs, etc to make a crystal widge amounts to £30.
Joe Manufacturer sells his crystal widges for £55.
So to produce a crystal widge, Joe has to invest £30 before he gets his money back later on sale plus £25 profit.
Originally, Joe started up with a loan from a family member, or a bank, etc, but over the years the profit from his operation (lots and lots of £25) gave him a huge profit and positive bank balance.
So Joe keeps £1 million in his business to buy raw materials, etc in advance to make his latest batch of crystal widges. He takes all additional money out as profit by paying himself a dividend. There is no cash in the business, but the Balance Sheet shows a £1 million profit (if the business was shut down, there would end up with a positive balance of £1 million in the bank).
So the business is successful, but has no money in the bank, except the stream of £25 coming in, which go out as dividends to the owner.
This is OK.
Now Johnny Asset stripper (a Private Equity Fund) comes and pays £600,000 to Joe and buys the business from him (ie. the right to the future stream of £25 profits).
But Johnny at the Private Equity Fund is smart, as he sees the Balance Sheet profit of £1 million. He legally pays himself a dividend of £1 million from the company, and pays an extra £5 per crystal widge to a trade insurance supplier to pay his suppliers (as he now has no working capital in the business to pay them) based on his future income stream of £25's (he probably also stops paying his raw material and other suppliers in good time).
OK, so he now only makes £20 per crystal widge, instead of £25, as he has an extra £5 charge for credit.
But now when he hits recession, instead of being able to flexibly reduce production and keep his manufacturing business ticking over during the hard times, he cannot service his debt, has no credit supplied to pay for his raw materials (credit insurance is withdrawn), and goes belly up (along with all the jobs of his workers).
So allowing the Private Equity Funds the right to extract working-capital Balance Sheet profit from businesses must be regarded of one of government's biggest failures.
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Update for petition - 911 signatures so far.
Come on, sign up now. Push the apathy aside and show some effort.
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Too all of the people asking why the risk was not perceived it is very simple: it was!
How can I offer you insurance at 1% when someone is offering it at 0.1%, they would take all of my business.
From 1998-2006 you could make good money on that 0.1% so why not?
Sure I want to charge 1% but then I would go out of business wouldn't I, that's a certainty, but a world-wide global downturn of the scale not seen since 1930, that's only one of many future possibilities.
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The point made in this piece shows the logic of what the Tories are saying, albeit they seem to be failing to clearly explain themselves.
If the goverment steps in to provide finance to business it would have to borrow every pound it lent which just grows the debt burden on all of us. In contrast by providing credit insurance, which reduces or removes risk for the banks thereby making it much easier for them to lend, borrowing only has to go up to the extent of claims that have to be funded.
In other words in terms of freeing up the markets, there is a huge leverage effect from the provision of credit insurance as opposed to simply pumping cash into the banking system.
Its not a silver bullet but on the assumption that only a proportion of the debt insured will go bad, gives the taxpayer, who ultimately must bear the cost, more "bang for their bucks".
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When I graduated in Math's, my tutor recommended becoming an actuary. After some consideration, I decided against this career. The pay is fantastic (about 50% more than I get as a mathematician in the defence sector), but I felt that a large proportion of the work actuaries do is based upon some fairly dodgy assumptions and that the maths is really 'pseudo-maths'. This I felt, and still feel, would ultimately be unrewarding. It gives me little (but some!) satisfaction to see that I may be proven correct. I do not believe that the majority of actuaries fully understand what they do, or appreciate the underlying weaknesses of their methodologies.
A very good book aimed at the lay-economist (like me) is The Undercover Economist by Tim Harford. In it is a very good description of why insurance of this type is bound to be problematic. The example used is actually the US health care system, but trade credit insurance seems very analagous (at its crudest, only those that think they will need it take it out i.e. only the sick/subprime insure themselves).
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61. At 10:28am on 12 Jan 2009, Emzdad wrote:
Not on the insurance track, BUT, can anyone comment that when the new superbank comes into being, if there is a branch of Lloyds and a branch of HSBC in the same town/street, as there is here, which one is likely to close?
ANSWER
The one that gave better customer service... doh!
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it is quite amazing that there is no shortages of Economic experts but all they spout is OPINION, it is all THEORY (HOT AIR), but few facts !
our blessed City thinks so short term, one day ahead is long term !
so many blame GB for all of our ills but I can remember the squandering of the windfall of North Sea oil spent to keep many millions unemployed with the legacy still visible today in certain parts of the UK.
this recession is different because it is hitting Tory areas not just Labour heartlands !
no doubt many parts of our rabid print media will support the Tory party at the next election but they give that backing due to their owners diktat, not out of any logical assessment of the merits of the argument.
the Tories have always had more experience of dealing with recessions but that does not mean their policies got the economy back to health quicker or better but they continue this "do nothing" approach and obviously would let the recession take its course !
I am grateful that we have a Government that totally rejects that approach and is at least trying to do something.
an ill patient gets better with suitable treatment, letting nature take its course may result in the death of the patient !
time will tell if the current policies will bear fruit, but just scattering the seeds and doing no gardening will give the weeds an equal if not better chance !
no doubt some will say this is class war rhetoric, maybe it is, but at least it is not "GB is to blame for everything" !
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One area of doom and gloom not yet discussed is the social effect of losing your job and not having any money - something that is with us now and accelerating fast.
More divorces, suicides, depression, lack of self esteem - we're all going to know people affected by this crisis and it won't just be because they can't buy their dream house.
A viewing of the excellent Northern comedy drama films 'Brassed Off' or 'The Full Monty' both cover these issues without leaving you totally depressed at the end.
If you know someone who does lose their job, try and make a special effort to find some time for them.
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93 =
Public sector 'worker' ;-)
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Post 61 & 92 I think you will find nothing happens.
However the Halifax or Bank of Scotland branch might close as Lloyds TSB has bought HBOS not HSBC.
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Robert,
Your previous articles describe the clever 'innovations' of the financial gurus in the Hedge Finds, Investments Banks and Insurance Companies used to create markets in credit default insurance etc. You have pointed out how this created a collective view across the City and Wall Street that risk was being magically massaged out of the system. The lenders were losing touch with the borrowers and old fashioned due diligence became redundant. All in the illusion of an ever expanding asset value bubble.
It seems to me that the Government now feels obliged to step into the loop and prop up these systems with taxpayers' money, creating more massive public debt. All to try and avoid the pain of a necessary economic correction.
Whilst there has always been a need for innovations such as this to support international trade and the uncertainties related to cross border trading risks, why should the Government now underwrite the normal trading risks. Woolworths' business plan went wrong for more fundamental reasons surely. The 'trigger' for their final demise could have been one of several issues facing their business. This is no argument for public intervention across the board such as this.
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@93
you say an ill patient gets better with suitable treatment......
The problem is the treatment he is giving is patients is weed killer.
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#89
If I thought insurance should cost 1% and my competitors are charging 0.1% that means, either:
- I have missed a very crucial point, or
- all my competitors will shortly be going bust
Either way, I would decline to trade rather than sell at 0.1%
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I challenge Roberts Peston's calculation that arrives at an average premium for trade credit insurance of £0.1%. I spent forty years or more in, or associated with, the trade credit industry - latterly as an underwriting agent, and I can assure any reader that by far the majority of policyholders would have considered that premium rate as a holy grail, particularly the smaller business with limited clout.
Theorising tends to depend on something approaching perfection in the market - experience shows that as times get harder, either nationally, economically or corporately, then perfection (if it ever existed) goes out of the window and corruption comes in through the door. Couple this with the need for increased sales figures and targets to be met, and lax underwriting is likely to follow.
sosraboc's points (post 40) are well made.
I have seen instances of competing underwriters offering terms which would clearly lead to a raft of claims based on the long-standing experience of their prospective policyholder - so many that we started to compile a library of what we considered to be "suicide terms."
I have also seen many cases where the original submission did not show a whole picture and after a "decent" interval the broker would try to slip concessions under the wire. Not surprisingly, these were often withdrawn in the face of judicious questioning. I have also seen too many cases where, for various reasons, it has been clear that a claim was either fraudulent of fanciful - sometimes due to the policyholder and sometimes due to the broker.
And, of course, it is always possible to get it wrong and find that an apparently adequate business has a vulnerability which simply was not apparent, based on available information.
Also, please do not confuse trade credit with CDOs and the like. If you are dealing with the kind of credit enhancement that produces CDOs, then you are looking at considerably longer terms of credit (several years) and larger numbers than trade credit commitments where sixty to ninety days is common and anything approaching a year might be considered outrageous. More importantly, you have the ability to make far more searching enquiries and conduct a deeper due-diligence. Trade credit requirements tend to work in a much shorter time-frame, with less time for due-diligence and much less ability to get information beyond that available to Companies House and the status agencies.
John_from_Hendon in post 34 also makes good points about the use of trade credit insurance simply as an aid to finance and the problems which flow from it. Any business model which is predicated on the price and availability of credit insurance is fundamentally weak - and this throws the onus back on the banks to do their job more thoroughly.
It is an old adage that credit insurance cannot make a bad business into a good business - and that has been proved time and time again.
Finally, for the benefit of polit2k (post 13), credit insurance has been around in the UK at least since the early 1930's - and in less stable forms even earlier than that, but that too is another story.
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I find this blog contributes enormously to my understanding of what is going on in the economy. It is incomprehensible that we are allowing our financial system to bring down the real economy.
It seems that much of the current crisis is a crisis of confidence. Investors know that there will be defaults, but they do not know which securities or companies will default. So they assumed that if there is any question at all on this issue that the default rate will be 100%.
We are tossing around trillions of dollars in efforts to stimulate the worldwide economy. Perhaps a cheaper and more effective way of mitigating some of this crisis would be to simply insure the securities and companies in question, knowing that only a fraction of them will default. In doing this we should recognize that we would be putting out many hundreds of billions of dollars in economic stimulus anyway.
If the root of this crisis is confidence perhaps we should address it at its source. At least they should be one of the mitigating measures undertaken and it would seem that it should be a major one.
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Let's be honest, the sophistication or otherwise of risk management models is really a specious argument in the present climate. No model, propriety or otherwise can hope to cope with the present levels of uncertainty.
Today Findus went into administartion. Not because it was not a viable firm. Not because it could not insure its contracts. It closed because its major investor failed (an Icelandic bank).
Findus is a major indicator of the debacle that is about to overtake us. They found it impossible to re-finance their operations. A well respected (as far as I know) firm, in a fairly secure market sector cannot find backers!
With a great number of firms across Europe having to re-finance their operations in the First Quarter, we are going to see this situation repeated over and over again. Governments will not be able to underwrite all of these organisations.
if we are to survive then we must now take some very difficult choices regarding which sectors and individual firms we are going to support in the national interest. If that means nationalisation and protectionism then so be it in the short to medium term.
last night I heared a guy on the radio saying that the 3rd Heathrow should not be built because the effect on global warming may mean hard times for sub-sahara. Well, that may be true but we can't help them at all if our whole nation disintegrates.
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#12
"If you now re-examine what Flash has been doing you may discover a logic to all his madness and maybe he is not so mad after all.
So instead of trying to second guess when the election will be you should consider when the emergency powers will be invoked to suspend Parliament in the name of preventing the complete collapse of the UK."
Do you mean that this perhaps, instead of being where "No more boom and bust"ends, is in fact, where it begins?
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94. GRIMUPNORTH77 wrote:
More divorces, suicides, depression, lack of self esteem - we're all going to know people affected by this crisis and it won't just be because they can't buy their dream house.
+
but they can't be stupified and ignored for ever
I think these type of people would have the best comments to offer on these type of forums
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12.5 billion V.A.T cut yet people cant get credit to buy goods to benfit from V.A.T cut....
Scratches head in amazement
New runway to get go ahead at heathrow as global econmony is to double in growth in next 20 years....
Scratches head even more.
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Land of Leather a new casualty?
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May the resident joker in the pack suggest underwriters can't spell? That bell should be spelt "Lootin' "...
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I notice that some of the posts on this blog believe that this is simply uneconomic correction. It seems that this is more than uneconomic correction and then it could spiral downwards into an equilibrium that none of us want. Government intervention is very likely needed to avoid this spiral.
The posts refer to the cost to taxpayers of intervention. And yes, if the intervention is poorly thought out, it is a cost and a big one. However if it turns what could be a major depression into a severe recession ending in a year or twoit is not a cost to taxpayers compared to the costs that would be incurred if this spiral occurred.
What, for example, would be the consequences if we are unable to employ are used for a decade or longer? What are the consequences to families if there breadwinners cannot find work, or only can find work and very low wages. What are the consequences if the fallen property prices wipes out the equity in the majority of people's homes? What are the consequences if defined contribution pension plans cannot pay?what are the consequences if defined benefit plans can only pay a fraction of what it takes to live?
No one can know the future, but there are some very talented advisors, including Nobel Prize winners, saying that we are at the abyss and that we have to use government stimulus to pull back. We must consider the consequences if they are wrong and the advisors are right.
The key is to deploy the funds in a way that stimulates the economy in the short run and contributes to economic growth and quality of life in the longer run.
Those who have not noticed the social decay in our societies are not looking. Speaking in a North American context we have allowed our services in the cities to decline; our water treatment and distribution facilities are in many cases not up to standards; our roads are being reduced to rubble; our bridges, or a fraction of them, have questionable safety; our schooling system is receiving failing grades and our schools are not being maintained properly. There is work to be done - let's get on with it.
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Another thing we could learn from the French is their attitude to personal debt.
Over there, credit cards are effectively deferred debit cards (30 days), so people are unable to buy a plasma TV for £3000 and pay it off for a fiver a month.
Mortgages are usually max 70% LTV and are fixed for 15 years.
Writing a cheque that would lead to an overdrawn account is a criminal offence.
Making it harder for people to spend money they don't have is surely common sense.
It may mean that our economy is no longer built on house prices, banking, shopping and debt, but that can only be a good thing.
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Dear Chancellor Darling,
I have the most credible set of motors on my forecourt needing insurance. Would you kindly settle, please?
Yours truly,
Arthur Daley.
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71 kiki
The system tends to totally fail. There is little reason for somebody with a problem to be open about it. If you had picked up a nasty rash would you pop down the pub and chat about it to the girls. Woolies is an example of something just keeping on keeping to the logical conclusion, Many more to follow. Because of this you have to wait for a failure to occur and then look at the system. It is too late. You seem to think you can intervene in the process. In many cases you do not have any legal right. Your only option is no contact either as an employee, supplier, or as a consumer. Even now you are too trusting. Sign of a nice guy. Doesnt help, you are not dealing with nice guys however much they sound nice. Still money at input end, consumer end of the system, just systematic problem. Just because the big model is in trouble does not mean there is not business. Just because they are up the creek with out a paddle or a canoe does not mean you are. That is what they want you to think. You then are tied into supporting them. Their future is your future. Hmm. Look around they will take the small number of golden lifeboats and leave you behind.
We used to supply IP, consultancy and I had a conventional management job. Having been truely cream crackered by so called blue chips, we moved to manufacture and direct international retail internet sales and prepayment as a right, waived if we judge. Cut out the chips, funny dont need them in my life, used to repeat on me. Better diet now. Action taken not being clever, survival.
57 Maimonides
The only software I trust is the one in my head. : ) Some do not seem to have software in their heads. Not my problem, section them. lol.
These big retail businesses can only get in further trouble. 1 Suppliers will say no thanks, rather go for a walk (we did, whats the point, still damaged us summat propa), some will be made to walk. 2 Sharp discounting will unmask the gross mark up in retail and people will ask how is this item sold at 50 percent off. Talk of value and trust etc will not mean anything. How many of these brilliant businessmen could have built the businesses originally. Not many. Poor ethics with most. Most appear to have been using Far East imports and the differential against UK manufatcure to hide their failures. Imports to go up in cost. Credibility to go down.
It is one thing to asset strip your own asset, it is another to asset strip your suppliers.
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The post from number 82 makes some excellent points.
However, in this instance the risks imposed on the insurance companies are not that one supplier or the other will be unable to pay - it is that many of them will be unable to pay; so many in fact that it could in theory but the viability of the insurance company into question.
The risks are correlated and what happens to one happens to many. the issue for the insurance company is what size the premium would they need to remain viable if many of their customers defaulted that once. The issue for governments is whether it is cheaper to subsidize this risk or to offer stimulus in other ways.
In the North American context, it is not one automobile manufacturer that is in trouble it is all of them. Some are in more trouble than others, but all of them are suffering severely, with little prospect of recovery unless he issues driving this "recession" are addressed, and soon. Even well-managed firms are at risk.
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#68. At 10:37am on 12 Jan 2009, Emzdad wrote:
When this government came to power in 1997, I believe that there wasnt a single member of the cabinet who, when at university, wasnt a member of the communist party.
Not sure on the ratio today.
Some were not only communists! Look up the meaning of the word Entryism
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As someone involved with one of the larger credit insurers I think it would be worth pointing out that credit insurers only cancel or reduce credit limits based on the following criteria:
- the risk they are underwriting has significantly deteriorated.
- there is a significant perceived risk of insolvency
- banks lend money at x% over base with the benefit of full security. Credit insurers are charging as little as 0.1% without security.
- a government g'tee for the industry will not make bad risks good.
Where the industry has failed somewhat is the arrogant, heavy handed approach in certain leading quarters which to an extent has given the whole industry a bad name.
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because a free-market economy works on profit margins that are small, in most cases, fractions of their costs the financial situation of companies can change radically in a very short period of time. Many of the costs are fixed and a small change in revenue is enough to wipe out profit margins.
If this recession continues for any length of time even companies with large amounts of equity will find their financial situation eroded. Those with more normal amounts of equity could easily find themselves in a precarious financial situation in a very short period of time. The clock is ticking.
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Message 93 spetmologer
At the next election I will put a peg on my nose and vote Conservative.
This will be breaking the habit of a lifetime but I will vote for anything that will put this pathetic, useless government out of its misery.
Mr. Brown was useless in the boom, Mr. Brown failed to call the top of the boom, and now he is equally useless in the bust. He is just wasting our time, our money and our lives.
I have run out of patience, life is too short to waste on governments like this that are only interested in themselves, their own client groups and trousering as much taxpayer monies as they can before they get booted out.
Yesterday I watched Mr. Cameron being interviewed by Andrew Marr. Cameron is keen to get his hands dirty and understands what he and his party will be in for. He has no illusions. Would that Mr. Brown were the same! He never will be, so why waste any more time hoping otherwise.
As for doing nothing, well it is a strategy at least. Rather that than doing anything that might remotely sound good on the telly whilst storing up serious grief for tomorrow.
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#55 BankSlickerminustheR
Someone more competent such as - ?
Not Call Me Dave or Gorge Frogspawn, surely?
Labour are attrocious, but so are the Conservatives, both scrabbling over policy!
One's as bad as the other, but I think making this an attack on one man is a waste of time and counterproductive.
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Thanks Vitro1 for explaining.
I understand that customers will go where there is cheap credit (to improve cash flow) but doesn't the price the widget supplier charges me include the cost of 'supplying + profit' + 'risk charge of supplying but not getting paid'.
ie. I'm a good payer but I'm paying more for the goods than I should to subsidise those few bad payers.
If I had credit insurance to show that I will pay then the price to me should not include the cost of the non-payer, he can buy his own credit insurance (premium based on his likelihood of actually paying), if he can't get that then the supplier would be wary of supplying, increasing the price to him to cover the credit risk or asking for payment up front.
I appreciate that this is too simplistic
BasaltRocky - good explanation
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"Insurance always leads to bad practice." How often have I heard that said. The banks need to know their customers better and the businessmen need to know their cutomers and suppliers better. There is NO substitute for this - certainly not insurance.
Insurance is there solely to cover unforseen circumstances and to treat it is an alternative to due diligence is foolhardy in the extreme.
The businesses that are most likely to suffer are the small businesses where I am afraid so many take on commercial risk with a "fabulous" end profit in sight - if all goes well.
Now they are suffereing and will continue to do so until the banking industry is able to expand its lending to worthy commercial borrowers.
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56. GRIMUPNORTH77
Back to the mid-1970's is where we are heading. Find someone over 50 and ask them what it was like. Government price controls on basic foodstiffs, no heating in public buildings, pay cuts for public sector workers, rampant inflation which in turn lead to huge pay demands which in turn lead to massive industrial unrest . 3 day weeks. And finally cap-in-hand to the IMF because we had printed to much money.
The only way it could be fixed in less than a generation was via Thatcher and 'Monetarism' and we all see where that led dole queues, industries destroyed etc etc. And back then we had North Sea oil/gas in abundance, energy was proportionally cheaper and we owned the means of producing it.
We don't now.
Banana Republic would be a suitable phrase but it's not hot enough for bananas here.
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We've just seen the Consumer Electronics Show come and go without any fireworks. Strike two, no innovations outside of Windows 7 (otherwise known as Vista SP2) to get the world economy racing over.
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ive got an answer..sack brown hes the biggest liabilty of the lot.....since 1720..walpole...this without doubt is the worst pm we have ever had.....and thats sayin something.... forget everything else untill we get rid of this numpty we are all in deep trouble..esp the young people.
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@106
and also findus the Ist food retail casualty
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#108 "What are the consequences if the fallen property prices wipes out the equity in the majority of people's homes?"
Not possible. Two thirds of homes in GB have no mortgage on them. So the 'majority' of people's equity cannot be wiped out.
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#77 RomePlebian
1. You obviously have no effective neighbourhood competition. When someone arrives, you'll crash and burn unless you buy yourself some breathing space that way.
2. Court action in big cities is becoming impossible these days. The Civil stream don't even call themselves courts these days, and are manned by one man and a mouse taking forever, you might as well forget it.
3. When growth is capped at 2.5% for fear of inflation and all that goes to the big boys, it's no wonder 95% of companies go bust in the first year, and it keeps right on that way for about the first five years.
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#78
The most profitable bit of Woolies' business was wholesaling people like Zavvi, which did require credit insurance - particularly when you see how fast the latter folded after Woolies went, no-one else would deal with them. WH Smith must be thanking their lucky starts they tidied that end up when they did...
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yes#47 where do i sign.....!!!!!! for gods sakes lets get rid of this idiot.
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Credit insurance is practised all over the world, and during the past 6-7 years the market has been considered 'soft' and many insurers would cave to lower premiums under pressure from the brokers, the big three insurers have been competing very hard for business in the last 5 years, however now in the UK premiums are rising and Insurers have lost the appetite for risk and funny enough the only Insurer willing to write cover on slightly risky business is the Insurer not based in the UK but abroad, the perception of insurers in mainland Europe is less risk adverse than the UK insurers. Im not sure why this is but they seem to be more supported in Europe by their respective governments.
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#18. At 07:10am on 12 Jan 2009, Common-Scents wrote:
Hi Robert,
Can you keep us posted on progress of the Banking Bill please?
Specifically, the Government's proposal to remove the clause in the law that requires the BoE to publish its weekly balance sheet?
This is important, since it means that the Government could simply print more money (as euphemisms go, "quantitative easing" is right up there) and we would not need to be informed by law.
I cannot for the life of me think of a practical motivation for doing away with this legal requirement of the BoE, which obviously means that suspicion is all that remains.
GREAT POST!
THIS IS A MOST IMPORTANT SUBJECT.
ROBERT PESTON, IF YOU HAVE OUNCE OF COURAGE YOU WOULD INVESTIGATE THIS OMINOUS DEVELOPMENT.
We are deluded if we think that the BoE is independent (from this wretched Govt).
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#9 - Annette - brilliant post which says it all really. Brown is (and has been) mortgaging the future for short term effect (he wants to win an election duh)! Brown needs to be punished for selling out the future of this country and kicking Labour out in the ballot box is the only way.
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It seems a quite simple. Firstly: although the risk is measured short-term the perception from customers of the insurance has been that the risk measure is an indicator only of the "good name" of the company and thus is a good indicator of the ability of a company to gain such insurance in the future; it is not. The risk also measures the current conditions of the market. Second: with this faulty view of the risk assessment, the use of this insurance was baked into the plans of many large companies. Whether they purposefully ignored that the supply of this insurance depended not only on their ability as a company but also on the performance of the market is unknown, but competition forced all to adopt once one had done so. The trouble is, it's only when we hit a recession that talk of storing a bit of fat for the winter starts.
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#101
We've tackled that one. Confidence is the old cartoon of Mickey Mouse driving in the mountains - each time he hits a bend, the car and caravan go careering wildly over the side of the precipice, but all's well as long as the guard-rail holds and he doesn't look down.
In this case, the divergence between price and value eventually broke the guard rail. Entry-level housing became a joke, with people telling all kinds of porkies just to get a mortgage, and when that broke down, the entire pack of cards collapsed.
The kind of socialist economic we're headed for is one where people get taxed, for instance, on the declared value of their assets. The catch is, anyone can then force them to sell the said assets at the declared value...
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I ve read through most of the posts.
There still seems to be some underlying faith that HMG can intervene. A belief the maths can be good enough the model tweaked. That flow can result. The market balance. Well maybe. Quite how quickly I can't say. However having spent a long time, some considerable time ago now, in a declining sector - manufacturing - A lot of high tech capital plant - I can offer this comment. If a sector is in trouble successive downsizing, reorganisation, new technology, whatever you want to bring in - It means very little in the long run. Downsize, costs run thru the accounts 3 months to 6 months, big smiles, we are home clear. No sorry. You have just bought a reprieve. Still in decline. The fact is decline is decline and growth is growth and inbetween - either growth to decline or decline to growth is a transition often regarded as stabitiy. It is not. Nothing is stable, that is an illusion, loved by many. So take a look around and tell me when things are called stable, then we may be in transition and see some growth.
At the risk of making people groan I remain optomistic. This mess is only affecting the grossly in debt. There are still many without gross debt. There is still growth about, just small. But imagining big business can be sorted easily when it is in decline, that is a different matter. Something about mathematicans working it out with a pencil comes to mind.
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I would advise anybody who does have credit insurance is that they do contain a number of conditions to get a claim paid and Insurers are looking for any excuse, firstly check you have cover on the buyer prior to despatch, check how many days after the due date for an invoice the policy allows before you have to report the account, and do put accounts on stop if they go over that period or you will not get a claim paid! better still appoint a broker! preferably one who is not affiliated to a single insurer.
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@120
In the mid seventies i was on 27 .50 a week, no central heating just coal. only the well of could afford central heating back then. They were the mega and supper rich. once again i refer to roberts blog a fairer soceity. I see primark and pound land are doing very well, not supriseing really these are the only shops most people are going to be able to buy anything in.
Back then most people to rented TV.S and washing machines, good news for drinkers it was only 23p a pint,
I could go on forever but im not.
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I'm with #7.
The real problem with the economy is that the whole house of cards is built on debt. If people and businesses didn't spend money they didn't have, we wouldn't be in this mess.
It's perfectly possible to run a small business without borrowing money. I've run mine for 10 years and never had a penny of bank loans or overdraft. It's all about managing cashflow sensibly.
I'm not saying there is never a legitimate need for businesses to borrow money, just that it should really be the exception rather than a routine way of doing business.
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Look out!
It's jobs this time. Brown's out there pledging and promising again.
Don't you just marvel at his talent? There is no limit to what he can do.
GC
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#120
Mid 70s? I spent most of the 70s offshore in the N Sea in the subsea business operating mini-submarines and wondering even then why it was that the UK was not starting and developing more oil/gas related companies, building ships, drill rigs etc.
Come the 80s and Thatcher and she was intent on creating a level playing field. That meant killing off Britoil (the Norwegians loved that as they'd just started Statoil) and generally igoring the need for UK content in offshore projects. She just wanted the oil revenue. Nothing else was important.
The industry then and now is/was dominated by the Norwegians, Americans, French and others. We maintain a sort of "also ran" position but all the strategically important. high value adding stuff is done by others.
In short, we blew the biggest economic opportunity that we'd ever had.
Labour of course just treat the industry as a tax cash cow but I defy anyone to tell me what direct benefit that has brought us.
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#108 u got it from the expert #124 every things ok now......what we all worrying about everythings perfect.
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Re. 18, Common-Scents
I'm also very concerned about the changes to legislation this week that mean the Bank of England could print money without reporting it.
The last thing we need in this climate is more uncertainty.
The continued reporting of a weekly balance sheet by the Bank of England is essential to understand how they are managing the economy.
How else will we find out when the government starts to print money, ruining the value of any savings in this country and leading us to hyper-inflation
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Poor old Labour, events are overtaking their useless attempts to stave off depression, Que? I hear you say.
Not even a murmur from the back benches, not an ounce of honestly from even one of their MP’s (Misplaced Persons) They have gathered round their glorious leader and tell the press ‘we are doing this, we are doing that’ at least we are not doing nothing…..
Even to a layman like me its all becoming clear, I’m not old or wise enough to know what going to the IMF entails but I know I don’t like it!
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I started reading through these comments - a fair mix of informed opinion and complete tosh, which is what you would expect on a public forum.
However when I got to comment 34, I felt I had to post a comment myself.
As a private equity investor I take isse with comments that myself and others in my industry are "asset strippers". As in every industry there are people who would leg over their own grandmother to make a profit, from across the political spectrum eg Robert Maxwell. But private equity is all about generating equity value. How do you do that? Well you ultimately have to grow profitability, and you don't do that by raping the business for cash.
The need for credit insurance is driven by working capital, particularly if you supply major retail chains - you know who they are. Their payment terms to their suppliers can be inexcess of 110 days from invoice, whereas the supplier will probably be on 30 days for all of his costs. This gap needs to be funded, usually by confidential invoice discounting. A bank or finance house will lend circa 85% of the value of the customer invoices, repaid when the customer coughs up the money. As the finance house would not have the capacity to credit check every single potential customer a company would have, they ask for credit insurance to be in place - the reason, invoice discounting is generally one of the cheapest forms of borrowing, as it churns very quickly, and as long as the customer doesn't go bump it will be repaid.
Credit insurance is a neccessity, as otherwise a massive number of suppliers to retail would go pop due to lack of cash. The alternative, is that the major retailers go back to paying their suppliers on 30 days terms, but they can't, the cash implication for them would be disastrous. And before anyone says blame private equity, the worst retail culprits for stretching terms are all quoted, in your pension fund, and major UK tax payers.
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Models, what a joke.
People keep referring to models.
The majority of models fail for many reasons but the principal ones are:
They make incorrect assumptions, eg a market will expand at a given rate forever
They ignore or do not recognise significant factors, eg loss of liquidity
They are not back tested aginst results sufficiently vigorously
Worst of all and most dangerously; they are wrong, eg there is a mistake in a formula or a fixed cost may actually be variable or a link to outside data has changed.
In twenty years of reviewing spreadsheet models, those where there was any complexity, I NEVER failed to find errors.
That is correct NEVER.
Even in fairly simple models the error rates were extraordinary.
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Off topic again, but I suspect Gordon and NuLab know the only way they will ever be re-elected is to make the economy so god-awful that when the next lot try to put it right they will antagonise the electorate to the extent the voters will forget what caused the pain and reelect Labour.
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#7 you make an excellent point...#136...yes ive been the same buy what you can afford....but thats not good enough.. im afraid...its the greed culture now.. and browns number 1 in the list.
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far be it from me to accuse the BBC of bias but i have noticed that when Cameron proposes to buy a packet of crisps he is grilled by Marr, Paxman etc about where is he going to find the money, what services is he going to reduce to pay for it, which taxes will be increased, .... meanwhile Brown wanders around the country buying bust banks, offering billions here and there yet he is never asked how he intends paying for it! Come on BBC journalists, start holding this government to account.....
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A fair point but bear these in mind :-
1) Insurance rates are often and general in the per mille range. They are prone to cycles, and markets generally have been soft for some time, say 18 months, ahead of the manifestation fo the crisis. Irony, when punters could afford it they wouldn't pay; now they can't afford it, it's dirt cheap.
2) The risks will have been reinsured, probably by alternative risk transfer, which is a jargon for saying it been reinsured in the capital markets rather than with traditional reinsurers. To clairfy, the risk has been transferred to hedge finds and their ilk rather than syndicates or re/insurance compnaies. Those vehicles are facing their own hardships at present, which will not be helping them to assume risk from others.
At risk of sounding like a dinosaur, we may basically have been victim of too much innovation in our "solutions", and perhaps not enough boring old rigourous conservative management of risk. Often, at the root of it there is a word involved - securitisation, wher the carrier is subject to security rating and it will be influencing those insurers. But ratings agencies are not that bright - if they were they'd be running the companies they rate and doing it brilliantly too - so why oh why do we pay them, so much attention? It's not like they saw AIG coming. If they do see, I wonder if they have the nerve to shout because in all my years I haven't seen them do it when it really matters.
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#142 ure the complete tosh.you talk alot and know nothing.
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124 annette
BTW Think it is 1/3 with no mortgage. But same true. There is probably a big skew in LTV distribution. 2.5 million houses (more as people) in neg equity either now or very shortly.
HMG mortgage intervention unsurprising. But cannot have any impact when forecast is drop throughout 2009, maybe 2010. Dont underestimate the impact of this on the mobile young highly qualified who are looking abroad and welcomed there.
It is quite obvious that things abroad may be difficult but nothing like as bad as here.
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"#79. At 11:03am on 12 Jan 2009, gordont10 wrote:
Moderator-please delete my post 78-its erroneous!"
Moderator- please return my post 15- its not erroneous but may only be a little too uncomfortable for some reading here, as it was obviously approved and posted after peer/moderation review, and yet now has mysteriously disappeared, for some probably right dodgy spurious political reasoning .... for it was not gratuitously offensive in any way and only shared positive alternative notions.
And it is not as if it is not available for Peer review and comment elsewhere, and on a Publicly funded Service like the BBC, to deny a Rightful Voice Expression is a slippery slope which always has the Censor in the Dock, to clarify their concerns and fears, which may be totally irrrational and the subject of a feverish ill-advisedness/debilitating Paranoia even.
Thank You.
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WILL SOMEONE PLEASE EXPLAIN TO ME THE CRASS IGNORANCE AND GREED THAT PEOPLE IN THE CITY HAVE. I APPRECIATE THAT MARKETS GO UP AND DOWN AND SOMETIMES YOU NEED TO CUT YOUR CLOTH ACCORDINGLY. BUT HOW CAN SOME ONE ANNOUNCE TO THEIR STAFF ALLEGEDLY THAT THEY ARE MAKING A HUNDRED PEOPLE ON THE FLOOR REDUNDANT AND THEN ANNOUNCE THAT A BAD YEAR HAS HAPPENED AND A MILLION AND A HALF BONUS FOR EACH PARTNER HAS COME DOWN TO 900,000. THE WORLDS GONE MAD OR TO HELL IN A HAND CART PROBABLY IF ALL THOSE PARTNERS DIVIDED SOME OF THERE BONUS TO THE REDUNDANT PEOPLE LIFE MIGHT FEEL BETTER FOR THEM AND THERE REDUNDANT STAFF YEA THATS GOING TO HAPPEN?
Gordon GECKO EAT YOUR HEART OUT. MAYBE THEY SHOULD HEED THE FRENCH REVOLUTION COMEBACK ROBESPIERRE ALLS FORGIVEN.
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This article clearly explains the complicated nature of business which needs to be tackled head on.
There is no confidence anywhere and until we get the credit moving and how many times have we heard this from the Tories we are going nowhere but downhill fast.
This government act as if we have all the time in the world but as most of us can see everyday the deterioration is gathering pace.
Eventually measures will have to be put in place but how many jobs will be lost and businesses gone before someone decides to act sensibly instead of plotting the next election.
Tinkering around for political reasons while the economy heads for destruction is a poor reflection of the state of those in power.
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Here we go again. Special pleading on behalf of viable businesses without defining what is a viable business. Credit insurance, as with the cost of borrowing, is frictional. That is, it is not part of the cost of production but a cost of doing business. Companies that need to borrow against current sales are at best undercapitalised and at worst struggling to be viable. In the long run, squeezing out non-productive costs is good for all, with the notable exception of parasitic banking and insurance of course. Propping up the status quo at unquantified cost to tax payers and consumers is no solution, merely postponement of the economically inevitable. Please do give us your definition of viability before using the term again.
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LAND OF BLETHER
On the day that Land of Leather finally bit the dust and the chill and icy winds of economic crisis reached even Findus frozen foods (despite one of their main warehouses catching on fire...), how appropriate to hear the PM interviewed on Radio 4's News at One explaining things in terms of his latest 17 initiatives to make it all ok again
It's worth a listen when BBC iPlayer loads it; he's tackling all the issues he says: creating jobs; not letting communities die; making credit available; and on and on
During his explanation he also managed to say 'global' so many times that he gave a passable impression of a turkey complaining about Thanksgiving
Blether:
1. foolish talk
2. a person who blethers [Old Norse blathr nonsense]
Noun 1. blether - idle or foolish and irrelevant talk
chin music, idle talk, prate, prattle
chatter, yack, yak, yakety-yak, cackle - noisy talk
No doubt this star turn will be followed by some CHIN MUSIC from the equally useless do-nothings from the Tory side.
Time to listen to Vince Cable anyone? Obama?
Or how about being really radical and finding someone to consult who is neither politician nor self-interested crony.
PS: I have never needed trade credit insurance myself or in any company I worked in but then I wasn't buying and selling merchandise. Perhaps some companies do need it but I suspect many of the comments here about bad practice and over-reliance on credit are right. Legal obligations to pay suppliers within 30 or maximum 60 days would be a great help. As for the writers/backers of this trade credit insurance surely some will break rank and adjust premiums upwards. Or is it that market solutions no longer exist.
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111. At 12:42pm on 12 Jan 2009, glanafon wrote:
71 kiki
The system tends to totally fail. There is little reason for somebody with a problem to be open about it. If you had picked up a nasty rash would you pop down the pub and chat about it to the girls.
+
it would be rude not to
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Case for Northern Rock small shareholders (and hedgefunds) kicks off tomorrow... Any thoughts?
I still value the shares at 0 GBP!
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sosraboc. Models are not a joke they are a very valuable tool.
however they are what they are - models. They are abstractions from reality. They only exist because the environment they seek to represent is too complicated. Therefore they are not magic boxes or silver bullets.
I can model every enterprise in this country quite accurately:
INPUTS -- TRANSITION PROCESS --OUTPUTS
This is a Black Box model. It is accurate as far as it goes but gives me actually no detail of any of the elements. As a prescriptive tool it is absolutely useless. However as a diagnostic tool it at least starts me thinking about the areas in which a problem may exist.
The Boston Consulting Groups Growth/Share Matrix was once viewed as a magic bullet by corporate and marketing managers. We now know that it is not the magic bullet that it was first thought!
One of the major downsises of computerised models is that we become fixated with the output - computer says no! More and more decision makers are removed from the day to day reality of the company or market place they are supposed to be analysing. hence the unreality. The same can be said for government, financial services and the civil service.
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#154 somali_pirate_SP500
You must be a bloody good swimmer!
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127 rvpisneverinjureds
Read post 64, you can get the info there.
913 so far. We could do with thousands.
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#145. Yes - on sunday, the same Andrew Marr who normally gazes admiringly at GB was grilling Cameron on what he was guing to cut to in order to find the "enormous amount of money" of £5bn, when such a modest sum is lost in the weeds of public finances.
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#141 - going to the IMF entails the Government promising to cut wasteful expenditure, reform taxes and, usually, losing the following election. Some might say that this is the rosiest awaiting us.
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Your comment that the insurance is really for the banks' benefit is revealing.
Banks have suckered businesses into borrowing for things they used to have internal funding for - like stock to sell. Banks have profited greatly from this and businesses have passed on the extra costs to customers.
Now businesses have become so dependent on borrowed money pushed at them by the banks, they can't survive when this artificial cashflow is withdrawn. Paying upfront is not an option.
Personally I hope Gordon doesn't find a way to get banks lending again. Businesses will budget for cash to fund basics like stock, rent and wages without borrowing and will become sounder businesses as a result.
Exit the moneylending and insurance parasites and we get back to a real economy. What's needed from government is a way to ease this transition, not funding banks to start the cycle anew.
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#154 somali_pirate_SP500
You must be a bloody good swimmer! (again)
http://news.bbc.co.uk/1/hi/world/africa/7824353.stm
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It occurs to me that companies using factoring to aid cash flow have a further problem, if the banks are running scared of credit risk insurance then the probability will be that they will either reduce percentage paid or increase costs or refuse to offer the "service". Many in our industry rely heavilly on invoice finance, how many of these can survive the removal/restriction ?
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142 propsupthebar
An interesting post.
110+days from invoice to payment... or goes back to 30 days..... but can't afford it. - or similar, not wanting to put words in your mouth.
Really the only mechanism to stop the ever onward drift - 110 outwards - is the limit to self cannibalism by the supplier or the limit that the financial bridging mechanism has. If I was stuck in that game I would be looking to import from a low labour cost area to give me some faint hope of having some fat in the system. The idea that margins were eroded based on a high cost labour area would be something of a chill.
The problem as I see it is if the bridging mechanism can be described as churning at say 90 days and yeilding a business in its own right to somebody there is really nothing to stop it going substantially outward. It is however enabling another non-value-adding activity.
It may be incorrect to describe cash as an asset and to describe the removal of cash out of the supply chain as asset stripping. Or to blame the private equity guy. However there is no doubt cash has disappeared, not to return.
The destructive power of large block shareholders demanding the maximum in profits is often overlooked, but it was fairly well documented that the pension funds of some industries had their part in destroying or damaging the very sectors their investment was drawn from. This is just the same mechanism in play.
The whole thing reminds me of an addicts reunion. Self harm and mutual dependency.
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# 160 - yeah,
I really winced when Cameron started going on about the 'Big beasts' who helped him from time to time (Lord Clarke of Brownshoes, Sir John of Family Values, and Lord Snooty of Heseltine etc etc etc). I thought 'oh, no, don't roll out those egocentric dugouts again..' Bad enough having 'I know a lot about business because I worked in the EU Mandelson' back with title to boot.
Shows who really pulls the strings in the Tory party though.
GC
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It wouldn't be Peston's blog if it wasn't dull and technical
So is this just the big brother of the banks forcing companies to Factor?
I can understand many companies squealing at having to renounce terms beyond 30 days, or even less, but I wonder how many of the smaller businesses out there actually have to pay for almost everything up front by Pro-Forma.
If this were actually true then basically all a company would have to do was not order anything for 30 days, sell the stock they have and then have money in the bank to buy more stock (simplistic I know but if you're got cash flow then you have possibilities)
I still think this comes all the way back to the banks
Specifically the collapse of Lehmann Brothers and the many tie ins with AIG
We have not even seen the many unravelling trades of AIG or the "wriggling" on the small print in the contracts
The US has propped up AIG, do they know how big the black hole is yet? At least the Americans seem to want to investigate and prosecute.
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Here's a radical thought not heard much during the recent histrionic media response to the current recession:
Bankers and insurers actually do know what they are doing !
Both the banking and the insurance industries employ extremely detailed and complex risk management models not to mention specialist staff who understand risk.
As we have seen they do not always get it right and make mistakes in their risk assessment. As someone who has been through previous recessions this is nothing new. In the last recession Barclays made its only loss in its entire history. Nobody is currently forecasting Barclays will make a loss for 2008.
Most of the large banks will usually have a bad debt ratio of less than 1% i.e they lose less than 1% of the loans they make. In bad times that will increase and may go up to more than 1%.
Because of the huge amount of money our banks lend if a large bank loses say 2-3 % of what it lends then that will have a massive impact on its profit performance. Those losses will also reduce its capital and may mean that it has to cut back on its lending as Banks are required by regulators to maintain a certain amount of capital to support their loan books.
Whats made it even worse recently is that the regulators have INCREASED the amount of capital that banks have to maintain to ensure they are perceived as being safe.
So losses plus increased regulatory capital requirements have meant banks have been forced to raise more capital. The cost of that capital - both government and external has been hugely expensive - 12% plus interest rates.
Its fair to question the pricing of risk by bankers and insurers when times were good - there was too much cheap money. However when the correction has come and risk is being repriced, everyone is now squeeling about rate reductions not being passed on.
The alternative option to banks and insurers doing their jobs seems to be for the government taking control of everything. Does anyone seriously thing G Brown and A Darling can do a better job when they have made such a mess of running the British economy ?
Yes there are things the government can do - extending the existing government guarantee schemes that small businesses can currently apply for is a good idea. But running banks and insurance companies ? - I think not
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"Just as banks charged ludicrously low rates of interest during the years of the credit bubble, ..."
But isn't that exactly what the BoE is attempting to force now with the cuts in the Bank rate? (Not that it appears to have trickled down into personal loans on credit cards)
To business customers the rate is very low, so much so that the Banks don't want to lend given the perceived default risk in this recession. Won't the low cost of money to Hedge Funds mean that, come an upturn (or rather, more optimistic perception of market conditions - which may or may not have any basis in reality ) they will be buying into companies and the whole damn shambles will happen again?
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Just a couple of questions.
1. If with all the leveraging debt-fuelled madness GDP was growing at the rate of 1.5-2% a year, what kind of growth or graceful decline can one realistically expect in a manufacturing-based,
honest, "resources"-aware environment (i.e. once
Britain is "rebuilt") ?
2. At the university level it is not clear to me whether the situation today calls for more liberal education or for more vocational training (in what?). Actually, do the bloggers who are so vehemently against public sector workers consider academics part of the bloated parasiterie?
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I'll tell you what this Gov't is good at....it's SUMMITS!
Summit about dis, summit about dat, summit yesterday, summit today, summit tomorrow!
They certainly can't be labelled the 'do effin nuffin' party!
Our Supreme Leader really is an all action Flash Gordon.
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Why focus on symptoms and not the cause. Labour failed to manage our economy, took and the denied responsibility when it suited them. We will be living with the legacy of this shambles Labour for a lifetime, so Mr Peston I think you should be putting the boot in!
http://news.spotz.com
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157 foredeckdave
I hold with models as a joke albeit not a funny one. My complaint about models is their potential for inaccuracy.
I agree that using a model to start you “thinking about the areas in which a problem may exist” is a reasonable.
However, my experience has taught me the vast majority of models cannot produce correct results because they are broken before they are started up. This is because the thinking process has been abrogated to the modeller and back-testing is generally inadequate, documentation poor to non existent and action arising from the model output is only likely to be successful through good fortune. In many instances, it is more likely action will be suboptimal.
Managers are duped by printed spreadsheets, generally the output of the models I refer to, which are plain wrong. They cease to think about what they are reading and thus act blindly. Just because it comes from a computer, it does not mean it is correct.
A simple example: I found a bank treasury using a model where a cell had been copied down a series. The cell referred to the month day count and used February all year. Net result, a third of a BILLION losses.
All the columns added up beautifully, but then they would, a computer did the calculation.
You’ll be pleased to hear they still got their bonuses. That’s a good joke don’t’ you think?
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markL64 If bankers and their friends in financial services actually did know what they were doing then how do you account for the levels of toxic debt?
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Credit insurance -just like travel insurance and mortgage repayments insurance. (useless, barely-claimable and damaging)
It wasn't devised to provide comfort the the insured, but to create premiums for the insurer and a way to stall payments even longer by the debtor (surprise surprise usually a bigger, bullying company).
The soft soap was that the poor supplier of the goods would get the comfort that the money was now 'guaranteed' ........
We always refused stupid payment terms from customers and have never factored our invoices. If they don't like our (fair) terms, then we don't like them, refuse to do business and bad-mouth them any time we can.
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The opportunities for fraud here are fantastic. I set up a shell company. I buy goods on credit. I couldn't get it normally as I have no trading record but HMG are stupid enough to insure anything. As soon as I get paid for the goods bought on credit I make for the Bahamas. The taxpayer indemnifies the supplier so they don't even care and will be happy to sell me more goods to my next company next week.
In the meantime another business is driven out of existence by being undercut by Government supply (BBC anybody?).
How do I apply?
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170 deffga
1 Export moderate up possible depend on o/s market and resistance to buying imports there eg nationalistic reaction if bad there. Domestic consumption down markedly so related mnftr down but some relief for items made here but expensive to import by currency levels but currency may go back up a bit. Depends what you are doing surely. o/s seems to be coping beter than here. Just guesses but that is all you will get. Some o/s firms appear to have taken the decision to absorb all of exchange rate change because they want the UK market. So many decisions/effects not obvious. Nasty feeling UK worse position than other countries. Based on contact with people o/s.
2 The objection to the public sector from some in the private sector broadly comes from the fact that the private sector is going to take the main hit and pays for the public sector via 46p in the pound indirect and indirect tax. Mickey mouse jobs and ipods on expenses for MPs do not help. Nobody I have seen says all public sector jobs are waste of money. Public sector probably has to contract/means test sooner or later as economy shrinks, if shrink permanent. Depends where you are in public sector.
Somebody else will know more. Doubt figs available. Could be wrong.
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one of the best articles on the current credit contraction i have read http://www.contrahour.com/contrahour/2009/01/martin-armstrong-the-coming-great-depression.html
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A link to an excellent article on the current financial situation
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138 wee scamp
When you where out in your mini sub did you spot Lord Lucan
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@ 142
So you're saying that operating on insured debt is the only way for suppliers to function given that retailers often leave 110 days between receipt of goods and payment for said goods, and retailers can't shorten that because they can't afford to. And all of this is bad for us because our pension funds would suffer...
Right, so what's happening isn't actually a good thing, it's just another precarious edifice built on the same expectations of an ever-growing economy and easy debt as everything else.
What we need is to get rid of all of this nonsense. Not paying for 110 days? That's insane. Routinely taking out up to 85% or your expected receipts as a bridging loan? Insane.
It sounds to me like all of these businesses are a hair's breadth from insolvency and we'd all be better off if these business models died out.
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#163 bankslicker
Ah but you see I didn't fall out of the boat; that was one of my colleagues
a bit of unexpected downsizing of the staff
as the report says, we're drying out the money; luckily it's nice and sunny out here
PS: pirates always pay in cash and within 30 days
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NO 35 glanforan
YOURB TALKING ABOUT BOOTS THE CHEMIST AREN'T YOU?
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181 goth
You got it. El Gordo and Comical Ali D in da House's perpetual bubble machine is broke. All those bubble brained businesses are stretched tighter than a drum, er bit like a bubble. The slightest extra stress it fails, er like a bubble. And people are surprised and talk about recovery for those businesses. Most of these big outfits have been in long term underlying decline and no amount of insurance sticky plaster or gummy tape is going to put those particular humpty dumpty numpties back together. For years the front men have been saying - oh yar it is brill, and sliding the cash out to prop up share prices. The bully boys holding the shares don't know the business, don't even check. Oh and there is the mathematical models mentioned. I worked alongside a team of mathematicans building complex models. What a load of bodgers - put the real life data in - put the models in - does nay work. Bodge here, bodge there, twiddle a bit there. Oh model matches real life, based on history. New criteria, the future - model fails what a surprise. Never mind go back n bodge it. They always say the model was right it just needed recalibrating and now it takes care of it all.
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Interesting topic. My employer cannot get trade insurance. If it were not for the fact that the european parent company underwrites these risks itself (I wonder if they use a similar figure for risk analysis?) then our UK operations would not be continuing, something that would have a fairly sized detrimental effect to the local economy (and sub suppliers of course).
I would imagine there are others just like us. It would be interesting to wonder if the companies underwriting this risk such as mine, are now reassessing the risks involved. I can imagine in some cases the sums being quite substantial, although thankfully the weakened pound could play in our favour.
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Robert, fancy doing a bit of investigative work into what's going on in the construction and housebuilding businesses? maybe get out of London and talk to some people beyond the M25 as well?
JCB have just announced another 700 job losses and say that the main reason is that their customers can't get any credit to buy new machinery ..... that may be a simplification of why JCB orders are dropping so precipitously but presumably one of the factors contributing to rapidly falling demand both domestically and abroad
It seems to me that housebuilding and general construction remain two of our most important sectors and that gov't help for these areas should generate more of a real upturn in economic activity, especially when compared to the money poured into banks which they then sit on, or suggestions of paying for trade credit insurance that many posters say is unnecessary or worthless; the housebuilding and construction has to take place domestically and would result in an increased/repaired housing stock and improved infrastructure, which the UK needs
It sounds like a lot of the building industry will be gone 6 months from now if the man at JCB is correct........ where does it appear on Gordon Brown's list of things that he is pledging to fix for us
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#56:
1. Currency devaluation and high interest rates could happen as a result of a run on sterling and gilts by holders tired of being diluted and sceptical of the government's ability to tax and pay. Not necessarily this year though, but considering the government's reckless borrow and spend policies, there is an elevated risk it will take on too much debt. Bear in mind tax receipts are collapsing, so this is a pincer movement in play.
2. It will affect prices of locally produced goods as traders price ahead of perceived inflation risk. However, a wage-price spiral is unlikely as there is little union bargaining power left compared to the 70s, so affordability could just decline markedly.
3. High interest rates mean lower house prices. High interest rates make all debt less affordable on a given income, and since house prices are ultimately defined by income and affordability, they will fall even more rapidly in response.
4. The UK is not self-sufficient in food production. It was a vulnerability as far back as 1917 if you recall your history.
There is a fanciful notion Britain can print its way out of this tight spot without reference to the rest of the world. However, credit and currency markets connect us to others more thoroughly than ever before. We can expect an equal and opposite reaction.
#93: One way or another, bad debt must be allowed to default or the cost of servicing it will consume the economy. Cold turkey is not nice and carries risks, but it is better than more of the same which carries certainty.
#101: The root of the crisis is insolvency through excess leverage, and there is too much bad debt to bail out without risking a currency and funding crisis, as explained above. Household and public debt alone has seen a trillion pounds of expansion not earned or supported by additional economic activity. Companies have more. It cannot be removed from the system without some adverse effects.
#108: It is not possible to stop a depression. Depressions happen when debt burden exceeds the income available to carry it. Compound interest laughs in the face of well-meaning policy. You cannot stimulate malinvestment into productivity, you just throw good money after bad. We tried it after the tech bubble crashed and it got us here. The only way is a long period of deleveraging, and that is unpleasant in its own way. Two roads, same destination. The consequences are available to view on the History Channel. They are what they are, however much you may wish them to be otherwise.
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#183
You might say that, I couldn't possibly comment.
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183 frank
Nope. Another lot. I wouldnt say who because was early 90s and different people at top so not fair. Probably not different behaviour now but you never know. But it was not the one you mention. We dealt with a large number of UK big outfits and some big outfits on the continent, couple in the US and one in Japan, many worldwide brands. Mainly based on UK not o/s. Over some 17 years. Fine at start. At end - Still on the phone asking for stuff when we said we are not providers of finance push off. 'Oh thats a different department', 'I just want something because I have to fly to see so and so and this is influential on what we do next year'. Youre on stop. 'You cant do that we will be in trouble'. Join the club, Youre on stop. Like talking to bacteria. Matter of weeks for payment at start, up to 18mths at end. Never again. I'd rather cut my middle wicket off. Thats why we do something else now. Oh, I know for a fact good dividends where paid durng this, with my money presumably. And people talk about fixing a system like that. : )
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#175
Have you ever had a heart attack abroad? Could you afford the medical fees?
Have you ever lost your job with £1500 to find each month for your mortgage before you lose your house?
If you haven't - don't knock insurance - It's there when you need it - and when you need it you save a lot more money than the premiums you paid.
(From an insurance broker specialising in travel insurance and MPPI - sold correctly by the way)
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178 neonbradyd
credit contractions, is that like contractions in labour, labour pains. certainly pains me ; )
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I personally think it is scary that a well respected journalist would publish an article that does not give the full picture !
Firstly, Trade Credit Insurance is non compulsory like other classes of insurance that we all , by law, must purchase. A companies biggest asset is tied up in accounts receivable. Money that is owed from its customers. By law that company must purchase insurance to protect itself against fire, theft, liability etc etc but not its biggest asset which in the event of a large failure of one of its customers may see the demise of that company.
For this reason , the penetration of Trade Credit in any territory is low and only a small percentage are forced to purchase by their banks ! In addition , Trade Credit Insurares have to offer a product in a commercial market with the forces of competition and more importantly the threat of self insurance.
Secondly, and this is very important, many of the high profile insolvencies we are seeing at present have been coming for some time. Most have been unprofitable for some time and would have been in trouble regardless of trade credit insurance. Can anyone think of a reason why they would go to woolies apart from pick and mix ? similarly do we all think Zavvi was a good brand. Richard Branson saw the writing on the wall and at the end of the day he didnt want his brand associated with a failure hence the sale of the business. Land of leather, are there not too many sofa retailers out there fighting for the same business.
My point is that would you as an individual keep lending money or guaranteeing debt to another individual if you thought they were not managing their affairs well ? Ok the banks lent to uncreditworthy individuals but the insurers did not !!
Part of any risk assessment should be ongoing. Things change and if an insurer is working on behalf of a supplier who will always take a portion of the risk should they not help a supplier trade out of a position if the supplier is in difficulty to minimize losses all round ?
It is an interesting topic to write about but not as straightforward as it seems !!
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I think the figures you're using are WELL off.
Looking around at the ABI website I can't find any figures on total Trade Credit insurance revenue in the UK, but looking at Atradius (who I believe are the market leader at about 30% of the UK market place) they had €280m in revenue in the UK 2007.
Furthermore, they aren't insuring the total revenue, they are insuring the outstanding debt- i.e. with 30 day terms, this equates to just 1/12th of the revenue of a firm. Finally, they don't insure the full amount, but normally only pay out 90%.
By my estimate the risk cost is much closer 1% not 0.1%!
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Land of Leather another victim. The company cliams it had appointed Lee Manning and Nick Edwards of Deloitte as joint administrators.
Deloitte. Something should be raised on this issue.
Following the demise of Arthur Andersen in 2002, almost half of the Partners and Staff of the UK business of Arthur Andersen joined the Deloitte firm.
http://en.wikipedia.org/wiki/Deloitte_&_Touche_LLP
Arthur Andersen.
Employees: approx. 200 as of 2007
85,000 (in 2002)
http://en.wikipedia.org/wiki/Arthur_Andersen
So half of 85,000 people have shifted from the company involved with the Enron fraud to Deloitte who are now taking all these UK firms under their wing.
Anybody here know more about this firm?
Yet more corruption and greed from another firm (with ties of course) doing it across the pond:
http://en.wikipedia.org/wiki/Cerberus_Capital_Management
It stinks and the majority look the other way.
Always do.
Draw your own conclusions on the outcome of the many looking the other way. And include the ones on here who have clearly sold their soul, prolonging this fact, and it becomes more evident that weve got a recipe for disaster!
Contrary to what some might think regarding one government or individual being responsible...Look into the highs and lows of one individual who made an impact in the US in the 40's. Senator Owen. Direct involvement with the Fractional Reserve system, who realised his own mistakes and tried to reverse or undo what he had done until it killed him. Or got himself killed as a matter of fact.
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Models are a useful tool, nothing more or less ..... clearly the better proven the model, the more use it is.
When I worked in applied biology (the same basic rules should apply to financial modelling) the debate was between Empirical and Mechanistic models.
The former are what glanafon describes in #184, a model based on previous behaviour, and identifying the key variables that describe this behaviour adequately by a purely statistical method. As identified in that post, some of the weaknesses of the empirical approach are
a) the need to include enough history to identify all possible responses
b) to include enough history, the modelling is constrained by the sampling approach
c) the fact that the real driver variables may not have been measured
d) the outcomes measured are dependent on the treatment used ..... eg. a credit risk model does not have final outcome information for declined customers.
In contrast, the mechanistic approach starts by building a theoretical model based upon an understanding of the underlying causal mechanism. Experiments are then performed to identify how inputs change the results (concentrating on the rate determining steps of the process).
A good mechanistic model, where the tested inputs are outside the norms experienced to date, will be much more effective at predicting the future behaviour in a changing environment.
I know from current experience that commercial banking credit risk models are entirely empirical - although the modellers would say that they apply a mechanistic razor to the variables that they choose to include in the modelling exercise. For reasons noted, the model shouldn't be only determinant - but there is plenty of evidence that models outperform experienced human underwriters in many scenarios - particularly for mainstream business.
Clearly, the experimental approach of mechanistic modelling couldn't be used in a social context (or is that what GB et al are doing ... one massive experiment?).
In the commercial banking sector, it looks to me like the main reasons for the toxic debt are
a) insufficient data available on systems to build empirical models that include a downturn.
b) sales having a greater influence than risk in the board room during the boom times
c) short term objectives of shareholder returns driven by unrealistic expectations of city investors
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Robert said
"Those aggregated premiums were equivalent to a minute 0.1% of the sum insured - down from 0.26% in 1995. Which would only make economic sense in a world where there are never recessions. "
The argument that Robert puts forward, both here and previously with regard to CDSs, is that the insurance / insurance related market has been systematically underpricing risk, in particular it has hugely underpriced the risk of a global recession.
Well of course it has. It didn't have a lot of choice really otherwise the insurance companies would have gone bust years ago. Well not unless governments got together to stop it happening.
Insurance is basically a competitive market. Any insurance writter who had fully factored in the risk of a global recession would have asked premiums so high they would have got no business. It would have gone to their underpricing competitors. No business doesn't just mean no bonus it means no job. So to get business, to get salaries, they had to underprice risk. Worry about the consequences later, at least they got a few more years pay.
Yes it was made worse by the front loaded bonus culture but the problem is built in without bonuses when you have a worldwide insurance market. The cheapest bunch gets the business. The cheapest will be underassesssing risk for short term gain.
The only way to make insurers price in the risk of global recession is maybe through global accounting standards, but these have only just come about and are currently about reporting rather than influencing markets. Unless all key countries are involved there will always be an incentive for players to think short term and underestimate risk.
This problem is, I believe, the inevitable outcome of the way the insurance market competes.
Obviously Gordon Brown didn't think it was inevitable as he thought he had eliminated boom and bust so would have no reason to factor in recession risk. But I don't think anyone actually believed Gordon so I don't think he is the cause.
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#185. At 5:58pm on 12 Jan 2009, dancing_shoes post is still waiting for Moderation.
Moderate please tick as appropriate:
1: You read 184 and passed out
2: You all go home at 18:00
3: Cannot be asked
4: Pressure of work, only 1 Moderator on duty.
5: You went to sleep Strees/Boredom
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#197 Toldyouitwould
Forgot one!
You read all these blogs, got depressed and ended it?
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Wharfgirl, you are so right. It is the old and the "wise (savers) who have been let down by politicians. These people defended the Country, worked all their lives and as a thank you have been ignored in the political struggle to help the feckless, workshy and the dishonest amongst us. Of course we should help those who fall on hard times but that includes the retired, regardless of what their house is worth or what they have managed to save. Yes we do need to do something about this government but how they can stick around for another 2 years. I am so sorry to hear your tale but we need a decent tough politician to take on the Country. I don't see one in this Parliament.
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# ALL
I found the posts facinating today in general (usual suspects aside who know who they are).
It has been quite a journey for me in the last few months in increased understanding of the underlying finanacial architecture that provides the blood supply to the economy.
I thought I knew a lot, but my goodness people have been busy in the last decade creating new gadgets to manage the same old stuff (assets and cash).
My background is more grounded in the 'real economy' and a few things are starting to gel now in terms of second guessing what will happen next. Here is my take on it for debate.
1) The government will carry on as is with respect to the finacial crisis, reacting to whatever pops up next, this will include printing money soon, which they will not tell us about initially.
2)Once they have done everything they can to prop up the finacial architecture by what ever means they can (as GB himself says)they will try to create jobs using printed money. It will fail.
3) They will find not only is the financial architecture blocked, they will also find that the real economy architecture is blocked by over regulation and red tape generally. Un-employment will be terrible yet they will be able to print the money faster than they can provide ' real' work for people to do.
4) In order to get money into the economy and get real people working again doing real stuff they will have to take a torch to the current book of regulations to reduce the burden of 'nanny state' red tape. Many of these regulations will be what they have been busy introducing in the last 10 years to generate jobs in the public sector, often in areas of marginal labour voting.
5) They will then realise that they can not do this as it will throw 100s of thousands of civil servants out of work, whos jobs have been created oveseeing the red tape created in the last 10 years, thus nullyfying any benefits of getting the money into the economy quickly by reducing red tape. Catch 22.
6) There will quite possibly be civil unrest at this point generally with high unemployment, mountains of printed cash in the treasury but no way to spend it quickly.
7) Some kind of emergency measures will need to be introduced. We will ultimately pull together as a nation and wonder why we did not do it earlier because it makes us all feel happier anyway when we work for each other ( y'know the old blitz spirit thing, it was the best of times and the worst of times etc).
8) We will build something new and better.
9) History will look back at the rise of the east and the relative fall of the west and reflect on the Opium trade wars over a century before. The west subdued China via control of the opium trade, generating huge budget surpluses to help build an empire and keeping the chinese quiet, addicted to their drug of choise. History may see it as the east returning the compliment to the west, but not with drugs but with flat screen TV's and cheap plastic tat that gratifies for a few hours then you need to buy some more.
I appreciate the above is quite an apocalyptic tale but I throw it open to you for debate and to punch holes in.
Straight of the bat from where I am sat it feels to have a bit of truth about it to me, but I am happy for others to tell me otherwise.
remember the Chinese curse...may you live in interesting times....
We are.
Jericoa.
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187 WerringtonSilent
'Compound interest laughs in the face of well-meaning policy.'
It certainly does.
A useful rule of thumb for all you bloggers:
divide the interest rate into 72 to discover how fast value decreases or debt increases at a given rate without repayments.
eg inflation at 7% halves the spending power of your money in about 10 years or invested at 7% doubles your capital (ignoring tax).
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#166. guycroft
Yes - aren't these the same people as lost it in the early 90's and Clark was almost as much of a tinkerer, when Chancellor, as Brown was. Cameron just needs more talented people who look human and didn't go to Eton
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JCB's predicament is instructive. The cycle starts with building. Once a factory, etc. is built employment ensues. As the enterprise succeeds more building, more employees. Getting the ideas for a business that requires a building would seem a good place for the government to start. Sadly it is chasing a ghost and always will.
Someone must stop GB before everything is lost.
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#186:
The British construction industry was a bubble that rode on the back of the financial services bubble. I have seen plenty outside the M25 and the last few years of construction stock was a shoddy quality sham apparently less concerned with practicality and more concerned with grabbing a slice of the cheap financing pie while it lasted. I watched in alarm as some structures went up. Their value will not hold for even a few years. They will be a rich source of losses for banks and REITs in years to come as people rent repossessed houses and commercial rents dry up. I expect to hear the government is to roll maturing debt of that sort, and I will not be happy because I know exactly the cheap tat that forms the collateral.
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The root many of the problems start back in 1998 and IR35 which was tragetted against the working class contractors monies , but which was not applied to the CITY for political reason, the blind eye of new labour.
The there was the CGT changes where people has to quickly unwind there positions take the profits in the Housing Buy to let market or stay in it for life a risk being there at the time of a crash whe nthey would loss everthing as the rent was not covering the buisness. ie un unsustainable model.
Then the was the Joint strike fighter (JSF) over a UK Navalised Thypoon. Only 6 T45 destroyers instead of 12 or more, and then Aircraft carries only 2 instead of 3 or 4.
Add to that the ground of the naval harries
and developement work on them
Many will remender the TSR2 debacel and denise Healy part in that. We would have had a would leading and independant defence industry with top quality jobs
These are all industrial polices of Labour that have had a tremendous effect on the economic outlook of this nation and they have called all of these wrong.
They could have created many sustainable jobs in this area and many others but have choice to reward the idle , the lazy and the gamblers.
There idea of a economic plan was to build super casino's to encourage more debt
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Hmm, Private Equity has drained the resources of many high street names.
A tip , never buy a company or its Shares if it is being floated by a private equity house !
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Mind you any Company that has borrowed heavily will struggle whilst Consumer Demand is low.
We've seen the Housebuilders cut their dividends, several Retail Chains going to the wall, long established manufacturers going bust.
And all because they subscribed to the return spare capital, take on more Debt siren call, of certain Investment Houses.
HSBC was one firm that ignored such demands from Investment Activists, and they are still standing, whilst their competitors are in deep trouble.
Any firm that has invested heavily in Land or property will findits valuations squeezed and its rentals falling,over the next few years.
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How many new Houses are being sold at the moment ?
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re. #190 #175
Of course some insurance is worthwhile, but not when the premiums are a distortion of the actuarial calculations.
Currently I think I carry-
Motor insurance
Life cover
Keyman health cover
Professional Indemnity Insurance
Employers insurance
All-risks insurance
Office & House insurance
Annual travel insurance (much cheaper)
Some accountancy/audit cover thing....
... loss of mobile phones ... I hope not.
Seems rather a lot to me, and I'm selective.
(At least if I get hit by a bus, my wife is a very wealthy -and glamorous- woman)
Regards,
Note no negative comments are ever directed at moral, honourable, ethical practitioners in their respective fields, just the abusers of the system.
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Is it a bird?
Is it a plane (yeah we really need a new runway)?
No, its crash Gordon!
He saved the world!
He saved our banks!
His middle name is 'prudence'
He believes in freedom of speach 'Unless you have an office in westminster'
He believes he will win the next election (g'faw g'faw)
Today he has saved thousands of Jobs (yet to be confirmed).
Is there anything this super hero can't do, oh that's right - He can't save for a rainy day.
Wonder when the war will start? My prediction of Iran is looking very good given Barack Obama's latest statements ;-)
More 'free' energy, pity the russians stopped the gas - Bet that doesn't affect us next time!
Mark my words, we are headed for a war that will break the middle east.
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It's time to stock up on food. Business is collapsing all over the UK, within a month you will see shortages on supermarket shelves, not because the food isn't there but because companies can't ship or trade with each other.
This may sound so dire, so pessimistic and so unbelieveable at the moment but it is coming.
Findus, Wincanton etc. (today's news) It's coming!
I can feed myself, can you?
New Capitialism? NO. Capitialism is finished.
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Quotes
The Federal Reserve System had been established to prevent what actually happened. It was set up to avoid a situation in which you would have to close down banks, in which you would have a banking crisis. And yet, under the Federal Reserve System, you had the worst banking crisis in the history of the United States. There's no other example I can think of, of a government measure which produced so clearly the opposite of the results that were intended. --Milton Friedman
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. --Ben Bernanke
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating. --Thomas Jefferson
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." --Henry Ford
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The withdrawal of this insurance is not necessarily a bad thing. Granted, it was the final straw for woolworths - but it was one of many; its collapse was happening with or without trade credit insurance.
Other companies have taken this lapse into their stride; JJB Sports most notably with a huge sale to clear out old stock and return to a more traditional form of selling stock and then using the money to fund new stock - not as quick as "putting it on the tab" but its nice to know that some companies recognise in times of financial strife, more debt is not a good thing. If only gordon brown could see this..
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20 45
Last moderated post 18 49
Giz a job I can do that
OR
Put up two sites
1 quick and dirty
2 moderated
pays your money takes your choice
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#7 gothnet
Why is everything being done on credit?
Why indeed?
In my whole life I have always paid on the nail, it was the way I was brought up, don’t owe anybody anything.
In my working career I would expect an order to be delivered within four working weeks, after that we would be chasing up the order. Companies who could not consistently deliver within that time would cease to be used.
On delivery invoices would be checked in and passed for payment on the day of delivery. I would have curled up and died of embarrassment if my organisation’s finance department did not pay that invoice within 28 days. Surely word would get out if we paid late and suppliers would not welcome orders in the future. Goodwill and trust would be lost.
Apparently this is not how business now works. As many of you have highlighted, companies are so asset stripped that they don’t have the capital to pass invoices for payment. WELL THEN THEY SHOULD NOT BE IN BUSINESS.
Insurance is now used to cover the risk but only if times are good. Typical. Insurance has always seemed to me a kind of blackmail, a waste of money, and more often than not has a let out clause in the small print. I don’t know why we put up with it.
Maybe I’m being over simplistic, but how more complicated can it possibly be?
A solution? As PROFIT, PROFIT, PROFIT will always have its way, the solution might be a legal requirement, vigilantly policed, that companies have enough cash in the bank to pay their bills.
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Models schmodels!
Irrespective of the balony talked above about models applied to financial services mentioned so far....you can't model human beahviour patterns. Its all pseudo science....and deep down, you all know it. Including the idiots that have won Nobel prizes for said models ....only to be shown up for the fools and shamens that they really were (LTCM anyone?).
Models can only be used, with any certainty, in the REAL physical world where the constants that determine real pyhsical relationships exist i.e. physics and engineering
eg.
modelling the stresses and strains in a component or a bridge.
These models are relatively simple and are validated against empirical data.
PLEASE, PLEASE, PLEASE ....NO MORE TALK OF MODELS IN THE FINANCIAL WORLD.....THEY REALLY ARE A COMPLETE WASTE OF TIME.
PS.... just as a footnote.... approximately 18 months ago (just after the financial crisis began to develop this side of the pond [starting with Northern Rock])....a master of the universe banker posted on Robbo's blog exactly why he was worth his six fugure salary..... because his supa dupa computer model had netted his bank 220million GBP over the previous 2 years....he never posted again....Maybe he 'worked' for Lehman Brothers.
Funny old modelling world....eh!
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The insurance topic is important but again we have to have a broad strategy of where we are going and there is still no sign of one. Pestons "New Capitalism" is a good start off point.
Drawing lessons from the past has little application today.- re the attempts to support the labour market. Apart from anything else much of the growth of the last ten years has come from discretionary spending supported by excessive asset valuations and debt. It is therefore comparitavley easy to row back without serious implications.
It will take years to get back to where we were so the job market is going to be much tougher. Surely a reduction of the baggage that a new employee brings with him should be a priority. I know not a comfortable thought but we are fighting for our lives in the world. (and trying to control the work mkt by admin means when all europe is the pool must be impossible).
With massive Bof P deficit, and potential inflation our only way out is innovate innovate innovate. Concentrate taxpayers money on this and scientific development.
Government spending has to be rowed back in line with the lower level of activity in line with a conservative assessment of where the economy will be in 5 years time.
We are deluding ourselves if we think we are going to recover to where we were in a short timescale.The poorest need to be supported but we will all go down the pan if services are not brought into line with the harsh realities of where we now stand in the world.
It is going to be nasty but it will be worse if we think we don't need to have some radical changes of attitudes.
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So LloydsTSB admits criminal conduct over a period of 12 years - have the board resigned and those responsible been dismissed? Why has an organisation with a criminal record been allowed to take over another bank? When LloydsTSB were carrying out their criminal activities what was the SFA doing? People have lost confidence and trust in the banks, is this surprising when one of them engages in criminal conduct?
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oops, forgot to include in my earlier post (195) the theoretical mechanistic models.
Whilst I described mechanistic models where the calibration is achieved through experiment - these modesl are then tested against real environment historical data (see flaws in empirical models)
The theoretical mechanistic models base the parameters on assumptions and theory only.
I suspect that many of the investment banking and insurance models have a large degree of this type of modelling approach.
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Somali Pirate post 186 as someone who is an expert in insurance, and has twenty years experience in insuring the sort of stuff JCB produce I can tell you what is happening in the construction industry.
1) A large number of contracting companies are going bust. We have had two big contracting clients go under since the new year.Their total turnover not far shy of GBP 150 million in 2007.
2) Those housebuilders and general builders still going are estimating turnover generally between 33% and 50% down on 2007/2008's estimates. This eans less replacement kit needed.
3) Many of the companies that are going bust only have one sort of easily realisable asset. The plant and machinery they own. This has led to a boom in supply of second hand plant on the market causing a drop in prices.
4) Most contractors plant sold new is normally sold on either a lease or a loan deal generally over three or five years. One of the biggest players in the UK leasing market was a subsidiary of a collapsed Icelandic bank leaving a large drop in supply of loans and lease credit for plant.
5) Another big source of credit for purchases for plant came from the manufacturers who arranged the money via the money markets. We all know where that source of finance has gone. I can't imagine JCB Credit has got much money to lend at the moment.
If I was a contractor and am still trading in the UK I either have more than enough plant than I need to continue trading or I can pick some up cheap second hand from someone I know in the trade who is about to go bust and would rather do me a good deal on plant for cash rather than let the banks and loan company not only push him out of business and also keep his plant.
In times like this in the construction trade cash is king.
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I would like old crash gordon to explain to me why my french parent company cousins are getting their bonuses but i am not
despite beating my sales and profit targets by 100%
oh damn, im in construction not banking
the forgotten and next to be confined to the scrapheap uk industry
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#56 grimupnorth
do we still have enough food production in GB, apples, bacon?
sorry, we cut down most of the apple orchards in the south west and now import from France
sorry, lost half the pig production in last ten years, and of those that remain most are owned by Danish companies
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#38 Tigerjayj "And what of massive companies forcing payment terms of 90 days plus settlement discount.
This practice should be outlawed."
Absolutely! In the western world we have anti-trust/anti-monopoly legislation for a good reason, but it has never gone far enough.
The free market does not work properly between large/small enterprises. Historical evidence suggests that, overall, in a boom, the big-players increase their prices more, and in a recession they decrease them by less. Why? Because they can rig the market. They may not be evil, (apart from the ex- "pile it high and sell it cheap" retailer.) "Why do you do that?" the dog was asked? "Because I can", it replied, smugly.
Perhaps any retailer achieving more than 10% market share should be broken up? A possible exception being those who source, say, 70% of their goods in the UK and in house. But even these should be allowed no more than a 20% market share.
Capitalism does not work properly without real competition in the system.
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As a matter of peripheral relevance to the present discussion:
When I was a student, I worked in the labs in ICI. We measured relative density* in degrees Twaddell.
The higher the Twaddell of the product, the greater the reward for the management.
This is absolutely true - you couldn't make it up!
;-)
*specific gravity
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#202 "Cameron just needs more talented people who look human and didn't go to Eton"
As a comprehensive school boy, I have nothing against Etonians per se; my problem is that by having so many of them in his shadow cabinet, he is severely reducing the potential talent available to him, not to speak of breadth of outlook.
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#88 gonzomuppett
I would sign up to get rid of Flash and his morons if I thought the other lot could do any better - unfortunately I believe they would be just as bad - only LibDems look sensible to me and they never get in
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#178 neonbraydyd
I thought the article you referred to was most illuminating. Thank you.
I particularly liked the interest rate cap idea.
The current crisis is certainly fuelled in part by opportunism off the back of interest rates with no legal upper limit post 1980 as mentioned in the article.
This both fuelled irreponsible lending, borrowing and its off shoot bad debt.
More damagingly it also generated a culture over time of irresponsible lending and borrowing that permeated society top to bottom.
Huge short term profits were made and a desire to disguise the risk associated with them to maintain them.
Quite compelling as one of the root causes.
I also like the idea of re-introducing a cap ( say 10% be it credit card, store card or personal loan or mortgage of any kind) as a way to start to redress the imbalance for several reasons:
1) Gets rid of one of the root causes for the future.
2) Puts a lot of money back into the real economy where people are experiencing real misery by reducing re-payments instantly.
3) Gives people hope they may be able to pay off thier debts in a reasonable time scale. Hope is great for the economy.
4) Punishes the most irreponsible of lenders and peddlers of misery and puts 'loan sharks' dressed as store cards with 35% interest out of business for ever.
5) Blinded by greed I doubt the bankers will do this themselves, but actually they should as they will probably help the economy and have more of a chance of getting thier money back in the process. It will not help their bonuses however in the short term, but I dont think society will be weeping for them for them. I do not trust them for an instant to do anything useful just to keep on apologising (talk is cheap).
This seems so compelling I must be missing something obvious here which blows it out of the water. Can anybody enlighten me on why this is not a good idea?
Jericoa
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There must be tight limits to the risk the government (i.e taxpayer) takes on. No freebies. Otherwise, there will be fraud and easy money galore.
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I'm exhausted by all this complexity.
The 20th century was obviously a mistake.
Back to the 19th!
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#216
Spot on.
You can't write a program without knowing how the system works...
That's also why the weather forecasts are at best an educated guess and global warming models are as much use as a chocolate teapot.
And every speadsheet I've ever seen has errors - in fact I'd go as far as to say that the speadsheet is probably the worst thing that has happened to the business world.
It enables poorly considered calculations to be presented as fact.
But hey, I'll write you a system that comes up with any answer you want (for a fee of course)
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State insurance is an interesting idea. If premium is increased to, say, 0.26% of sum insuranced, we, the taxpayers may even make money from it :-)
The state must think and act like a responsble capitalist and a reliable servant. Careful with the resources it has beeen entrusted and show some decent, consistent returns.
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#220 Economicallyliterate
Your post scares the pants off me!
The 'domino effect' is just one domino knocking over the next domino etc. etc.
This is more like a 'fan' effect. It's like one domino knocking over two dominos, which knocks over four...then eight etc. etc.
BTW... JCB is an important customer of my company!
We are all completely buggered. No one will escape the effects of the on-coming Depression.
Please search purpleDogzzz on the BBC website for a more insightful comment than mine.
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#227 Jericoa wrote: "Hope is great for the economy."
Hope cannot cheat reality forever. The problem with interest rate caps is they only cap credit risk if borrowers whose risk lies beyond that threshold are automatically denied or asked to post additional collateral. The usury of loan sharks is worth fighting, but the price of risk has to be accurately transmitted to the market otherwise you end up with this all over again. Mortgage rates of 4% are not normal, credit card and store card balances are not meant to be run longer than a month, and financing common items like furniture is beyond silly. This bubble has lasted so many years, it has fostered an entitlement mentality of its own, and we must be wary of demanding the preservation in aspic of what have really been market abuses.
#231 puzzling wrote: "The state must think and act like a responsble capitalist and a reliable servant. Careful with the resources it has beeen entrusted and show some decent, consistent returns."
The state is a net consumer, not a producer. It derives its revenue from taxation, not from production. It should be an accountable servant (and it is not), but asking it to be a responsible capitalist as well is a contradiction. If it were to run sufficient industry to create the bulk of its own revenue, I am not sure that would be a representative government any more. Maybe something like the chartered corporations of old, whose employees were virtually their subjects. No-one seriously wants a return to that model of governance.
I doubt the taxpayer will make money from any of this. Looking at the growth of public debt to date and the government's borrowing proposals, it looks like a generation of toil is being pledged as a loss provision.
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216 BankSlickminustheR
I must disagree with you. Models are very useful for all sorts of non-physical activities, if you have the nous to understand their limitations and use them as part of the decision making ... not a golden bullet.
As a scientist with working statistical knowledge, who then changed career to IT in commercial banking .... I think that I have a reasonable breadth of experience to see those pitfalls.
How many of the managers or staff making decisions with the aid of the models can claim to understand even those basic concepts that I mentioned earlier...... come to think of it how many of them have the intellectual capability to grasp it?
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#218 angelmarine
"When LloydsTSB were carrying out their criminal activities what was the SFA doing? "
+
Freudian slip? Typo?
The FSA were most likely doing what you wrote:
SFA!
We need an enquiry into Regulation and some prosecutions made.
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#233
I think what I am saying is the creditors need to buy into the solution as well. Many of the grass roots people who drive demand are all maxed out on thier credit cards and other loans (I know we are supposed to pay them off monthly but millions do not).
Worse than that they do not now see any way to reasonably pay it off in a reasonable timescale with incomes and job security shrinking. A pretty miserable combination.
I honestly think a bold move like an interest rate cap combined with increased minimum payment to meet creditors half way would make a difference. A bit more money in thier pocket, debts reducing more quickly (even if they just make minimum payments).
Surely this will both put money into the economy, create some jobs in the process, decrease net debt over time more quickly and indeed reduce the quantum of defaulters simply by giving the economy a boost. It may to an extent pay for itself?
Still not convinced that an interest rate cap on all existing loans is not a bad idea. Surely under current circumstances a high interest rate is no hedge against defaulting at all, it actually causes more defaulting in the current climate?
Break the cycle.
Someone convince me more please that this is not a good idea, I am not there yet.
Jericoa
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But I do agree that modelling human behaviour is shaky at best .... just too many inputs to the system!
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#217 RMichaelSh
"Government spending has to be rowed back in line with the lower level of activity in line with a conservative assessment of where the economy will be in 5 years time.
We are deluding ourselves if we think we are going to recover to where we were in a short timescale.The poorest need to be supported but we will all go down the pan if services are not brought into line with the harsh realities of where we now stand in the world.
It is going to be nasty but it will be worse if we think we don't need to have some radical changes of attitudes."
And there you have the economic/social dilemma. the consequences of cutting government spending when social conditions are deteriorating would be catastrophic. In the 1930s you could get away with cutting the Dole - just! Do you seriously think that our cities would not go up in flames if social programmes were cut?
On the economic front, we do have the possibility of using government spending to re-build our infrastructure and invest in sectors that can lead recovery in the future.
I agree with you about the necessity to innovate. i have stated before that any state investment must include a requirement to commit heavily to R&D. We are fighting for our lives. I believe that this would be easier if the EU were united (if only because more resources would be available). However, it would appear that the nation state will prevail and therefore we must adopt a more insular and protective approach to our economy - even at the expense of revoking laws and trade agreements.
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Evening all-not long in from work, and more than a little annoyed that I had a post removed on last Peston blog for 'breaking house rules'
Can't understand why, as I haven't had an email. The only other one I had pulled was a couple of months ago when I used a BBC Blog unrecognisable character!
I suppose I could take it as a compliment-it seems to be that any very close to the truth posters get trounced in a similar fashion.
Perhaps we are perceived as as serious threats?!
Credit insurance -a necessary evil for some-successive governments have encouraged individuals to start businesses, regardless of personal equity available. They are encouraging the same now for those newly out of work.
Upping availability of loans for new start ups etc. For many, this may have seemed and does seem a more attractive proposition than being on the dole and their employment prospects appalling.
Add to this the prospect of invoice factoring as a means of managing cash flow and life must look very rosy. They wouldn't expect the brutal massive increase in nonpayment or delayed payment.
I suspect these poor naive souls choose the most expensive factoring deal of the main 3 kinds available as this includes credit insurance and the factoring company running credit control. What they don't realise is that after 90 days or on a spurious dispute (as a means to avoid payment of invoice) the factoring company withdraws the invoice completely from. The availablility of funds to draw down. Overnight a company can have a very serious cash flow problem. Add into this mix that the credit insurance terms don't always make it cost effect to have the factoring company claim on it, and no temporary facility at their bank (banks assume that a company factoring it's invoice will not have a cash flow problem, and will not allow it to have any overdraft, and that was before the credit crunch!), and guess what?
Another one bites the dust.
So please, those of us who have never needed credit insurance, don't be so quick to condemn those who, for whatever reason, have had the need.
These people may simply have been trying to keep a roof over their heads and a living wage in the house. A great deal of small businesses are run by people with integrity. Not all are run by greedy asset strippers or unscrupulous thieves.
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Regarding consequences of redundancy-
I said in a post the night of the reduction in interest rates that such a reduction would have a terrible knock on effect-precisely what we are seeing now and what will come.
Regarding Lloyds TSB's activities-take a look at whom they were acting illegally for! I mentioned it a couple of days ago, but only one poster seemed to take it in. If they can do this AND get away with it for so long, what else is being done in the name of banking?
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Love your comment, ' banks charged ludicrously low rates of interest during the years of the credit bubble'
Good job the base interest rate is now at a sensible level!
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I wonder if HSBC had credit insurance?
I read on MSN and Bloomberg over the weekend that there is a possibility that HSBC Holdings will have to sell shares to raise capital.
Given the growth contraction in the East, perhaps there isn't enough liquidity available for them now?
If they needed a government bailout, which government would they go to?
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#225
Forget Cameron.
Vince Cable for Chancellor of the Exchequer and then we shall see some intelligent statesmanship!
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Just had a thought re missing email about pulled post-I had only 5 emails today-I normally get upwards of 50. Checked my server and nothing there.
Has email monitoring started on the quiet?
Perhaps I need to get credit insurance to be safe!
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Alexander Curzon for Chancellor!
Vince Cable for Pm maybe?
Does Vince have credit insurance
(using the phrase to avoid losing post!)
Actually, serious question-do countries have to credit insure debt owed by other countries? I read somewhere that creditworthiness of countries has names for different ratings-can't remember the name for no creditworthiness-it's not banana republic though.
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Even if trade credit insurance was now readily available, would the firms concerned be in a position to afford it at the new rates?
I doubt it - so we would be back to square one.
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Credit insurace is about the short term position i.e. TRADE. i.e. cashflow in case of default by the other party.
If companies are going insolvent because of falling sales then the cost of insurance rises. But insurance being withdrawn is not the cause of a collapse in companies like woolies! - its got more to do with their faling sales, massive debt and near certain bankrupcy risk as assessed at the time.
Its crazy to get the taxpayer to step in to underwrite such risk with failing firms - high street dinosuars like Land of Leather, Woolies etc.. to save them for what - a few more months?
1. The cost of UK credit insurance is low in comparision to France, because UK credit insurance is a competetive industry, and France has a cosy government rigged monopolised industry, which add on another layer of costs for French Businesses of all shapes and sizes.
2. Robert figures from the BBI are highly suspect!
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This comment was removed because the moderators found it broke the House Rules.
Why things have gotten to such a point affirms the problem democracy has when too many people benefit from the status quo to have an interest in changing it.
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#236 Jericoa:
Defaults are a natural and healthy part of the system. They can be a quicker path to recovery than extensive modification of loans.
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As suspected the headlines this morning are beggining to confirm that many were simply hanging on for a last hurrah at christmas. If the speed of decline was bad before, look out.
But wait, someone is here to save us!
Is it a bird?
Is it a plane ?
No, its that 'prudent' guy who oversaw the economy for 10 years when this was brewing.
Its the guy who sold our gold at the wrong time
The guy who does not have a mandate from the people to run the show.
The guy, who despite all the above facts is deluded to the extent that he actually believes he is the one to save us and will hang on as long as possible in an attempt to prove it, all for our own good no doubt.
He is blinded by his own ambition.
'' The man who shoots for nothing has all his skill at his disposal to hit the target (Vince Cable).
The man who shoots for a prize becomes blinded (Gordon Brown)
We are entering the worst crises in living memory led by a blind man.
Jericoa
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#250
Have a read of the base article where it came from if you have time (#88), I would be very interested in your opinion of it.
Defaulting is a part of the process but if you can reduce it to a level manageable within the context of a playing field that has completely changed, rather than stimulating it with interest rates on credit cards still above 15% typically (for example) surely that is not a bad thing.
I am still not there yet.
Jericoa
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The rising cost of credit insurance will be matched by the increase in other general insurance premiums this year. Car insurance for instance is predicted to go up by between 15 and 20% according to AA Insurance Services.
Part of the problem is that underwriters including those at Lloyds of London are under pressure from US and European insurers - the falling pound has meant outlays are up around 40%.
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so now housing prices are hitting a much lower level as 20% deposits are required.
clear evidence that the reckless lending by some banks and building societies created the ridiculous rise in property prices.
if any tradesman had done a sloppy job, he would be much poorer if not out of work, so those who caused the bubble should go the same way !
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So will this scheme be monitored by banks or government?
Can banks use it to rebalance their books?
Why have banks been given the opportunity to bring themselves back from bankruptcy when they may not have given the same opportunity to their customers had the positions been reversed?
Will these loans be used to import more stuff from China?
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After reading these blogs for several months, I have drawn the following conclusions:
1) Banks lending have been less cautious than they should have been.
2) The Sub-Prime lending in America was totally irresponsible, criminal even.
3) International banks bought into sub-prime instruments, derivatives, SIVs (without understanding them). None of the pitfalls were recognised by Risk Managers, Auditors or Regulators
4) The 'values' of the derivatives became astronomical (Trillions) but were (are) in fact, indeterminable in practice.
5) A downturn turned into an avalanche due to margin calls and repayment demands.
6) All the 'money' disappeared as the house of cards fell down.
7) Discussion of domestic (UK) banking, interest rates, models, seems to offer subjective solutions - interest rates should be higher, lower etc.
8) Nobody knows how deep they are in it, in particular banks. This is quite alarming as you would think they could count.
9) Nobody knows where we are going.
Is that about the gist of things?
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After reading these blogs for several months, I have drawn the following conclusions:
1) Banks lending have been less cautious than they should have been.
2) The Sub-Prime lending in America was totally irresponsible, criminal even.
3) International banks bought into sub-prime instruments, derivatives, SIVs (without understanding them). None of the pitfalls were recognised by Risk Managers, Auditors or Regulators. These derivatives were invented to circumvent insurance regulation
4) The 'values' of the derivatives became astronomical (Trillions) but were (are) in fact, indeterminable in practice.
5) A downturn turned into an avalanche due to margin calls and repayment demands.
6) All the 'money' disappeared as the house of cards fell down.
7) Discussion of domestic (UK) banking, interest rates, models, seems to offer subjective solutions - interest rates should be higher, lower etc.
8) Nobody knows how deep they are in it, in particular banks. This is quite alarming as you would think they could count.
9) Nobody knows where we are going.
Is that about the gist of things?
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Anyone know anthing about global goods deficit?
figures not long out show the uk deficit widens to RECORD 8.3 billion for november.
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It's a cut-throat industry and world out there. In 2009 we will witness the greed and brutality mentality of money finance and business, which those nice sales and marketing guys didn't mention when trying to reel suckers in. Maybe collective strategical consumerism would redress the balance of power back to customers.
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Money is Power
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I think many of the posters here don't actually understand what credit insurance is (I wish we could keep the political vitriol out of discussions like this as they're utterly irrelevant to the original blog). To clarify - credit insurance covers a supplier for the potential of its customer failing to pay an invoice whether through that customer's failure or protracted default i.e. insuring the debtor book.
I'll make a few points in response to posters and Mr Peston:
- Firstly whilst it's plainly clear that the industry has undercharged for its premiums, the figures from the ABI are more than 12 months out of date. Premiums have risen sharply. It's all very well to say that they were too low in the first place but we were living in different economic circumstances. Hindsight is fantastic but very few saw a recession of this magnitude coming (i.e. the perfect storm of falling credit and rising prices plus other assorted factors).
- Credit insurance is very often NOT a requirement of invoice discounting facilities. Companies merely take it out as good business practise. After all, it's far more likely that a customer could go bust than your factory burns down yet we all accept the latter without question. It's also a tool for companies to outsource their internal credit functions to companies that have better resources. In the case of high profile companies, credit insurers actually have real life human beings assessing risk based on a number of criteria rather than just feeding numbers into a spreadsheet. The big 3 credit insurers actually send people out into businesses to meet with the management and discuss matters in great detail.
- The ability to get credit insurance is often based on the ability to provide information. Companies often cite confidentiality reasons for not providing management accounts/details of financing arrangement. However, is it reasonable for any finance company to provide a financial risk product without information? Added to that, credit insurers don't generally have any security apart from a few isolated cases. Many of the companies bleating about not being able to get credit insurance cover are the ones who flatly refuse to engage with credit insurers in a professional manner. In many cases, credit insurers are more exposed than a company's bankers. Credit insurers merely ask to have parity of information with a company's bankers where there is a financial risk.
- Terms of payments are ridiculous and have created a greater need for credit insurance. This is definitely a consequence of the private equity market where trade creditors are seen as a very cheap source of finance - I've seen sizeable chunks of PE financing repaid in this manner simply by extending creditor days. Many of the companies highlighted by the press in recent weeks sent out blanket emails to suppliers forcing them to accept terms in excess of 60 days. It's difficult to refuse a major company when they make up 60% of your turnover.
- The withdrawal of credit insurance merely hastens the demise of weak companies and is not the cause. Bad businesses are just that and maintaining banking facilities and/or credit insurance is merely delaying the inevitable. Woolworths was a basket case for years and all credit insurers were quietly reducing exposure up to 18 months ago. That's not to say that the withdrawal of credit insurance is a cast iron sign of a company failing, just that the risk/reward ratio isn't sufficient for an insurer to provide cover. However, more often than not, the insurer is right (most recent company failures were accurately predicted by the industry).
- The reckless and frankly immoral use of pre-packs in recent retail administrations has made insurers much more cautious about providing insurance cover. Can you really blame them? The banks get repaid but suppliers and insurers get left with the liabilities whilst wealthy backers carry on regardless.
- Whilst retail may be uppermost in the minds of the media at this time, every industry is covered by credit insurance whether the companies know it or not. There is still a massive amount of insurance cover available and new business and limits being written every day. There is absolutely not a wholescale withdrawal from the market by any of the leading players.
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"Mark my words, we are headed for a war that will break the middle east." .... #210. At 7:55pm on 12 Jan 2009, JavaMan1984 wrote.
The problem is manufactured in and factored from the Wild West, JavaMan1984. And that is where the Battles for the Hearts and Minds of the East, will be Won and Lost and War Defeated.
"I'm exhausted by all this complexity. The 20th century was obviously a mistake. Back to the 19th!" ..... #229. At 10:36pm on 12 Jan 2009, Fist_of_Onan wrote.
Fist_of_Onan, Why so negative with a thought of going backwards to a time when there was so very limited communications, whenever using Beta Imagination, there is nothing to stop a few Bright Sparcs with Government Flash Cash, jumping a Century and starting up 22nd Century InfraStructure Projects.
The Problem is not, that there are not any Valuable Novel Ideas, the problem is that the Money Invented is being kept by those who invented it, for themselves, and they have No Valuable Novel Ideas.
However, Lord Mandelson and the Export Credits Guarantee Department, are email informed of a Program available for Funding, so they cannot plead Ignorance should Arrogance have taken it Place. And you can be assured that in CyberSpace, Neither have a Look in ....... http://amanfrommars.baywords.com/2009/01/12/090112-skirmishes/
To date, they have declined to reply and/or enquire .....which is typical of an Administration in Denial of Catastrophic Systemic collapse and that is a Monumental Vulnerability which is Easily XXXXPloited?
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#260
Power tends to corrupt, and absolute power corrupts absolutely
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Thank you, Fatrunner, 261, for a rational, informative and sensible post, which makes a great change from the incoherent rambling and raving which passes for discourse on many of the posts here.
Just one point- I don't necessarily agree that credit insurance has been too cheap over recent years. Surely the real test is the profitability of the insurers, which I believe was high during the "boom" years.
All that is happening now is that premiums are being increased to recognise a huge increase in the risk covered, and in some cases, as you say, the risk is too high to be worth insuring. Just perfectly normal sound business practice. That is how insurance works, if the insurers behaved any differently, then insurance would go the same way as the banks, who entirely forgot what their business was, and how it should be run.
The idea, apparently endorsed by Mr Peston, that insurance should always be available to cover any risk whatsoever is crazy. If the government get involved, they will simply be throwing away yet more taxpayers' money. That is truly the economics of the madhouse.
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If you are asking somebody to buy something from you - whether you are big or small and whether they are big or small - you are asking them to make themselves less wealthy to do it. Whilst the scenery is falling down it is inevitable that some potenial buyers say I'll just walk on by for the moment.
If the cash in a business is virtually non existent, a modern practice, then the slightest extra stress means they are in deep trouble. It is black or white no grey scale. That in turn makes for job losses and the potential customer says I will walk on by a bit more.
We do not supply kitchens, we supply lifestyle products. However a customer yesterday in conversation said they were putting off buying a kitchen, for a year or maybe even two. Had intended buying this year. Money in the bank. The old school type I love. Not flash, steady , sound, friendly. So there is the business there for somebody but deferred.
If a business has reduced its flexibility to virtually nothing, has reduced the cash in it holds to virtually nothing. Is that due to the environment or the business. I would say the business. If you let the environment become the business then all businesses become the same, sell the same, behave the same, fail the same. The objective for too long has simply been to take money out for propping up profit to prop us share value mainly one suspects because management are rewarded in guess what shares. The fact these businesses cannot cope does not mean that there is not business there it just means they cannot cope with the landscape. It does not matter how much insurance you throw at it or how much massage you put in place. They wont all go but as sure a hell some will.
I have referred before to the nillionaire. Somebody who behaves like a millionaire but has nil in the bank. Lives off credit. Dies when credit dies. They are dreadful as a customer. Never move to completion of a deal, always put everchanging small hurdles in the way, reality is they do not have the money. Sorry there are nillionaire businesses just the same. No money in the bank. All front.
85% percent of businesses in the Great Depression continued trading throughout the period at a lower level. At least that was what I read. They probably were not nillionaire businesses.
Sorry I see it as very simple. Offer something somebody is prepared to make themselves poorer to buy. Or hibernate for while. You dont need buildings full of clever people telling you what to do, they just get in the way. Sorry but by definition they dont know what they are doing. QED The Great Recession, as they are calling it in the US.
It is brutally simple and many are just plain trying to be too clever still.
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@haufdeed
Absolutely right. Arguably premiums were only set too cheaply at the beginning of 2008 but I'm confident that the credit insurers will only make a year or two of losses at most (if they do indeed make a loss) The insurers have done very well out of the market in recent years - more than enough to offset a bad year.
The flaw in Mr Peston's argument is that in an industry where policies are only renewed once a year, the credit insurance industry can afford to (and does) take a shorter term view of things and the pricing models are adjusted very quickly to cope. It's an unfair comparison to the banks who set rates for 5/10/15 year periods and are stuck with that rate. Credit insurance policies are usually taken out over 18 months at the very most.
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#266
It's an unfair comparison to the banks who set rates for 5/10/15 year periods and are stuck with that rate.
Centuries, they have had to get their house in order. They finally have at your, and your families expense and you still stand by them?
I have to agree with you regarding doubts about losses, however looking at the bigger picture, money as we know it, created by the banks is now being retracted and its locked up tight. Therefore custom is falling. I have readjusted my outgoings, altered my out of contract phone tariff, will be cancelling my TV licence just as a start to get me through all this. What will you be doing in a year or two?
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~202, others, re Cameron and 'Big Beasts' and Eton.
I happen to think that Cameron's pretty good on his feet, more than a match for Plodder Brown in the Commons.
That he's from Eton is neither here nor there, as what really does matter is that what many see ie: his being the new 'friendly caring' face of the Tory Party is really just smoke and mirrors. However good or well-intentioned he is behind him sit a thoroughly rotten lot of losers whose sham pedigree dates back to a slightly less intensive disaster in the 90s. I do not believe Cameron can survive without their consent. Clarke, Major, Lamont & many others. To this day they have no shame nor regret whatever about what happened under their leadership (using the term generically) on Black Wednesday , Clarke indeed, still cannot resist smirking when he relates the story of the crash of the pound as they listened to it at No10 on a transistor radio. And Sir John of Family Values - whose only useful legacy really was the introduction of the ghastly word 'prudent' into the economic vocabulary, and who should have been hung out to dry over his affair with Edwina Currie, still believes to this day that his decision to enter the ERM was the right decision. I met Heseltine when he was MP for Henley, never met a more arrogant man in my life. Clots, the lot of them.
Everything I have seen and heard of them reads deep down they are - as a party - deeply self-centred and deeply self-interested and I'm afraid, remain the party of wealth, patronage and privilege dedicated to middle comfortable England and no more than that.
If the best of the Conservatives (there are one or two outside the fold) got together with the Liberals, that might produce something worth hearing, but I think most of the senior Tories would rather fall on their swords..
GC
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The simple answer to all this "credit crunch" hiatus has been with us since 1603:
As I said at that time in Shakespeare's Hamlet "Neither a borrower, nor a lender be"
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267 - you misunderstand me. What I'm saying is that Mr Peston criticises the credit insurer for mispricing in one year only in a similar manner to mispriced debt. The insures can however react by simply upping premiums the following year, much like a general insurer would after say a year of massive flood payouts. Peston is not comparing like with like.
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261 fatrunner
.... Terms of payments are ridiculous and have created a greater need for credit insurance.....
...It's difficult to refuse a major company when they make up 60% of your turnover.
Thank you for some sound comment.
There are 2 conclusions I would suggest
The availability of credit insurance simply allows the gap between point of invoice and point of payment effectively to drift ever onwards. It provides the customer, assuming the their credit rating holds, the vehicle to abuse the supplier. I have never seen a clearer case for the legislation of a limited maximum payment period. It would not stop people who could/would not pay but it would stop the wilful abuse of the supply chain due to the knowledge that a bridging mechanism was available to the desperate.
Further - It has been known since trade began that any single customer who holds more than 30 percent of your business controls your business, you may as well throw the other less than 70 percent away. You are totally at the behest of the 30+ percent customer. They hold you, they walk and you usually are in it deep. It might sound easy from here but I cannot understand anybody allowing their business to reach this position. You have none of the advantages of being a subsiduary of the customer, and none of the advantages of being independent. All the downsides. Choose between a slow death or a quick death. Be squeezed to the point of gasping.
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268 guycroft
It is the choice of who is the least attractive not the most attractive. A default. Do a search online for GE odds, winner and date. The opinion is pretty conclusive I'm afraid.
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271 glanafon - having credit insurance certainly addresses the risk issue although I don't think it created the problem. I'd venture that such long payment terms force suppliers into taking credit insurance but it's not really a vehicle by which the customer can abuse the supplier (the wider use of invoice discounting facilities is more at fault here - many banks force their customers onto this and away from the traditional overdraft).
Mandatory payment terms are good in theory but you compound the lack of available credit by forcing companies to borrow more when they reduce their creditor days. We've gone too far in the opposite direction so any move to mandate payment terms would be positively glacial to avoid funding pressure. I agree though that to have allowed the situation to get this bad (I could name several major companies that have imposed 100+ day payment terms on suppliers) is unconscionable.
I also absolutely agree that concentration risk is suicidal for any business. Perhaps one of the best things to have ever happened to the West Midlands automotive supply chain was the long forecasted demise of MG Rover that forced them to diversify both their client base and the industries to which they supply. Sadly in the current economic climate, even those with 5/6 major automotive OEMs (rather than just the usual staples of JLR) on the debtor book are facing a severe test of their resources.
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Banks insist on credit protection often as a way to mitigate the need for personal security for business lending - before you say we need an overhaul of business lending perhaps you would like to question what the alternative is..
Almost 100,000 UK companies now use invoice finance rather than an overdraft or loan to fund their businesses and the main risks to a bank with this lending include fraud, debtor dispute, and debtor insolvency - and yet businesses want (say) 80% of their invoice funded by the bank. Add into the mix increasing exposure to overseas debtors, and the number of companies a bank would need to be monitoring in depth at all times and you can see the obvious need for a credit insurer.
If someone is hacked off that their credit rating with an insurance company is falling they should make sure they aren't guilty of some of the common reasons for this: a) they are making a loss, b) they are taking all their profit out as dividends reducing balance sheet worth, c) they haven't filed their accounts on time...
Simple really
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# 272 - Glanafon
done, but none the wiser really. My own thought is that unless Tory/Lib combine to crash Plodder Brown he will win by a flying mile due to the distribution of potential Labour voters: 1) those who always vote Labour because they think it's still the party of the 'common man' (and who'd vote Labour on principle even if Satan ran the party) and 2) those undecided by Labour-biased voters who will receive the benefit of non-stop handouts from Brown as election time approaches. This has started in earnest of course, probably yesterday as the guvt. announced another 'package of measures' (as they love to call them) to help the children of the poorest families into a level of education that will clinch them the top jobs.
GC
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265. glanafon wrote:
"...If a business has reduced its flexibility to virtually nothing, has reduced the cash in it holds to virtually nothing. Is that due to the environment or the business. I would say the business. If you let the environment become the business then all businesses become the same, sell the same, behave the same, fail the same...."
An analogy for a Government in thrall to Brussels and a chancellor / PM who both raided the larder and threw so many bureaucratic hurdles in the way of businesses. Time for a take-over.
271. glanafon wrote:
"The availability of credit insurance simply allows the gap between point of invoice and point of payment effectively to drift ever onwards. It provides the customer, assuming the their credit rating holds, the vehicle to abuse the supplier."
Not so. Credit insurance policies require that there be an effective control and collection procedure in place, and that overdue accounts outstanding beyond an agreed period are referred to collection agents. Insurers are generally unwilling to agree extended credit and failure to follow an agreed collection procedure may well prejudice a subsequent claim. This requirement provides information to the insurer, which also provides valuable background information for those responsible for monitoring exposures and credit limits, and in turn may lead to the insurer reresenting several creditors in a collection procedure with greater muscle than the individual suppliers. The tendency is, therefore, that credit drift severely prejudices the continuity of the credit limit.
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Why have we adopted this blame culture towards Credit Insurers? Lest we forget they too are businesses attempting to ride out a recession.
Surely their priority is to protect their customers first and foremost, and in doing so their shareholders. By withdrawing cover on high risk buyers they are attempting to steer their clients away from defaulting buyers. I for one as a credit insurance customer am very happy with their knowledgable advice on potential and existing customers and truly believe this has contributed to the success of my business.
Perhaps the businesses that are solely reliant on one supplier / customer have to accept that their business model is high risk and not to blame banks / credit insurance for removing facilities / cover when it makes little sense for them to continue.
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Barclays were only just beaten by RBS to purchase ABN Amro. Imagine what their actual loss would be if they had acquired this Bank. Barclays secured salaries and bonus' by going to the Arab Banks for loans and arrogantly refused the Government bailout which they appear to now need. However I wonder how much longer their fudging of figures will stand up - especially in their Commercial areas.
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I suggest FORESIGHT is what is required not the inevitable HINDSIGHT in the current credit crunch.
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Probably one of the most balanced, and incisive report on the credit insurance industry i have seen. There seems to be a lot of criticism of the industry in the press, but many of the articles fail to recognise that the industry is a business, and therefore underwriters must take steps to protect themselves and therefore cannot simply continue to underwrite unacceptable risk.
I am glad that the profile of our industry has been raised, and that businesses now understand that even if you do not have a policy, credit insurance underwriters often are key to a businesses ability to get supplies.
Working closely with underwriters, and providing up to date trading information to help them underwrite your suppliers is now more important that ever. Published accounts which may be 18 months/6 months or 3 months old now may be too old for an underwriter to make an accurate assessment of the viability of a business in these tumultuous times.
www.creditinsurance.co.uk
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The numbers are indeed scary if not outrageously high risk.
FSA should be investigating all insurers to determine the level of risk they have on their books against reserves and adequacy of premiums charged.
If this situation is replicated elsewhere then insurers are at risk on a wide scale.
Allied to this situation their investments and thereby reserves must have been depleted because of share price collapses.
Greed appears to have blinded insurers to the approaching cliff face.
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It's now August 2009 and in the past 6 months our credit insurer has remove the credit limit on the majority of our customers. Our credit insurer appears to be going through our customers A to Z (currently they are on M) and only two customers have maintaned some credit limit. We are having to ask our customers to pay cash or issue bank guarantees. I did mention to our credit insurer that we would be happy to pay a higher premium (one of our banks suggested this) but the credit insurer didn't seem to understand. At this rate our credit insurance policy won't be worth having and I beleive if our experience is common then credit insurance as a financing tool will end and the credit insurance companies will fail through lack of income/premium (if they haven't already failed due to losses incurred by insurance claims).
If people beleive the banks were badly run I think the credit insurance companies have done an even worse job and in many ways they are more important to the whole flow of business. Maybe they need to ne nationalised, although I can't seriously see that happening. Instead, I beleive we are going back to the old days where preople (and businesses) simply spend what they actually have in the bank and that will mean a much smaller and slower economy.
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