Bank reform: The radical way
Please forgive me for not having published a column for a bit. I've been pre-occupied sorting out family stuff.
That stuff isn't quite ticketyboo yet. So the blog will go into hibernation for some weeks (please don't look so pleased).
There will be plenty to talk about when I return - so I hope fervently you will still want to have a conversation with me.
In the meantime, it seems appropriate to discuss what a radical reform of the financial system would actually look like.
I say the "financial system" rather than the "banking system" because arguably the debate has been too fixated on institutional reform of banks rather than the size and scope of the financial system as a whole.
The governor of the Bank of England is widely seen as having joined the radicals' camp - in that, overnight he declared himself the friend of those who wish for sprawling banking conglomerates to be broken up, such that banks' more speculative activities would be separated from those functions vital to the functioning of the economy (see Stephanie Flanders' note on this).
As usual for the governor, it's an exquisitely timed intervention in the debate - in that the Financial Services Authority will be publishing its latest reforming thoughts later this week.
So the poor old FSA is bound to be characterised as sleepy and unimaginative compared with the bold and courageous Bank of England.
And, do you know, I almost feel sorry for the FSA. Because the remedies proposed by Adair Turner, the FSA's chairman, are arguably a greater challenge to the status quo than King's.
In some ways, King's position has not shifted a jot since the crisis began in the summer of 2007.
He has always been fixated on moral hazard, on the idea that it's lethal for the efficient functioning of markets that institutions should be protected from the consequence of their mistakes.
And, as a matter of social justice, very few would fail to share his frustration that taxpayers have bailed out British banks to the tune of a short trillion pounds only to see the bankers making plans to pay themselves fabulous bonuses once again.
His characterisation has been incendiary: "never in the field of financial endeavour has so much money been owed by so few to so many - and, one might add, so far with little real reform".
For him, it is a matter of overwhelming importance that when banks and bankers gamble and lose, they pay the price - that the casino isn't rigged such that the winnings always go to them, while losses are forced on the state, on us.
That said, there is probably no way to avoid the provision by taxpayers to banks of financial protection for those functions that protect our savings, that provide vital credit to businesses and that move money around the economy.
What should be avoided (King would say, and most would agree) is what happened last autumn - which is that we rescued the speculative or casino operations of banks, the parts that generate the spectacular gains and losses, along with the supposed utility parts.
Which is why hiving off the banks' trading activities may well be a sensible way of limiting taxpayers' liability in the long term.
And it is perhaps testament to the lobbying clout of the big banks that the proposal from Paul Volcker, the distinguished former chairman of the Federal Reserve, for the separation of banks' investing and trading functions has not been embraced by Barack Obama or Gordon Brown.
But although breaking up the banks may be a sensible and necessary reform, it's by no means clear that it would be sufficient to correct the flaws that got us into this mess - even when combined with the recent international agreements to strengthen banks by obliging them to hold more capital and liquid assets.
Which brings us to Adair Turner and the FSA.
He would part company with King on an issue of fundamental principle.
The point - and most in the City will find this impossible to believe - is that King is much more the bankers' ally than Turner.
Because King, and others who argue for breaking up the banks, want onerous regulation and heavy supervision to be concentrated on a relatively narrow area of what banks do - those utility activities I've described as being the infrastructure of a healthy economy.
For King, there could be a relatively free, unfettered market for trading and investment banks, so long as the incentives for bankers can be corrected, such that the risks they take are genuinely risks for them, the proprietors of their institutions and professional creditors.
Turner would not agree.
He believes there is no serious alternative to much more intensive interference in all credit markets by the authorities. And he also believes - which is arguably more radical than breaking up banks - that credit markets have become far too big and opaque and that governments should take active steps to shrink and simplify them.
Perhaps his main point of dispute with King would be whether the guarantee against losses provided by taxpayers is really the main contributor to boom-and-bust cycles in credit.
With Keynes and Hyman Minsky, Turner would argue that the heart of the problem is simply that there is always a subjective element in valuing the future stream of earnings from any loan or investment, and that therefore the pricing of financial assets is always prone to overshoots and undershoots, depending on whether there is a prevailing climate of euphoria or despair.
No-one would argue - surely - that the insane dotcom bubble in shares prices of 1997 to 2000 was in any sense a moral hazard phenomenon. There was no taxpayer protection for over-enthusiastic investors who bought shares in "we_saw_you_coming.com" at multiples of 1,000 times notional prospective profits.
Investors paid far too much for "new economy" shares for the same reason investors traded their life savings for a single tulip bulb in the 1630's - hysteria and greed persuaded herds of investors that they were going up forever.
Precisely the same mania afflicted bankers and professional investors who lent colossal sums to over-indebted companies from 2005-7 with few strings attached and bought bonds made out of poor-quality subprime loans that were priced only a bit more cheaply than high-quality sovereign debt.
In the recent credit bubble, the equivalent of the insane heights touched by shares in 1999 and 2000 was the ludicrously low cost - in July 2007, just weeks before wholesale financial markets froze and the credit crunch began - of insuring against possible losses on loans to banks through the use of credit default swaps (CDS's).
The CDS premium for bank debt at the time was as low as it had ever been: it implied there was almost no risk of lending to a bank, when in reality there had never since 1929 been a riskier time to lend to a bank.
This was as much a bubble as had been the dotcom one.
But there is a really important difference between the two bubbles.
The retail and commercial banks on which we all depend are more-or-less prohibited from investing depositors' money in shares, so when share prices collapse there's little impact on their viability or solvency.
But when a credit bubble goes from boom to bust, there is a hideous feedback loop which damages the banks, then the economy, then the banks again: banks suffer losses on their investments and loans; their ability to lend becomes constrained which leads to a slowdown in the economy; which in turn generates greater losses on loans and investments for banks; and so on, till we're all paupers.
It would of course be theoretically possible to stipulate that retail banks benefiting from a taxpayer guarantee should be prohibited from any lending or investing at all, that they should only be allowed to hold high-quality government bonds or cash (which is similar to what the economist John Kay has recently argued).
But that would only protect depositors' money. It would not flatten the credit cycle.
The important point is that it is not just the more obviously tradeable forms of credit, the bonds made out of loans, that are prone to being overpriced and underpriced; banking history is an epic of periodic manias in all kinds of loans.
For Turner, therefore, if it's acknowledged that the big risk that has to be reduced is the susceptibility of the economy to boom-and-bust cycles caused by boom-and-bust cycles in credit, there is at best only a partial cure to be found in breaking up the banks.
The economy would still be inextricably dependent on credit provided by banks and other financial institutions, whether those banks are narrow insured retail banks and uninsured trading and investment banks, on the one hand, or today's conglomerates, such as Royal Bank of Scotland and Barclays.
So, for him, a better prophylactic against the boom-and-bust cycle is to curb what he calls the more socially useless and frothy trading by all and any banks, whether they are pure investment banks like Goldman Sachs or conglomerates like Barclays.
He has, for example, already said that he sees a powerful case for introducing a tax on much of the trading in wholesale financial products.
And, as I understand it, he would also be highly sympathetic to the suggestion of George Soros, the hedge fund billionaire, that there should be a prohibition on so-called "naked" trading in credit default swaps - or that only those holding the debt of a company or institution should be able to take out insurance against that debt.
Which may sound technical and dull. But it would shrink the CDS market by many trillions of dollars, since something like 90% of the market in recent years has taken the form of pure speculation, according to industry statistics.
By the way, if you are one of those who want to see a substantial and permanent reduction in bankers' bonuses, Turner may be your man - because he wishes to see a substantial diminution in banks' revenues, so the bonus pot would inevitably become much smaller.
What is clear to me is that the British financial services industry should be feeling quite uncomfortable.
The City of London is sandwiched between Mervyn King at the Bank of England, who wants to break up the likes of Barclays and Royal Bank, and Adair Turner, who believes its activities should be fettered and constrained to an extent it hasn't experienced for almost 30 years.
Perhaps the bankers are hoping for a Tory government and assuming that George Osborne as chancellor would see off the irksome King and Turner.
If so, that's as likely to pay out as the massive bets many of them took two and half years ago that the banking system had never been sounder.
I'm 
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Robert - you're back!
I hope you sort out your personal problems - there are some things far more important than money and business.
Sadly not much has changed while you've been absent, the markets are still being boosted by QE money, the inaccurate predictions of 'a return to growth' are still being hurled about and the jobs are still being lost.
We should be hitting the winter of discontent II soon, so make sure you have some warm blankets and tinned food sticked up. Already the Post looks like it's finished for the year and I have seen numerous reports of strikes being prepared.
Still the politicians play see no evil, hear no evil - ah what it must be like to be so oblivious to the impending disaster.
For the rest of us - preparation is the key.
Water, Food, Shelter - get them sorted now while the pound in your pocket is still worth something.
On this banking waffle - well it doesn't really matter does it. The banks will get their own way in the end, because despite the rumours they own us all as we owe them Billions
The Merv quote was the killer:
"never in the field of financial endeavour has so much money been owed by so few to so many"
We shall fight them on the beaches...
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Robert,
The competitive structure of the investment banks needs to be investigated as the bonuses are only a symptom of the enormous profits being made. This would seem to imply that there is no real competition and banks are operating in a rigged market. A market with healthy competition has a tendency to limit the level of profit available against the volume of business. With low volume of business, which must surely be the case at this point in the cycle, then profits should also be low.
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King is right - it's about the City CULTURE not Regulation - the R word is a giant red herring - in fact, tougher Regs would probably do more harm than good
main thing is to get a handle on the crazy bonuses - we do that, it's pretty much sorted - we don't, well we just forget about it
great news that Mr King is coming around to my way of thinking
Mervyn rules!
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Personally i dont see a way this can be done, more legislation creates more loop holes....
IMO simplicity is the key,easier said than done i know, but we have to get to a position where Banks will never again be bailed out by the tax payer, how soon and quickly that be achieved is another matter.
A system of account reporting should leave us in no doubt what the assets and liabilities of a bank are so we the public can make an informed decision whether to invest/save with them, and it is this to me that has been sadly lacking.
As has been said, while the banks are in a no fail position it will not curb their sharp practices.
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If I had the power to choose, I would take the King tack. His proposal neatly solves the problem of the taxpayer picking up the tab for the failures of private enterprise. What more can we ask?
Robert successfully argues that this approach would not prevent boom and bust. Does any rational individual in 2009 believe that boom and bust can ever be eliminated? I for one do not.
Lord Turner's proposal, on the other hand, perpetuates the risk of too-important-to-fail private enterprises, and then seeks to manage that risk through regulation and tax incentives. This will have an inevitable drag effect on economic growth, and yet might still fail to deliver the end of boom and bust. Finance practice is constantly evolving, striving to wriggle free of regulatory fetters. Can we really believe in a near-omniscient regulator that is capable of keeping on top of these changes throughout decades of constant struggle?
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Sad you are going to be away when Alistair Darling has said more borrowing for longer is the answer.(A terrifying statement given current projections) Will this be to re-structure the banks? In which case we risk serious problems if we can't sell the record levels of debt this will generate.
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What an opportunist, political animal Mervyn King has shown himself to be. I don’t recall many warnings from him before the event or criticisms when labour’s position seemed rock solid.
One issue is the actual practicalities of separation. My understanding is the banking world has become so entwined it would take up to ten year to identify actual legal ownership alone!.
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If I am understanding the Govt bail out of Banks, we the taxpayer have provided loans and guarantees to the banks on which the banks pay a premium / margin to the treasury. Therefore you could argue that as long as the banks are making the payments to the govt what business is it of theirs [the govt] what they do with their profits. - simplistic I know as taxpayer support stop the banks from failing. However if this support is so risky and crucial then why isn't a higher premium being charged so that profits would be less and therefore reduce the amount available for "extreme bonuses"?
The break up of the banks to hive off the "casino" part seems to me to make sense as if the bank makes huge losses it fails or is unable to obtain the credit it needs to undertake the investments or is this relying on "market principles" again which we have seen didn't work.
the g
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good to have you back Robert.
If financial institutions are too big to fail then they should be split up in a way that they can fail.
The Government should realise that banking is now almost a utility as it is almost impossible to live a normal life without access to banking. If this type of banking was hived off from the casino risk taking then the FSA could regulate them far more strongly.
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Separate out commercial and retail banks from the rest. Require them to pay a minimum risk free interest on secured deposits, to encourage customers to keep a positive current account balance, and to strengthen the effect of interest rate decisions (and charge for the services provided, just like all other industries - I don't need branches and I don't want to pay for them).
Establish a mortgage bond market similar to the Danish one (http://en.wikipedia.org/wiki/Danish_mortgage_market) which would go a long way to provide a safe alternative to investing all your money in Government bonds. Let investment banks buy the surplus bonds, attract the gambling money and play around packaging things up beyond recognition, at their peril.
But most of all, insert some creative thinking into making rented accommodation a viable long term alternative to the insanity of forced property ownership. Forcing the population to own their house - just to have a stable place to live - puts the whole economy in the hands of frothing amateur property speculators who's gambling habits are the biggest threat of all.
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WOTW is correct, like it or not.
The banks have triumphed in their one-sided and brief tussle with the politicians/regulators. They have stared-down the opposition and now know for sure they can get away with just about ANYTHING.
A gambler will NEVER stop gambling until all sources of money available have been exhausted. The western banks and finanial institutions have run-out of their own money to gamble with, and now have taxpayers money to squander on spread bets and swaps etc. They will never voluntarily accept the seperation of retail and investment banking, as that would limit their bets and bonuses. An addict will tell any lie and lobby anyone in order to obtain relief and continue a 'lifestyle'.
Ordinary folk will have to hunker down and prepare as best they can for the coming storm. Also, never accept what the apologists say about us having to make 'sacrifices' through tax rises and cuts etc., on the say so and for the benefit of ponzi-bankers and the criminally irresponsibe gamblers who brought down this situation upon us in the first place.
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David Einhorn (a US hedge fund manager) made a great speech about this all the other day...
http://blogs.reuters.com/rolfe-winkler/2009/10/19/einhorn-on-gold-sovereign-default-and-more/
My favourite from the speech is:
"The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer."
hits the nail on the head!
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I have a feeling that much as King says if we split the casino from the grocery store then a lot of the problem will go away. who would bother if a someone playing the field made a whacking loss as it did in Singapore(sorry cant recall the names) but that did not threaten the High Street banks.
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Once again it appears that the governor of the Bank of England (I have to admit...my hero in all this) is talking sense. Once again the bureaucratic FSA are fudging the issue.
When I started investing in the stock-market I read a number of educational arguments about how to do this. There is one phrase that has stuck in my mind: "Don't forget that financial markets are run by people. They react like all people. Greed!"
To quote Niccolo Machiavelli in his book 'The Prince':
"...a prudent ruler cannot, and must not, honour his word when it places him at a disadvantge and when the reasons for which he made his promise no longer exist."
"...because men are wretched creatures who would not keep their word to you, you need not keep your word to them."
I would recommend anyone to read Machiavelli's 'The Prince'.
It is suprising how much it teaches you about modern politics and commerce.
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It is simple, Turner is one of the bankers and looking after their interests and King is looking at the economy as a whole. Turner is quite happy for the status quo to remain with slightly more regulation.
It made me laugh today when the Gordon Brown stated that the Northern Rock collapse had nothing to do with "Out of control" merchant banks and their associates.
The reality is we can't afford another financial collapse and I think the Tories will agree with King on the principle that financial institutions have to stand on their own feet or be allowed to fail. The tax payer needs to be removed from the position of "Fool of last resort".
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Robert, yes welcome back and thank you for this analysis as you see it of the two issues.
I think a combination of both approaches would be good i.e. both a split between the 'system' banks and the 'casinos', together with a Tobin tax on all financial transations for the speculators.
I'm extremely glad that Meryvn King is not dropping this one. (....... weak kneed Gordon Brown is doing the usual - thinking that a pretend minor change will solve the problem. It's surprising that he has not suggested using "targets"!)
How can we get this debate into the public mainstream, and throw things wider?
The disgrace that is the fund management industry in this country also needs to be looked at (high charges, hopeless performance).
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"Perhaps the bankers are hoping for a Tory government and assuming that George Osborne as chancellor would see off the irksome King and Turner"
Why i will vote Labour, tough words from GO but little action is what we can expect.
Legislation would be easy to enforce. You tell the banks that they must split their operations into Retail (receiving Govt backing) and non retail banking. If they refuse, support is to be withdrawn for them. Let them go to the wall. Lets face it whom has Lehman's collapse actually affected . All their employees seem to have found positions.
An intersting view of the future
I work in an industry supplying the public sector. I was at a trade show a few weeks ago and all of my fellow exhibitors said the same thing, business this year has been hard but it has been there if you worked at it. But as for next year everyone is bricking themselves, both political parties will be keen to show how much can be cut from the public purse with inevitable carnage in my industry. If the banks are still being picky about loans and overdrafts then it could be curtains for many of companies who deal with Public Institutions.
Of course the banking sector will survive and pay themselves nice bonus's as there industry has impecable financial backing - us. Have i missed something or do these guys need a good slap.
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It is clear the banks and finance institutions only seem to experience competition in the form of head hunting each other's senior staff. How else do we explain the stupendous size of bonuses - they reflect easy and excessive profits. Tesco's come nowhere near yet they are profitable and successful and stable! Whether banks are split or not there is and overwhelming case for supervision not regulation. Better still if there is a sizable and strategic public sector presence which conveniently could be formed from dis - aggregating HBOS from Lloyds and merging it with NR to make the standard bank UK to set the pace in conduct and customer service.
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" And it is perhaps testament to the lobbying clout of the big banks that the proposal from Paul Volcker, the distinguished former chairman of the Federal Reserve, for the separation of banks' investing and trading functions has not been embraced by Barack Obama or Gordon Brown."
Spot On!
"It would of course be theoretically possible to stipulate that retail banks benefiting from a taxpayer guarantee should be prohibited from any lending or investing at all, that they should only be allowed to hold high-quality government bonds or cash (which is similar to what the economist John Kay has recently argued).
But that would only protect depositors' money. It would not flatten the credit cycle."
But Narrow/Limited/Utility Banking is part of the solution. We should start with that foundation.
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The too big to fail destroys the reward - risk dichotomy. It fundamentally undermines the point of a free enterprise based banking system - as some said what will the speculative whizz kids get up to if they BELIEVE that unplanned debts are always going to be socialised. This is why there should be a strong public sector presence, supervision not regulation and legislation that criminalises negligence and anti social behaviour(a pin striped ASBO?)
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#14
Are you referring to Nick Leeson?
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We should avoid complexity at all costs as this allows places for the too-clever-by-half to hide. The City is full of that sort.
Simplicity is of the essence.
Separate retail and investment banking and do it yesterday.
The investment bankers can then take all the risk. Hopefully they will all do a Barings and go pop! Then as a country we can go back to making things we need, growing things we need, building things we need and looking out for each other. It won't be exciting but it will be home and peaceful.
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Splitting up the banks is much too complicated and costly a solution. We need the banks to be making money - our economy relies on it. Better understanding by Regulators and better regulation is required. The core of the problem which caused the crash was that, fuelled by greed, the banks convinced themselves and the regulators they were not taking risks when piling in to highly risky structured products. As a result they did not have to allocate capital to these products and could do as much business as they pleased. One answer would be for a Basle-style licensing of all existing and new products; not to stop their use but to force the allocation of capital commensurate with the risk.
Of course this would require a very high calibre of Regulator, internationally.
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It is very, very late and long overdue that a radical critique takes place of the way financial institutions hold both, the state and the tax payers, to ransom. The time for change is now.
It is about time that someone in a senior leadership position (well done Mervyn King) in the UK society calls a spate a spate. We live in an unaccountable, injust financial system, where most banks can only win and the consumer (in the long-term) can only lose (via high debt interest charges, inflation, loss of pension funds, etc.) Currently, the biggest banks are not controllable by the government, they seem to live in a political space of their own. If any institution in a country is beyond political control, its democracy is severly damaged. Effectively, the government has no control over the direction the UK economy will take over the medium to long-term. Another bust or inflation spike could, and will, at any time ruin the governments planning.
Please find many more arguments why this sad situation has to be changed now on the following web site:
http://globalinsights.wordpress.com/
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Best wishes for resolving your family issues, these are rightly your priority.
To extend the churchillian theme; never has so much common sense been spoken (by Mervin). Of course banks must be capable of failing they are in the risk business after all. The sooner the goverment hands back more powers to him the better. The FSA have been the biggest bunch of incompetents we have suffered in a generation. Too busy making trillions of rules and beurocracy whilst failing to see the big picture. The FSA has failed us all badly and should be held to account.
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I've become addicted to your column over the last year, and missed your musings of late. Take all the time you need, but come back soon.
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The trouble with splitting the banking functions will obviously be whether the "docile" retail banks can attract enough money to continue to lend and meet new criteria concerning healthy balance sheets. Having said that, the extortionate rates of interest ordinary borrowers are now having to pay, together with rip-off arrangement fees, might well mean the "docile" banks are making so much they won't need any back up. Caledonian Comment
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Breaking up banks might work, but what if they all agree on the same foolish behaviour ?
Utility banks could fail too.
In the next financial/banking crisis,cash will become meaningless..
when the bullets are flying on the streets.
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£10n bonuses in 2007, £4bn last year and an estimated £6bn bonus this year.
Should not the banking industry, in particular the investment bankers and those bank which have received public money at least pay the interest that we had to pay on the money which we had to borrow to bail them out?
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And another thing why are bank shareholders so impotent or indifferent when it is they that are subject to the consequences of reckless dealing?
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Hi there RP - hope all is well.
Good luck with the family matters.
Interesting dabble into politics at the end there. There can be no doubt that a political change is generally sought but it might prove a false dawn in the short term if the change is to the centre right and the bankers think that will help them. Playing to the masses is more important than almost ever before, I for one don't blame the bankers entirely- sure, a lot, but not entirely, but the media witch hunt goes on...
Bankers are easy targets and that makes them political capital, for any party. Further, resolving the financial mess will earn kudos and brownie points in front of the electorate, as will capping/meddling/reducing the bonus culture in the city, which does need to be capped/meddled and reduced in any event.
However, if the suggestion is that those in the city don't think the Conservatives will/would take on the above I think they're in denial over how important it is to DC to be the 'pop prime minister'. It all smacks a bit of 'new labour' at the moment- and just ask the unions how much new labour achieved for them in the last decade.
[Irony in light of postal strike noted]
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Robert,
I trust the family stuff is ticketyboo very soon!
Twelve months ago I guess all of us would have been delighted for the return to a healthy banking sector but now that we have apparently got it we aint so sure we like it!
Bank reform, radical or not, is a certainty but the fact that the surviving bankers have so quickly recovered (bonus payments and all) while the rest of us continue to pay the price for their rescue is what goes to the heart of the matter so far as the majority of tax payers are concerned.
This weekend's papers Homes sections were full of trophy houses for sale at credit-crunch defying prices, all in anticipation of a financial sector bonus fueled bonaza. I muse over what reforms the potential sellers of those properties might support if indeed any reformation measures damaged this particular sector of the housing market.
I have also been reading with interest about the gigantic fees being paid to the leading UK accountancy firms involved in the wind-up of Leaman etc and again I imagine the partners and associates of these firms may worry that radical reform may damage rather than advance their future prospects.
The trouble with radical reform is having just given the banks all this money to save them and all of us from undoubted disasterquite it simply makes no sense to take it all back again. We all must resist the understandable upset caused in the minds of ordinary folk when they see the return of the bankers bonus just as we must resist the undoubted self-interest warnings from those saved bankers that radical reform will lead to another set of disasters.
Is there not a sensible middle way where banks are restrained by the threat of bankruptcy and not underwritten by the tax payer? I can't see how in the free market permanent control over pay by Government would work so regulation to restric the scale of bonus payments looks wrong but attention to incentives that encourage unacceptable risk looks more hopeful.
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Separating retail and investment side of banks will need international co-operation at least between UK, USA, Germany, Japan and Switzerland. Difficult to achieve but possible.
The next issue will be whether certain of the retail banks remain too big and therefore the market lacks competition. Personally I do not think there is a lack of competition at the retail bank level, as countless OFT investigations have failed to show this, but it does need to be thought about.
Turner issues wonderful sound bites but when you think about it they prove to be insubstantial rubbish - credit markets and socially usefulness being the classic example, sounds great but when you think about it one person's view of socially useless (do not get me started on "My Little Pony" products) is totally different from someone elses often for totally good reasons. The last think I would want is for govt to decide what products were socially useful or not, you can guarantee they would be wrong and mess up the economy (again).
King is right. If investment banks are cut free and so if they make losses it is their investors who pick up the tab not the public, then what is the problem
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Thanks for excellent clear article.
This may be too easy, but what about making the banks bond all our savings? If you 'invest' £1000 in a holiday and pay the tour operator in advance, that money has to be bonded. If the operator goes bust, you are protected.
But if you put £1000 into a bank, it is the taxpayer that guarantees your savings. Surely this is effectively a government subsidy to banks?
The tour operator needs to pay the cost of bonding the money paid to him. So why not make the banks pay the 'bonding' cost of
the amount guaranteed by the UK government to each depositor?
Simpelz.
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Q. Why did Brown,Mandelson etc. Bail out the banks and not the RM pension defecit?
A. Because when they get chucked out they want to do a Tony and not a reverse Alan
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*37 ???
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Why does it need agreement with other countries. Unti 1999 that is how the banks were organised. Clinton repeleled the Act and so the whole mess was born. If the investment banks need capital then they can obtain it at commercial rates, from retail banks. Hopefully they will not put all our savings in one basket.
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I hope I speak for many when I say I just hope it's not too serious, (although I assume it must be.) As a good employer would say, "We fully understand, you must take all the time you need." The business world CAN wait, (or if it can't it can get lost anyway.)
The problem with the financial system is that those with the power to limit the extent of it's influence don't believe they need to do much.
It's as if we've had a serious plane crash, we think we have a good idea of what caused it, but we're too frightened to correct things, anything more than superficially, in case it causes the industry to make lower profits.
It's just no use politicians trying to gloss over how serious the situation is and dampening people's concerns by saying the best minds have given things a tweak and things are all OK now. We just aren't prepared to believe such patronising rubbish!
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38
Tony Blair(Banker 17 mill last year) Alan Johnson ex-postie
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Hi mr Preston,I haven't read all the blogs on the fiscal trouble yet, but the investment side of the bankers work was surely working on the amount of 'credit'within the industry and not raw/liquid cash,because if there is more than say,2.5 billion floating around the system,then to an
extent we the general public have put too much in the system over the last 5-10 yrs,thus awarding the frivolus bankers with excessive amounts to be working with.when this and the probability of lessening the number of MP's in the house of ill repute,and the excessive number of investment
bankers being thinned down the country would be better run.Also the so called 'hedge funds' and other get out clauses.cheers for now and keep up your work,spicer
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The Governor of the BOE is quite right to say that the only way to prevent another finacial market catastrophe like the one we just experienced is to separate the high risk speculative bank dealings from the functions that are vital to the economy.
To say the least there has to be a fundemental flaw with a banking system that is designed to allow groups of people from within the banking industry to recycle vast sums of money, in a way that only they understand, so they can pay themselves vast bonus payments before anyone from outside the banking industry knows for sure if the profits they claim to have made are genuine and are commercially sound for the future of the business.
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sorry, forgot to say in my self congratulatory haste at 3 ... all the best Robert and come back soon!
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Robert - I'm not even going to comment on your article; just want to wish you all the very best in relation to your 'family stuff'.
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Well done Mr King
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Banks must be split up into retail (low risk) and investment (high risk). This need not wait on international agreement. I just hope the Conservatives get the point. As long as banks know that the taxpayers will save them, they can hardly be motivated to avoid reckless behaviour and will be vulnerable to the next bubble which gives the illusion of easy money.
Adverts have warned that share prices can go down as well as up. It is high time we had a banking industry that reflected this.
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Good to have you back Robert, but as many have already said, top priority is to sort out your 'family stuff'.
I have to say, my vote would go to those who, like King, favour a dismantling of the banks. Its simple; if you take risks - you enjoy the benefits and also take the pain. Currently that just doesn't happen - too often there are safety nets, paid for by others, that protect people from their own stupidity. So no-one learns; just continues to weaken the gene pool.
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"And, as I understand it, he would also be highly sympathetic to the suggestion of George Soros, the hedge fund billionaire, that there should be a prohibition on so-called "naked" trading in credit default swaps - or that only those holding the debt of a company or institution should be able to take out insurance against that debt."
Willem Buiter has also argued for such a prohibition. I guess if Buiter and Soros agree on something, it must be the right thing to do.
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Mr Peston, my sincere wishes that ticketyboo-ness will sprinkle amply over your domestics.
#23:
Hit the nails on their heads. Two sentences and two short paragraphs.
Essentially, purge the financial system of the leeches (Hedgers etc)put an infinite gap between retail and investment(casino) banking, but not yesterday, more like last week. Time is of the essence rightly so.
Todays' news about the Trojan Horse of immigrant baby-boom in years to come sent a shiver right up my fundament. My small Government pension and even tinier OAP will diminish as the state hands out more welfare and housing to the new 'benefit clients'.
While most of my local churches are less than a quarter full, (some nearly running on empty) more mosques will necessarily be built. I served my country for 30yrs in the RAF, often flying relief supplies to the needy; now they're coming here for it, through our back entrances; I've just had that pain in my fundament again.
We do need to look to each other, earnestly, before it is too late. We no longer produce anything worthwhile in quantity or quality;, no cotton, clothing, cars, coal, steel, ships, scientists, etc. But we're good at producing gigantic greedy financial conglomerates that suck us, the taxpayer, dry, then ask for more, before we've even had a post-transfusion cup of tea and a biscuit, chocolate, Gordo for the use of.
Which brings me to a final suggestion; the next government must get the top twenty (or so) specialists, the absolute best in their fields, finance, banking, agriculture, defence, law, legal and policing, foreign affairs, transport, (road, rail sea and air) etc etc, lock them in a room for at least a week, give them nothing but tea and biscuits until they come up with several dozen portfolios to sort this once-great-country out. And knock off all the pc nonsense.
Oh health and safety, ok, give the team one hot meal a day.
Good afternoon all.
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Wish I could put some of my work on hibernation when I get a personal problem. And no cover for you? Actually both Robert and Steph seem to claim the title of economics editor, so maybe one is enough.
Also wish I shared your confidence that this won't just blow over into nothing. It has all the makings of people with too much money and clout having a strategy of talking about change until people get bored, move on to the next big thing and stop noticing what they're doing.
They are showing a remarkable disregard for pyublic opinion though - I mean, given the outrage that has been expressed, you'd think they'd show a modicum of circumspection and avoid a 50% hike in bouses until the coast is clear. Which suggests that they know something... something like "nothing's gonna change".
Which seems borne out by the inaction of a government that is doing very little to stop them, including allowing them to walk off with massive pensions, no jail sentences and no real responsibilities to go with the giant hand-outs they got.
I never thought I'd say it, but some form of nationalisation (for the retail arm at least) does look attractive.
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The reason King's views differ from Turner's is that as Governor of the BOE and responsible for the health of sterling he is aware that reform is not just a matter of protecting depositors and preventing rash lending. The economy must be protected also.
The net total of sterling credit issued by the private banks effects the economy just as much as unfunded government debt, or funded by the BOE by QE which is the same thing. The combined effect should be kept at a level which keeps the economy buoyant without overheating.
When the private banks suddenly started reducing credit the BOE and the government could not compensate quickly enough to plug the gap. The result was the recession.
To prevent this happening again even a strict cap on net bank lending will not do, because it was a sudden reduction that actually did the damage.
I agree with King that regulation is unlikely to work, but do not agree that splitting up the larger banks is the best solution. It would be much better to take them fully into public ownership and run them essentially as the retail arm of the Bank of England. In this way the great advantages of a large bank providing absolute security for sterling deposits, because of backing by the BOE, would be realised. At the same time the bank's credit policies could be reviewed on a day by day by the BOE to avoid future shocks to the economy. Incidentally the profits would go to the taxpayer, not into easily earned staff bonuses.
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You deserve all the time you need Robert and I suspect many of us will most certainly want to continue having conversations with you whenever you are ready to return (as we miss you when you are away) - I tend to refer to the Great Recession as Robert Peston's Great Recession: if it was John Simpson who saved Kabul surely it was Robert Peston who engineered the Great Recession ;)
Mr King is right to want to regulate the crucial bits tightly and avoid moral hazard and let the rest go and play casinos. The instincts of Mr Turner, on the other hand, are rather new labourish and bolting stable doors: too much nannying and too little when it was needed: I was still investing in HBOS last summer (yes, more fool me) when the FSA should have already pulled the plug on them (of course the knight Crosby being at the FSA might have fooled them too that all was well there).
Anyway, you have more important matters to attend to than banks. All good wishes to you and the family.
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Robert, I don't see that the respective approaches of King and Turner are mutually exclusive, though. It might be for the best *both* to split the banks *and* limit the paper in which they can trade, through prohibition on "naked" buying of CDS and other casino-like behaviour.
And while we're at it, why not also prevent both deposit-taking institutions and investment banks from becoming too big to fail, e.g. by requiring a progressive increase in the capital adequacy ratio as the balance sheet grows bigger, as suggested, inter alia, by Buiter.
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I don't want to be a kill joy here but wasn't it the packaging up of mortgages made by the 'boring bank' that was then traded through the 'casino bank' that created this mess.
So under King's suggestion Boring & Casino are split, great. Boring then lend loads of money on mortgages, package them up & sell them to Casino. All goes well whilst mortgages are paid, but that stops. Oh dear Casino now goes bust and being socially useless cannot be bailed out.
Boring suddenly has no source of funds or liquidity & finds itself peering over the abyss again.
Boring cannot fail as it is a socially useful bank ? So guess what - taxpayer to the rescue.
Sorry guys you really will have to do better than this, surely all those degrees can come up with something that might work.
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Is not the core of this issue related to the (wise?) passage of the second Glass-Steagall Act in the US in 1933 and its (unfortunate?) repeal in 1999? Some would say that recent events strengthen the argument that it should be reinstated in some updated form by all countries which are major players in the global financial system. I understand that China continues to maintain a clear separation between investment and commercial banking to this very day. Perhaps the Conservatives, who presumably will form the next government, should support the Governor if he develops a firm position on these lines - exactly what he is paid to do, surely?
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"So under King's suggestion Boring & Casino are split, great. Boring then lend loads of money on mortgages, package them up & sell them to Casino."
Yes, but that's why Boring should be required to hold part of the original mortgage on its own balance sheet, which would give it an incentive to make sure the person taking out the mortgage can pay - an incentive that was previously lacking and which was partly responsible for this whole mess.
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I am sure my analysis of the problem is too simplistic and would be grateful if someone could correct me if it is wrong.
Anyway as I see it, the problem is that the financial services industry worldwide has shown itself incapable of managing risk. This has occurred for a variety of reasons, remuneration systems that favour short-term performance, complicated products that only a few (if anyone) really understand etc. In a normal commercial environment this would not be a problem, incompetent management end up with insolvent companies. However certain parts of the Financial Services industry, particularly deposit-taking and domestic/ commercial lending banks, are too important to permit to fail.
Two solutions have been identified. Firstly the politicians and the FSA want to micro-manage the way financial companies manage their affairs. This would cover remuneration, products, reserves etc. The BOE take a different view, they want to split the "too important to fail bits" from the rest. The former would then be micro-managed but the latter would be permitted to continue with the current competition, going to the wall if they are either incompetent or unlucky.
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Good old Mervyn, someone needs to tell him the horse has already bolted and sadly he was the one who left the stable door open. Perhaps, since he does not seem to have any concise solution to the problem he was partly responsible for , he should take the honouable course of action and go look for a sword to fall on.
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The link I followed said "What might banking reform actually look like?"
Answer: It'll lool like inadequately regulated and controlled banks milking their customers for every penny they can under any excuse whilst they cut back services, customer support and generally give the customer the run-around.
It will take the form of more and more you must do our admin for us on our web-site to keep our costs down whilst we charge you more and more for services.
It will take the form of (as recently happened to an associate of mine at HSBC) here's a charge for £78 for paying £5 in cash into your business account.
It will take the form of here's and annual charge for an account that gives you lots of "extra's" that you don't want anyhow.
It'll take the form of increasing numbers of mistakes being made - in the banks' / insurance companies' favour - which they will of course apologise for profusely, but only after YOU have discovered it and threatened them with regulatory intervention. I
t will take the form of "automatic renewals" of insurance policies where you get a confirmation of your renewal after the renewal date but no renewal notice prior to it and the money has been swiped off your account or card.
That is, the UK financial industries will continue to be the notoriously unhelpful and infamously dodgy lot they've always been (in recent years).
And why? Because when push comes to shove no-one is actually going to say so much as boo to them. It's all posture and waffle - they will never be truly reined in.
And the one thing that is actually wrong with them? They need to be reined in.
They have TOO MUCH licence and TOO MUCH autonomy and they get away with far TOO MUCH bad treatment of their customers and investors.
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If what you say is right then just combining King's and Turner's schemes would constitute a serious financial reform. I have waited more than two years to hear any official talking about serious reforms. Two at a time seems almost too much to grasp. But before we all get carried away, I do not believe that this country will see any reforms until I see them happening!
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Mervyn seems to have taken six years since he was appointed in 2003 to riddle out that the financial service industry consists of two parts: a productive part and an unproductive, or casino, part. I wonder how long it will take him to realise that the latter can be completely abolished without damage to the economy?
The productive part of finance consists of simple banking (taking deposits and lending at interest), simple mortgage lending, insurance, fund management, etc.
The unproductive part consists of derivatives trading, inventing new derivatives and structured products, providing consultancy to mugs who want to trade in those, hedge fund management, private equity take-overs, devising tax avoidance schemes, etc. These can all be abolished in toto without any damage to the economy - they create no new wealth and add nothing to GDP.
If they appear to generate money in the form of financial-sector dividends and taxes (and bonuses), then it is a mirage: this is not new wealth but borrowed wealth. In effect, the property market has been the nation's credit card, and when that collapsed, the debt was transferred to the government as a huge and increasing 'national debt' in gilts etc that will take decades to pay off.
In fact it would be highly beneficial to be rid of 'casino finance' as a source of completely unnecessary economic instability; also the wasteful bonuses and the destructive effect of private equity deals on wealth-creating businesses. It would be a great boost to the real economy to push the energetic and resourceful (albeit ruthless and grasping) denizens of the City out into productive industries: exporting and emerging industries, high-tech and fashion industries, environment- and Internet-related industries, etc.
Let's do it! Let's have real reform.
(Please do let me know if you spot a flaw in my analysis.)
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The banks, or any other industry, cannot be bigger than the country can manage; look at Iceland for the consequences. We need to encourage a successful financial services sector, but not at any cost. As for the bankers, whilst some bonuses are justifiable, they have completely lost the plot in thinking that they can return to the good old days. They are inviting government intervention to the point of stupidity.
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As in so many posts above re your family Robert...
The banks attitude can be summed up as:
Shut your appalling pleb faces and give us whatever money you might have left. We're itching with a need to get back to boosting hostile takeovers using borrowed money to pile debt on the small remaining number of UK businesses we haven't destroyed. Who remembers GE Marconi or Pilkingtons now Then when you are crushed into the floor we will take our world leading skills off to somewhere where we feel 'incentivised' to continue leaving behind a few management consultants who can advise on huge pay rises for our slightly more useless friends we've wedged onto the government payroll.
Amazing to think our leaders grovel before these people
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Robert,
I hope I speak for everyone (and associate myself with all similar sentiments above) that we all look forward to hearing from you once your really important family stuff that you are dealing with is behind you, and you can once again address the trivia of the economy and entertain us all.
In the mean time I strongly suspect that nothing will be done about anything, even through delay is very bad, until after the election so don't worry the same problems will be with you, us and the Nation when you return.
We need fifty banks and not four, and we need regulators who see the oncoming express train before it hits them (unlike the present failures.) We need money that has a realistic price, but hey we won't get what we want, and the economy needs, will we. So they will just re-inflate the credit balloon, fiddle the statistics and 'prove' it is a recovery when we will all know that they are not exactly being truthful! Sooner or later the banks, the economy and the price of money will be fixed by the market - probably in the worst possible way for the Nation. Just like the credit crunch 'fixed' the insanity of the last decade - but only more so!
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Robert, along with all your other many well-wishers I to would like you to know that you have been sorely missed and I sincerly hope that the ticketyboo business at home will soon be cleared up and that normal services will be resummed as soon as pooible.
Best wishes old friend
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Too many time I have trusted empty words. (eg "Whiter than white.", "No more boom and bust."
This is just spin from a trustworthy looking man. He may or may not be sincere, but nevertheless empty words and ineffective actions. But the speech does serve as early warnings to bankers so they can prepared in ample time. It is a bit like telling the poachers when and how fences will be pended.
Instead of hoping and believing it would be better to only consider what had been said in context of the results and actions performed, not before.
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Robert
I think Merv wants to see moral hazard dealt with not that he is not interested in the wider controls you mention.
We simply can see the ordinary people raped of their money again and it is still going on as savers are being robed to help the property bubble buying fools
As for the Churchill quotes
"never in the field of financial endeavour has so much money been owed by so few to so many"
The most apt is
Who is in charge of the clattering train?
The axles creak and the couplings strain,
and the pace is hot and the points are near,
and arrogance hath deadened the driver's ear,
and the signals flash through the night in vain,
for Brown is in charge of the clattering train
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Robert,
I do hope your family issues are sorted out soon.
However, the views of King and Turner are not necessarily mutually exclusive.
For me the big issues are in those banks that are still receiving state support either through state funded equity or by the state taking on or insuring "toxic assets".
These banks are technically bankrupt, and desperately need
to repair their balance sheets. Many made overall losses, and no doubt will continue to make losses for some considerable time.
How they can even consider paying any bonuses at all in this situation beggars belief. It should be simple: no profits means no bonuses. Ravaged balance sheets means no bonuses until the balance sheets are repaired.
I have no problem with rewarding success; but these institutions are rewarding spectacular failure on a scale not seen since the 1930's with equally spectacular bonuses. It is simply not on and goes against any sense of natural justice.
The argument that they will walk to competitor banks if they don't get their bonuses doesn't hold much water with me either. The relatively healthy competitors don't have the balance sheet strength to take on all the risks associated with expanding their trading books to such a large extent. A spell on the dole would bring some of these people down to earth with the bump they need.
The main purpose of these banks is to allocate capital in a free-market economy. This "massive bonus culture" effectively pushes up the cost of capital for everyone else.
The finance sector is too big, and is crowding out more useful activity in the economy: like solving the energy crisis, world hunger and tackling disease.
Some of that puts me in the King camp, of wanting a new "Glass-Steagal". But I would also go along with some of what Turner wants. But not "more" regulation, but "better" regulation:
1) Ban off balance sheet vehicles of all kinds
2) Force all trades of these exotic instruments on to a recognised exchange
3) Indeed follow the Soros view that "naked" trading of CDS's and other similar derivative instruments be banned
4) Force all banks/institutions with a balance sheet above a certain size to hold even more regulatory capital to cater for the bigger impact of their failure in the event that the regulatory framework fails - as it will from time to time. This might act to limit the size of institutions (some have got too big to save compared to the tax base of their native country, let alone to big to fail) and encourage a variety of business models (so all the ex-building societies don't go the same way as Northern Rock).
5) Force all bonuses to be paid in stock in escrow that can only be released say 5 years after the trading year in which the bonus was "earned"
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SUB PRIME mortgages are the reason we are in this mess.
The losses on sub prime loans were (perhaps) containable, but what brought the global financial system to near collapse was the 'dicing and splicing' of these loans, re bundling and selling them on. The effect of spreading risk was meant to be benign. In principle, it is good banking practice.
These loans were used as collateral on which to base yet more lending. Thus the multiplier effect of these toxic debts poisoned or infected the whole global financial system.
Sub prime mortgages will inevitably re-emerge (in some other guise) when the housing market re-embarks on another insane, speculative boom.
Surely, none of the proposed solutions from the FSA or Mervyn King address the fundamental - the greed of the housing boom.
The recent paper published the other day from by the FSA on mortgage regulation does not tackle the simple fundamental of discouraging speculation in house prices.
Of the British banks, Northern Rock and HBOS are the ones which collapsed.
Neither were involved in investment banking - corporation merger and acquisition etc - but were most exposed to loans made to households for mortgages. Separation of investment banking activities is not the solution.
The FSA proposals are equally wrong headed: heavy regulation.
If we rush to knee jerk, emotional solutions, responding to public reactions to bankers and their bonuses, we risk a large part (whether we like it or not )of the British economy.
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Sorry to hear about your troubles old mate. Hope things get sorted in the right way.
Your article is pretty dense with information.....I imagine you must be bursting with stories that you are keen to publish.
The bit that caught my eye the most however is the bit about the CDS market potentially being clipped in the future so that only one CDS at a time can relate to an underlying instrument.
To my mind the fact that 10 or more CDS contracts can each be "in the money" to a value equivalent to the amount that a single bond is "out of the money" is no different in principle to QE.
Except QE is small beer compared to the amount of CDS wealth that was manufactured in the eight years prior to 2007. .....
The cause of the crash may well be CDS related to a greater degree than is presently being spoken about.
All the best Robert
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Well at least you didn't get Swine Flu Robert, best keeping the private stuff that way though or you'll be dealing with swathes of tabloids
I also think that it might just be affecting your actual perception of the realities in the marketplace
Zombie banks, with no competition, harvesting desperately to restore their short term balances, little leadership, no movement on regulation and busy buying QE government bonds whilst moving profits off shore to cushion against the currency deflation just around the corner.
Looks like the whole mess will be handed over to the next parliament
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Robert, all the best from me as well regarding the family issues....
Regarding your blog, it does seem that the ground is slowly starting to move regarding the need for radical reform. And we deperately need both Mervyn's proposals to break up the banks and Adair's suggestions of regulating and/or taxing the dodgier parts of the finance system out of existance.
There is one further vital aspect of reform which does not yet seem to be on the radar. There is simply too much "investment money" sloshing around the system looking for the latest bubble to "invest" in. There are a number of reasons for this, though they mostly relate to long-standing imbalances
- international trade imbalances resulting in countries like China or the Gulf States having huge piles of cash
- imbalances between rich and poor within each country, such that the rich (net savers) end up lending at interest to the poor, with the banks acting as intermediaries.
- broken pensions systems which result in us all putting far more into pension funds than is actually needed by industry for real investment purposes.
You can't have too much debt without someone else having too many savings. To solve the former you need to solve the latter. Correcting the imbalances is essential, and neither Mervyn's or Adair's approach will be sufficient if the imabalances are not addressed,
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So who presided over the incompetence that was Summer 2007-Summer 2009? Adair Turner and Mervyn King! Now, they have the answer! But - as anyone involved in finance will tell you - the FSA and Bank of England have as little control over the industry now as two years ago. Nice speeches, but completely irrelevant. THE PROBLEM IS YOU ADAIR AND YOU MERVYN. It's a problem of governance. Your organisations failed to do their jobs, and it's a sin that you are still in your seats pontificating. With no governance, nothing works.
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If only we could coordinate a THREATENED mass non-payment of loan re-payments to show government and the moneypower that we're as mad as hell and we're not going to put up with it anymore!
Nationalise the whole money creation system for the benefit of all not just the few.
As Abraham Lincoln said, "..the taxpayers will be saved immense sums of interest. Money will cease to be the master and become the servant of humanity."
Look what happened to him though.
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Robert, I hope you feel as if you are overwhelmed with good wishes. I'm sure every reader of your posts wishes you well.
I think what we have is a policy dilemma. You appear to believe that we can regulate ourselves out of this mess. The Governor of the Bank of England sees regulation as irrelevant but structural reform as the way forward. You cannot both be right. No compromise can be reached between the two positions. We have to jump one way or the other and I can see no way to work out which way to jump.
When I was your age, I would have believed the problem could be solved objectively by computer simulation and the application of gaming theory, but I no longer believe that. My degree says BSc(Econ). I no longer believe my degree title to be justified because I have come to see the so called dismal science as a black art.
Somebody, somewhere, has to decide which way to jump. There is clearly no consensus and ultimately it will need someone with nerves of steel to choose - because on this decision not only my grandchildren, but yours too have their fate hanging. (And I kinda suspect that yours have yet to be born). Doing nothing will ensure catastrophe.
FWIW, I think King is right and Turner wrong because I do not believe you can do anything about the cyclicality of banking. Roll on ten years and the banks will be awash with money again and wondering what new wheeze they can come up with to lend it at a profit. The thing is to stop them doing anything foolish with our money and simply not lend it if it cannot be prudently lent. Frankly, if you invent regulations, the smart (and frequently amoral) cookies who end up in banking will work out ways round them.
But - if you make banks who receive public and corporate deposits separate from the wild and wacky guys who will bet on futures for camel loads on the Kyber Pass - who can then earn all the bonuses they like before they go bust - well we should never again see you breaking a story about a British bank going belly up while the regulators were sleep walking. The way they trade will ensure they cannot go bust. Making it illegal for a licenced deposit taker to lend to a casino bank should get round the problem. There will always be loans that with hindsight appear foolish. That is why there is a need for a margin between deposit and lending rates.
My judgement is no more likely to be right than anybody else's and when the decision is made either way, I will not be cheering if it goes my way.
And incidentally, Robert, if you read this, I still think that you working out what was happening at Northern Rock was the finest piece of investigative financial journalism by anybody ever. Feel encouraged, and we all look forward to your return.
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Good luck with the family matters Robert, I'll miss the blog in the mean time it's always enlivening and enlightening reading.
Both King and Turner have some good points to make, but truly we need to go further, I don't mean trashing the entire capitalist system, but surely we need to take a step back and properly evaluate the role and power of our financial services?
I honestly think that the greatest problem with taking the required action to get our financial system on the right basis is the fact that somehow we have managed to avert total meltdown.
Right now I have the horrible feeling that we're living in the delusion that because we managed to push the right switches this time and scrape by, that all's hunky dory.
I hope this delusion does not deny us the chance for change.
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Never has this been more true....
The trouble with being educated is that it takes a long time; it uses up the better part of your life and when you are finished what you know is that you would have benefited more by going into banking - Phillip K. Dick
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We'll get more Huff and Puff from Messrs.Brown and Darling then the bankers will get paid their bonuses because actually there is nothing the Government can do about it,short of shooting a 90% tax on bonuses bill through Parliament.
What I would like to know though is-what special skills and competencies do these particular bankers have that make them so valuable to the banking system.
My understanding is that they are the same people who screwed it up last time
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Radicals? I'd prefer to call them 'sensibles'. The sooner we decouple the speculative arms of banks the better. Radical is the demonstrably dangerous structure we have at the moment.
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I hope all things personal resolve them selves as your heart would wish.
Don’t worry about us nothing much is going to change with these wasters in power life will slither slowly down hill the economy will continue to live in a bubble under a false dawn with a rosy pink glow.
Thus making us forget that a red sky in the morning means sailors take warning
True your pound wont be worth as much and a few bankers will take a lump sum and run but then no one either has the vision, the guts nor the leadership to do anything about the UK s problems. Just to talk about it and hope it will go away.
Does any body with all these false statistics truly know how far the bottom twenty percent have sunk or the top twenty have risen both at the other eighty percents expense when the average sixty percent majority in the middle as a consequence remains the same.
Good luck.
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It is very difficult for a "man-in-the-street" like me to understand the fineries of these financial alternatives. Here are a few points that I feel strongly about:
(1) We have had socialism with all its regulation and it does not work. Beware of over-regulation.
(2) The financial industry is completely taken up with money-making with the morals of the addicted gambler. They will lead us into disaster again. They are blind.
(3) The financial industry is contrubuting greatly to the economy in taxes and jobs etc but it is not worth the risk they bring. If we get rid of unattractive parts of it (like hedge funds) that would be OK.
(4) Mr. King and Mr. Turner, who are familair with the financial system are reccomending bold steps. They must be listened to. The government must be prepared to take bold steps, maybe bolder than what they are reccommending to protect the people.
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Now, now you can't lay the blame for Bankers greed at the feet of their Shareholders.
Whilst the Bankers print their bonuses, the poor old Shareholders have still lost up to one hundred percent of their investments.
For example RBS was once over five pounds, and is now forty five Pence a share. Do RBS Executives deserve a Bonus ? I doubt it !
The Middle Eastern Investors in Barclays have in effect signalled the top of the market in selling such a large stake. Or do they just believe they can get a better return elsewhere ?
Until Banks have to retain responsibility for their own loans, there will remain a problem.
Whilst Salesmen are employed on Commission to sell Loans which will then be passed on to someone else, there will remain a problem.
Banks can raise money from Deposits and Bonds, but they do not need to sell Loans to each other. That is a flawed American Banking concept.
The only people who benefit are the Merchant Banks, and looking at the Lehmans of this world it didn't benefit them all.
On the Economy, when will the Parties in Britain, actually put forward some proposal to create new Export Industries ?
That is what Britain needs, not Accounting fudges, and removal of hard won workers rights.
It is easy for rich businessmen to pick on the retirement age as a soft target, but how many of them will actually do a 37 hour week up to the age of seventy ?
How many Businessmen actually Retire long before that ? Actually doing nominal one or two days a month as Directors. Spending the rest of their time enjoying their wealth ?
It took two world wars to bring the workers rights that British people currently enjoy, and these Rights look like they will be thrown away in order to maintain the Illusion of a Global Free Market.
There is no such thing as a Free Market, each Country around this world does its best to rig the market in its favour. Just examine the Yuan to Dollar exchange rate.
That is clearly rigged against the West.
Europe has anti dumping Laws. Why hasn't the flow of cheap goods from China been examined under those Laws ?
In effect the rigged Exchange rate for the Yuan, amounts to an indirect Government subsidy to all Chinese goods being exported.
Is that not dumping ?
Thats enough for one day, I'm off to enjoy the Rain (with a bit of Thunder just for icing!)
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It must be remembered that it is possible to take a lot of risk just within the context of a 'narrow' bank (with all the trading activities stripped off into the 'casino' bank). The likes of HBOS and Northern Rock were undone by a combination of the riskness of their traditional banking assets and their dependence on short term funding from the money markets. So what do these tradiational but risky assets look like? Loans simply. But given to the wrong people at the wrong price. For example v. high LTV loans to very cyclical industries such as contruction, all retail mortgages at 80+% LTV, as well as underpriced loans where the risk premium has effectively gone to zero. If you want some more insight into this last point compare the rate of growth of HBOS commercial or ratail bank balance sheet with its revenue growth. They were lending ever more money at lower rates of interest - making implicit assumptions about the continuing availability of cheap funding, and failing to take a through the cycle view of what appropriate credit risk premiums should be.
In short, splitting up the banks is not sufficient to curb excessive risk taking (nor possibly required).
It does pose a fundamental question of how banks should actually compete with each other - because their customers are typically happy to get cheap credit as a result of intense competition. And they would be equally unhappy to have a defacto high interest rate which leads to massive profits for the banks in boom times but is 'safer' in a through the cycle view.
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Robert
I wish you well with things at home and I hope all works out for you and your family.
I am not a fan of your comments and am constanly disappointed in your lack of interest in real business rather than just gossiping about banks.
But I think it important that we all wish you well at this time.
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To my mind all the regulatory stuff is fiddling around the edges.
The core issue is that financial activities are pulling in around a third of the profit produced by the economy while only generating about 10% of the GDP. 25 years ago, it was roughly 10% and 10% which looks intuitively right.
Until we figure out how and why this massive distortion is happening, it is extrememly unlikely that any kind of regulation will work.
Either the bankers have improved their relative contribution to the rest of the economy beyond all recognition over the last 25 years, or - far more likely to my mind - it's all built on sand and will collapse just like Madoff's operation did. I've been running a business for the last 20 years and though there have been improvements in business finance, nothing out of proportion to improvements in other areas of the economy. I've certainly not seen any tripling of the effectiveness of financial services in the real world.
If it's the latter scenario, then we're all in big trouble unless it gets stopped. Quickly.
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Robert, you just take the time it requires to sort your family matters out. Nothing else matters more.
Opposed to some other readers, I am actually a fan of your blog, and I do find your interest in the UK banks both timely and relevant. Never before (I think) have they screwed up this big, still managed to get into the public treasure chest, and now even rewarding themselves bigger bunusses than ever before. The banks surely deserve every little bit of critical and negative exposure we can find.
Looking forward to seeing you back at the old computer...
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Robert,
Hope you get your issues resolved asap, look forward to your return.
JM
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Hope you get back to posting soon, I've been missing your articles and the little debates they spawn.
Gl with your issues.
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Greetings Mr Peston (Robert)
Best wishes ....and as the wife of a famous Monarch once said....in Life you only need to do three things...hope for the best, prepare for the worst ...and take what comes.
When things are better for you Sir would you consider the parallels between the Enron scandal and HMG ?
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Robert,
I hope all will be well soon with you and yours.
GREED, and a lack of "purpose in life" (try rading Frankyl's writings)are the main reasons for all of these problems. Farcical salaries and bonuses paid to a small proportion of the population who contribute very little, if anything, useful to society - Turner was right about that. People selling stupid mortgages (anything over about 95% is ridiculous - all it does in increase the price of houses, which encourages people to take the risk of taking a stupid mortgage (after all, "if the banks are offering them, they must be sensible"). 99% plus of traditional bank managers (I am not a bank employee)knew this would end in tears, but they were replaced with salespeople whose pay was partly determined by how much they sold. Things won't recover until people realise that the prime purpose of an organisation is to deliver LONG-TERM CUSTOMER STAISFACTION. mMaking a profit is a necessary condition to be able to do that. Get it the other way around (as we do) and disaster inevitably follows. get the message : THERE ARE NO FREE LUNCHES!
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RP: " ........But it would shrink the CDS market by many trillions of dollars, since something like 90% of the market in recent years has taken the form of pure speculation, "
++++++++++++++++++
Pure speculation? erm, like Roulette using other peoples money?
It seems to me that CDS canot be accurately assessed either to risk or value. How on earth is there trillions of clamshells/pounds/dollars bundled up in them? The credit rating agencies never saw they were worthless, on the contrary, triple A+ was freely bandied about CDS.
Will somebody assure me that the credit rating agencies are no longer rating these possibly worthless instruments as AAA?
We really do have to split the people who carry out the 'pure speculation' from the retail banks. If this does not happen we will be having another 'crunch' soon.
I do not see any repentance anywhere.
Toldyouitwould
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This is going to sound like a rant and it's the first time I have posted anything! I am only only starting to do so because our social economic and political system has become illogical and unethical. careful analysis will bear out this statement:
Economics is not a science it is the management of the economy by fiscal (monetary means), the need to manage an economy is brought about by social choices made in theory by members of society, the choices needing to be made are for the provision of services to that society, in order to provide firstly for the majority and then for the minority. These choices are first based on need, then ethics.
Society needs an infrastructure that provides for a police force, society needs defence, society needs healthcare, society needs education, welfare, transport, etc. These needs are decided upon by a political system (government) that in theory acts for the majority.
Individuals employed in these services are there because society can afford to pay for these services, if it is unaffordable to do so society would, or should choose not to pay for the service or services based on ethics, this involves making choices, these choices are supposedly made by the majority via a political system (the Government) who make choices based on (in theory) the wishes of the majority.
If this system is working so well, how can it be that government chooses to pay civil servants (anybody not employed in the private sector) more money than the private sector could choose to pay itself? This statement needs clarifying:
In the private sector if you work you get paid based on your output, if you can afford to put money away for your future you do.
The private sector (when based on individuals and not averages or those on very high earnings) is unable to fund the equivalent pensions received by those in the public sector who typically end up with a pension of 2/3rds of their final salary (typically a lot higher or at least equal to average earnings) at retirement, anyone in the private sector wishing to provide for this would have to put at least 50% of their earnings aside, and would therefore be earning 50% less. Is it ethical for the private sector to be asked to provide this benefit to it’s employees?
In times of recession the self employed and those in the private sector do not get increases in income because the employer does not make sufficient profit to provide an increase, the self employed tend to make less and suffer a fall in income. Yet in the public sector pay rises are restricted or reduced, to be paid for by the employer (the private sector) either by increased taxes or by borrowing based on possible future increases in private sector income. Is it sensible or ethical for society to provide pay increases to it’s employees when it can least afford it?
The cost of public sector pensions now exceeds the cost of providing the Army, the Navy and the Air force, so society’s representatives (the government) have decided to put public sector pension provision above society’s defence needs. Is this ethical?
Do we really want to provide better pensions for society’s employees at the cost of the lives of the people who defend us and those we choose to defend us, because we cant afford to provide bullet proof vests for our soldiers because government wants to have an index linked pension for our employees higher than the pension we can afford to pay ourselves?
Is it ethical that public service employees get a full state pension as well as their employee pension, when the average earners and those below average earnings in society may only get a state pension because they could not afford to provide for a private pension as well?
Society provides education, and society’s representatives (the government ) choose on society’s behalf to ask teachers to prove they are teaching our children well, by filling out forms to say what and when they are going to teach, then to say what they have taught as well as planning for each and every lesson, it asks that work is marked and these marks go into tables to show how well they are doing at their job.
A good teacher gets results a bad teacher learns how to manipulate forms to show they are doing their job and uses statistics to justify performance. The good teacher spends less time than they would like in front of children teaching in order to fill out obligatory forms, the bad teacher does what is necessary to meet targets, and demonstrates they have done so using forms as evidence, which teacher would society prefer, and wouldn’t results speak for themselves?
The great bulk of self employed (who earn less than their employees in the public sector) now choose not to employ staff based on the benefits society’s representatives (the government) has decided they are legally obliged to give, like access to pensions, sick pay, maternity pay, paternal leave pay, keeping jobs open and replacing staff when off are an additional cost. An employer has to find funds to cover these benefits from his/her own resources.
So instead of choosing to bear the cost of additional employee’s the potential employer simply chooses to work longer hours and not to employ somebody, especially since it is almost impossible to get rid of an employee without several warnings or paying redundancy payments at a time when an employer can least afford it. Is it sensible or ethical to encourage unemployment by granting employment rights via legislation?
It costs somewhere in the region of £70,000.00 per year to keep someone in prison, this is more than the average salary in the private sector, is society choosing to treat those that choose to hurt society too well at it’s own expense? Is it ethical to expect that it do so?
This fact may be wide of the mark but not far off, roughly 90% of the national health services budget is spent on treatment for those with less than 5 years to live, yet society does not allow you to choose to die, keeping you alive at it’s expense. Is it ethical or desirable for society to force you to stay alive if you can, at the cost of society and against individual wishes?
Society allows us to sue Doctors and surgeons and other health workers when they make mistake’s, yet society asks that they work hours that result in fatigue and increase the likelihood of mistakes, and when a case is successful against someone who is doing a job of trying to save lives not endanger them, society foots the usually very large bill. Perhaps unless it could be proved that the carer actually intended to cause harm, should society not exempt such an individual?
Should not society accept that it expected too much of the carer instead of trying to apportion blame?
If you were a surgeon would you choose not to try and save someone’s life because you were tired and might make a mistake, and if you did , you would be sued and someone attempt to blame you for the outcome if it were to go wrong?
Society has started to legislate for minority’s at it’s own expense, it grants rights to minority’s that cost the majority funds the public purse cannot afford. These right’s may be ethical but are they if they contribute the bankruptcy of society?
Society chooses to investigate and have enquiry’s into individuals actions that cost far more than the result of the individuals action and then have enquiry’s into the enquiry. The idea behind the investigation is to prevent something happening again, but in the majority of cases the cost seems to out way using common sense to reach a conclusion. Does that show that the choice to have started the enquiry in the first place was an uneconomical one ?
Public service employees choose to interpret legislation whilst carrying out their office, how can it be possible for an individual to be allowed to openly display their religion by their dress code and it be possible for another individual wearing a cross to be told that they are not allowed to wear it whilst in a public place of work?
Why are public officers not allowed to look after each others children for more than a few hours a week so that they can go to work? If it means that they cannot afford to go to work without paying for child care and so choose not to, is society now saying public officers are not to be trusted with your children, is it saying that you should stay at home and not go to work if you cant afford to pay a registered childminder or find one that you trust with your child?
Is it not about time public service employees saw themselves as such and that they were paid what society can afford, with similar employment and pension rights to their employers in the private sector (this of course would result in a reduction to them in pay, pension, and employment rights). This might reduce the tax burden on society and go some way to equalising the income gulf between the Private and Public sector.
In Cornwall the average income of those outside the Public sector (excluding larger employers) is around £15,000.00, most of these employees cannot and do not pay into a private pension yet they all employ Public sector workers via their tax and National Insurance contributions.
Is it not time to examine what society can be reasonably expected to pay for, should the unemployed be able to be so for their whole working life, and should society pay to home them, pay for cars, dishwashers, televisions, satellite dishes, DVD recorders, and a whole host of things that are “essential” not to mention the taxes society deems them to have paid for them in order that they receive pensions when they retire! Shouldn’t unemployment benefits provide a basic level of support until the claimant returns to work, and not encourage the unemployed to remain out of work.
It is apparent that if it were not for the influx of foreign workers now in this country that their would be insufficient national insurance contributions being paid by UK nationals to meet the current call on those funds to pay UK old age pensioners their pension.
We need society’s representatives to start making choices based on economic principals, we need them to be prioritised in favour of the majority and then the minority, we need ethical choices to be made on the needs of the majority and then those of minorities, and big savings in the public purse would be made if we stopped making criminals by introducing legislation that makes criminals of the general public for petty things that are not worth policing.
Society needs to re-form social groups that feel empowered to effect the future of it’s members and it needs to be able to penalise it’s members and their children in an effective manner that prevents antisocial behaviour from occurring in the first place. Members of society should be trusted to do the best for society until they demonstrate they are not worthy of that trust by acting against it’s wishes, and they should then be dealt with in a proportional manner, that is likely to discourage such behaviour in future.
Our Current Taxation Burden:
Income Tax 20%
Employee national insurance contribution 11%
V.A.T. Soon to increase again back to 17.5% 15%
Total 46%
Our allowances are around £6000.00 over a working life of say 50 years that equates to £300,000.00 not surprisingly the Inheritance tax allowance is above that figure at £325,000.00 so if as an individual you manage to accumulate an amount above the allowance and die your estate pays 40% tax on the excess.
Conclusion if you do save money and have some left on the day you die above the allowance you will already have paid tax on these funds at 46% and then will pay an additional 40% on the balance, Council tax, road tax, water rates, TV. licences, stamp duty, and having your assets used to pay for your care costs have been ignored in this simple exercise!
Does any of this seem fair, logical, ethical or even sensible for the masses?
Are we simply choosing to impose this on ourselves via our employees in public service who get a much better deal?
OR have we been blinded by all the legislation and benefits that seem to have been granted to individuals in society and not noticed the effect it has had on us?
Right now the post office is holding the people who pay it's wages to ransom, preventing the private sector from earning the funds to pay their wages by striking. Perhaps the private sector should go on strike for a week and see what effect that would have on the ecconomy, perhaps we would have to loose a lot more public service workers.
We also have the government trying to introduce legislation on mortgages that will restrict the ability of people who will be deemed unable to afford a mortgage without taking into account differences in life choices:
If a couple smoke 20 a day each they spend around £280.00 per month on cigarrete, if they get a takeaway one a week they spend another £80.00 per month, perhaps they also have Sky at a cost of £30.00 per month, these three things total £390.00 per month and anyone choosing to service an interest only mortgage with this amount would be able to borrow £93,600.00 at 5%. Are the government going to introduce obligatory life style questions on borrowers?
Talk about a Nanny State government has lost it's way and has no idea what it is doing by producing a never ending stream og Kneejerk legislation!
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It was a sombre speech by Mervyn King and rightly so. As always you have to listen very carefully to what he says so tactfully are his words chosen.
Everything is not good and his fears seem to be that before the country can organise a banking system that will stand alone against another credit crunch one may have already occurred. With £1 trillion pounds already propping up the present system it is inconceivable that the taxpayer could take on any more.
It is shocking that Brown and Darling are disagreeing with his concerns that the financial separation of the casino banks and retail banks must be done on an international basis. Perhaps the agreement at the G20 on cooperation was not all it seemed.
This then leaves the option for a new bank as discussed on previous blogs to safeguard the public from any further upheavals.
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13. At 2:21pm on 21 Oct 2009, danj180 wrote:
My favourite from the speech is:
"The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone’s shampoo, in that it gives the appearance of officially “doing something” and adds to our bureaucracy without really making anything safer."
Superb analagy - spot on.
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There is a popular movement for the Glass_stegall equivalent here - although I don't believe it will solve the problems of Capitlaist banks, I can see peoples point.
However the total lack of media or politicans talking about such an act is 'deafening'. Not one inch of column, nor minutes of TV time has been dedicated to the subject.
If nothing else this should be ringing alarm bells about 'who the Government is working for and what their aims are'
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64. At 8:01pm on 21 Oct 2009, FauxGeordie
That was excellent - and possibly very true...
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79. At 08:47am on 22 Oct 2009, gavin_humph wrote:
"What I would like to know though is-what special skills and competencies do these particular bankers have that make them so valuable to the banking system."
Gavin, their skills are:
1) Taking your money and ensuring someone else gets the blame
2) Resisting any reform which might impact their taking your money in the future
3) Convincing the world they are clever by making up acronyms like 'CDO' and 'CDS' allowing them to confuse non-bankers
4) Manipulating Government into a position that it is forced to save them from their own recklessness
5) Paying themselves vast amounts of money for very little work - and then convincing you and I that they deserve it!
6) Getting away with the biggest robbery of publicly owned money since the brinks matt robbery.
Come on Gavin, you know they are well trained at what they do - they have just run rings around one of the largest and most established Governments in the world...
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Old Swervin' Mervyn was spot on in excoriating the entire banking culture there, wasn't he? The City has perfected the dark science of 'trickle up' economics whereby they accumulate wealth no matter what the actual state of the real economy - either by emptying taxpayer's pockets when they encounter a little temporary difficulty or by "speculation and obfuscation" when things are going more swimmingly.
When the Governor of the Bank of England appears as a firebrand radical reformer compared to a Labour Chancellor and Prime Minister, you know something has gone very badly wrong with Labour ethics. Quite simply, Brown et al have none, they merely seek power for their own ends, just like Cameron and Clegg and their cronies.
That is why we need a ballot box revolution in this country and the political status quo must be rejected.
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Robert, like you I have been away from the blogosphere. May I join the others that have expressed their best wishes and hope that things work out for you.
My absence was partly due to internet problems and partly due to holidays. There is nothing like getting one Euro to the Pound the reinforce the fact that the UK is going to hell in a hand cart. It's not just the UK economy but Spanish tourism that has taken a huge dive this year.
Much as whatever Messrs King or Turner say we all know that the key decisions will be made in numbers 10 & 11 Downing Street.
The sad fact is that Messrs Brown and Darling are doing the equivalent of putting their fingers in their ears and screaming "la la la la" to try to drown out the problems or do they hope it is going away?
I wonder if they hope that QE and artificially low mortgage rates will help keep the people off the streets this winter?
Like post 1 I can see a winter of disconetent this winter as many in the Public Sector know this is the last chance to try to save or preserve what they have. The Unions have labour across a barrel when it comes to funding the next election and now is the last chance to call in any favours they may have.
I am convinced Gordon's plan is to defer and delay any difficult decisions until after the election and there are a huge number of issues that need resolving. Many of these have been already highlighted by other posters but my top five are as follows.
1) The banks. Something needs to be done and it has to be pretty major. New Labour have no idea and fear that any actions that seem like letting the bankers off could cause electoral suicide for them. Best to keep quiet and hope no one raises it until after the election.
2) The public sector. Public sector pay, pensions and staffing need a cleansing like the Augean stables but any attempt by Labour to sort this out will cause massive unrest in the councils and NHS. The Public Sector Unions just won't stand for it and Gordon can't afford to stand up to them.
3) The Post Office. Again despite their being a decisive need for leadership in an organisation that is Government owned we have no leadership from Mandelson, Brown or Darling and the strikes keep on coming.
4) PFI. All of this is off balance sheet and apparently if it was brought back on then Government debt would treble. PFI deals need paying whether the hospitals or schools are used or not. PFI will drive education and NHS choices for the next 20 years. Any government spending cuts will make this even worse. Expect real problems over the next two years that will make the current situation look like a garden party in comparison.
5) Defence. Whether it is Trident, new aircraft carriers with no planes or an overstretched army and a non trained TA allied to just how and when we get out of Afghanistan, if we ever will in our lifetimes. The lack of activity and leadership from the top is a disgrace.
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It's a pity really that when Northern Rock crashed, the government did not prosecute the directors of the bank.In that way the directors of other banks would not have been so willing to keep the bonus culture going because it would be they, as the formulators of bank policy,who would be doing the jail time or paying the fines.
The sad truth is that the government is afraid of the banks because though we have had plenty of talk, threats and proposals we have very had little if any action. As things stand, we could have a credit crunch tomorrow because we the public have not been told what changes, if any, the banks have made.The bonus culture hasn't changed so why should we believe that anything else has.
We need a deterrant in place now because in a situation like this prevention is better than cure.It's better to stop a crisis occurring rather than have to put things right after it has happened.So far I haven't seen anything that gives me confidence that such preventative measures are in place. I wonder how the government will react if they let things be and we do have another crisis?
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Like Mr Kings use of Churchill on this area
Hope family problems are sorted , does it require you to join the super hero's ?
if it did which one would you like to be ?
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Is there good to come out of the BoE Governor and the FSA head appearing on the frontline of radical market reform in the midst of a 13-year Labour administration?
My hope is that Turner & King's two arguments will become - in the pitiful absence of any leadership or serious proposals from either of the two main parties - the markers between which reform will occur. Let the debate be an either/or choice, where perhaps a compromise can be struck. It may well appear a Hobson's choice to the markets and banks, but hey, they already got what they wanted and blew it spectacularly while rewarding themselves unbelievably well. They don't get to choose anymore.
I look forward to the wailing that will emanate from the City when they are forced to operate more accountably - "but we will make less profit and attract less investment, and the City is the economic heart of the country" they may well say - "what will you do without all that tax we paid on our profits"?. And as easy unearned profit on money shifting from one cup to another does become harder to amass, is it too much to hope for that capitalists will look elsewhere to invest? How about somewhere in the real economy where people actually do things that employ real people making things - actual physical things you can touch and see - or providing an actual service you can use, rather than a tiny tax-dodging elite in London who contribute nothing socially useful.
If investors need to look elsewhere for profit they surely will - for example there is a goldmine out there for environmental & renewables that could keep us all in work for centuries, and Britain, with enormous renewable resources, has no real market to speak of.
If the effort and intelligence occupied with creating, maintaining and defending the apparent alchemy of the financial markets over the past twenty years was directed to new technology and industry we'd all be better off.
The City's emperor's new clothes have been revealed to us - we can't continue to pay the bill for dry-cleaning their pinstripe suit while asking them to recommend a tailor that could fit one for us, too.
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Hi Robert
Hope the home front is easier to resolve than the banking crisis - as we are about to enter its second and more worrying phase.
The taxpayer cannot afford to save the banks a second time. Sadly, I read the Chancellor's 2009 Budget forecasts recently. The incoming Government in June 2010 has two horrible choices.
Choice 1 - Raise income tax to at least 28p and VAT to 22.5% on all goods and services. This should raise around £50bn per annum on present employment and GDP consumption levels. This will make some capital repayments and cover interest (if levels rise to pre October 2008 levels).
Choice 2 - Assuming that tax revenues are received as per the Budget document until 2014 - then on Day 2 of the new Government - cut all budgets and benefits by 25% across the board for a 5 year term. Deeply unpopular, will risk civil unrest, strikes, etc. However, doing this will just maintain the level of Government Borrowing Debt levels at March 2009 levels! The Swedes did a similar thing in the early 1990's and have now just got their economy back on track - a 16-17 year exercise.
Either way - people would understand the medicine on offer. Introduce the UK version of Glass-Steggall and allow investment banks to invest, whilst high street banks manage depositors' money and make sensible, "real" loans to SME's who after all, account for 98% of the private sector, and employ over 50% of the UK workforce - the forgotten majority. We are in a phoney recession right now. The full force will not be seen until next year, but rest assured, it will be horrible for everyone.
Finally, let the next Government initiate a full tax audit of all present MP's in Parliament today, subject to the new Bribery Bill being enacted into Parliament and also making sure the current crop of MP's are subject to the Theft Act (like the rest of the population), not the watered down MPs’ expenses and allowances law, The Parliamentary Standards Bill introduced on 23 June 2009. What a joke. HMRC should be given wide ranging powers. Not enough auditing of MP's expenses after the exposure of the abuse and misuse of public money - our taxpayers money.
Look forward to your return when things calm down at home.
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All the best Robert, and thank you for your latest coverage and explanations.
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" 1) The banks. Something needs to be done and it has to be pretty major. New Labour have no idea and fear that any actions that seem like letting the bankers off could cause electoral suicide for them. Best to keep quiet and hope no one raises it until after the election.
2) The public sector. Public sector pay, pensions and staffing need a cleansing like the Augean stables but any attempt by Labour to sort this out will cause massive unrest in the councils and NHS. The Public Sector Unions just won't stand for it and Gordon can't afford to stand up to them.
3) The Post Office. Again despite their being a decisive need for leadership in an organisation that is Government owned we have no leadership from Mandelson, Brown or Darling and the strikes keep on coming.
4) PFI. All of this is off balance sheet and apparently if it was brought back on then Government debt would treble. PFI deals need paying whether the hospitals or schools are used or not. PFI will drive education and NHS choices for the next 20 years. Any government spending cuts will make this even worse. Expect real problems over the next two years that will make the current situation look like a garden party in comparison.
5) Defence. Whether it is Trident, new aircraft carriers with no planes or an overstretched army and a non trained TA allied to just how and when we get out of Afghanistan, if we ever will in our lifetimes. The lack of activity and leadership from the top is a disgrace. "
Couldn't agree more...
The banks need to understand there is no second chance. If they think they can screw things up again and expect to get bailed out by the poor and middle classes then they need to wake up and smell the coffee...
...we the poor downtrodden citizens will rise up and overthrow you and your corrupt Govt. media cabal. Repeat. There is no second chance.
Why Applegarth and others have been let off scot free amazes me
PFI is a massive millstone. Another 'Prudent Chancellor' special along with the Pensions raids.
In the nearest local town to me, Chesterfield, there's a PFI built school whose roof came off in windy conditions which suggested the quality of these new shiny PFI buildings are all style and little substance.
Tough decisions are required.
Unfortunately Broon is so indecisive and knows the game is up. The unions have him over a barrel...
...as for the CDS debacle the offered solution sounds good to me.
Banking needs to get a life and get its head out the cocaine tray and get a big dose of reality.
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Why is plagiarism such an easy word to copy?
Did Mervyn King really write his own speech?
http://blogs.telegraph.co.uk/finance/edmundconway/100001466/did-mervyn-king-really-write-his-own-speech/#
At the end of the day, I don't suppose it really matters. Just as long as their words turn into actions.
We now seem to have entered a bidding war.
FSA chief Lord Turner urges sell-off plan for 'too big to fail' banks
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6406439/FSA-chief-Lord-Turner-urges-sell-off-plan-for-too-big-to-fail-banks.html
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It really is pretty desperate to describe the range of detailed bureaucratic interventions proposed by te FSA as radical. The Bank's proposals to break up the current banking conglomerates, to increase competition and compartmentalise failure, combined with increased reserve requirements, are a much more fundamental and elegant solution. This would get to the root of the matter - more competition to cut overcharging and drive value for money, higher reserves to rein in speculation and cover the costs of failure, plus smaller banks to contain systemic impacts. Seems obvious really, and more potent than any amount of poliical posturing, public lectures, codes of conduct etc etc
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Most would agree regulation (complication?) did not work before so how does it follow we need more of it?
One would be tempted to suggest Adair has a vested interest in chopping and changing the rules on a frequent basis and adding more of them whereever possible...
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As long as directors can hide behind Limited Liability Company law all this huffing and puffing will change nothing. Regulation will hamper good boards and be worked around by greedy ones, fines and liquidations will hurt shareholders and depositors and leave those bonuses intact. Until the rules are changed so that a director of a financial institution is faced with the real possibility of his/her next career move being that of becoming a Big Issue seller in the event of their bank going bust, their minds will be on structuring that remuneration package of theirs first and the long term future of the bank second.
Yours Aye,
Graucho.
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Is Merv the Swerve's proposal to split the banks in two, or just a crude sleight of hand trick!?
Is it possible to regain trust and restore confidence in the old system through simplification without actually simplfying anything...
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The thoughts below are from a shabby me, which may not be right.
1)The government can sell back to the banks the nationalised portions, and ask for the fees from the banks bit by bit. Some banks might be secretly confident of their finance ability. If they can really buy back the nationalised part from the government, the government can be discharged of quite a lot of burden.
2)Can the government use the money collected back from the part nationalised bank to buy some shares of the banks, which are at low price now, and which might increase value in future.
3)During the recession, the banks are more cautious to provide higher percentage mortgage to customers, although they are also eager to have more customers, who they can provide the mortgage products to and earn the profits year after year from the customers.
4)The government has expressed the plan to sell some state owned companies. Is it feasible for the government to rent some public facilities to private companies for tens of years?
5)The government can invest in buying shares which have great growth potential, for example, the shares in mining industry, natural resources.
6)The British government can negotiate with developing countries and win the engineering projects from the foreign governments. Then British government can invite bid from private companies in Britain. If this can be achievable, Britain can export techniques, management, services and labour abroad. Perhaps, the British government can issue some overseas engineering construction bond to British and overseas clients.
7)Can the British government export their democracy and management expertise to other countries and earn money from it?
8)The American companies have occupied much mobile phone technical market overseas. Can Britain gain the foot ground in overseas digital and satellite media market? This is part of the culture immerse.
9)To expand the internal market and stimulate the consumption desire of residents, can the government contract the use of water land to private fishing industry? This can bring up farming, forest, and fishing by product market.
10)Some retailers like to purchase cheap product from overseas, which may be at poor quality, and attract less consumption appetite of British customers. If favourable import tax policy can only be given to good brand product from overseas, it might lead capitalists to be less short term profits focused.
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This comment was removed because the moderators found it broke the House Rules.
This comment was removed because the moderators found it broke the House Rules.
Fiat currency is a paperchase to inkfinity and beyond, run by litteraaairy geniuses persued by relative wealth seekers as opposed to absolute ones ,where fiat currency represents the plastic cheese and bread that once adorned the windows in empty communist shops..
Providing that no one changes their spendink habits it ought to be possible for everyone to be a millionaaaire.
The secret is to give everyon a million pounds and offer them interest[maw paper] to save it rather than spend it.
Should the delusion of "earned interest" fail the shops will empty in the twinkling of an eye.
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Not moral hazard nor an oversized financial sector.
Capitalism is inherently unstable.
No other historical economic system has reduced output periodically without supply side shocks, e.g. harvest failure or war.
Only capitalism, through its internal dynamic of the rate of profit, periodically reduces output when there is still need.
It is capital accumulation in production that creates the fall in the rate of profit and hence the need for devaluation.
The credit system merely transforms this contradiction so that the financial crisis appears to cause a crisis in the real economy.
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We now see in America the tough action President Obama has taken against many of their Banks e.g. the huge reduction in salaries and bonuses. Why haven't Brown and Darling got the same courage to bring into line these scurrilous individuals who have wrecked the U.K. economy for the next several decades?
Before you accuse me of "Banker bashing" it is not about that. What it is about is demanding that the Banks take full responsibility for their irresponsible actions that led directly to this calamity for the Nation.
It is now suggested that the "debt" created, thanks to these Bankers is around £800 to £900 billion pounds. What I cannot understand is, if this is true, why haven't the Banks collectively been sent a bill, for the above amount, to cover the debt directly caused as a result of their past indiscretions? The Government have more than one way to recoup this money, if the banks refused to refund their debt.
Surely before any Bank can think of starting to hand out bonuses, they should first clear up the financial debt that U.K. taxpayers have been forced to pay to bail them out. Whether or not they received money directly from the tax payer is totally irrelevant. ALL Banks have survived because of the bailout. Had the bailout not happened, worldwide, then the banking sector would have collapsed - period.
The British Government ought to take a much more proactive role in forcing Banks to pay back this sum so as to free the U.K. taxpayer of this burden - they do not deserve. I suspect that Brown Darling et al won't, not just because they don't have the balls to do so, but they are probably looking for lucrative positions, within the banking sector, when they leave politics - by choice or by having been forced out.
Cheyanne (Spain)
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"37. At 4:38pm on 21 Oct 2009, talkinghorse wrote:
Q. Why did Brown,Mandelson etc. Bail out the banks and not the RM pension defecit?"
I think they still want to "Bail out" the RM pension, by bail out I mean take the fund into public ownership (wich dispite being 3-7billion UNDER Funded actually has real assets of 10's of billions).
Once the fund is in public ownership it will be "converted" into a standard Civil Service fund (ie one that is TOTALLY unfunded and who pensions are paid out of current taxation).
In doing so she will claim that has saved the world etc, but what he will actually doing is a slight of hand converting a fund into a long term liability and hence freeing up the actual assets (some where between 20 and 30 billion) to reduce headline goverment debt or for some last ditched vote grabbing policy!
After all Civil Service pension libalities are off book and NOT listed in his published debt figures.
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Best wishes Robert, I've missed you and now I look forward to having you back on your extraordinary column.
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I don't understand how it's legal for the company to have undeclared debt. Do private companies like BP, Microsoft, or Honda get to use the same slight of hand?
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It appears that despite the constant spin coming out from the centre about the recession being over in the last month or so that we are still in recession and that Q3 growth was -0.4%.
I'm coming to the opinion that we are heading for a W shaped recession with a very small pick up in Q4 before the increase in VAT and the Christmas bills in Q1 2010 followed on by the impending tax rises and public spending cuts in 2010 bring us back down again.
Robert, I fear there will be much more for you to write on a pessimistic rather than optimistic note when you return.
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There are a lot of financial geniuses (genii?) out there so can somebody provide some figures please?
If Lloyds is at one pound, and is said to be going to do a rights at a 40% discount, ie 60p, what will be the likely ratio needed for them to obtain 11bn? Obviously one would need to know the current total capitalisation. Would it be in the region of 1 for 1, 1 for 2 etc.
Just rough figures and I apologise in advance for using the board for investment purposes, but you get so little information on these things and it might help others.
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Post 122, there are 27,161,682,000 shares currently issued in Lloyds (see link below)
http://www.lloydsbankinggroup.com/investors/share_price_information/detailed_share_price.asp
Assuming a share price of GBP 1 to make the maths simple to raise GBP 11 billion at par (i.e. current share price) would require an additional 11,000,000,000 shares to be issued making the total issued to approx. 37 billion.
At this price of GBP 1 there would need to to be a 1 to 2.5 share issue i.e 1 new share to every 2.5 currently owned.
If the rights issue was discounted to 60 pence then there would need to be 18.333 billion additional shares issued or approximately 2 new shares for every 3 currently held (its actually 67.5 new shares for every 100 held but you get the gist).
Hope this is useful.
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Ahhhh, shame...
http://news.bbc.co.uk/1/hi/business/8321970.stm
...and all hopes were pinned on a 'technical recovery' being announced today.
It wouldn't have mattered if the 'technical goal' was scroed and we had a slight increase in growth - print 175 Billion new notes and shove them into the Economy and what do you expect?
It's actually very concerning that we have had low interest rates for more than a year and QE - and still there is no growth
You may accuse me of being a doom-monger, but this is actually worse thaneven I was expecting.
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@ 112. At 00:17am on 23 Oct 2009, dewonflower wrote:
... "Can the British government export their democracy and management expertise to other countries and earn money from it?"
I believe they're running some marketing trials and focus groups on this concept right now in Afghanistan and Iraq - it's a whole world of opportunity for the entrepeneurially minded.
Mind you, Mr Brown and his chums won't be handling this little start-up project personally you understand, they have nobly delegated to our armed forces the task of seeing how this flies with the locals.
Anyone serving with the forces shows more courage every day than Mr Brown has ever shown in his entire career.
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Banks can pay all the bonuses they like - once they've paid off their debt to the taxpayer. Instead of working out how they can shave £1bn here and £1bn there off spending, why don't the government enforce all the banks who were bailed out to pass on all their profits back to the Treasury? Some of them are making billions again so the national debt would plummet a lot quicker this way than adding an extra few percent on tax or lopping a couple of billion off defence.
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Moral hazard, as I understand it means that the banks can do as they like because the know the state will not let them go bust. De facto, that IS the case! Surely if it is then all or a proportion of the banks balance sheet should be counted as a liability against the national debt of the country hosting that bank. If that was then case then you wouldn't get big concentrations of banks all inone or two contries....the host countries simply couldn't afford it! That then may mean that the banks become more spread out amongst the big ecconomies, thus spreading the risk to host ecconomies, and that those ecconomies took a very real interest in what types of risk the banks were taking, since they were basically their insurance policy. Now, I'm a humble business man who runs an SME, but why wouldn't the following solution work namely to make the rules so that host countries to banks were officially the insurer of the banks customers (as in reality they are) and to make sure the banks balance sheet was accounted for in the host countries national debt.
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I think the issue with bankers bonuses has been misunderstood and fails to recognise the problems faced by the people who own banking corporations.
How else can you attract someone to work hard in a business that
a) is detested or else regarded as a necessary evil by many of its users
b) is regarded as sinful or evil by many religious traditions
c) exposes the worker to the risk of prosecution or worse if the political climate should change
d) no intelligent, capable, idealistic young person aspires to work in
I think those bonuses will be around for a while....if only to keep consciences asleep
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123 Ian
Thank you. That is really helpful, and as clearly put as I have seen it.
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Very interesting stuff. It seems something has to be done sooner or later as the current situation has left the tax payer paying for everything.
Not only are out taxes being used to support these giant institutions that have gambled away all of our money, but if this article is anything to go on, it seems we are being indeirectly taxed via the current solution as well.
http://wwfp.net/weekly-articles/commercial-finance/16-oct-2009.htm
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124 writings......................What next?
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It is a MAD, MAD, MAD, MAD world.
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125. At 10:59am on 23 Oct 2009, magnetic_monopole
Ah yes, but the early trials are not going so well are they.
Poor turnout (possibly because you risk your life), electoral corruption, people told how to vote by local warlords and a re-run because the first result was unreliable.
....looks like bringing 'free and fair elections' to Afghanistan isn't going to plan.
I'm sure they won't thank us for bringing our version of democracy to their country - what will we taint them with next, our version of Economics?
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Mervyn King came out and called it ‘delusional’ for government-supported banks to be allowed back into risky trading activities, at the same time RBS for one appears keen to do all kinds of investment banking deals Bank of America-Merrill Lynch lost faith in, by harvesting their hotshot traders, guaranteeing bonuses. Already RBS’s dud rights issue sub is looking unlikely to produce a dividend, perhaps they need reminding that the moment that they took taxpayers’ money they became a public institution held to a new set of standards. Or to put it into perspective, imagine your local MP lost a hundred million of the government budget in a bad city investment all the while voting themselves a pay increase
Meanwhile the gallery of rogues is coming along nicely. Bernie Madoff will serve out his days in jail, Nicholas Levene is rumoured to be in the Priory clinic with 70m of shareholders’ investments allegedly gone missing, Cioffi and Tannin are on securities fraud charges from their two 2007 sub prime hedge funds collapse, and Raj Rajaratnam has been led away over allegations of using a network of contacts to collect advance deal information. Looking ahead, AIG-created products are under close scrutiny here in Britain and could lead to arrests. All coinciding with a headline of record recession for the UK economy.
Best wishes Robert.
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Pokerlovintaxadviser
"enforce all the banks who were bailed out to pass on all their profits back to the Treasury".
I am sure you would not have included Lloyds in that, which was, in my view, conned into taking over HBOS "in the national interest" (following a "chance" meeting between Gordon Brown and Lloyds chairman Sir Victor Blank) and which now finds that all the people who went along with the monopoly-creating deal like the Treasury, the FSA, the MMC, Neelie Kroes etc are acting as if Lloyds was the guilty party.
You might think that Lloyds and its shareholders were stupid, and there is some merit in that given the lack of due diligence and the failure to stop the bid in January even though some of the horrors must have been evident. Small shareholders like us were putty in the hands of the big pension funds and other institutions who had shares in both banks and saw the takeover as a way of saving their HBOS bacon. The fact that none of us took up one of the rights issues at 1.73 when the shares were trading at around one pound (all the shares went to the Government) shows you how crass this whole episode has been. The next rights went at 38p per share, which smacks of a scatter gun approach to funding if ever there was one.
One day all this will be over, and we will get back to having banks without any of the baggage or the negativity. Before that the best solution is for the Government to treat RBS and LLoyds as if they were their own (70% and 43% is good enough for that purpose), and encourage them through to soundness. (Fair) profit will equal a higher share price. That will mean greater value for the taxpayers' shares and the opportunity to sell on the public shares in due course.
In the end all that will mean successful banks and shareholder dividends providing vital tax to the Treasury to help pay down our debts. Or go your way and completely nationalise them. Which is what the party in government used to do when it was more socialist than Mr Brown and his chums.
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Seeing as it's a good day to bury bad news....I won't allow it.
Many Economic stories are coming out today which are suitable covered up by the BNP furore.
This one in particular - expected aproval by the EU to split Northern Rock ahead of a possible sale.
....but wait a minute, we split the bank into a 'good bank' which is making money and a 'bad bank' which is not.
The 'good bank' will be sold back to the private sector to continue making money and guess who is left holding the bad bank?
That's right, all the taxpayers - just stabbing the moral hazard in the eye one last time.
what's the betting that the good bank will be sold back to the private sector 'at a profit' so the Government can laud over it's genius. Unfortunately the bad bank has no way of making money and we will end p loosing every penny we make as the defaults come rolling in.
I really don't know why they bother, it's so inefficient.
What the Government should do is to come round to everyone's house and demand £3000 each to cover the expected loses at the bad bank. Anyone who refuses gets beaten up by security forces (under the prevention of terrorism act) and their families taken hostage until they pay up.
It might sound harsh, but at least you will know you're being robbed blind - this long winded way of good bank and bad bank gets the same result - but there is a lot more fuss and paperwork!
How can a bad bank do anything but fail if you disect it from the good part - i.e. the part that might actually offset the bad bit?
Every bad bank we take on will simply be converted to a loss for the taxpayer - luckily this will be over time so hopefully no-one will notice....
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131. At 2:00pm on 23 Oct 2009, JavaMan1984 wrote:
"124 writings......................What next?"
I shall have to do what an "economist" does and downgrade my forecasts - god that's depressing - I really didn't think things would sink that low.
Decimation, Decimation, Decimation - that's what you need.....
if you wanna be the best, and you wanna beat the rest oooo-oooh decimation of your economy is what you need....
....if you wanna be a record breaker - yeeeeeaaaaahhh.
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All the best with the personal stuff Robert.
Does anyone actually believe that either Mervyn King or Adair Turner will actually do anything to alter the behaviour of the investment bankers.
Even if the banks are split down the bankers will still strip massive bonuses during the good times and will be long gone before the chickens come home to roost. You're all still living in cloud cookoo land.
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134. At 2:14pm on 23 Oct 2009, peterdough wrote:
"Meanwhile the gallery of rogues is coming along nicely. Bernie Madoff will serve out his days in jail, Nicholas Levene is rumoured to be in the Priory clinic with 70m of shareholders’ investments allegedly gone missing, Cioffi and Tannin are on securities fraud charges from their two 2007 sub prime hedge funds collapse, and Raj Rajaratnam has been led away over allegations of using a network of contacts to collect advance deal information. Looking ahead, AIG-created products are under close scrutiny here in Britain and could lead to arrests."
Trust us, Trust us - come the cries from the financial world......
"We don't need no regulation....
We don't need no thought control....
Treasury! - Leave those banks alone."
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And ticketyboo to you too Robert.
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Does anyone find it a little frightening how slowly the government responds to public feeling? They are so far out of touch it's ludicrous. It has gotten to the stage where almost every single statement issued by the government is assumed to be a lie until proven otherwise. The real problem is the current Labour government have so tainted politics, that my generation (Current university students) have begun to assume that spin and half-truths are what government is actually about.
I've been reliably informed by my parents that there was once a time when people might believe politicians in the same way people still have faith in a doctor's opinion. It was just assumed that when it really mattered they would be honest with you. I don't think anyone believes that anymore, and when our trust has been so irrevocably broken it makes it hard even for the few remaining honest politicians to be taken seriously.
A case in point is Alistair Darling's most recent comments about the UK economy. They are so obviously based on nothing but wishful thinking it would laughable if it wasn't actually happening to us right here, right now. Imagine how unthinkable it would be if another public servant, say a surgeon for the NHS, told you: "Yeah you've got pancreatic cancer, but don't worry about it, you'll be just fine I'm sure." Or just didn't even give you a diagnosis at all. Alistair Darling is pretty much doing just this.
Does anyone see a way out of this ever-perpetuating spiral of what amounts to institutionalized government deceit?
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The economy is so bad now, I went to my bank the other day and the bank teller handed me a note saying, "This is a robbery!"
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136 Writingsonthewall
I am not sure I can buy into your thesis at 136. We own it all, good parts and bad. We are stuck with the bad whatever happens because the government couldnt let the bank fail and screw up the whole system (their take on what they did). People out of jobs, people with investments unable to get their money back (for which I assume the government would have become liable?), people with mortgages etc etc. As I have said with LLoyds and RBS, if you have a dud but you can get some money out of part of the dud what else can you do but build up the good part and sell it on. The key here is to make sure that they get enough money from the good part of the dud to help offset the losses on the bad part. Does that mean selling now, or should they do a complete separation (ie call the good part something imaginative like Northern Rocket?). Why let some spiv pick it up on the cheap now and make all the profit that ought to belong to the taxpayer?
You can call the second part N Othing and just take the medicine of writing off all the toxic assets, rather like good old sound and prudent Lloyds shareholders are doing for their HBOS dud.
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And now for something completely different. Or not. The man who by some stroke of genius managed to get his firm's name on the Brawn World Championship winning car has applied to the FSA to have Virgin Money set up as a bank. How long will it be before we have a Northern Virgin? Or a Bradford and Branson?
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His characterisation has been incendiary: "never in the field of financial endeavour has so much money been owed by so few to so many - and, one might add, so far with little real reform".
>>>>>>>>>>>>
It looks as if M. King had been reading the last ten months posts on your blog before writing his own speech as many receommendations and comments are reflected in his comments. Of course, he didn't need any help in practice and his frustration is showing through.
Surprisingly perhaps, the one point that King and Turner have not mentioned, I believe, is the prospect of there being more than one national interest rate - if this was analysed properly and the banks required to hold separate accounting systems for the trade then this would naturally split the banking business between activities and give e.g. the bank of England more control over e.g normal mortgage lending as opposed to savings rates as all elements of the banking systems could under-pin better saving s rate as a result with riskier sections of banking putting more back to savers.
The other issue is what if anything has King/the BoE learned from the ongoing crisis?
I would ask him to consider:
'Never in the field of central banking have a few central bankers miscalculated both the amount and timing (delays) of crucial central bank lending rate alterations to the detriment of so many ordinary taxpayers'
The BoE were much too slow raise interest rates when the property market was over-heating and much too slow to reduce interest rates when the market fell off the cliff - but will this become his epitaph over the next few months in the back drop of todays recessionary GDP figures?
Danger Mouse Darling has kept some QE money back to try and boost the last quarter 2009 GDP figures as timed wity Christmas season in the hope that consumers are holding something back in regard to their mid-winter spending.
Should we expect an earlier than expected general election next year? If the final quarter 2009 GDP figures are negative (and which they almost creatinly will be without fiddle-diddle QE monies) - then the election will I think be in June 2010 unless there is strong pick up in global demand in Jan/Feb 2010 making it worth waiting for better 1st quarter 2010 UK figures on the back of any improved global demand and hold the general election April2010
If Danger Mouse can fiddle the 4th quarter 2009 GDP figures to show growth as he has predicted then the general election will I think be in February 2010 as there will be no point delaying and getting any further bad news as a double dip effect.
My guess is that we're still on for a June 2010 general election as I think that Danger Mouse Darling has got his figures wrong and the UK economy is in very poor shape indeed.
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#144 majorroadaheadagain2
A bit depressing that Branston wants a bank. But quite understandable.
Who wouldn't when you consider the benefits:
The power to magic money out of thin air.
The ability to make some companies succeed whilst others are left floundering about trying to get funding.
Continuous stream of folk wanting your product.
Being able to fleece those folk.
And the downside?
None really. Just having to grovel a bit to the government if some of your loans look like they will never get repaid. And then of course the ignominy of having to accept IOUs from the rest of us. Oh the shame. What a laugh. All the way to the bank. Oh, it's my bank. Ho ho. What a clever chappie I am. Please let me start up a bank..
This government will of course likely grant him a licence.
It will look good on their record and will help them to inflate the economy on the run up to the election.
I note that no one has yet picked up on my observation that the state banks - Lloyds HBOS etc are effectively funding construction companies. What is the status of these private companies? They would not exist without our government's largesse.
Are they private companies or nationalized?
Either way they have money and can do no wrong.
They can pick up distressed assets ready to make future profits.
When they will show private company status..
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Great to see you're back - a voice of sense in the wilderness. I am very interested in your views on non-value-added activity.
As an engineer, I try to relate what's happening to real-world metaphors - although no doubt the money men would accuse me of being over simplistic.
If an engineering system vibrates too much it shakes itself to bits (see Tacoma Narrows bridge disaster). If you want to prevent that - you have to deliberately 'damp down' the vibrations by restraining the structure (as in the Millenium Bridge).
So why is it so difficult to do this to the financial world? Surely taxing derivative trading / CDS trading etc is the right way for society to get control of this monster. Why are the politicians so limp in pushing forward reform.
When I graduated as an engineer in the 70's, a close buddy of mine went into the city and has since become a 'big cheese' and made a fortune. I remember him saying to me 'don't ever do engineering - you'll never make any money'. Loosely translates as 'only fools and horses work'. How can we call time on these 'Dell-Boys' who are shaking our hard-earned prosperity to pieces with their unashamed greed?
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It seems to me that the simple act of increasing the statory capital requirements of financial institutions would solve a number of problems. Firstly it would provide the institutions (and the taxpayer) a larger cushion in case of disaster; secondly it would suck up a large chunk (or all) of the profits currently available for bonus distribution; thirdly it would probably increase shareholder value; fianlly it would provide the powers that be an extra lever to pull, either decreasing the requirement if the time was right or indeed increasing it again.
It is imperative in my view that the Institutions should be able to cover more of their own potential problems. What am I missing?
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The return of the Glass-Steagall act is the only way to guarantee the safe future of banking and the economies who rely on them. As lord Adair Turner recently said much of the Commercial banking that takes place, gambling with funds raised in the Retail banking arm serves no other purpose than creating unearned bonuses for bankers and illusionary tax takes for Government.
In a surreal world created by Gordon Brown when he deluded he had done away with "boom & bust" and on the suppositon that the stock market would always rise, he did away with the tax credit on pension funds. The carnage this did to the pensions of those who worked in the Private sector was lost on him as he threw money at his favourite Public Sector.
So the lunacy continues, in a week when it is confirmed the Country is still deep in recession the banks, many of them only standing now because of Taxpayers' money, prepare to pay out record Christmas bonuses. Lewis Carroll would be considered a novice in creating fantasy when compared to what Gordon calls PRUDENCE.
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#148 GRBarath
You are right of course but the financial sector employs more than just bankers.
Instead of holding capital the bankers insure against having to draw down on capital reserves. Hence another layer of financial engineering - and workers.
It still all goes wrong of course - look at what happened to AIG for example.
The main thing though is for the bankers to make money whichever way they can.
That usually means fooling the regulators into thinking that the bankers know what they are doing.
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You are all mad.
FSA, BofE, HMG and even HRH do not have any influence over the city.
They will carry on as they want.
Money is power and we have given it all to the banks.
I'm sure Sir Fred feels like he has been savaged by a dead sheep to quote a politician who have all the authority of the said sheep.
They will pay exactly how high bonuses they want to and they will be obscenely enormous again.
Only the the common mugs like me trying to scratch a living out of manufacturing and paying my meagre taxes will suffer again.
Only fools and horses indeed.
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Makerofsense
Shame you said "you" rather than "we". I agree entirely about the plight of manufacturing but then we have abandoned making things for the past thirty years. Unlike our friends the Germans.
Incidentally, mad or not, I think you are wrong about them paying obscenely enormous bonuses again. Even the Government is going to have to do something about it and I think they will, hopefully in time - they know that the bankers are regarded as worse in the public's eyes even than Griffin and there is an election coming up. White coats anyone?
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I hope it's nothing serious Mr Preston.
I would like to share this if I may, I could not stop reading until the end, for myself at least it was a real eye popper, from RollingStone Magazine.
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1
Could it really be the greatest fraud of all time?
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To decrease the shocks of the volatility in the world foreign currency market, some fast developing country increases the gold reserve in the central bank.
To stimulate the economy, the projects with low cost of investment but big potential GDP growth effect will be the best solution. I always think that Britain has great potential to be explored further in agriculture, river fishing, and management service provision industry. Can the government organise a council project team to lead the business in these areas?
Can retail shops open in the evening in medium sized cities? How can people with work go shopping in day time in weekdays?
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dewonflower
Most of the them would be delighted to open at any time of the day or night but in our Surrey town they are all closed for ever. 50% boarded up.
Eventually when everyone buys what they need on-line there wont be any shops, and our great-grandchildren will ask their parents "what's a shop daddy?". I was going to say there will just be shops attached to garages, but then there wont be any garages will there? "What's a garage daddy?"
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Mr Peston. Dont you have internet at home? :)
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Flabergastingly, even a blnd monkey could make money in such a depressed share market, the rest of the world is REALLY comng out of recession. So why the bonuses. Bonuses paid every 5 years perhaps - rewarding loyalty and consistency - then they can be mega Euro ones (the pound will be worth nothing in 5 years btw).
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According to the Telegraph this morning UBS has issued a note saying that LLoyds is at least 50% undervalued.
I dont know how these people do their sums. As far as I can see the trouble with RBS, Lloyds, Northern Rock etc is that nobody knows anything about valuation. Not the government who owns large slugs of them, not the brokers trying to assess them, the regulators who are looking to see whether penalties should be imposed, not the Treasury who are trying to run our economy and, worst of all, the management of the banks themselves.
I cant see how anyone can do anything until a proper analysis has been made. Obviously the level of damage may change from day to day as property markets change or the economy improves, but there ought to be a range of values according to circumstances. Goodness knows how Lloyds ever carried out even the barest due diligence before taking over HBOS.
The sums of assets that could be put into the APS for Lloyds vary up to 300bn. That would be something like ten times their market value? Of course, the ultimate right-down might be next to nothing, given the huge sums they have already written off. But to come out and say that Lloyds is undervalued by as much as 50% seems to me to be a bit odd.
It is time for the public to have a better handle on all this, so that we at least know something about how much we might be in for.
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153. At 01:26am on 24 Oct 2009, VFRMarK wrote:
I hope it's nothing serious Mr Preston.
I would like to share this if I may, I could not stop reading until the end, for myself at least it was a real eye popper, from RollingStone Magazine.
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1
Could it really be the greatest fraud of all time?
>>>>>>>>>>>>>>
Great story!
Must in all probability have been the result of senior/inner management sleaze - and insider trading which of course is illegal in the US and elsewhere but of course nearly every banker does inside trading and gets away with it - because of weak regulation of the financial sector.
Keep 'em coming - great story!
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Why does it need to be 'the radical way'?
If Government simply changed the rules about whether banks qualified for (i) government depositor protection and (ii) ability to issue 'fiat' currency from created debt (for which government have to license them) such that banks with 'casino' investment arms would NOT qualify - then the banks would split themselves up quicker than you could say 'integrity' (most bankers have difficulty with this word).
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Re 145:
if you want the Q4 2009 figures to show growth, you don't fiddle the Q4 figures - what you do is to fiddle the Q3 figures to suppress growth and then simply 'reveal' the growth later. It is much easier to suppress growth that to create it!
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It might help, Roberto, if the next time you are on the TV News, you explained to the licence-payers that all the bonuses being creamed by the bankers come from three sources:
Your future pension
You current savings
Your children's public services, education, healthcare.
Bank reform is now a year too late, and just ‘cos Merv. makes a few sensible comments to an audience in Edinburgh, doesn't mean that much to me. I want to hear him say 'I banged my fist on the table at No. 11 & told World Statesman of the Year and his sidekick exactly what had to be done!!!!!!!, and then I lost my temper'
Regards,
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161. At 4:26pm on 24 Oct 2009, svrsig wrote:
Re 145:
if you want the Q4 2009 figures to show growth, you don't fiddle the Q4 figures - what you do is to fiddle the Q3 figures to suppress growth and then simply 'reveal' the growth later. It is much easier to suppress growth that to create it!
>>>>>>>>>>>>>>
Interesting and good point, but as the Chancellor has predicted growth by the fourth quarter and if e.g. he is aiming to do this by suppressing 3rd quarter growth then is he not fraudalently fixing both the third and fourth quarters growth?
My guess is that the government has found it difficult to massage the figures to get close to zero growth in the '3rd quarter' and will now throw everything it has left and even borrow more money to fiddle the last quarters figures to try and yell that the 'recession is over'.
Even I do not accuse Danger Mouse of fiddling everything that he touches (because the matter is a closely guraded government secret) but I do smell a rat on UK Government growth figures - they really do look very well contoured and/or are politicised rubbish and need to be presented as having all of the stimulus monies stripped out, to show the true state of the UK economy. But why are the opposition parties staying quiet on this - Vince Cable particularly?
To my mind, this equates to the same thing - Danger Mouse is staking his reputation and a great deal on his year end prediction and the Q4 GDP figures will determine the date of the general election.
But if he gets it wrong - Will anyone 'bat an eye'?
Thanks for pointing out the option - but I think that the true position is unknown outside of HM Treasury (unless Stephanie Flanders is hiding something very big from us?)
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It that the Gov and their advisers have made a very simple error. They are allowing the Banks, whatever they say publicly, to start paying huge bonuses yet again. This seems to me a continuation of the disaster that occurred after Regan and Thatcher decided Banks could act as principles.
What we have seen is an increased Risk profile adopted by the Banks as they lend(through whatever instruments) and collect large fees at the same time. I think this can be related to the highly leveraged chains that have operated in the Retail Sector, and indeed hospitality sector. So Banks had 2 bites at the cherry-fees and Interest. It is notable that over the last 10 years it has been increasingly hard for small businesses to raise funds and I believe the Gov was fully aware of this- hence all the Government funded Small business loan schemes available until recently.
Maybe the Government have been fully aware for the last 10 years at least that the major providers of funding have been more interested in the "Big deal" that involved their brokers, Corporate Finance and Lending divisions. As the compete for business salaries and bonuses have gone sky high, and small businesses have been deprived of funding.
In my opinion the Government should have let some of the Banks fail, and used the Nationalised Bank to pick up the pieces. They certainly should not be allowing State funded Banks to compete in the Corporate Debt market, paying these huge salaries and bonuses. It is obvious that salaries will fall over all if there are fewer in the business, across the board, as there will be fewer opportunities for employment unless you set up your own firm. Some will earn more, many would earn substantially less. Set up you own firm, take the risk-no problem
High Street Banks should be that lending to the businesses in their region and dealing with the public. By allowing Banks, with huge Capital Access through retail customers, and then basically gamble the money was a fundamental failure, and grossly unregulated. I think the so-called mortgage companies, then gambled because they had to compete in the cash market for funds and provide returns to the parent company/investor. So everyone got caught up in trying to make huge returns compared to the City, which were never realistic.
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The root problem, spiralling debt, has not been addressed.
Worse still, it has been aggravated by creating more debt.
Failure is being rewarded and success penalised. The latest example is the awarding of bonuses to state bank leaders for their success in picking our pockets, while people who have worked and saved all their lives see their savings stolen or devalued.
Radical reforms are indeed required.
Banks should be made to function as banks, and forbidden to engage in gambling activities. That is not their province.
First however, the criminals who knew what was going on and participated in the grand larceny should face trial.
It goes without saying that the next bank that blackmails the government by threatening to turn the ATMs off, should be allowed to fail.
It also goes without saying that Parliament should be dissolved and an election called, so that we can get rid of the crooks on both sides of the house.
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Thanks for an illuminating summary. For me the greatest immorality lies in the vast web of financial trading that seeks profit without responsibility, fosters inequality, and creates the fundamental instability that we are all paying for now. I'm with the FSA - but vested interests will surely prevent real reform.
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Welcome back, Robert.
I'd support both what Kind and Turner have proposed. The banks need some good old fashioned regulation. One thing that I find constantly annoying is how the banks (and for that matter any overpaid, self-interested person) are always able to hold up the threat of moving their business elsewhere, to scare off government. Sure enough we hear government repeating the banks' mantra of global action being needed, which, of course, the banks know is impossible to agree. So they fool the government again. What the government needs to realise is that we can do without such a big banking sector, however much tax they might bring in. They single-handedly threw us into a recession and period of slow growth with no end in sight. The government needs to act unilaterally, or at EU level, and stop waiting for the impossible dream of international action. If they don't, the Tories - in the pockets of the banks - certainly won't, and nothing will change. A horrible thought given the amount of damage the banks have done to the economy, and so many ordinary peoples' lives.
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Sproutsy 167
We can do without a big banking sector however much tax they might bring in"
I think your first point about regulation is exactly right, but it is too late for your second. Unless you mean reducing banking to good old fashioned ins and outs, a bank manager we know and talk to, and nothing spivy. But if the finance sector is 25% of our GDP (someone will correct me on that one) how can we do away with the bit that really needed regulating like underwriting etc? How much do we stand to lose from foreign competition?
Look at Lloyds and the people who are going to underwrite their rights issue, like UBS, which I believe this week issued a note saying that Lloyds is undervalued by 50%. A lot of bonuses out of that one, but it is a Swiss bank so we dont get any tax out of whatever they make. And should we not ask if this might be a case of someone with a vested interest not being allowed to make such prophesies which might be construed as talking up their own book? Why should we use a foreign bank to underwrite a bank 43% owned by us?
I dont understand any of this, but I do think once all this nightmare is over we have to get back to earning money to wipe off our debt and I have grave doubts about any meaningful increase in GDP coming from manufacturing. I hope I am wrong.
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There are a lot of highly intelligent people on this board who know much more than I do about these matters. I wonder if someone would explain something really basic to me?
You hear a lot about sub-prime and all these packaged assets changing hands many times over until, like musical chairs, someone on the end is stuck with the dud. If a mortgage for a house in Boston is packaged in this way and finishes up after going through five sets of hands in the books of, say, RBS is this toxic asset in the books of RBS completely naked through to the first mortgage, with all the others having nothing further to do with the transaction? If so, when you hear about packages of such assets how is all this unravelled so that Mrs Dewitt in Boston is chased up by RBS?
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Robert
I really despair at the state of the economic debate in this country at the moment. The prime concern has to be to get the economy out of recession and Friday's GDP figures were a huge setback. While the Government's support to the banking industry and the reductions in interest rates and taxes all helped to avoid the liquidity shortfall that, hopefully, will stop the recession extending to a depression, now is not the time to pull the rug. The UK economy is still in a very sick state.
This is not the time for our politicians to go around talking about tax increases and slashing public expenditure and debt. It is not the time for the Governor of The Bank of England and the Head of the FSA to worry about moral imperitives in the banking system and credit markets. It is not the time to raise minimum monthly payments on credit cards to 5% of outstanding balances and it is not the time to hike VAT back up from 15%. Those responsible still need to do everything they can to continue to stimulate the economy for some time yet and even then we will still have to rely on recovery in other economies to drag us off the sick bed. The onus has to be on building the consumers' confidence, not on scaring them to withdraw into defensive positions, the effects of which could well be catastrophic.
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I'm no banker by any means but is it too simple to only pay bonus payments on successful deals? Surely this is how the rest of us operate. Admittedly this may mean waiting a couple of years but if your confident of the result surely money in the bank in 2-5 years time is better than the destruction of an enitire financial institution.
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# 169. At 12:44pm on 25 Oct 2009, majorroadaheadagain2 wrote:
There are a lot of highly intelligent people on this board who know much more than I do about these matters. I wonder if someone would explain something really basic to me?
You hear a lot about sub-prime and all these packaged assets changing hands many times over until, like musical chairs, someone on the end is stuck with the dud. If a mortgage for a house in Boston is packaged in this way and finishes up after going through five sets of hands in the books of, say, RBS is this toxic asset in the books of RBS completely naked through to the first mortgage, with all the others having nothing further to do with the transaction? If so, when you hear about packages of such assets how is all this unravelled so that Mrs Dewitt in Boston is chased up by RBS?
>>>>>>>>>>>>>>>>>>>>
It is unravelled by a Bank such as RBS holding a portfolio of so called securitized assets with possibly a couple of thousand individual mortgage debts in the portfolio.
The fact that the mortgage may have been passed around several lenders shows that the Finacial institutions do not want to touch the debt with the proverbial barge pole and in practice, the banks do not have the time to review the debts in detail as this is very time consuming and unproductive.
'Unravelling' as such is mainly when the borrower defaults on the loan and the bank forecloses on the loan and repossess the property. Then the borrower is dealing with real vultures and in the US - potential buyers of defaulted property get zero sympathy and potential buyers are bussed around by realtors and given do-nuts and coffee as part of a vulturised circus.
The issue is that how did e.g. come to own the 'securitized asset' - by gambling on a risky asset withot carrying proper due diligence and risk assessment.
The last bank holding the securitized asset is probably unable to dispose of the portfolio or even the individual foreclosed property in a very weak property market, except at a huge discount to the original purchase/loan prices - losses can be as high as recovering 20-30% of the original loan price in the US, in the worst affected States in the mid-west US (probably not in Boston, MA).
RBS have ended up as the dumbos with their holding too much of this securitized mortgage property - they were still buying these toxic portfolios when US banks were reducing their own holdings on these bad loan portfolios. It is quite amazingly bad business for RBS and other 'British banks' (if there is such a thing as a truly British bank).
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Nautonier 172
Thank you for taking the time to explain it. I am grateful for the clarity of your post. Looks like we were seen coming in our greedy scramble, which as you say makes our banks the dumbos particularly if as you say we were still buying them whenthe Americans had washed their hands of them.
It makes me wonder when Brown, Darling, King, Cable, Osborne, the FSA, the Treasury etc etc think about all this utter nonsense why not one person who could have blown the whistle said "what is this, how does it work, what are the downsides, and above all else what happens if the property market crashes? Regulation now is about three or four years too late on this issue but at least we can avoid it happening again.
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Accounting/accountability was the answer to the problems, The GAAP - well look at the disastr that is - The Accounting world itself was in turmoil over an accounting standard called FAS 157. It arrived and every economy in the world went pear shaped. This link is to accountingweb http://www.accountingweb.com/blogs/evalang/bv-girl/fas-157-dead-long-live-topic-820 a website by accountants, the top accountants, for accountants. I quote from Eva Lang, aka BV Girl, a member of the AICPA Business Valuation Hall of Fame. Eva discusses hot topics, practice management concerns, and technology issues that affect business valuation and litigation support practices.
" FAS 157 Is Dead, Long Live Topic 820. I would venture to say that FAS 157 has been the most controversial statement ever to come out of FASB. This fair value standard has been blamed for the current recession and there is increasing pressure on FASB to change it. So change is coming. The first change is the name – FAS 157 is now Topic 820. Other changes to FAS 157 – excuse me, Topic 820, are more substantive. Most of the changes deal with Level 3 inputs and includes the following new disclosures: .......
FASB. This fair value standard has been blamed for the current recession and there is increasing pressure on FASB to change it. So change is coming. (AGAIN)
There is a huge problem with the concept of GAAP, let alone the implementation. Eva Lang, aka BV Girl
is a top tier, heavyweight in accounting. The practice of mark to market as an accounting device first developed among traders on futures exchanges in the 20th century. It was not until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals. Former FDIC Chair William Isaac placed much of the blame for the subprime mortgage crisis on the Securities and Exchange Commission and its fair-value accounting rules, especially the requirement for banks to "mark-to-market" their assets, particularly mortgage-backed securities. [Unsuitable/Broken URL removed by Moderator]
Fundemental economic assessment of the role and practice of Financial derivative markets needs to take place. They contribute nothing to the real economy and simply leech value away. What FDIC Chair William Isaac is saying is a broad view of matters one year ago - the problem continues, the problem is systemic BECAUSE it is a fundemental issue. It requires a fundemental review. FAS157 has become Topic 820, what more is there to say. Super Gnomes are playing god! [Personal details removed by Moderator][Unsuitable/Broken URL removed by Moderator]
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Have you ever tried nailing jelly to a wall? The practice of mark to market as an accounting device first developed among traders on futures exchanges in the 20th century. It was not until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals.
As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available or the asset value was derived from other traded commodities, such as crude oil futures), so assets were being 'marked to model' in a hypothetical or synthetic manner using estimated valuations derived from financial modeling, and sometimes marked in a manipulative way to achieve spurious valuations. See Enron and the Enron scandal.
Simple Example: If an investor owns 10 shares of a stock purchased for $4 per share, and that stock now trades at $6, the "mark-to-market" value of the shares is equal to (10 shares × $6), or $60, whereas the book value might (depending on the accounting principles used) only equal $40. Similarly, if the stock falls to $3, the mark-to-market value is $30 and the investor has lost $10 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.
Internal Revenue Code Section 475 contains the mark to market accounting method rule for taxation. Section 475 provides that qualified securities dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions).
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The net effect of a spread bet over its contract is very different to placing value on a component of that bet at a fixed moment. The concept being nailed to a wall is dynamic, it values out over a term.
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Implications. The scale of losses is staggering but still not understood properly. The process measured by FAS157 was fundamental mental funding. It was insurance, dynamic risk spreading and profit taking in the moneterary economy which is funded from the Real Economy. The Classical Dichotomy is real. It is a truth of our lives and economic system. It has been broken. The monetary losses are leeching value and reward from the Real Economy and the scale of it all is amplifying across the entire Real Economy because that was the concept behind the Derivatives markets. It is Insurance and Banks were using the idea to buffer their Capital Requirements which is what happened to AIG.
The problem is of a scale such that it is prime, economic equations have been altered and liquidity rules because value will decline, constantly. Nothing remains except profit, cash is king and his new invisible suit.
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Bankers look at the situation they are in and then try to find a way of maximising the profits they can make, usually short term.
So we have to realise that we cannot beat them in the short term.
The way to regulate them in the long term is to increase their capital adequacy requirements.
Companies declare profits at the end of their trading year.
They pay bonuses and dividends out of those profits.
No profits declared - no bonuses and no dividends.
A quick look through their declared accounts will show both their profits and also their capital adequacy.
If they have been clever then they will have made loads of money without much in the way of capital adequacy. Good for them; but increase their capital adequacy for next year by a known, fixed factor. Increase = K multiplied by profits divided by capital adequacy.
Those banks being cleverer than the rest will have to increase their capital adequacy more than their peers.
Pretty soon the bank bosses will self regulate due to them having to raise fresh capital if their underlings have been too clever.
Banking will return to being boring.
Is this scheme artificial?
No more so than the present system. And the present system does not work.
All that is left to be done then is work out the value of "K".
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Domestic housing markets across the devloped economies adjusted -30%. That happened, it's in the numbers. Nations are coping in different ways but significant equity was destroyed. Legal requirements and common sense ensure banks lend reasonably. They cannot lend as much or at all to diminished equity. Collateral was destroyed. That was the domestic housing market, it remains in shock.
The underlying problem no one is prepared to expose is commercial property valuation and it is a situation worse than terrible. Commercial loans in effect before FAS157 was effected, have been revalued. Talk to some of the Credit Card company bosses, off the record. When refinancing those loans, each and every one of them is working with diminished values, they cannot borrow as much, the shortfall must be repaid and they will sell assets to meet commitments. 3-10 year project funding will not roll over, there will be a bloodbath of assets clearance and guess what is sitting on the sidelines, licking lips. Private equity (liquidity) - Gorgon Gecko sublime - Asset stripping which will extract all value, cut size and load up the victims with debt before riding into the sunset. The entire economy is now one under valued asset for the Gordon Gecko's.
Pray and confidence all you like for glimmering shoots of growth, it cannot happen - it is impossible, no investment for growth took or is taking place. It simply hasn't happened. The bet is a short bet that growth can't occur. The entire process that is underway needs to be short circuited.
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Pour a large drink, relax and mull over the link here http://en.wikipedia.org/wiki/Ferengi
This is the New Economics. Traders take over, they play to contol and manipulate their markets. It is a way of life and way of thinking. It does not suit me and they can all go back where they came from.
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173. At 6:31pm on 25 Oct 2009, majorroadaheadagain2 wrote:
Nautonier 172
>>>>>>>>>>
No Problem - but you'll wish you never asked.
That was just Phase 1.
The next stage is that the banks, or at least some of those, which bought these securitized assets paying 'top dollar' at the height of the market then regarded thse at safe, low risk assets that could even improve in value and then used these to boost their paper value reserves upon which further loans and ratios could then be calculated and effected. This exacerbated the risk effect when the value of those original and further assets deteriorated and sent value shocks not only through individual banks but throughout the entire market.
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hey robert,
is the governor suggesting that we return to building societies for long term lending?
does he believe the public is better served by both mutual and market driven competition?
l wish you and your family well!
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majorroadaheadagain2 # 173. why not one person who could have blown the whistle said "what is this, how does it work, what are the downsides, and above all else what happens if the property market crashes?
http://sysopt.earthweb.com/forum/showpost.php?p=1466732&postcount=29
http://sysopt.earthweb.com/forum/showpost.php?p=1466346&postcount=13
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4682432/Second-whistleblower-accuses-HBOS-of-risk-taking.html
A former manager at the banking group, accused senior executives of turning a deaf ear to employees who attempted to raise concerns about the business decisions being taken at the company. He came forward in the wake of the revelations by Paul Moore, the former head of risk, who says that he was sacked after warning of excessive hazards involved in the bank's lending practices.
There are those able to stand proud and ring the bells of alarm. They may be right, may be wrong. Paul Moore was right, absolutely correct and wasn't minded to meekly accept the slap in the face handed him. He is no rebel, he is no no reformist, he simply did his job and was all but cruxified for such. Good man. Well done. Thankyou.
http://news.bbc.co.uk/panorama/hi/front_page/newsid_7858000/7858253.stm
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An unlikely revolutionary. Someone who knows because he understands from hands on experience and endevour at the highest levels. A geek, a real honest to gooness financial geek. As soon as you think his observations through you know. It is simple logic.
http://dev-www.sysopt.com/forum/showpost.php?p=1486040&postcount=150
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6829803.ece
Traditional theory is based on the idea that investment decisions are made by an infinite number of self-interested, rational households. That is bunkum, Dr Woolley argues. The reality is that investment decisions are taken by their agents — fund managers, who have different priorities and enjoy access to better information. “Incredibly, the academics fail to take into account the agency problem,” Dr Woolley says. It is a problem that permeates financial services. Agents — fund managers, pension fund consultants, bankers, brokers and company directors — all stand between assets and their beneficial owners. Quite rationally, they behave in ways not in the interests of their clients. Their presence is highly distortive, raising the cost of capital and drastically shrinking investment returns. Dr Woolley estimates that without the agency problem, private sector pensions could be twice as large. “And that’s probably being conservative.”
Boris Johnson, the Mayor of London, called the ideas “crackers”, and Richard Lambert, Director-General of the CBI, urged Lord Turner to shut up.
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Stop sorting out yesterdays problem. It and the thinking that produced it are history with nothing left but wait for the dust to settle. Those with vested interest in the leverging and extortionate financing should be left with their mess. The rest of us ain't interested. Time to move onwards and upwards. Game over! Gamblers must face their perils. Tomorrow must not be yesterday - leave the past where it belongs, with those who have an 'interest' :) in it. Foreward....... Yo! Shareholders were responsible for the disaster. The Pension Funds and Hedges they are still planting. Finance is a huge gravy train that robs us all. Cheap Finance. Cheap Finance. Cheap Finance. We want to drive the Ferrari's, not be forced to watch a bunch of jumped up finance clerks with their TAkE PI55 licences.
チャットモンチチャットモンチチャットモンチチャットモンチチャットモンチチャットモンチチトモンチチ
http://www.sysopt.com/forum/showpost.php?p=1469991&postcount=7
チャットモンチチャットモンチチャットモンチチャットモンチチャットモンチチャットモンチチトモンチチ
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Where there's a William, there's a way http://en.wikipedia.org/wiki/Dissolution_of_the_Monasteries
I'm off down the Fox & Duck.
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http://farm4.static.flickr.com/3420/3814823214_b383ccd40b.jpg A mystery?
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Missed you. They are on about bankers bonus's again this morning and hanging out the age old fear that if we cap them the bright boys will go elsewhere. Well, good, were they not the ones who got us into this dreadful situation in the first place?
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herosrest
I assume that in the third (telegraph) example the loss was meant to read 11 billion?
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nautonier
Thanks again.
Here is my latest dilemma. You have a bank with people who buy things like these securitised assets. You have people in the bank who count them, and people who audit them. The latter people are just bean counters. Where is the person in the organisation who looks at the assets in the balance sheet on a regular basis to make sure they are worth the sums in the books, and who monitors their progress against markets for those assets and sells when considered appropriate?
It looks to me as if there is no-one filling this role, hence a bank like HBOS can go from being apparently solvent accounts-wise in 2008, still viable in the eyes of those in Lloyds carrying out their due diligence (please don't laugh at that assumption) before the takeover in 2008 (finalised in Jan 09) to being found to stuff-filled with toxic assets just months later. Assets they may have bought some years earlier.
It looks to me as if the whole edifice could be a total sham and if you multiply HBOS by all the other businesses with potentially similar structures the we are really in bigger trouble than Gordon Brown is letting on? Am I being too simplistic?
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190. At 09:57am on 26 Oct 2009, majorroadaheadagain2 wrote:
nautonier
Thanks again.
Here is my latest dilemma. You have a bank with people who buy things like these securitised assets. You have people in the bank who count them, and people who audit them. The latter people are just bean counters. Where is the person in the organisation who looks at the assets in the balance sheet on a regular basis to make sure they are worth the sums in the books, and who monitors their progress against markets for those assets and sells when considered appropriate?
>>>>>>>>>>>>>
The banks generally have many of these people but they are unable, scared, bullied or simply just do not care about speaking out against bad practice, bad management, risk taking, higher tier management with their faces in the trough etc!
Whistle blowing in the banking sector is extremely difficult (in the absence of ethical banking practice)! The subject of 'whistle blowing' is well covered on the blog elsewhere.
A certain amount of 'go with the flow' is tolerated in every industry - most people just look to their next cheque - Would we be any different i.e. if either you or I were to be working in a bank (assuming by your question, that you are not a banker yourself?)
We can criticise bankers, but as someone has recently pointed out to me, (guess what - it was banker) - We should always ask ourselves what would we do or have done if we were exactly in their position?
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Nautonier
"Assuming that you are not a banker yourself?"
I am what it says on the tin, 31 years in the army, five years in the Treasury, and ended up as a Senior Civil Servant running a small dept's finance and administration. The old fashioned way of getting some semblance of a career having left school at 15 and never owning up to an O level or A level.
I love finance and look on with a lot of interest in the posts of people like yourself who understand it all and are not unwilling to share it. My biggest beef at the moment is Lloyds and the way in which shareholders (i am one) have been so badly treated for rescuing HBOS in a deal everyone acknowledges was brokered by the government (you can just hear the conversation last September between Brown and Blank as they tiptoed around creating a huge monopoly, with not a murmur from the competition authorities here or in Brussels). It is just about alright to use a good bank to rescue another if all the participants agree that that was what was done in the national interest, but what you have is a bunch of ingrates who waste no opportunity to attack Lloyds as if they were the bad bank. The PM and the Chancellor say nothing about all this.
It may turn out alright - as I have posted earlier you have a UBS "philosopher" saying that Lloyds is worth 1.60 odd per share, while his company is going to underwrite the rights when it comes out. Sort of Chinese walls? In the end it will be three rights in less than a year, one at 1.73 (which none of us took up), one at 38p (which was like an early Christmas present) and another at presumably 55-60p.
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192. At 12:25pm on 26 Oct 2009, majorroadaheadagain2 wrote:
Nautonier
"Assuming that you are not a banker yourself?"
>>>>>>>>>>>>>>>>>>>>>>>>>>>>
I have thought about this issue a great deal over the last year and I have come to the conclusion:
'We can criticise bankers, but as someone has recently pointed out to me, (guess what - it was banker) - We should always ask ourselves what would we do or have done if we were exactly in their position?
But what I think thid done indicate very clearly is that the banks have to be 'stopped externally'. When you say 'the PM and the Chancellor say nothing about all this' then in terms of their actions, I agree entirely and say that the buck has to stop with them on all major banking issues.
On bonuses, if the government can borrow Trillions of pounds to save the banks then it should be able to step and make sure they are ALL properly managed and excess bonuses 'stopped.'
The banks will not stop until they are stopped.
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I love these 'ideas'. By the time they actually try and do anything they will have nothing to regulate. The break up of the 'Financial Trinity' (Banks/Corporations/Investors) has already started, have a glance at the Geneva job market/property market (the latter up 30% in the last year!!). The UK banking sector will shrink in size because everybody is running for the door.
Banks should not be too big to fail, few will argue about that but don't confuse dislocating banking divisions with increased liquidity or competivity in pricing. Firms and infividuals will pay more for credit and banking products, simple economics dictate that. There is no magic wand just simple trade offs.....
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IS THIS THE WAY FOR BANKS TO SAVE THE DAY...AND MAKE A PROFIT DOING SO?
We currently trying to spin a solution in to the banks that would enable them to finance the creation of enterprise and jobs - without taking risks, whilst still making money and building market share through positive PR.
In a poetic format, here's how it works...
COULD YOU, WOULD YOU?
Could you, would you like to make some money?
Could you, would you like to help fix the economy?
Find some money, fix the economy,
What kind of solution could Pie Financing be?
Could you, would you work in the City?
How about setting up a start up company?
Job in the city, start up company?
It all depends on what the outcome would be.
Most fund their ideas with great difficulty
But you know, this doesn't have to be
It doesn't have to be with great difficulty?
Maybe Pie Finance is the solution to help me
Could you, would you work for free?
Could you would you work for equity?
Work for free, work for equity?
We think that they're equally silly.
So having said that equity is far too risky
We have a way to help people see
It's not so risky, because it's not equity
Revenue share can help start your company!
Our web tool makes your proposal safer for all
Increasing your chances of getting a call
From supplier, dragons and the banks too
They can all help with what you're trying to do!
It can help to look, it can't hurt to see
Signing up at Pie Finance is completely free
Get a job, set up a start up company
Could Pie Finance be the solution for me?
Senake Atureliya
Entrepreneur & poet (kind of)
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So much is written, spoken and researched in the media about what needs to be done to learn from and avert another crisis, but what action is really taken? Messrs, King, Turner, Osborne, Darling et al use speeches and interviews to promote and argue their case but nothing happens. I realise we are dealing with mighty issues but who really has ACCEPTED the accountability for moving the debate forward? Until we have a government in place with a new mandate from the public nothing will change.
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You're probably correct to opine that Adair Turner @ FSA is prescribing better remedies than Mervyn King. Despite Mr King's excellent analytical skills, I too don't beleive that making Banks any smaller helps. Northern Rock, B&B, Alliance & Leicester and Dumfermline are each quite small but we could not allow their depositors to lose their money. When BICC went down on the BoE's watch in the early '90s, the wider effects were very bad. Likewise in the US, more than 100 small banks have closed, which is bad for confidence in the financial systems. Because Banks' actuaries are not able to be competent, the FSA will need to reinforce then through regulations in greater detail.
What we need is to enforce a greater safety culture in banks and closer supervision by their shareholders. Which ought to happen anyway because the RBS & Lloyds Group & other banks' shareholders have lost heavily. Tighter regulation - agreed on worldwide principles - is what's needed. Moreover, it's what we're most likely to get from the G20 discussions.
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I can remember Martins bank. A regional bank that used to operate in the North West especially Merseyside (got taken over by Midland which subsequenly became HSBC). Martins bank invested in local business because it new it had to for the region survive and so ensure its own future. Not only do we need a seperation of casino banks form retail banks we need the retail banks broken up to be regional. So not only should the UK and US goverments insist on Glass Steagal approach the UK should also break up the retail opertions to be regional banks with their loan accounts 75% underwritten by the government. Then bring in a Tobin tax on derivatives and only allow hedging for those companies that need to do it. Regional banks would support local SME's who are the real employers and the real corporate tax payers in this country. Not many SME's have a treasury department to hedge their foreign exchange or their crude oil. It is nonesense to say we can't bring in a Glass Steagle, bring in a tobin tax and only allow hedging for companies that need to (George Soros idea). If the US and UK agreed to this, then that would be enough to swing it as they represent the two biggest financial centres on the planet. Can Gordona dn Barack do it? Yes they can!
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Methody1972
I dont think you can expect to get accountability out of debate. We need accountability, and that comes from actions and rests with Brown, Darling, King and Turner. The likes of Osborne and Cable can huff and Puff but they have no influence over events. Brown and Blair have the ultimate accountability for boom and bust, for raiding pensions, for not regulating banks, for encouraging spivs, for screwing the pound, for not giving us a referendum.........fatal - once you start writing it down it takes a long time to get to the end.
I agree with you that we have an accountabilty vacuum but hopefully as you say that will end come next year.
I would like to see accountability boosted by placing much greater emphasis on each party's Manifesto so that we would not be in the position of a government being allowed to renege on a promise like the referendum simply by saying that the treaty is not the same as the constitution, something that even the author Giscard didnt agree with.
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#198. At 8:27pm on 26 Oct 2009, zadonk wrote:
I can remember Martins bank. A regional bank that used to operate in the North West especially Merseyside (got taken over by Midland which subsequenly became HSBC).
That's funny, Martins bank was my first bank account in the North East, it subsequently was taken over by Barclays.
Maybe there were different Martins banks?
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Here http://www.reportbuyer.com/energy_utilities/country_overviews_energy_utilities/united_kingdom_oil_gas_report_q3_2009.html is the last piece of the UK puzzle. The party ended but no one turned the lights out.
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Here's revenue numbers....... hmmmmm!
[Unsuitable/Broken URL removed by Moderator]
Gas seems a much more intricate affair, they are Buccaneers, you are vassels and me Thane.
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Reposted as a .pdf download link from ECFIN. Euro Commision Finance.
http://ec.europa.eu/economy_finance/
[Unsuitable/Broken URL removed by Moderator]
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An early example of Quantitative easink in the sawsirerrors AAAprentice,notice the stunning resemblance of Michael Mouse to Ben Bernanke [ been banker]
http://www.youtube.com/watch?v=XChxLGnIwCU banker]
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At least *some* companies are doing well:
http://www.slate.com/id/2233154/
"Freedom Group", indeed.
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i get the impression that the whole banking system is gearing up to make a rip off assault on joe public.Whats holding them back is a few wishy washer people whingeing on about bonus,s and how awfull the banks have been,Well i see it as business as usual soon,lend out 150 per cent mortgages double house prices get as much money off people as possible, keep interest rates at - 0.00000001 per cent ...who gives a stuff.print money ...why not, make up some nonsense about inflation, and and keep on paying those huge pay cheques to the casino bankers. but its ok folks we have brown in charge to stop all this...yeah right..... brownwatch 216 days.
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I think one BBC reporter summed up the situation nicely regarding reform of the banking industry.
They want to control the Golden goose - but don't want to stop it laying.
Unfortunately if you dig deep into your knowledge you will see that the 'gold' coming from this golden goose is in fact your own - it has been taken from you in minute slices (so you don't notice) and collected for redistribution as the bankers see fit.
Sadly what they 'see fit' is guided by the ability of making even more money - which isn't neccassarily the best choice for:
a) The environment
b) Social development
This is why it's madness to have our resource allocation dictated by the market.
I have lost count of the number of times I have heard the phrase 'systemic failure' when talking about the credit crunch.
....but who is questioning the system?
Why are you all in such acceptance of it? I cannot understand.
The people who benefit from it will of course support the system (politicians, bankers, spivs etc)
....but what about the rest? Where is the silent majority?
Until the system is questioned there will be no permanent solution, we will continue to create havoc with the lives of millions.
Nearly everything I have predicted so far has come to pass, the rising unemployment, fascist tendencies as a reaction to mass unemployment, the lies being told by parliment in the face of never-ending recession, the keeness of the state in cahoots with the banks to 'brush it all under the carpet', the rise in property crime, the steady stream of reassuring words to convince us all they are in control, the reaction of the workers by striking.
All I now fear is an upsurge in war and the inevitable state crackdown (see London's police now routinely armed on the streets - without seeking MPA or Mayoral approval)
I'm no soothsayer - I merely read history. I wasn't there but the books tell me what happened and why.
Are we really going to make the same mistakes all over again?
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....and still the cards fall.....
http://news.bbc.co.uk/1/hi/business/8326071.stm
It's not the big 'crash event' that the media look for to sell headlines of 'black Wednesday' - but the steady and painful slow decline as one by one each brings down the next.
It's called diversification - great for spreading your risk is rising markets - to avoid the occasional failure of individual entities - but also ensures that collapse is propogated around the world creating catastrophic results when the decline inevitably comes.
All market theories are based on rising markets - they all assume collapse simply does not happen.
...and the fools followed their king into the sea...
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.but what about the rest? Where is the silent majority?
Silenced, cowed, scared, worried if we step out of line we will lose our jobs; badly educated, unaware of history, entitled, complacent, immoral, unethical, up our own rear ends.
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WOTW, You may already have done this, but would you care to make a prediction as to what the financial and economic world will be like this time next year (and please just don't say worse). I'd be interested in seeing what you think, and whether I agree with you. If you could explain your reasoning it would be even better!
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#207 WOTW
I agree with every word of your post. Your strength of feeling and frustration about this is palpable...and similar to mine.
I have been reading these posts since September 2007...and watching the establishment desperately trying to re-instate the status quo has been sickening down to the gut.
Since reading this blog and many others on the BBC website, the only person that seems to explain any of this with any plausible understanding is JadedJean.
Free-market, liberal-democracy pushing anarchists, primarily from the US, have engineered this whole crummy, pathetic system whose only purpose is to serve the financial oligarchs.
http://www.washingtonpost.com/wp-dyn/content/graphic/2008/02/01/GR2008020102389.html
Thatcher embraced them in the 80's and Blair became their standard bearer from the mid 90's onwards.
It all explains everything from the decimation of our manufacturing industry to our ludicrous foreign policy. Old Labour were infiltrated by the technique of entryism (that is as old as the hills) by the anarchists to form New Labour, who became the new running dogs for the oligarchs.
My only advice would be to hunker-down and prepare for the downturn. Sadly, I think what we are about to experience in this country will make the early 80's seem like a stroll in the park.
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Worth a read...
Why sovereign bond yields will explode
http://www.ft.com/cms/s/0/27e90dea-c23b-11de-be3a-00144feab49a.html
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Writingsonthewall
"Are we really going to make the same mistakes all over again?"
Yes, and in my 72 years it was ever thus. Each decade brings a new potential disaster that seems to set Britain back whereas others like the Germans seem to go forward. And yet in twenty years time you will still be what you are today - provocative, challenging, a prophet with just a tad of a doom=laden inflexion in your posts. And I have no doubt someone who values citizenship and is bewildered when it doesn't work.
In my view, none of the main systems work, from communism, socialism through conservatism to fascism. True, the people always end up being screwed, but even with today's level of unemployment there are still 26m people in employment. And a similar number in education or retirement.
I believe people like you who understand so much can make a difference, but hopefully not by telling everyone what is wrong with the system but by telling people how to put it right. That way when the fools follow the king into the sea it will merely be to bring out some fish (to replace all those horrible cows and pigs farting their toxic horrors into the atmosphere - which reminds me to go down and have my lamb chops...)
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210. At 12:39pm on 27 Oct 2009, Qn3tQs
...and now I go all 'Economist' on you and start giving vague responses and each way bets....
The problem is timing, the events are likely to happen, but how fast and how soon and to what extent is often defined by Government intervention (or lack of it) and how you, me and Joe Bloggs reacts to events.
I expect unemployment will continue to rise into next year, there will be more strikes and more bankruptcies. I am taking my examples from the 1929 crash where after the initial shock there was a resurgence for about a year, and then the decline began, slowly.
At the start of this crisis there was talk by me and others of '10 years of austerity' - and I expect this to be quite accurate. The Government intervention has created a false Economy (mainly in the stock market) but that 175 Billion will soon run out. I'm looking at the 'lost decade' in Japan as the most likely scenario rather than the 10 year depression in 1929 - but I also wonder if there is any difference.
The crunch will come during of after election next year - the Tories have the best chance of providing recovery - but this is by making the little man pay for the excesses - will it create a backlash of revolt?
Labour will do it the 'softer way' - but at the same time increase the risk of us spiralling further.
The botom line is Capitalism cannot sustain itself and either the Environmental or Social damage will catch up with it. I used to think this would be after my lifetime - but with the Economic records being broken today, I am not sure.
We have classic Capitalist overproduction and the solution has to be destruction of capital. Wars often provide this useful destruction of both capital and population - this is why we have had so much growth since then. I wouldn't bet against us suddenly finding a 'new threat' which requires armed intervention - or even one of the old ones (Iran)
The sad fact is that Capitalism rates the making of money above the sanctity of human life.
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213. At 4:49pm on 27 Oct 2009, majorroadaheadagain2 wrote:
"I believe people like you who understand so much can make a difference, but hopefully not by telling everyone what is wrong with the system but by telling people how to put it right."
I wish to God I had the answer and I could write it here - but I don't. However maybe it's crisis that brings out the thinking people (or makes non-thinkers think) and that will lead us out of here.
The first step however is agreeing the current system is wrong - and at the moment the people who benefit from it are determined to retain it - just as the Feudal Lords clung to power when Capitalism was born, and theere are far too many people in denial. Most western workers are unaware that they are actually worse off than their forefathers - mainly because technology and inflation masks this fact.
For me the solution has to be in the individual and the collective. If individually we all accept we can work without profit being the motive, and then collectively we do so - the progress will outstrip Capitalist progress by miles.
It's the generation of profit and the re-allocation of the resources that it brings which is the catastrophe that envolpes us.
I am quite prepared to work and innovate without the motivation of making myself 'better than the others' - unfortunately too many people sign up to this false ideal of competition as being a suitable driver for us all.
I mean if you wanted to get across the Atlantic in the most efficient way, would you
a) Race across with others in individual competition.
b) Work together to pool your ideas and reduce 'cost' of reaching your goal.
Too many people have the mis-guided belief that their 'individualism' is supreme over others. This is not true as no man is an island and no great inventor, scientist or entrepenuer ever did it all by himself (or herself).
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This suggested tinkering is simply tinkering. Nothing has changed as banks and investment firms are using the same derivatives scheme to underwrite products. The painting of banks and investments firms as victims of risky investments is simply talking around the truth. The financial collapse was a contrived and calculated scheme, facilitated by governments with the responsility to provide over-sight. First, financial services should be banned from any contact outside of public hearings with elected officials, 2nd, CEO's and Board members should be subject to loss of personal wealth and property when losses are due to malfeasence, 3rd, any insurance type products related to loans and investments must be capitalized to a degree that will minimize losses to a set percentage of the investor. 4th, any insurances or public funds would be used to make the accounts of investors or depositors whole before any funding could be used by the bank or investment firm.
This financial collapse was a fraudulant enterprise developed by financial institutions and facilitated by governments. The greatest betrayal of public trust by both groups in the history of the world. The lack of accountability and the lack of outrage only predicts that this will happen once again. No matter who is elected the people will lose.
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Writingsonthewall
It looks to me from your last post that what you are talking about is family. With a large dollop of Adam Smith for good measure.
The difficulty is to ignore the makeup of human beings - kindness and goodness set against evil and jealosy and all the other weaknesses we all suffer from in some measure. Like arguing against women bishops or who owns which church when half the world lives in abject poverty.
I was doing the old bit of feeling good about life yesterday - sounds so corny, but we sit here on our computers and communicate while people sit in whatever shelter they can find wondering where the next scraps are coming from. An accident of birth.
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Hmmmm ... that old chestnut 'what we need' eh?
Well, actually, what I think we need is somewhere that we can trust to put our money, do our financial business and not feel we are being ripped off by dodgy dudes and con-artists.
We have an incredible dichotomy really. Jo Public wants a bank, insurance company, pensions firm, or whatever that serves its customers and does that fairly and reasonably. Banks, insurance companies, pensions firms or whatever want to make more and more money to justify their big salaries and big bonuses and, indeed their existence at all.
The two standpoints are mutually exclusive. There actually isn't any way to make both of those exist within a single organisational culture any more than - as was said somewhere in the Bible - that man cannot serve both God and money.
However much people may want it to be, I'm afraid that a reliable, customer-focused, trustable bank is just not going to happen. In boom times you can push up share prices, give yourself big bonus rewards AND treat the customer reasonably. In times of hardship, there just isn't enough to go around, so the customer gets increasingly squeezed.
The real answer would be perhaps to pass legislation to make the 'retail' parts of the banks into mutual societies or co-operatives, so that they would be owned by their customers and so give Jo Public the chance to rein in the greedy managers and CEO's and Chief Accountants. The wholesale parts can go and do their own thing and win or lose dependent upon their skills or lack of them. If retail banks put money with risky wholesalers, then that would be down to the officers of that bank, but at least the customer would have some ability, as shareholders, to control that and to sack risky, lairy or scary CEO's and other senior officers.
In fact, perhaps they should do that to many of the major insurance companies too.
Now hands up everyone who thinks Gordon Brown, and the Chancellor and Lord Turner and all that lot have the political stomach for that idea?
.....Hmmmm. Truth is, I don't reckon they have it, either.
So that just leave large numbers of people where they know they were anyhow when it comes to the financial industries - sitting between a rock and a hard place.
Oh and nautonier, you said, "The banks will not stop until they are stopped". That's right, but it's also true of the politicians and lots and lots of other groups too.
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Since you have been away the economy seems to be growing (doing alright you might say) coincidence or what!
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Sutara
Yes, and in twenty years time someone will come along and demutualise them all over again.
We have just been through the worst kind of financial nightmare where no-one in authority or the so-called experts like economists at the LSE and the rest had the slightest idea what was going on. Hopefully we will have enough red faces to get something meaningful out at the other end; with all the spivs back in their boxes (at least for now) it might be back to a financial system that works. Here's hoping...
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Just seen Evan Davis programme on Warren Buffet - here's a guy who has had "Social Value" by way of Efficent Allocation of Resources (which may have ruffled a few feathers) coupled with a Long Term view of Active Investment - knowing the Rag Bag of companies Berkshire Hathaway own & using relatively simple Fundamental Criteria as described by Chalie Mungus - his colleague.
HE TAKES RISKS as their money is on the line - but our, so called, risk takers used Other People's Money (OPM) as per Danni de Vitto.
So, why o why can't these so called Investment Bankers (aka Casino) take a hit rather than Pupils, Pensioners & NHS Patients? George Osbourne has certainly got it naievely wrong saying "We're all in this together" - there is no rational reason for these people & Tax Payers to suffer.
A serious rethink needs to be done PDQ (Pretty Damn Quick) otherwise - dissaffected "Middle England" will join the "White Working Class Poor" - flocking to the BNP since been deserted by New Labour to create a Toxic Mix for a re-run of events in Germany.
I am not hopefull of this Government doing the right thing especially in the light of the cuts to the TA (Territorial Army) whilst we're engaged in a so called "Critical" War ( of dubious legaility ).
If HMG can't get this right then what hope. The Independent reported that the USA are trying to get the culprit bankers pay up - so why can't the UK do it - some collars need to be felt & wallets opened - before this whole situation gets out of control.
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Bonuses are not morally wrong. How and for what those bonuses are awarded for can be?
My solution would still be to tie bonuses to performance - BUT that performance would be reviewed three years after the year of endeavour. Has the performance of that year really been original (unique) AND created sustainable growth, improvement, etc. How often does an individual receive a bonus on merit for something that goes wrong the following year only to be awarded another bonus sorting out the mess!? Crazy. Payment of bonuses should be part cash and part shares in the institution the person works for. Shares cannot be sold until reaching the national retirement age. And of course, the proportion of cash to shares should be heavily biased to the share.
This lends itself to accountability. Will you take such enormous risks if your retirement fund is directly affected by your results? Will you promote others beneath you who may jeopardise your retirement or who will nurture it? I think this is a step to evening out the boom and bust mentality; where those masterminding and controlling the cycles feel the pain as well as benefiting from the rewards. A bonus culture of this style would prove a model not only in financial institutions but throughout industry.
The government is not accountable for an individual or corporation but in the case of the big institutions where the country's economic welfare can be seriously affected then it should retain a stake - regulation becomes less of a dirty word when compared to nationalisation.
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#222
What is morally (abnd legally) wrong is the manner in which these bonuses were achieved.
Bankers were entitled to bonuses because certain targets were achieved. (At the expense of others such as solvency or liquidity).
They are now entitled to further bonuses because they were able to persuade the government to bail out their banks. (With the threat of turning off their ATM machines and other actions which would cause economic meltdown).
The government has retained a stake. No doubt when the government is persuaded to write off its stake, the bankers will get another bonus. (At our expense).
All the above actions are tinged with illegality, but no action will be taken.
Just like Iraq, just like MPs expenses, just like giving up the nation's sovereignty to the EU.
Making money out of crime is what our leaders are good at. Our country is run by crooks.
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217. At 6:28pm on 27 Oct 2009, majorroadaheadagain2
Isn't that exactly it though? When all collapses we revert to our most basic instincts - community, friends and family.
I don't believe in evil and I believe jealousy and greed come from inequality. There will probably always be greedy humans, but at least without a system that promotes the greedy to the top - we would be heading in the right direction.
I mean if you think about it logically, is it any wonder the bankers, politicians and Oligarths messed up by becoming far too greedy? - it's those instincts that got them there in the first place
It's also impossible to have any idea about the resources we're using (or rather over-using) without equality. This is because the proportion we're using is masked by a fluid system of inflation, floating exchange rates, FIAT currency etc.
Capitalism will eventually make the sacrafices for us that many have been denying need to be made.
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221. At 00:51am on 28 Oct 2009, CaptainMorgan007
I saw that too.
Didn't you see the part where he was questioned about his 'dabbling' in financial instruments?
His reply lay the answer to all your casino questions "If we see something priced cheaply (by our analysis) then we will buy it"
Even someone as supposedly 'old school' as Warren cannot help entering the casino in the chase for glorious profits. The problem is, great as Warren is he simply doesn't know what the value is - it's a gamble. I mean he doesn't know if the AAA rated bank will fail - we all know it shouldn't, but then no bank should fail - should it (Lehmans)?
I was also interested to hear how he made his early money - asset stripping, in no uncertain terms.
Some would say this was improving efficiency, but actually it's moving inefficiency elsewhere.
I mean if your town has a giant steel works, everyone in the town is employed and trained as a steel worker. Someone like WB comes along and buys out the plant and knows he can make financial savings with job cuts - suggesting an efficiency improvement.
However the inefficiency is the hoardes of 'trained and experienced steel workers' who are flung onto the dole queue and end up doing road sweeping jobs as that's all they can get - thereby wasting years of training and experience.
This also has the effect of discouraging others to learn the steel trade - which lead to shortages in staff once steel orders go up again.
It certainly looks like efficiency is being achieved by the bottom line of the steel factory - but the reality is it's just more smoke and mirrors.
You have to go back to basics and question where the profit comes from. If I dig something out of the ground, polish it and set it in a ring - I have added value through my labour.
If that ring is then sold on for greater value - either I charged to little when I sold it, or the final buyer is not being provided with the full information - maybe he suspects scarcity, or future scarcity - and therefore pays too much for it.
The banker is simply acting as the middle man (as above), to say he or she add any value to the process is ludicrous....
....and yet they have got 80% of the country believing them (well it helps when you have the countries leader on your side)
The reallocation of resources that is investment banking has shown itself to be flawed. We were paying a high premium for the 'expert decision making' bankers are doing - but the reality is that we could have done it with the roll of a dice and still had the same (or better) result - only for a lot less cost.
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222. At 04:22am on 28 Oct 2009, nonewsis wrote:
"Bonuses are not morally wrong. How and for what those bonuses are awarded for can be?"
If you need a bonus to complete the task you are set then don't you think the problem is with your attitude to the work rather than the system of reward?
Many people (at the weekends) do jobs for free which people in the week get paid for (it's called a hobby).
Surely the only reason people need financial rewards is because they are doing the wrong job?
I bet if we opened up the world of banking to 'anyone who wants a go can, but for no bonus' - then we would get a flood of applications from people who want to do it for the experience.
The truth is the job is made to look hard by those in it - but actually (and I can tell you this from the inside) - there isn't much to it, and they're not actually very good at it anyway! (a point made by Warren Buffet - so it has some credibility)
Once again, market manipulation infects the banking world as it's the barriers to entry (old boys club etc) which create the impression the job is something of a challenge that only 'skilled' people can do - hence the need for a big bonus.
If I tell you I'm good at something and don't show you how it's done then you will be fooled into thinking it's something clever or exceptional.
....it's called the Derren Brown effect. People actually think he can read minds, but the logical amongst us know he can't, and that he is infact using body language and tells and leading questions to give that impression. Until you realise this - you might be tempted to pay good money to see him.
Bankers operate on the same principle - as do politicians actually.
"Never mind dearies, we're in control of the Economy, it's too complicated for you to work out"
...the reality (as can be seen now) is that they are never in control of the Economy
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213. At 4:49pm on 27 Oct 2009, majorroadaheadagain2 wrote:
"Yes, and in my 72 years it was ever thus."
P.s. - You should be telling me this - your experience is what we will need in the coming years. I'm sure you remember the Suez crisis, rationing, how to build an Anderson shelter, how to darn socks, how to get the most out of what you have etc.
Soon there will be a steady stream of blotchy starving teenagers at your door desperate to know how to work a 'baby belling' portable stove because since the power went off they cannot eat as the microwave "don't work no more"
Our most (currenly) undervalued citizens - pensioners - are about to become our most valuable. At the moment we barely provide enough for the aged to live on - and soon we could be relying on them to ensure we can survive.
Just as with many other valuations - the market has decided pensioners are 'of little value' as commodities as they cannot sell their Labour power - only the collective social will ensures there is a pension (as Capitalism would allow pensioners to starve if it could)
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Nonewsis
I don't believe in bonuses. A survey this week showed that the average salary of a CEO (I suspect it was of FTSE 100 companies) was over 3m. The salary of those CEOs for the worst performing companies was 4m. I think if salaries are used properly, and linked to performance and promotion then bonuses are irrelevant. If you were determining the FTSE 100 CEO salary levels you would certainly reverse the findings above, and where performance was dire then that would be reflected in a much reduced salary level in the next year or even the grand order of the door showing.
From my experience the real incentive comes from the ability to have higher salary rates which are a mark of a person's worth in the organisation and which (as a "bonus") feed through into pensions. That gives the incentive for people to strive to do their best and to take on more responsibility if available. They should know that when the next year's salaries are being determined their performance will be taken into account. If you have that tool and you are paying a CEO 3m why does anyone think they need any more?
There is a great myth about mobility which accompanies the need to perpetuate bonuses. It is that if you dont pay enough the best people will leave. I have always thought that the best people are those who want to stay to build the business, and they are not people who leave simply to get more money. If they do leave on such an impulse then I would have doubts that they were the sort of person I was looking for.
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Will anybody be reading this far down?
Anyway, here's my tuppence worth: Bankers want to give themselves 6 billion quid - well divide six billion by the number of upheld Financial Ombudsman complaints against the banks. Fine the banks that amount for every time they have had a complaint upheld against them. Thus, we get our six billion back and the banks are given a big incentive to pull up their socks!
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# 214 - WritingOnTheWall
It's good to see someone with enough conviction to actually make a prediction, although I remain a little more optimistic than you (perhaps because I'm still an ingenuous 19 year old). As someone planning to study physics, with a bit of chemistry thrown in, my understanding of economics and finance is a bit amateur.
That said, looking around the research and developement industry in the UK (gap-year employment) I can't help but feel a little positive. There is such a vast wealth of incredibly talented, enthuiastic, and knowledgeable people still in the UK (and abroad), that I feel technological developements will still ameliorate many of the problems that the economic downturn threatens to spawn. Moreover, there is still a great deal of funding in the private sector going into renewable energies (from companies like Shell and BP), increased farming productivity, cheaper, better, and greener plastics/alloys/ceramics (the list goes on).
So whilst I would have to take my positive thinking to absurd levels to disagree with your prognosis about more unemployment, and more conflict in the Middle East doesn't seem unlikely either, I don't agree with some of the more doomladen predictions that I've seen on this blog.
As someone who never really understood what the point of investment banks were, I wasn't too surprised when they eventually started to fail. Nevertheless, even if people lose their faith in the financial institutions, I hope they have enough sense not to turn the backs on the technological ones.
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Well, I think I would stick with bonuses - little chance of doing away with them anyway in a free market. Salary is the basic standard - you turn up, you do the job OK, you keep the job. A dynamic organisation will want to reward (and here I would insert exceptional but who decides that I am not sure) performance above the standard. Achieving targets when realistically set seems to be the job for which the salary is paid, exceeding them can justify a reward. If you are to alter salary based on performance - well it is the same thing - but do you want to be the manager telling someone that he has to take a pay cut for not "exceeding" his target because his salary based on previous years' performances outstrips those around him who have done an average job throughout. If he has a salary reflecting progression and seniority attained, a bonus can reflect a good year without carrying forward.
I still stick to my view that a bonus should not be paid for at least three years so that the "exceptional work" stands the test of time; and to pay the bulk of that bonus in shares.
There should also be credibility in the scale of the bonuses. Robbing shareholders to give huge bonuses is obscene as it is OUR pension policies and investments that buy into these companies yet we do not have the say - only the investment managers do and with that you are into a kind of nepotism and self-sustaining bonus culture that snowballs.
Unfortunately I am not eligible for bonuses myself. As my occupation is to fly helicopters it is rather assumed that my salary (or is it something else) provides the incentive to do an exceptional landing every time!
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I think the reason fr little change is the pension problem. Thatcher encouraged house purchaes which could be used as retirement pots, she was aware, as have governments pre and post, that state provisions are inadequate.
Pensions are largely invested in markets. Without the growth they see, how will people fund retirement? Surely that will mean a greater reliance on the state?
While bankers bonusses seem to be taking the blame for the recession, it's worth remembering that our government has taken no responsibility for selling gold reserves, for not putting funds away for rainy days like these and for obliterating our manufacturing industry.
Our governments have intrinsically linked banks, markets, housing and retirement funding with our economy, hence the collapse.
Regulation restricts growth. Over regulation will kill off our finance industry as investors will get cold feet due to poor projected returns.
Yes some change does need to happen. Though the poor souls in retail banking seem to be bearing the brunt. Their wages are set below market average, with bonuses as a way of making them up through performance. No bonuses, no performance, no profits no bank.
Perhaps seperating the investment business from retail business is a good idea, even if it is just to improve the reputation of high street banks in the eye of the consumer.
I think investment bankers should get big bonuesses, but have little or no salary. So if things go pear shaped, they get nothing. The risk of their decisions needs to impact them personally. It's easy to spend money when it's not yours! Or perhaps bonus pots should be held over the course of a year, so losses can be recovered.
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230. At 10:53am on 28 Oct 2009, Qn3tQs
Here's the point of investment banks.
They are deciding where resources are allocated, which in turn is dictating the courses student take in order to obtain future employment. The problem is this decision is not driven by what's good for the environment, what is good for society or what is good for progress - but rather what is good for makng profit.
Currently many companies are indicating 'renewable energy' as being their future investment lines - but this is not because they have had a sudden crisis of concience, rather they think that there is profit to be made because you, me and everyone else will pay a premium to relieve their social guilt - i.e. pay more for wind power generated energy - which in turn enhances their opportunity for profit.
I don't have a 'disaster' view of the world because I know there are enough young and positive people like yourself out there who are trying to get educated in useful disciplines which will help us develop technologically. Unfortunately this does not fit in with the 'plans of Capitalism' which has made it clear that only those who are prepared to take huge risks (obtain huge debts) will achieve these goals - thereby restricting the future numbers of people like you - I refer to student loans, student fees etc.
Education should not be a question of choice, or we risk limiting our scope for development - and yet Capitalism (along with the assistance of Government) are ensuring this happens. It's a disasterous plan.
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231. At 10:55am on 28 Oct 2009, nonewsis
....but isn't the reward for producing 'exceptional performance' the good feeling you get with the praise for doing so well?
Is human confidence so poor that we all require 'paid recognition' of doing a good job?
How sad if it's true.
I would reward members of society who perform well with awards of recognition (not monetary) - Lordships perhaps, instead of awarding them to the richest and most selfish members of society who generally did not 'earn' their passage through exceptionality, but rather inherited from their forefathers, or in the case of some recent appointments - simply proved their passage to glory by being 'outstandingly selfish'.
....once again perpetuating the myth that 'worthyness' is an inherited trait - which it clearly isn't (I mean you can look at the Royal family for a good example)
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.....by the way, not all outcomes of the recession are bad - hopefully this is a trend that will be emulated here soon.....
http://news.bbc.co.uk/1/hi/business/8327185.stm
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Yeah the cost of university is a bit of a pain, hence my year in industry in order to raise the money (no can accuse me of living off my credit card ;-) ).
I agree that 'rampant capitalism' is a recipe for disaster, but I also think that market forces can be positive. I don't think it matters whether a company developes cleaner energy because they're feeling philanthropic or because they feel they can make a profit, just so long as develope it.
Also, most of the researchers and technicians I work with are motivated more by an interest in what they do then by the promise of massive bonuses (not that they have any prospect of getting one, anyway).
As for the point of investment banks, I understood that they had a lot of influence in where investment went, I just never grasped why anyone wanted them to have this influence in the first place. It all just seemed like a complex financial gaming involving other people's money. Either way, I'm banking (no pun intended) on there still being a market for people with Natural Science degrees when I finally leave university in the Summer of 2014. Anyone rate my prospects?
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Posts 198 & 200 Martin's were all over the UK.
http://en.wikipedia.org/wiki/Martins_Bank
I believe, but I may be wrong, that Captain Mainwaring, Sergant Wilson & Private Pike all worked at the Walmington on Sea branch of Martins Bank in Dads Army.
I'll get my coat as I must get out more.
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#227. writingsonthewall wrote:
'Our most (currenly) undervalued citizens - pensioners - are about to become our most valuable. At the moment we barely provide enough for the aged to live on - and soon we could be relying on them to ensure we can survive.'
I don't care how bad it gets, there is no way I'm eating old people (they're too chewy:)
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BobRocket (aka Hannibal)
"There is no way I'm eating old people".
That's a relief then. Although maybe not for my progeny...
Incidentally, in view of yesterday's piece on farting live stock can I take it that "The Silence of the Lambs" suggests they have found a cure?
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I have discovered the Government plan for rebalancing their books.
They are simply going to criminalise us all and then sieze our assets.
http://news.bbc.co.uk/1/hi/uk_politics/8329583.stm
Speeding fine unpaid? - Get out of your house we're siezing it, no doubt to house a 'pooly paid' MP who can no longer claim expenses for their second home.
I'm going to invent a new acronym which is appropriate for the years to come - OMDB
It means 'Over my dead body' and I shall be applying it frequently in the future.
Does this mean however that if society decides that the paying of bonuses to bankers and the fiddling of expenses by MP's are 'criminal activity' that we can reposess their assets as 'proceeds of crime'?
That's the problem with hypocrisy and justice - the two simply don't go together.
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Addendum,
There was one man who saw (no pun intended) this financial crisis coming - David Blunkett!
"When the Proceeds of Crime Act was introduced it was meant to be used to deprive major organised criminals of their lavish lifestyles.
The then home secretary David Blunkett said it would target "the homes, yachts, mansions and luxury cars of the crime barons". "
Yachts, mansions, luxury cars, lavish lifestyles - surely a clear description of the financial elite who have 'robbed us' of our futures.
I wonder if this also includes war crimes - Tony.
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#236
There will probably be many vacancies for debt collectors in 2014!
Good luck for your finals!
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#234
My bonus is calculated according to the NGF factor...
i.e. NGF = Not Getting Fired (for spending too much time on these sodding blogs!)
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It is very possible that the government will ramp up taxes enough to pay for this mess and the british people will bend over and take it like we always do.
Resilient bunch us brits.
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Here's a story that has got me livid today:
http://news.bbc.co.uk/1/hi/business/8330057.stm
In summer 2001 I took out an unsecured loan (for less than £10k) with an infamous british bank. I was consolidating a couple of loans into one easy payment (I sound like an advert)
When I called to arrange the loan the bank advisor asked about PPI, to which I declined. He then went into automatic spiel mode and belted out the 'have you considered what you would do if you fell ill' lines to persuade me.
I politely declined (more than once I might add) and the operator actually made me angry as he did not listen to my rejection of the offer. I went on to explain to him that 'as someone who understands insurance' I could get a tailored quote to cover all my debts for less than the offer being made - eventually he relented.
When teh application came through for me to sign the section titled 'PPI' had an indication that I would like to take it up. I was livid and called the infamous bank and complained. The operator then re-iterated the spiel, but to no avail I made it clear if they did not remove it then I would not take out the loan. It got to a point where I was asking "is this protection a condition of the loan" - as it was not in the T&C's then it is not part of the agreement - despite the operator indicating I may not get the loan if I did not take out the insurance.
Eventually I got my way, but fortunately for me Mrs WOTW is a Legal graduate and knows what WOTW's rights are - otherwise I wouldn't have known about the T&C's.
Anyway, I complained to the Financial Ombudsman, and they replied making it clear that they did not see it as a problem, they were in complete denial.
So now - the same ombudsman (because they're all the FSA) - has come down heavy on Swinton - more than 8 years later they now decide it's not acceptable
This is truly scandalous - these monkeys are claiming to be regulating the market and it's plainly obvious they have been inactive for years - and yet the tax payer has been footing the bill.
I am lucky as I got sound advice, but is Mrs Bloggs supposed to know the in's and out's of the law in order to take out a simple loan and not get ripped off?
Robert - when you're free, how about you request under the FOI the number of complaints the FSA had about PPI over 8 years ago (mine will be one of them) and then ask them why it's only now they realise what their damm job is supposed to be
Fire the lot of them - complete waste of time and money. In fact, firing's too good for them. Do the next Government think less regulation is the answer? It seems to me we haven't had any for the last 10 years.
Why is hector Sants and his motley crew of fools still in a job - and best of all they're now telling us how to clean up the dirty market they were responsible for keeping tidy.
It truly beggars belief.
I'm going home - it makes me sick to the bone. Frauds, the lot of them.
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this will be a bit of a rambling post , don't laugh or fall asleep...
as you will guess from my name I'm in my forties and along the way I've come to have certain opinions on just about everybody and everything and here are few of them when thatcher sold off the council house stock for ridiculously low prices(50K house you can have it for 10K)50% of the money recieved went to replacing it??? (remember Derren Brown was just wee laddie) and the rest to keep rates down everyone happy? of course now they are a property owners .they if they are clever sell as soon as they are allowed,move to a new area with fantastic return on their investment fast forward to now and in the near future they require to move into old folks home they don't want to give up the proceeds of the sale of their property to pay for their care, why not, if they had stayed with the council and paid the rent till they needed care it would be free but they didn't they wanted to own a home so why don't they want to sell and pay for their care.mind you £750 per week for a 10 x 10 foot room privately run how long is the money going to last (about the same time as they do I would guess).
Self worth as WOTW says all of us have vastly inflated ideas of what we are worth (thatcher again) the helicopter pilot-nonewsis sounds almost rueful of the fact that he doesn't merit a bonus .he/we/she shouldn't need bonuses or like most people rely on them to pay for our over inflated lives.we should be paid fairly be able to live a decent standard of life without fear.
tax,why do we look to the USofA for taxation look at the state of it my, good friend who is a big admirer of thatcher and low taxes went there for a month touring was shaken to the core by the mess he found in the heartlands whilst saying that san fran was very nice but that he'd never seen so many homeless desperate people in such a pretty place.and on my recommendation went to copenhagen and was flabbergasted at its sheer quality of life for everybody then left speechless by its taxes (59%).he conceded that whislt it might go against everthing he'd believed about taxation he could see who has got it right (the frendliest junkies he had ever met at a hot dog stallin copenhagen).whilst there aren't many well known super rich Danes when you see the super rich celebrities, and media moguls that we have, if we put our taxes up to that level will you bee sorry to see them go.oh and all those bonus chasing financial wizards! that have got us in to the s£$%.
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#245 WOTW
check out the What Do They Know website for Freedom Of Information requests, they also keep track of how your request is coming along and any response you may get.
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I must be getting old, I remember a bank was somewhere you deposited money so that you could save up to buy things or get a mortgage as you progressed in life, when a cheque account was something 'the well to do' had... where it all went wrong was when the banks conned business's into paying salaries into the employees accounts that the banks would 'set-up' for them, after that we lost control of our MONEY, CASH, WONGA...
Then the Banks came up with the idea of unsecured loans, credit cards etc.... shame, I never fell for their hype, yes I have a mortgage but that is it.. if you don't spend more than you earn you can have a fantastic life - I own a nice house, drive a nice car and sleep at night knowing that the banks do no own me....!
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I have been a pensioner for a few years and have seen my savings and investments severely depleted by the ravages of 2001 and more recently by the credit crunch. I have followed your blog for the last three months but have so far been trying to understand what is going on.
What I find difficult to understand is why many bloggers seem to want discuss and resolve the symptoms and details of the current problems rather than try to identify the root cause of the current problems and rectify that. I see many proposals about how to separate the retail and investment banks even though this may not be possible on a global scale, and this is further complicated by the sound bytes of politicians trying to score a few quick points. The actions or inactions of the FSA seem to be a further distraction. CDS’s and Parliamentary Expenses are further distractions to the current climate. Is it possible that there is a common thread running through all of this????
I would like to suggest that ‘Intellectual, Professional and Moral Dishonesty’ is a large part of the problem which we are facing here. We have toxic mortgages being sold to customers who had no possibility of repaying them (the sellers took their commission) which were then securitised by people who must have had a good idea of their true value. These products were then sold on at a false value (self assessed??) by sellers who told a good story (the sellers took their commission). After several further transfers of these products down a line of willing buyers who didn’t truly understand what they were buying, apart from a profit opportunity, they finally finished up with one of the banks that are in trouble today. Everyone down the line made significant profit and the creators of the products took their bonuses. Finally the banks had to recognise the toxic debt on their balance sheets and they took taxpayers money to keep them afloat.
If my assessment is correct, why do we not have intellectual, honest and moral people in this chain prepared to stand up for decent ethical business values anymore. I find it hard to accept the banks current view that these people are so valuable that we must continue to pay them large bonuses for fear of loosing them to the competition. It only takes one bank to sack them all for fraud, dishonesty and un-professional conduct so that they can go off, enjoy their misgotten gains and give them time to re-assess their purpose and values in life. With this blemish on their financial credibility what other bank would want to employ them at an increased salary, let alone bonus.
Credit Default Swaps are another very creative product invented for a ‘fast buck’. Insure someone else’s default on a debt and if they fail you stand to make money. Surely this is only ethical, moral and honest if you are the one who will loose if they default.
http://www.financialsense.com/editorials/engdahl/2008/0606.html
Parliamentary expenses are another subject to the same root cause analysis. I find it very hard to believe that some of the members of the House of Commons and the House of Lords did not know and understand that many of the claims they made, whilst being within the ‘Rules’ which they had created for themselves, were morally and ethically unacceptable to the taxpayers who they were paid to represent. Perhaps the above solution to the banking problem would also help to resolve some of the problems with MP’s expenses.
Let’s hear it for Honesty and Morality, and let’s hope that some of it rubs off onto society in time to save our children and grandchildren
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#249 oldgommy
Honesty and Morality.
How do you make money out of those??
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#250 prudeboy
You don't neccesarily make money out of honesty and morality immediately. You start to build a better business and society which is not focussed on personal greed at all cost - ie you don't feed a few who are very creative with financial products at the expense of most of the population who have spent their whole life working hard to secure their own futures without relying on the state.
Before you start writing me off as a socialist with a mission to put the world to rights. Please be assured I have spent most of my working life in business managing a profitable speciality chemicals business and I am not a socialist. I just have a strong belief that a narrow minded few people with some exceptional financial skills should not be able to flood the world financial market with worthless products for their own financial gain.
I personally see very little value in boom and bust and I suspect the vast numbers of people currently hitting the unemployment queues would support this
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I see stock markets plummet again, this will mean more QE. In a short time, hyperinflation will be upon us.
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Time to buy into the Euro?
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The prophets of doom are out again. You get a small rally in the stock market, accentuated by rises in bank shares that had been beaten up to levels assuming the worst, and everyone starts talking about another crash on the horizon. I think they are wrong. The first thing is to dismiss the FTSE 100 as totally unrepresentative of our economy, including as it does foreign miners and the like. The second thing is that the true bedroock of our economy and therefore the stock market is represented by companies like BP, Vodafone, Glaxo, Tesco etc, all companies that turn a profit in spite of the recession and which have sufficient global assets to mitigate a UK only disaster (which I dont think will happen).
I think it is going to continue to be a stockpickers market, with a maximum upside of 6,000 on the FTSE within the next year, but when you can get 6% net dividend from investing in a share like BP the all other forms of saving look positively stupid. And all that money that people will keep putting into their pension funds (the so-called wall of money) is still out there waiting to find a home.
Incidentally, when people talk about banks like Lloyds trebling from their low of 30p it is minute in comparison with the fall that they suffered in the past year after the announcement of the HBOS bid, when they traded at over three pounds. It is a straightforward gamble now, given the total lack of knowledge on the extent of the toxic assets. But one day most of the banks will be back to strength like HSBC and Barclays are already and some of the penny shares will look a bit like a latter day Poseidon (hopefully without the eventual outcome that Poseidon and its bubble holders suffered).
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Just want to get this in before we go into the Great depression II (credit to the author not me)
Remember, our piddly little QE excercise makes no difference as we are the '52nd state' of the US and totally at the mercy of their current situation.
comes from Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University:
Because their teachers and their history books said so, most people know that the Great Crash of 1929 caused the Great Depression of the early 1930s. I am not one of these people.
What I know is that the Dow Jones Industrial Average closed at 306 the day before Black Thursday, October 24, 1929, and at 199 on November 13, three weeks later. That drop of 35 percent was the Great Crash. I also know that on April 17, 1930, the day before Good Friday, the Dow closed at 294, or 96 percent of its level before Black Thursday. In other words, almost all of the decline of the crash proper had been undone by a recovery of 48 percent in the Dow between Halloween ‘29 and Easter ‘30. Most people don’t know that, or if they ever did they forgot it.
On Good Friday ‘30, the New York Times referred not to the Great Crash, but to “the break in the market last Fall.” The Times that day also noted that the day before, April 17, “average prices worked higher and a few outstanding issues shot up smartly to new high prices for the year to date,” and that “British interests were investing heavily in these issues.”
The Great Depression began sometime after the spring of 1930, most likely when a lot of banks failed late that year. But the so-called Great Crash a year earlier had almost nothing to do with those bank failures, the first of thousands of bank failures that occurred from late 1930 to March 1933.
What’s interesting from the perspective of 2009 is that from September 12, 2008, the Friday before Lehman, to the low of March 9, 2009, the Dow lost 44 percent. The Great Crash of 2008-09 was actually a greater crash than the Great Crash of 1929. And half a year after the crash lows of last March, the Dow again is up about 50 percent, as it was half a year after October 1929.
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Sorry i am lost. It seems Santander have made a nice profit unlike our banks. Santa bought several of our lesser banks when our now strugling banks were not allowed to. I cant help but wonder what would have happened had they been able to proceed? It all seemed stange at the time perhaps Santa will give us all a nice present at Christmas
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#253. Qn3tQs wrote:
"Time to buy into the Euro?"
Probably not. The time to buy into the euro was five years ago, when it was trading at around 60p, rather than at today's 90p.
Currencies generally move cyclically, and fundamental shifts in their relative values are very few and far between. Sterling has been at this level before, and the chances are that it will be significantly higher at some (unspecified) point in the future.
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The next set of Government financial swizzle coming up
The splitting of Northern Rock - let me tell you how it's going to go....
The banks will be split into 2, the good half and the bad half (Cain and Abel).
The good half will be taken by the private sector and the bad one handed to the Government - rumour has it that only 10% of the debts in Cain (the bad bank) are in default and the rest are not.
Swizzle 1 - Most of these debts are not in default because banks have been holding off in order not to collapse the housing market, however it does not make them good debts. Also, if the downturn continues then they are likely to start defaulting, the money the Government must hold back to cover these will not be available to inject into the economy in any sort of Keynsian boost.
When the Abel bank (Good one) is fully in the private sector the share price will rise - I mean who wouldn't buy into a bank who has just dumped all it's bad debts on the Government?
Swizzle 2 - The government will take the rise in share price and start selling it's shares in the bank, then (as Stephen Timms nearly said on Radio 4 last night) - the Government appears to make a profit on the shares they obtained. However this is masking the risk the Government is taking on.
Swizzle 3 - The big swizzle.
The intention is for the Government to 'run down' the mortgage book of the bad bank. This is assuming that a) there are buyers and b) The mortgages won't default before they are sold on.
Once again the Government is gambling on recovery - which is odd because surely there can't be many in the private sector who think this recovery is imminent - or why split the bank in the first place (or not simply sell the bad bank to a PE company).
The reality is the Government knows it's going to have a lot of defaults and it's hoping as they will come gradually we won't notice the steady stream of public money slipping out - as opposed to leaving it in NR and the possibility of the whole thing going bang - which is much more noticable.
The whole thing is a con in order to allow the Government to claim victory in it's prediction of 'the public could make some money out of this'
As any free market Economist will tell you - if there was money to be made then the private sector would be interested - and it's abundantly clear they aren't.
Even if you discount these arguments there isn't much hope the taxpayer will get paid back for some time (10 years). It's a long time to lend money to the private sector and consequently public services and public projects will suffer as a result.
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257. At 12:26pm on 29 Oct 2009, jimisdim wrote:
"Sorry i am lost. It seems Santander have made a nice profit unlike our banks."
I wouldn't read too much into Santander's profit, especially as they are not reporting the regional bank failures in Spain or many of the asset write downs. I found a piece on it a while ago and consequently removed my money from a Santander group bank.
Spain has got some ridiculous level of unemployment (I think it's 17%) - no bank is going to continue to make profit in a country that has those levels of unemployment.
I suspect fluctuating currency rates between the £ and the Euro are helping Santander show a paper profit.
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I guess you have been too preoccupied to spell check your blog. You are forgiven.
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One of the key points about the Santander situation is that it is going to be able to do things that british banks wouldn't get away with. On our high street we have an A&L, a B&B and an Abbey within a hundred yards of each other. I am sure that is mirrrored in a lot of other towns and cities. The staff are already talking about the day when the three goes down to two as being in the short term, and the day when the two becomes one as not far off either. Exactly what Neeelie Kroes would want from our banks. That will give them tremendous economies and sharper focus on the brand (Writingsonthewall's point about the problems in Spain notwithstanding).
It will be interesting to see how our banks, particularly LLoyds with HBOS, try to rationalise. It has the precedent of TSB but it did retain Cheltenham and Gloucester - and now it has a very big rag-bag of names to try to rebadge. Neellie is already on the case. I will be very interested to see how the unions react to the separate companies of Lloyds and Santander, and how those companies themselves react if any muscle appears as is most likely.
I had a few A&L shares which had been well over 10 pounds in the good old days - the Santander bid of three pounds was snapped up by people who had the vision of A&L being another NR, which it obviously wasn't.
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Please correct me if I am wrong but this story cheerfully announces the 'recession is over' in the US - and by the technical reasoning of an expanding Economy then it appears to be true.
http://news.bbc.co.uk/1/hi/business/8331497.stm
However doing some quick maths I discovered that the GDP of the US in 2008 (before the trouble really started) was $14 trillion.
The US Government have injected $787 Billion into the Economy, a figure that represents 5.6% of GDP.
The result is growth in the 3rd quarter, by a margin of 3.5%.
Now doesn't that mean it's actually a net contraction of 2.1% ?
The $787 billion doesn't take into account the ultra low interest rates in the US at the moment and the effect they have.
Also bare in mind this is an annualised rate (the 3.5%) so over the year there is no increase in GDP on average (-6%, -1%, +3.5% and whatever comes next quarter)
...and of course the GDP of the US is much reduced in 2009, so the % which represents the stimulus package is even greater - making it seems even less productive.
So when you're watching TV tonight and the pundits are all lauding about the US growth figures, don't forget how much thay actually put in.
I mean if I increased your annual household income by 5.6% with a stimulus - wouldn't you expect your overall wealth to increase by at least 5.6%?
You cannot lie your way out of recession.
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Writings,
My ex next door neighbour fled his house in Feb 2009, since then nothing! No for sale signs, no payments to the mortgage zip. It was a buy to let (although he stayed there, he owned 7 properties in all). We have had several visits however from loan companies etc looking for his whereabouts but nothing about the house. I was told it was getting repossessed but where are the bank? Where are the for sale signs?
Is this the evidence the banks are hiding their losses by not realising the value of defaulted loans?
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260. At 1:48pm on 29 Oct 2009, writingsonthewall wrote:
262. At 2:24pm on 29 Oct 2009, majorroadaheadagain2 wrote:
I thought the British part of Santanders profits is what i was refering to. Perhaps being new i did not get this accross to well. Had the restrictions bought about by the competition people and the FSA not been implemented would things have been different. Was there an underlying agenda for Santander to profit? at the expence of our Banks and their recent seperation.
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#263 WOTW
'You cannot lie your way out of recession.'
---------------------------------
Gordon Brown is trying his best!
(Let's all just hope he doesn't lie his way INTO a depression)
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Jimisdim
I dont think there was a stampede at the doors of A&L or B&B from our other banks even if the competition boys had been acquiescent. Lloyds already had their hands full with HBOS, aa did Barclays on thne investment banking side. The others like HSBC are not into that game. RBS was in the intensive care unit. So Santander looked a bit like a white knight, particularly to the government which was looking to offload a part of B&B. And as Santander already had Abbey and hadn't caused any "offence" they must have looked like angels.
So they make some profit out of it? In my view that is how capitalism works, although when you have a seller like the government you would always look for them to screw it up if it was at all possible. at the time none of the analysts said anything about Santander having got a steal.
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Ian the Chopper
I dont know if you are still out there, but a week or so ago on this board you were very helpful in setting out the sort of likely sums involved in a rights issue for Loyds assuming they need 11bn.
The Times has an article today with a post from someone called Doh Doh which is correcting another post on the same subject of the rights and the sums involved. Do Do says something to the effect that:
"Lloyds has 5.7bn shares outstanding. A rights issue of 3 new shares for each 1 old share at 65p would raise 11bn if fully underwritten".
I dont know if you do requests, but these figures seem very different from the ones we talked about earlier. Do you think doh doh is wrong please?
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Dear all on this, to me, new blog, only a couple of weeks.
It goes without saying that we all wish Robert all best wishes in his family issues.
Many facets have come to mind in the last blog of Robert, and this current blog, and the large majority is negative, whether it be concerning the Banks, the Hedgies, ( and all other speculative beasties) and of course "our" Government. In fact the only positive(ish) posts that I recall are from RBS_temp, chap, or chapess.
I can live with the Banks and the Hedgies as they are a kind of constant. They are, and have always been there to make money, and for no other reason. (Although the Banks have an increasing roll as an amenity, as has been pointed out on this blog), but I cannot accept that this Government has acted within it's ambit. It is becoming increasing clear (probably for the last God knows how many years) that the individuals that now, and in the past have formed our Government, are simply not clever enough to do the job.
I would be grateful if anyone on this forum could itemise ANY Department in this Government that has been a success. There are many areas to consider, but let's look at:-
Home Affairs (health, schools, local Government etc..)
Foreign Affairs
Pensions
taxation
Immigration
Control of Banking (pretty important now but probably not generally considered previously)
Anyway, as I say, any successes will do if you can find any.
Why do the current Labour Party Labour Party politicians remind me of a bunch of incompetents, who would generally spend their spare hours at the local pub, but then win the lottery and join the polo club. That is how I see that they have treated the power bestowed upon them. Whether it the unprecented density of (largely pathetic) legislation, or it's failure to meet it's promises, (Europe), MPs expenses, WARS, ID, etc...They appear to be completely out of their depth, but just don't care,because they have won the money (power).
I am sorry if this is crude , but that is how I feel. I would be very grateful if someone could persuade me that I am wrong, and that our Government actually knows what it is doing.
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Post 269. I also an article in today's FT re Lloyds and the recapitalisation.
The figures I had for the number of Lloyds shares came from Lloyds own website.
From my own experience I wouldn't take too much notice of the comments in the FT. I would pay much more attention to the following which Lloyds issued today.
http://www.lloydsbankinggroup.com/media/pdfs/investors/2009/2009Oct29_LBG_Update(US).pdf
If there is to be a rights issue it will be flagged with plenty of notice by Lloyds so I wouldn't lose sleep over it at the moment.
As Lloyds say in the announcement today re their participation in the Government scheme or any share issues "all options are open".
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Oh and I forgot to mention Lloyds shares were up 7.5% today.
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Post 269 I have found the part of the Lloyds Banking Group website that has all the relevant information on it. The web link is repeated below
http://www.lloydsbankinggroup.com/investors/share_price_information/detailed_share_price.asp
You might want to save the link.
You and hopefully Doh Doh will see that there are 27,161,682,000 shares in issue.
At a current price of 86 pence per share the Bank has a market capitalisation of GBP 23,359,050,000.
As my post earlier stated don't worry re the rights issue pretty much everything in the press is conjecture and merely guesswork.
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Not too sure I am pleased to see your blog back. For some time I have found your comments to be overtly negative and if not a contributory factor to the sense of economic doom certainly a constantly depressing assessment of reality and not the consistent with the objectivity one would expect from a BBC correspondent
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273. At 10:03pm on 29 Oct 2009, Ian_the_chopper wrote:
Oh and I forgot to mention Lloyds shares were up 7.5% today.
--------------------------------------------------------------------------------Or looking at it in another way ,shares lost 7.5% and money lost 15% in value a net 7.5% differance ,price/earnings is colapsing.
If you were unknowingly in a lift in free fall [g] and the person next to you had a stroke and fell to the floor ,you might think his situation was worse than yours .[ha]
At the moment central bankstirerrs are having to debauch their currencies in unison, which is why they are so happy that Gordon got his QE'rs off their strutting bloks faster than the colapsing financial ponzi in order to give the appearance of stocks and shares going up ,this situation cannot last forever .
I have a strange feeling that we have arrived at one of those wake up moments where the world once appearing to be flat is reccognised in fact to be round and printing money which was once thought of causing inflation may in fact cause deflation,it makes no sence of course but neither does the world being round/square /oval or whatever it turns out to be when weve had enough of it being round. .
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Yes, the banks need more bailouts!
The markets are again at a critical juncture. We have just
experienced a powerful rally that brought major market
averages close to one year highs.
But where are the markets headed next? And what are the
trades you can do to help you make a profit?
It is plain and simple. if you want to be able to buy and sell
at the right time, you must use a market timing system.
There are many web sites providing market timing signals out
there (search Google). Just find one that works and use it!
Check out http://invetrics.com as an example.
Its Dow Jones index timing signals are up a respectable
65% for the year (as of 10/29/09) and it is free of charge
for individual investors.
Following a market timing system works!
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Post 276 Lloyds and RBS are up again today. Your analogy re the lift is wrong, IMHO.
Surely the fact that Alistair & Gordon are looking to sell a bank (the good bit of Northern Rock) is as good a sign as any that we have reached the bottom of the market and the only way is up.
Let me cast a few thoughts in your general direction.
1) Virtually all of the World's large economies have started to grow again (ours obviously excepted).
2) House prices are now higher than they were a year ago. This is absolutely crucial to Lloyds with it's huge exposure to the UK domestic housing market.
3) Counterparties have apparently paid AIG back USD 3 billion in the third quarter as their toxic CDS's have become less toxic.
4) Common view is that mortgage rates will stay very low for at least the next two years. I would be surprised if they rose before the election.
5) Sterling is likely to stay low against the Euro and the USD (in view of 1 and 4 above) which will help both manufacturing (admittedly what little we have left) plus tourism and retail as more and more European's in particular take advantage of their recovery and our cheap prices to stock up on clothes, fashions and other goods.
Don't get me wrong we are still up the creek without a paddle but when the recovery comes the bank share prices will boom.
I expect to see both Lloyds and RBS share prices double in 2010 and maybe have another 50% plus rise in 2011.
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Following on from yesterday - this is proof that the world has really gone insane.
http://news.bbc.co.uk/1/hi/business/8333055.stm
What growth?
I have a plot of barren land and I plant 15 new mature bushes in the earth - what has grown?
It looks like growth to the untrained eye, but anyone with any nouse can see the ground has been disturbed and these are recent plantings.
I'll start making predicions - when the next GDP results come out from the US the oil price will be back to where is was 2 days ago. Any rise off the back of fake figures will be wiped out when the conformation that the US is still in recession is discovered.
.....at least then all the pundits who predicted a 'double dip' recession can claim they know what they're talking about.
The truth is it's not a double dip - the Economy hasn't left recession, only the money supply has increased.
Today was the day the world went barmy - October 30th 2009
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Warm up those presses Merv! - we're going back into production
http://business.timesonline.co.uk/tol/business/economics/article6896278.ece
Lost decade here we come.
What's that? realised that printing money only makes it look like growth, but looking like growth is better than not looking like growth?
What a waste of money (literally).
I knew a crisis was coming, but I have to admit I underestimated the reaction and how bad it actually is.
I think I will have to change my username from writingsonthewall to "embossedlettersonthewall" in recognition of the inevitablility of this collapse.
It's really time to start planning how you're going to eat next year - the fall in sterling will mean higher imports so it's home grown seasonal veg. recipies for us all for some time to come.
I used to think I was mad, but now my madness has become reality and I was counting on the problems of the world being my downward perception of them - I wasn't prepared for them surpassing my dreary expectations.
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Not having any banking or economics training but having read this blog for quite a long time, it appears to me that CDO and CDS 'instruments' have been at the core of the problem. 'Exotic' has been a term applied which may be a euphemism for unquantifiable, too complex to be accurately valued or tracked.
How then can these things carry a rating?
Are CDO/CDS indispensible?
Then we have Derivatives which are a very recent. There were none a short time ago and now they are spoken of in Trillions. These are regulated by...erm, would someone please enlighten me?
#71 Iceland Express: " wealth manufactured up to 2007" Was it really?
Was it not just conjured up and has now disappeared whence it came?
I apologise if I appear naive to bloggers who know about these things. I cannot understand how we came to this point and I am baffled by the resistance to regulate on the things that have been the cause of the problems and on the refusal to separate investment and retail banking.
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@278
1) "Virtually all the world's large economies have started to grow again."
These are the "official" figures. But given all the government debt, QE etc needed to achieve these "growth figures," the foundations of this "growth" look very shakey, even fundamentally artificial. I would be more likely to accept they were genuine if there was no massive Government intervention/debt - which we are all going to have to have to repay via much higher taxes - as indicated by David Cameron & George Osborne.
2) "House prices are now higher than they were a year ago." I'm not sure this is the case. Yes, they have been rising, but higher everywhere? Are the figures Land Registry derived or from a Bank/Building Society that you are quoting? If the latter, they are untrustworthy, to say the least. Even so, when higher taxes and rising interest rates do appear this will "suck" money out of the economy. Less money supply should dampen down the economy, so paying higher house prices today will probably look like a silly thing to do in the not too distant future.
5) "Sterling is Likely to stay low against the Euro....,"
Given the printing of money, could that be the reason for a lack of confidence in Sterling, (rather than low interest rates in the UK?). And the realistic possibility that people simply do not have confidence in the so-called Official figures? For this you would have to have faith in the Government managing the economy competently? The Government's credibility is in tatters generally. Investors in the Euro think it is a far better bet (than Sterling.) The implication being the Eurozone IS better at running its economies than the UK? In the UK we have been told quite the opposite by our business leaders and politicians, saying things like the higher Eurozone cost base will be their undoing. What utter rubbish!
I agree when the recovery comes bank share prices will.... recover, rather than "boom," but by how much is open to question. Barclays highest price was just over £8.00 per share, but this was short-lived. At todays price of £3.60 they are just under half what they were. A doubling of the share price in say 5 years may be big gains for some, but others would not really consider this to be that much of a big deal.
I sold some Barclays shares for £17.62 in 1998 (well before the 4 for 1 share split, in 2006.) At £8 per share in 2008 that was the equivalent of £32.00 per share, back in 1998. In other words last time it happened for real, (in supposedly good economic times,) it took Barclays shares 10 years to nearly double in price! On that basis I would comment, don't hold your breath where share prices are concerned.
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Ian_the_chopper - your assessment seems to be based on 'what the press told you' rather than 'what is actually happening'.
1) Virtually all of the World's large economies have started to grow again (ours obviously excepted).
See post 263 where I explain how adding 5.6% of wealth only produces 3.6% wealth increase (and that's an annualised rate) - not what I would call 'growing'. All the countries who have injected funding have now reported growth, not one of them will sustain it. We'll see if the US is still growing next year - I very much doubt it.
2) House prices are now higher than they were a year ago. This is absolutely crucial to Lloyds with it's huge exposure to the UK domestic housing market.
The supply of houses and mortgage approvals are at an all time low - I think Adam Smith mentioned the effects on demand following a lack of supply. I know people who are looking for property right now and what there is on the market - the quality is very, very poor as landlords tend to sell their least palletable properties first when they get into trouble. Only true homeowner 'gotta move' houses are any good and they are the ones people are competing for.
The last time I checked the mortgage lending was negative - i.e. more people with mortgages are paying down capital faster than people are borrowing it - in addition to this banks are hoarding cash they make to fit in with new FSA guidelines.
3) Counterparties have apparently paid AIG back USD 3 billion in the third quarter as their toxic CDS's have become less toxic.
I couldn't comment on this - but all credit default swaps are underpriced at the moment because the general expectaion is (incorrectly) for growth and not for further defaults. In a situation where there is increasing unemployment then I think this is incredibley dangerous.
4) Common view is that mortgage rates will stay very low for at least the next two years. I would be surprised if they rose before the election.
....sure, if the Government was in total control, however once the markets catch on to the dwindling credibility of the US and UK Governments they will demand higher interest received on their gilts - which will force rates up (just as they did in the 1980's) - that's when homeowners will have their throats cut.
5) Sterling is likely to stay low against the Euro and the USD (in view of 1 and 4 above) which will help both manufacturing (admittedly what little we have left) plus tourism and retail as more and more European's in particular take advantage of their recovery and our cheap prices to stock up on clothes, fashions and other goods.
Whilst this is true - I believe we are a net importer, and even if we're not we are definitely a net importer of oil. Our continued reliance on oil to power trucks, trains and planes to import these goods and move them around the country is a built in 'inflator'. Therefore even those things built in the UK wil suffer oil based inflation - which in turn will force interest rates up.
As much as we all hope the signs are of recovery, this is not accurate and it's very dangerous to make people think we're out of the woods when we are in fact going deeper into them.
The 'technical' measurement of recession is being manipulated by Governments to show a much better picture than it is.
As I posted recently the markets fell by 35% on the 'Black Thursday' in 1929 but by the spring next year they had recovered 98% of that loss - however what followed was a far worse collapse - mainly because people had been convinced that the worst was over. We witnessed a collapse of 45% in the markets (I'm talking the Dow, but the FTSe follows the same rule) - and apparently this time it will be different.
Well - I guess when all else is lost only hope remains.
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Post 282 may I kindly respond to your rejoinders to my comment. I wasn't trying to give the impression that we are out of the woods merely listing a number of pointers that some would list as "reasons to be cheerful" as Ian Dury & David Cameron would say.
Point 1. I Accept your comment re official figures and them possibly being massaged / assisted by transitory assistance. The problem is they are the best ones we have.
Point 2. I would agree with you re how realistic these improvements in house prices are. They come from the Nastionwide and are the top story on this sites business section.
http://news.bbc.co.uk/1/hi/business/8332861.stm
My own gut feeling as to why prices are rising is that it is lack of supply that is causing prices to rise. I imagine many people that want to move cannot move due to lack of equity in their houses in order to be able to facilitate a mortgage.
If they were able to move the price rises would soon halt as supply increased.
Post 5 I would agree with your views however the fact that we are in the position we are in means that the UK is a cheap place to invest in and spend money. This could encourage both investment and spending in the UK by foreigners. I doubt the European leaders are economic superstars but compared to the "Chuckle Brothers" in numbers 10 & 11 Downing Street almost anyone would look good.
Re bank shares I was referring specifically to Lloyds and RBS. The fact that both are running at a very low percentage of where they were 2 years ago means that it is much easier for their price to double or treble.
If something was worth GBP 1 and is now worth 5 pence its trebling in price from 5 pence to 15 pence looks good but in comparison to the GBP 1 is still pretty disastrous.
For example RBS did a rights isue at GBP 12 so a current price of less than 50 pence is horrendous. A rise to GBP 1.50 is good compared to 50 pence but still a nightmare for those that bought at GBP 12.
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273. At 10:03pm on 29 Oct 2009, Ian_the_chopper wrote:
"Oh and I forgot to mention Lloyds shares were up 7.5% today."
You really are clutching at straws....
I have been watching the RBS and Lloyds shares falling for weeks now, the occasional daily rise is not stopping the downward trend.
Today they are priced at 87p, a month ago they were 104p - a fall of 16%.
If you go back further you will see we are almost back to where we were 3 months ago - 84p
Some way from the time when the Government took a 43% stake in January - when it was about 137p (although I'm not sure the exact price the Government paid for them to hand)
Did nobody ever teach you that investments in the stock market are for the 'long term'? To suggest the Government will buck this trend and produce short term profits (with such a massive stake) is a joke based on 'hopeful economics'.
Don't forget that (we) currently also own stakes in other banks - thereby breaking more rules of investment by not diversifying.
What the media is telling us is either:
a) Every financial advisor ever has been lying
b) The Government as an investor is different to an individual as an investor - i.e. normal rules have been suspended.
Neither of these are true - and yet we're being told they are.
You will still be here in a decade telling us how the Government will make a profit from the Lloyds stake.
I'll start the count - day 1.
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Post 285 thanks for your hightly condescending response.
If you would have read the posts I placed immediately above and around 273 you may appreciate that I wrote this to rectify an ommission from a previous post and it was posted as a fact not as a celebratory revelation.
The price of RBS & Lloyds has been falling recently and yet you mention share prices over the last few weeks then have the temerity to disparage my short term views!
I believe that in the long term, and when I mean the long term I mean 5 to 10 years in investment terms, I believe that both RBS and Lloyds will represent a good investment compared to today's prices. I fully expect the UK tax payer not to get all of our money back on either of these banks or Northern Rock by the way.
At no point did I suggest the government would make a profit and in post 278 I made the point that those who invested at the bottom will most likely see gains. I did however clearly state that this would still be a massive loss on the price many purchased shares in the not so recent past.
A trebling of RBS's share price from todays price would not even allow the government to break even and would still leave those who bought shares at GBP 12 with a nearly 90% loss.
Out of interest I don't own any Lloyds shares, don't work there and don't bank there.
The same applies to RBS apart from 1,800 shares I bought at 54p merely as a gamble.
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@284
Yes, I accept investing at 50p and selling at £1.50 would be a trebling in profits. But when you invested at 50p you wouldn't actually know that you were going to get £1.50, nor would you definitely sell at £1.50, chances are you would be tempted to hold.
This looks more like speculating (gambling?) Investing proper is buying and holding - for 10+ years. Or putting it another way, if you bought and then the stockmarket closed for a decade or more, you would/should not be troubled by this.
The real trouble with the present situation, is what happened in the period 2002-2008, in the banking (retail and commercial) sector and the speculative house building that went with it. They both went crazy! And the UK & US Government deliberately turned a blind eye to it!
I think we both know this, so apologies for repeating it.
What I think is utterly disgraceful is the mealy mouthed way our politico's are now using deceit and so-called official figures to cover up the scale of their incompetence at the same time as doing precious little in the way of forcing the banks to have to face up to their total lack of responsibility for "moral hazard."
They keep talking about principles and standards and "the right thing to do." These all sound so reassuring on the tele and in newspapers. Yet in practice what they mean is so long as they're comfortably off, a few (million) losers doesn't matter much! Well it does matter! I'm almost "as mad as hell and I want to know what they're going to do about it!" And so should everyone!
Meanwhile people keep losing their jobs and families are being kicked out of their houses, but all our MP's can think about is reform of their pay scales. Well they ain't going to be cut, obviously! So what can they possibly have to be of the slightest worry, other than an election? etc etc.
We need a revolution, that clears away the old fabulous elite and its banker friends.
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286. At 2:44pm on 30 Oct 2009, Ian_the_chopper
Yes, while I was writing 285 you were responding in 284 (which hadn't appeared yet) which did clarify a number of the points I raised.
My concern (which you interpret as condescending) is that too many people think we will get out of this 'investment' with a profit. The government didn't make a wise investment decision and choose to invest, it was forced to invest - making it a weak deal.
I'm sure (as I said further above) that the government will split the banks in order to make it look like they come out on top - but the stark reality is the public will take on all the bad debts through the 'bad banks' being created - and that means you, me and everyone else will be paying for it for a very long time.
If this economy was a dog - it would have been shot by now.
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Post 288, this may come as a surprise to you but I agree with every word you say in the last three paragraphs of your post.
I'm sure as a UK tax payers that we won't get all of our money back and we certainly aren't going to see a profit on bailing out the banks.
The reason is very simple. We won't make any money as at some stage, and it will be sooner rather than later, the government of the day whatever colour it may be will not be able to resist cashing in our chips in the banks and sell the shares to fund their latest great idea.
I also very much doubt that we will ever find our how much money we lose on the bad bank loans.
Remember it isn't just Northern Rock, but Bradford & Bingley and Alliance & Leicester and Dunfermline Building Society plus several other Building Societies that were rescued plus whatever RBS and Lloyds manage to palm off in due course.
I would put money on it slowly but surely being written off and hidden away in the government books.
I imagine it will be called "asset write downs" or "investment impairments" or something similar and just be smoothed out so no one knows.
I fully expect to be paying my share of the bill for the next twenty five years and then when I retire my pension will be worth less as taxes and other costs are needed to pay off New Labour's mismanagement of the economy.
I blame Gprdon Brown for all of this. He could and should have raised interest rates in 2004 as RPI and house prices got out of hand but he changed his measure of inflation to CPI to ignore the house price rise ponzi scheme. This allied to low interest rates generally on home loans, personal loans and mad rollover 0% credit card deals all encouraged people to borrow moey they couldn't afford. He encouraged banks to keep lending to people who couldn't afford it by keeping cheap money flowing when the plug should have been pulled.
In the Emperors new clothes boom we in 2003 to 2007 nothing could put in jeopardy Labour's chances of winning the 2005 General Election and thus ensure Gordon got to be PM.
For one man's vanity and power lust we will all be paying a lot more for many many years.
As to the economy being a dog failing to put it down must be animal cruelty.
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#251 oldgommy
Congratulations on finding a profitable niche company to work for.
Presumably you kept the prices just low enough to avoid any real competition starting up. In turn presumably the shareholders were satisfied with what was offered to them.
As for honesty and morality in business I have found them to be short lived. There will always be somebody that can do things more profitably.
Things change. Products do not last forever. The people with less honesty and morality end up running the show. All in the name of progress. And efficiency.
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Hello there!
Bankers are playing with us. The huge amount money that has been injected into the economy is simply not enough. Not enough as the US economy shows, 3.5 per cent growth, only because of the bail outs. Other indicators shows different story. Unemployment is still rising.
We are not going to be winners because the more money is injected the bigger the budget deficit will be and the inflation can climb up.
If they do not put more money in banks may go down.
To be honest, I might be an idea that let one bank go down to teach
some lesson.
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Ian
I am sorry but I have been busy today so I didnt see your reply on Lloyds. Thanks again.
There is one thing about the Lloyds/HBOS situation that is totally different to RBS and that is the fact that good bank Lloyds was used by the Government (us) to save the banking system from total collapse. The scenes outside Northern Rock would have looked like a tea party had HBOS been allowed to go down. You will correct me if I am wrong, but it seems to me that any losses that are incurred by the state from LLoyds/HBOS "bail-out" is a cost of avoiding a financial melt-down with much wider imnplications for everyone. Thus in my view it cannot be looked on just as a financial transaction with a profit or loss measurable purely in pounds won or lost.
The second thing is the level of the bailout, and here again a lot of what the state could lose eventually from Lloyds is down to their own stupidity. Correct if I am wrong but the first money the state put in to Lloyds was to buy shares at 1.73 for the first rights in January, which nobody else took up. Was there any other investment? People didnt take them up because the price was trading at around a pound, signalling an instant loss of 73p per share. I am not quite sure why the Government and the Lloyds Board didnt pull the issue and start again at a lower price, but that is up to them. Just three months later they did have another go for more money, this time at 38p per share, which shows the stupidity of what they were up to. The Governent bought their 43% worth at that price. I blame a lot of that, and the price slump after the first rights, on total lack of information, and then the awful trading statement with the huge losses from HBOS. That was the realisation for everyone of the magnitude of what LLoyds had done and the scant natiure of their "due diligence".
If the Government's stake is 43% the question is what is that of and what are the chaances of us getting our money back. The worst scenario is if Neelie Kroes and our regulatots line up LLoyds as they appear to be doing with RBS to undertake fire sales of valuable and highly desirable assets. Like Scottish Widows as just one example, which was said to be worth around 6bn in 2007. It is clear that the monopoly that is Lloyds will have to be broken, from 32% or whatever down to, say 25%, and the Scottish bits mooted wont go near. Against all that value of assets is the possibility of toxic assets sinking the whole thing. Again correct me if I am wrong, but the fact that they dont want to pay 15bn plus to insure those assets suggests that they are hopeful that they can contain the losses. Taking a "penalty" hit of 2.5bn suggests that is so. Presumably, we are not talking about absolute losses at this stage, but assets that look anything from dodgy to tottering, like Blacks Leisure which was in the news this week.
I bought TSB at one pound, but I also bought through my PEP some Lloyds at ten pounds (the highest price on 1 May 1999, one month before I was totally paralysed with Guillain Barre Syndrome). The loss on Lloyds rather took a back seat at the time.
I have gone on a bit, but it is interesting and dangerous times.
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I don't know what the right answer is regarding bank reform but I'm really interested to see new forms of banking appear such as Zopa, the social media enabled bank that is a breath of fresh air in banking. Just started as a lender.
http://reid24hrs.blogspot.com/2009/10/maybe-banks-could-be-nice-afterall.html
What do you think?
Reid
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Writingsonthewall. A short postal strike and you've given up the will to live. We need positive people who don't retreat to a cupboard of tinned peaches but make a contribution to the world.
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Just take a look at the comment of 263. Does it make sense?
Simply, we have to stop financing banks even if the ecomomies slow down, to learn lesson about the normal and proper way of living based on real values. The consequence is going to be disastrous if we are still pumping money into the system. Society also have to take on board that we have limitations and we can live a good life without being too much obsessed by money. I believe the current dealings only delaying the problems.
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295 SZensiblerafael
Yiu have to read all the posts and the backwards and forwards of the debate to make sense of it. Or you can own up to being thick like me, and jusr read it and wonder about my education.
We cant stop financing banks to learn lesons as you put it. If HBOS and RBS had been allowed to go bust as some might have thought they deserved to the economy would have collapsed. I dont know how many millions of savings would have had to be guaranteed by the Government, or how anyone would have unravelled all the mortgages and loans these two account for. What the Government did was the only thing it could do, much as I hate saying it because I am talking about Brown and Darling, who havre doine som much wrong in other ways.
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What you can see the problem is deeper than just about the economy. People are seeding the foundation of the next crisis, instead of making people learn to finance themselves with the proper way. We have to learn the basics and our limitations. The luftbaloon is being blown up again, debts are burdened, people are shopped out.
Problems will not be solved unless the main issues are addressed. The things are looking bad because it is brushed under the carpet.
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I can not believe how Preston gets so much air time on the BBC - let alone such a high profile spot on the website
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#298 stevosando
We need Peston to explain bank ownership changes to hoi polloi.
Quite necessary at the moment me thinks.
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We dont need lots of competition in the banking sector.
Lets cut out the middle men i.e Banks and have the bank of england as the main lender, problem solved.
While I am ranting, is it me or are people who deal in shares taking part in one big pyramid scheme, earning money for nothing of the backs of others while the bubble pops, correct me if I am wrong.
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2manyfreeloaders
That would be nationalisation wouldn't it? As a policy rather than as a result of a grand cock-up by the Government which we have now with NRock, the majority of RBS and 43% of Lloyds?
While we are at it we could have just one drug company, run of course by the Secretary of State for Health, ably advised by a panel of expert professors. And get the MOD to make their own helicopters.
Only joking, as I suspect you were.
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Wondered why we hadn't seen much of you of late - hope the family things get sorted satisfactorily soon.
The, perhaps, frightening thing in the weekend's news has been the furore around the sacking of the boss of the government's own drugs advisory panel. It tells us that however good is the advice ministers are given by the likes of King and Turner, the decisions they then make about regulation will, at the end of the day, be political and they are free to ignore any advice they are given.
And then of course if King or Turner dare to enter the political arena and criticise the consequent government policy and 'campaign' against it, they will be sacked!
But then I am forgetting, being a politician immediately makes you an expert on everything - so nothing to worry about...
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Lots of Bank employees and others are losing thier jobs or having their wages cut. This isn't true though of those that caused the problems. No they are keeping their jobs, getting pay rises and collecting huge bonuses for failure. They will argue that they are the people we need to fic the problems they caused. I think that they have already proven otherwise. Sack the money men and exclude them from ever holding Directorships and high office again. You could say that it won't make amends and thats true but it will deter others from repeating the same mistakes as they will finally realise there is a real penalty for failure.
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303 Richard Gibb,
That is the way it has always been - the ones at the top take the large pay cheques, but the ones at the bottom suffer when it all goes wrong.
My wife lost her job at RBS because of mismanagement, yet the people doing the mismanaging get massive salaries and bonuses - although I don't know how they can justify those bonuses at all!
When they do get "fired", it almost always comes with a massive financial payoff anyway. My wife gets laid off and gets nothing because she hadn't worked there long enough.
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The problem is with the subjective realities of 'value'. It's like the concept of 'truth': There isn't actually any such thing, as an integral part of the human condition, we like to think that there is a grand definition of an abstract 'truth', but really its all personal, and ultimately based on nothing fixed or realistic in any way. Value is much the same: Capital is inherantly unsafe because it is inherantly unvaluable. We are not going to be able to fix a system simply by making it smaller or 'more managable' because the same problems will still exist. And, just for the sake of argument, there is, in another 10-20-30 years another boom-bust (which there will be of course) ALL the banks will be affected, regardless of size. Its the same amount of capital, just shared out between 1000 banks instead of 100.
The inherant instability of people's ideas of 'value' and 'worth' are the problem: And they simply aren't fixable in a capitalist system.
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I fear the use of the word 'radical' over recent months probably means that we will end up seeing some very poorly-thought out legislation eventually arising from this. Current legislation is the result of decades of slow correction and addition - throwing it out all to start anew is rarely the answer.
To draw an analogy with the software world, rewriting the source code from the ground up in a 'radical' fashion will almost certainly mean forgetting the lessons that are enshrined in existing legislation.
I think the real lesson hasn't been learnt at all - the banks aren't too big to fail, but they are too big to protect. We should have let them fall and cleaned out the system that way. As it is, we can look forward to decades of support for a discredited system
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