Monday, 23 November 2009
Obviously I’d not fully woken up, but from what I can remember both appeared pretty certain the credit crunch will prove an intellectual watershed comparable to the perceived death of Keynesianism in the 70s and its subsequent replacement by the Anglo-Saxon model of capitalism.
For me this is the Hollywood version of events, except rather than some grave injustice being righted in a courtroom by some handsome and/or beautiful lawyer in the final ten minutes, over the next few years academics, regulators, governments, bankers and so on are presumably going to see the error of their ways and adopt a more touchy, feely, fluffy notion of capitalism.
The reality of course is that the righting of wrongs is so unusual it’s worth making a film about it when it happens. Similarly, comparing now with the 70s illustrates why the credit crunch is unlikely to have a Hollywood ending. For one thing (and ignoring Scandinavian as well as French and German notions of social democracy), thanks to Milton Friedman and Keith Joseph, the UK in the 1970s had a readymade alternative intellectual foundation for economic policy waiting to take over.
By contrast, right now, we simply don’t have an alternative of any substance. Indeed, the efforts of say a James Purnell to encourage the adoption of god knows what kind of political philosophy illustrates how Labour for one isn’t even in the right ball park.
For another the exorcism of Keynesianism was as much an institutional process as it was an intellectual one. So while this morning’s discussants cited 1970s style industrial relations, they forgot to acknowledge the very real changes made to their substance and conduct that were so integral to Thatcherism. Put simply trade unions were booted out of the polity and left sitting on increasingly restricted sidelines throughout much of the 80s and 90s.
By contrast the bankers and financiers who caused the credit crunch are still in place and still able to influence policy, give or take a few meaningless public gestures and the odd early retirement. I reckon this institutional stasis alone will prove enough to limit the significance of any changes. So sure undergraduate degree options that focus on financial crises will prove popular for the next few years or so, but apart from that so feckin what?
The dumberer bit refers to the masturbatory navel gazing some academic economists appear to be engaging in. Must finish that bit off tomorrow.
Sunday, 22 November 2009
So there was me listening in on a conference call hosted by one of the big 3 global rating agencies on the future of UK high street banking. To quickly summarise the view presented by the agency (1) UK high street banking has seen a long term trend towards concentration and (2) the sell-off of primarily retail bank assets being forced on the two banks that have received the most state aid, by allowing new entrants into the market, could well see the fundamental restructuring of the market into one with more big players and more competition. This mattered because in the rating agency's (woefully simplistic) view more competition = less profit.
What an utter pile of ignorant pish. Even ignoring the untested assumptions about competition being presented, besides the sell-offs and the potential for say Tesco and Virgin to use them as a means of setting up shop (as banks) on the high street, you've also already seen foreign banks leave the UK market (think anything vaguely Icelandic), the Nationwide Building Society merge with or acquire the Portman, Derbyshire, Cheshire and Dunfermline building societies and Santander add the Bradford & Bingley and Alliance & Leicster to its existing Abbey business during the crunch.
A fundamental restructuring that will produce a more competitive market? Swings and roundabouts more like and thats being generous. So while RBS and Lloyds have to sell off over 900 branches over the next however many years, Santander alone has already added 451 branches and 140 agencies (god bless you wikipedia) to its network.
So there you are then - in 2009, 2010 and 2011 (and possibly beyond), the UK high street banking market will be more concetrated than it was up until 2007. Its not an especially complicated conclusion, more a bloody obvious one thats hard to disagree with. It's also one that anyone with access to wikipedia and bbc.co.uk/news could have worked out. But, not this rating agency. I wonder why?
Obviously, what they were saying (1) was a big notion and as such more likely to grab people's attention and (2)was cautious, which presumably is an impression they want to convey given their sub-prime experience. I'm also guessing (3) its a product of the kind of analysis they produce, which seems to fixate on sticking today's wanked up business headlines to the side of overly complex financial modelling at a remove from actual events.
Except, given the influence rating agencies actually have over corporate and public policy (e.g. Britain needs to cut public spending to preserve its rating agency awarded credit rating) such basic ignorance strikes me as simply unacceptable.
Sunday, 20 September 2009
You can see this in the packages given to Chuck Prince, John Thain, Fred Goodwin etc. to fuck off – all of whom were multi-billion fuck ups and all of whom are still multi-millionaires.
And yet everyone else is having to pay for the risks these money grasping shitfers took, judging by the latest unemployment statistics. So having troughed at 785,000 in November 2007, the British unemployment benefit (oops jobseekers allowance) claimant count reached 1,602,000 last month, an increase of 816,000!
In amongst all the chunky early retirement packages a handful of execs were given for fucking up so as to smooth the way for the financial system and its PR bitches to claim changes have been made, lessons learned and the guilty punished, etc., etc., Johnny Cameron, the ex-Chief Exec of RBS’s corporate banking division, stood out as probably the only example of a high heid yin who’d actually paid some sort of price.
Not only was he got shot of, the pension he moved onto of £62,000 a year was almost vaguely normal. I mean there’s no way that would “guarantee you bragging rights in a Soho wine bar” (to quote his former chairman Sir George Mathewson)
Even better when he was about to get a job elsewhere earlier this year for presumably mucho money, the FSA appears to have stepped in and said no chance pal by not “pushing through the formal approval required for the appointment of individuals by regulated financial institutions approval”.
So for everyone who’d lost their jobs and their homes due to an economic catastrophe driven by essentially a few hundred people, there was at least one teeny, tiny, grain of schadenfreude. Well there was until a few days ago when it turned out Johnny was taken on as a consultant by an executive head hunter specialising in the financial sector. I wonder if he’s already trying to fix his former boss Fred Goodwin up with a job? If he could do that he really would be worth the money.
As a P.S. am probably being a bit paranoid here, but why does the FT focus on how Sir George Matthewson's reputation was saved by getting out before the ABN Amro acquisition, but not refer to John Varley at Barclays who also wanted to buy that particular pig in a poke, but lost out in the bidding war, like are advertising revenues and club-ability factors here?
P.P.S. against this backdrop the who can cut the most "back office" jobs and still leave front-line services unaffected political posturing going on is repugnant. I mean how motivated are civil servants supposed to feel after watching professional politicians toss each over off over whose the best at cuting public sector jobs?
P.P.P.S. The head hunters that took on Johnny were also contracted to find a new boss for United Kingdom Financial Investments (UKFI), which oversees our stake in the banks. Ater taking on Johnny they lost the contract, which in turn prompted him to resign and him on only £62k a year as well, poor lamb. But, why just pick on him I wonder, theres plenty others that could do with a (spit)roasting. (added Jan 2010)
So there we are then the chair of Britain’s Financial Services Authority and the CEO of the world’s most prestigious investment bank now both think social justice matters and that some of the activities they have responsibility for are unjust or at least useless. Brilliant! Job’s a good’un cos I’m sure the global financial system is about to be changed dramatically for the better. Alternatively, both were spouting intellectually vacuous shite that by obscuring more than it reveals helps preserve the status quo.
First off let put Red in his place. Now if I had a turd needing polished he’s the very man I’d ask to do it, I mean the man is a legend at that kind of stuff, give or take the pension commission he chaired failing to anticipate what Eastern European migration might do to the UK demographic regime. That’s as maybe you might think, but just look at the magazine he used - using Prospect avoided the left/right tribal loyalties associated with the New Statesmen or the Spectator, making his message more likely to be heard.
This it certainly was judging by some of the mince it generated, like the shite spraffed by this bod - “His comments will also help counter accusations that financial regulators have been captured by the industry they are supposed to police”.
or this one - “Lord Turner describes himself as a “socially concerned liberal capitalist”. His friends call him a “public intellectual”. For some bankers in Britain and beyond he has become a dangerous foe: the man on a mission to cut the financial services industry down to size.”
Alternatively, Red is someone acutely aware of the medium and of public perception, but a tad less good at the message. I mean a public intellectual? You must be fucking joking. Compared with the Bank of England’s Paul Tucker and his deliberate invocation of the enlightenment when he discussed Redrawing the banking social contract, Red’s memory only stretches as far back as the early 90s New Labour guide to wanking on about social justice.
And it’s not even as if any banker need fear the rhetoric because the “social” is a rank rotten basis for arguing either for or against any financial arrangement largely because it's too vague to use. I mean think about it for a mo, given the existing legal industry and all its accumulated knowledge, training and expertise still takes years to reach decisions about criminal justice, how likely are we to get meaningful decisions about any other kind of justice? And that’s not even taking into account the fluid and contested nature of the "social”.
Besides, what with Alan Greenspan himself talking about how "innovation and deregulation have vastly expanded credit availability to virtually all income classes", it would have been a piece of piss once upon a time to argue sub-prime mortgages where socially just and useful (give or take the hard sales techniques used). Rather, invoking the “social” strikes me as no more than a recipe for doing nothing give or take establishing the kind of commission Red usually chairs.
But, it does serve the political purpose of sounding appropriately touchy feely at a time when millions of us feel as if we've had our wallets "touched". Even better it draws attention away from more substantive arguments that are both easier to prove and translate into actual policies (yes I know there’s probably already consultancies trying to sell advice on the social utility of this or that and all that kinda bollocks, but they’re bollocks).
Lets illustrate this with a quick example - so there's you, a financial
engineer whiz kid quietly nursing a pint when some bloke wonders over
and says "oi, bawheid that CDO squared doodly-dad you sold me is socially
unjust!” to which all you say is "mebbes aye, mebbes naw, but that’s nancy bollocks whereas what I sold you definitely creates wealth and tax revenues. So shut it bawjawz!”
Except, on balance complex financial products don’t create even medium-term wealth aside from the fees paid to whoever sells them. Rather, the real argument against gadzillions of pounds worth of financial instruments is that they impose
clear economic costs, misallocate finite resources and, by undermining investment in productive capacity, constrain economic growth.
You don’t need to take my word on this, here’s what John Kay said recently “The social rationale of financial markets is that they discover information and create liquidity. But the benefit to society of more informed guesses of what the MPC will announce in an hour's time is small. The benefit of creating liquidity at 11am, when the decision is uncertain, rather than at noon, when it is known, is also small”
He continued - “Foreign exchange dealing is necessary to enable businesses to export and import and to handle the capital flows that are the converse of trade surpluses and deficits. Some speculative trading in these markets does indeed improve information, smooth prices and aid liquidity. But the volume of dealing that is needed to serve these purposes does not need to be several hundred times the underlying volume of merchandise trade. That level of activity creates instability, not stability, in foreign exchange markets”.
So there you are then, much of what goes on is either trivial from the perspective of the economy as a whole – but incurs clear transaction costs i.e. misallocates scarce economics resources – and/or causes instability, which is a clear disincentive to invest (just think of the various arguments for inflation targeting and/or the perils of boom and bust economics, fer instance). That’s OK you might think given you can always buy a hedge against currency fluctuations. Except chances are it would be from the same institutions whose currency trading is making a significant contribution to the volatility you’re wanting to avoid in the first place i.e. it’s like buying home insurance off a burglar.
If that wasn’t bad enough, hedging is itself a risky business judging by the billions recently lost by the global airline industry, which is a shame because if they hadn’t lost that money they might be less inclined to cut services used by the public, make fewer staff redundant and buy more planes.
And it gets worse if we’re to believe the findings set out in a US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” which found speculating on oil price futures significantly increased the cost of the oil we all buy to fuel our cars, heating and (in the US) air conditioning, money that we might otherwise have chosen to spend on other things.
I’m trying to think if “socially useless” quite captures the economic damage much of what passes for global finance actually does to the global economy. Nah, not in the fucking slightest.
As for policy prescriptions well Willem Buiter’s comments on CDOs, the things that helped feck AIG, provides one example; as these, for the most part (by volume and value) simply involve speculating on the likelihood of a company defaulting on its debt and can have a market value several times the underlying debt, restricting the trade in CDOs to businesses that actually have an interest in the underlying asset would limit their impact and the resultant volatility. Similarly, restricting the purchase of oil futures to actual users, producers, refiners etc., would lower the cost of living for all of us. Hmm, can’t see that happening, it’d be socially unfair to speculators for one thing.
* no even as if Inglourious Basterds is much cop either. Is it just me or does the first bit come across like an old Stella Artois advert?
Monday, 7 September 2009
With her blue-stocking, finishing school teacher persona Lucy Kellaway is "the FT's management columnist. For the last ten years her weekly Monday column has poked fun at management fads and jargon and celebrated the ups and downs of office life". So there you are then. How simply super!
The downs of office life certainly strike me as a reasonably appropriate topic at the moment. Throughout Britain managers and employees are agreeing pay cuts, short-term working, redudancies, in facts all sorts of stuff that signals how fundamentally different the employment relationship and culture of work is today compared with say the 1970s and 1980s.
Best not. because while Lucy had "expected the recession to kill off the global epidemic of Waffle flu", it unfortunately hasn't. Consequently she chose to tell us about yet another bad author - "Hewlett's book is riddled with signs of infection. She talks of ramping up touch points, by which she means talk to each other more. Even more worryingly, she writes "talent is a gift that keeps on giving", by which she means nothing at all". How awful. Stuff the hundreds of thousands of jobs that have been lost, what really matters in FT-management-world is bullshit bingo's immunity to the economic downturn.
This would be an interesting point if it wasn't so fucking obvious; because all the people who caused the credit crunch are still in place - give or take the odd early-retired exception - so are pre-crunch ways of thinking. So to ridicule CEOs, management consultants and the ghastly people who write management books for talking shite is the equivalent of criticising dogs for barking.
For me the more interesting notion is actually presenting such dreck as meaningful commentary. To my mind its the equivalent of middle class teenage angst - critical, but of nothing especially substantive, articulate, but with nothing to say and heartfelt, but with the heart located a couple of feet down and to the rear of its usual location. Above all, just like all rebellious teenagers, it's predicated on the assumption that mater and pater/the great and the good, will be along to put everything back to normal in case things actually do get a tad sticky.
I should fess up at this point - give or take the odd note fawning over individual CEOs, I used to enjoy Mizz Kellaway's articles. Now though, rather than crimes against the English language, the management-speak bollocks she ridicules strikes me as evidence of and a contributor to the hubris that caused the credit crunch i.e. as a symptom of a larger problem. For me to not identify it as such is irrdeemably conservative. It also, to my mind, renders those incapable of making such a connection pointless arses.
Friday, 31 July 2009
Technical competency is all very well, but what any best in class organisation really needs is leadership. Sort of, actually no it doesn’t, not really.
Leadership is both a catch-all phrase and a cult. Typically, it's that amorphous mess of charisma, vision and ability to inspire others you occasionally stumble upon, but more often watch strutting about on a podium or sitting the other side of a desk. And by definition it’s both a vague and rare quality; we can’t all be chiefs after all, leaving it something you simply know when you encounter.
This vagueness makes it's supposed importance a belief more than anything else, yet one powerful enough to underpin an entire industry of head hunters, business schools, publishers and training companies, all engaged in selling the stuff YOU need to recruit or even better become a new and improved leader. Unfortunately, reality gets in the way because the belief in leadership is one that can actually destroy shareholder value, the only real measure of a thing's worth in business.
One reality is that “leadership” informs a self-serving political rhetoric that helps legitimise structured inequality. Like when you ask why has that bloke got loads of cash and I don’t, it’s because he’s a leader.
Another reality is that people have vested interests that influence their judgement, decisions and behaviour. To give an obvious example, people buy themselves food because they have a vested interest in not being hungry. To give a more complex business related example, people support projects led by people more senior than they are because it might make their getting a promotion more likely regardless of whether the project is silly. And that’s it really, vested interests routinely drive decisions that may or may not destroy shareholder value, but are perfectly rational for whoever makes them due to the material rewards they generate for the individuals involved.
You could of course challenge this by claiming various organisational structures are in place to put a check on stupidity. Except, the point about the cult of leadership is it emphasises the individual over the committee and, as already mentioned, legitimises as well as encourages the unequal distribution of resources, including organisational authority and power. So you can have as many project approval committees as you like; if one leader is in a position to influence the size of every committee members’ bonus, then what he wants is typically what happens and if he’s an utter nutter, you’re stuffed (and thats not even taking socialization into account or the pressure to conform with organisational values, etc., etc., yadda yadda).
The typical response here is to try and make sure you don't appoint a silly leader by conducting oodles and oodles of interviews. Except, these are typically just more of the same thing, which transforms the process of recruiting a new leader into a pointless endurance race.
A practical alternative that’s both more cost effective and efficient is to move away from the cult of leadership and focus instead on a candidate’s technical competency. To put this in sociological terms it’s to ditch the rediscovery of what Max Weber called “charismatic authority” and instead re-emphasise the importance of “rational-legal authority”.
I’ll explain why; first off, technical competency is easier to assess and measure. So rather than asking some bloke to tell you about a time when he inspired people to exceed expectations and what the outcome was, you simply ask him to change the plug on a kettle then plug it in. If he gets his wires mixed up, bingo, that’s one less travel expenses claim.
More seriously, leadership is such a half arsed, subjective thing to assess shifting the emphasis towards more technical criteria reduces the scope for inconsistent and basically bad outcomes. Most importantly of all, as someone kindly pointed out to me earlier today, it minimises costs/losses and avoids destroying shareholder value.
This is easy to illustrate using a wee model that sees 4 candidates being interviewed for the role of leader.
- Candidate A is a good leader with good ideas
- Candidate B is a good leader with bad ideas
- Candidate C is a bad leader with good ideas
- Candidate D is a bad leader with bad ideas
Candidate “A” is who you’re looking to find, not only has he got good ideas, he’s also got the leadership skills needed to implement them. Appoint him and bingo, you’ll going to improve your company’s bottom line.
Except, if you could spot an “A” straight away you wouldn’t be working thru a protracted interview process in the first place. Alongside this if your organisational focus is on leadership, the difference between a candidate A and a candidate B i.e. someone who can talk a good game, but doesn’t have a fucking clue, runs the real risk of being obscured.
Even worse, the vested interests noted above mean the fact a newly appointed leader might not know what he’s talking about will be swept under the carpet by everyone involved in appointing him because they don't want their lack of judgement shown up. Similarly, all those hoping that by keeping the new leader sweet they’ll get a bigger bonus aren't going to say diddly either.
So installing a B type candidate will see money wasted on external consultants, strategy weekends, bad acquisitions and so on, because they have the personal ability to convince people to buy-in to all that kinda shite. At the same time no one will challenge them because of their vested interest in preserving the status quo
Candidate C on the other hand has loads of good ideas and is highly technical, its just he’s a boring fecker everyone tends to ignore. But, that’s OK. If he was candidate B, he’d be pissing money against a wall inspiring people to build a shareholder value destroying machine. C on the other hand has this wonderful idea for making oodles of cash, it’s just everyone always ignored him whenever he mentioned it, so it never got implemented. At least not initially except now "C" is a leader, he will be listened to.
Similarly, no one cares what “D” thinks, because he also doesn’t have the personal chutzpah needed to introduce any changes of any significance whatsoever regardless of whether they’re good or bad. But, "D" doesn't matter anyway because the use of technical criteria meant he didn't make it past the first interview.
Pulling this together, focusing on good ideas (i.e. technical competency) has two possible outcomes. (1) increased profits or (2) no additional costs. By contrast focusing on leadership will either (1) increase profits or (2) generate losses/increase costs.
So focussing on leadership is only just as likely to deliver the same gains as ignoring it altogether, but poses higher risks. And thats that really.
Friday, 10 July 2009
When John Kay recently wrote an article arguably excusing, if not quite defending, bank CEOs, it got me thinking about those other, not quite as senior executives. I mean who is out there right now defending or even helping them? No-one, thats who despite them needing it judging by the story I once heard about a recently appointed exec who did something in clear breach of company policy.
For the HR Business Partner involved this was due to his naivety and inexperience and most definitely not an obviously nepotistic act that successfully alienated hundreds of staff. Except we don’t even need to take the HR bod at their word to know why the modern executive needs help. The cult of leadership that defines so much of corporate life to the extent I keep getting spam at work from training companies asking me if I want to unlock its secrets, by definition means there’s no need for leaders (i.e. executives) to have the foggiest notion of what it is the businesses they lead actually do or how they do it.
Except unfortunately they do. Now mebbe Oliver Williamson might intervene at this point, getting all transaction costy to say that’s not an issue because recruiting that type of executive has so far generated the highest returns. Except that’s post-hoc rationalisation that is and doesn’t take the opportunity cost of the alternative into account.
Besides that still leaves us with all these poor execs trying to make their way in a corporate world whose politics they understand, but whose markets they don’t. The obvious solution at this point is to get a consultancy in to outline a big project that will make everything best in class. Result! Theres the exec with consultants fanning his ego 4 times a day outlining a project that will give him enough resource to start doing some of the patronage type shit that got him his company beamer in the first place!
Except now he discovers the project approval committee he sits on has received a report from elsewhere in the business that comprehensively destroys the rationale for his pet project. No it’s not as nice as the consultants' report (they’ve a team of 20 MBAs in India who for 2 rupees will produce the whizziest power points imaginable), but it is clear, factual and well-founded. So what is he going to do? Even worse, what if that was you!
First of all DON’T PANIC! Instead take comfort from the fact anyone naïve enough to challenge the status quo regardless of how credible or coherent the analysis, is clearly not executive material.
Second, remember the golden rule; in business all success is due to great leadership and all failure the result of circumstances over which no individual could possibly have exercised any control let alone forseen.
Third, use one or all of the following tried and tested strategies (complete with shit acronyms) to make sure any opposing view can be safely ignored. In fact, if you’re so inclined use them aggressively enough to completely discredit whoever contradicted you in the first place. Bingo!
1) The Captain Pedant (CP): The CP is easy and can be applied to any report. The mechanics are straightforward – find a fault, any fault, then blow it completely out of proportion to discredit the entire document.
Because no report is perfect it should be relatively easy to spot something. Except, that involves having to read the whole thing and being able to understand the subject matter, which can be difficult to square with the all the other important meetings you need to attend and your basic competency level.
But, that’s OK because you can start with the basics, like is there a vaguely complicated diagram you can spend 10 minutes asking about? Can you plausibly get away with saying the exec summary is too long? Even better is a department that changed its name after the report was written referred to by its old title? Better still get someone else to read it and on their suggestion point out “labour” should be “labor” and that it’s not a “gutter-dynamic-shifting flange”, but actually a “dynamic-gutter-shifting flange”. Sure all this might strike the man in the street as superficial mince, but for a high-flyer like you it’s actually a rich source of reasons as to why an entire report can be safely ignored. I mean if they can’t get the small stuff right, what else have they got wrong?
Even better there’s a good chance no-one else round the table has read the thing, which means you’ll create the impression you actually know what you’re talking about and are a stickler for detail, a definite positive if your career to date has been in sales.
2) The academic (the Bad A): Oh, oh, despite you playing the CP someone who actually read the report is claiming to be impressed by its overall thrust. Again, don’t worry – an executive with time to read every paper he's sent is clearly an executive on the way out, in fact he’s probably already in discussions with HR about his early retirement package. Besides, now you can do the “Bad A”.
In business to call something academic is to discredit it, because in business “academic” is commercial’s idiot brother and that’s that really. Hence, the only decisions worth a damn are “commercial decisions” and the only kind of experience required is “commercial experience”.
Call something academic and you tap into a deep-seated prejudice that means allova sudden the best aspects of academic research – that it strives to be objective, informative, independent and substantiated (yes the reality is different, but hey ho it’s something worth aspiring to) – become weaknesses. So are there lots of facts supporting the argument? Thats academic that is. Are there any numbers, graphs and possibly even formulae? Definitely academic. Even better if its formatted in such a way that even vaguely reminds you of a university essay, then by definition it’s academic and as such can be completely ignored because its irrelevant to the kind of hard, commercial decisions you and everyone else round the table takes every day.
And again you come out smelling of roses because you’ve made clear that for you if it ain’t commercial it ain’t jackshit. Ooo, whose all hard nosed allova sudden.
3) The Mom and apple pie (MAAP): Shit. The report actually stated in clear English in the first few lines of the exec summary that you’re project could drive the company into the ground, listing both the reasons why and practical alternatives. But, that’s OK because there’s always the MAAP.
Somewhere, sometime, someone wrote out a meaningless list of mince packaged up as the "core-values" of “how we do things round here”. These will be so vaccuous no-one could possibly disagree with them and in there somewhere will be something along the lines of “we value our customers through the good times and the bad”.
Because this report is essentially saying for gawd sake don’t do the bad, it'll fuck the lot of us, you can ignore that and instead respond with a MAAP quote. Brilliant! Everyone round the table has to agree because they were at the same strategy weekend held at a rather good hotel where the CEO came up with that bollocks in the first place. I mean to not agree with you that the report is a bad thing is to be disloyal so of course they will.
Still smelling of roses? Definitely, you’ve just quoted the CEO fer gawd’s sake.
4) The offline long-grass (OLG): Except mebbe the CEO or committee chairman just realised the facts are so fecking obvious the points made can’t be ignored. Damn, you might be thinking, but don’t. Theres a meeting agenda after all and because by now you’ve used the CP, the Bad A and the MAAP and there’s still lots of important decisions to be taken, you can now play the OLG – just say rather than take up any more time you’ll take this off-line and pick up with the report’s authors (by which you mean sponsors) so that everyone can move onto the next item. My, my aren’t you the time conscious fecker and masterful with it too. Go tiger, Grrrr!
So despite your project being completely discredited, you’ve now created enough time in which to get this temporary hiccup sorted out. And in dealing with the report off-line you can now reapply the CP, the Bad A and the MAAP all over again in a one to one setting with a wee bit of BM on the side!
5) The Big Mate (BM): Off-line is when the BM comes into its own. First off any report worth its salt should be circulated in draft form round all interested/affected parties before being submitted. Don’t like it? Then hit it with the CP, the Bad A and the MAAP either individually or all at the same time. Has that not worked? Nae bother, just find out who is sponsoring this report and whether you're more senior than them. Then do the BM during a wee quiet chat about how at the present time this might not be in the business’s interest, or anyone else's for that matter i.e. I am senior to you so shut it.
But, what if the sponsor is just as senior as you are you're thinking? That’s OK, the kind of maverick willing to put his name to critical reports won't have as many patrons as you do amongst the upper reaches of the organisation, so all you need to do is have a quick chat with one of them, then drop their name in an email to the sponsor and hey presto, the report is gone because your BM is bigger than his BM.
Now thats before a report has been submitted, but don’t worry you can take the same approach now its OLG. Even better if you kick the report into limbo by inconsistently applying the CP, the Bad A and the MAAP, the poor sod that wrote it won’t have a clue what to do because they're probably the kind of schmuck that thinks black is indeed black when its black rather than the lovely shade of orange the CEO has been partial to ever since that 2 week strategy course he went on at Insead . Even better the more irrational and unreasonable you are the greater the paralysis you'll induce, which means the author will rapidly acquire a reputation as someone who can't deliver.
There you are, problem solved. Apply all of these strategies often enough and rest assured you’ll soon be so senior you can simply disagree with things for no reason whatsoever. As for the project, its costs and eventual losses, just remember the golden rule; in business all failure is the result of unforeseen circumstances over which no individual could possibly have exercised any control.
Tuesday, 7 July 2009
But, here that’s no saying its good, rather it’s saying it’s not bad, whereas it is in fact good. So sure the recent article by some plumb saying Sarkozy’s appeal to France was based on French people wanting to be ridden hard by a sex dwarf was bloody awful (I shit you not. Shame the references were to Nietzche and not Marc Almond), but for the most part the commentary is wide-ranging and the views expressed informative and thought provoking. I mean fuck me a magazine that actually provokes thought as opposed to reinforcing existing prejudice, how cool is that? The problem it has right now though is relatively straightforward – it’s the economy stupid!
I don’t mean by this an exercise in political positioning or sloganeering. Nor is it a question of which party is best equipped to run the Treasury. Rather the reality is that (a) the economy is totally fecked and will be for a good while, (b) following on from that we are going to see a mighty hack back in public spending over the next 3 years at least and (c) we’re currently seeing the rules governing the relationship between the financial sector and the economy being debated before they are rewritten and as such are still up for grabs.
These are key issues and they’re simply not being addressed by Prospect (or anyone else for that matter). Sure they’re getting in bods to explain what quantitative easing is, but so the fuck what? The point surely isn’t to simply explain, rather it’s to analyse, contextualise and relate the implications of this to government policy, the economy and social issues.
Here a quick and easy example –
An obvious response to the recession is for government to embark on a major social house building programme, which would address housing issues and provide jobs.
However, it would also increase government borrowing. The existing level of government debt has already prompted at least one rating agency to make noises about downgrading Britain’s credit rating, which would increase the government’s cost of borrowing.
However, the same rating agencies also said sub-prime was the bees knees despite the conflict of interest whereby the people paying for the ratings where the same ones who would benefit from it getting a high rating.
So should we look at the role of rating agencies, their structure, strategy and technical competency both in terms of rating sub-prime debt and government debt? Like should we rewrite market rules so they can go and fuck themselves?
Even more straightforward, should the issue of social inequality figure in the regulation of pay in banking and the assocaited rhetoric used to justify mega bonuses.
See? Some quick, practical examples that relate social policy to economic policy to financial re-regulation.
And there’s more – the cuts in public sector spending to appease rating agencies arguably render Prospect’s a wee bitty wanky obsession with think tank politics irrelevant. So one think tank says we need to do this to help the disabled, that to help ethnic minorities and the other to address issues of national identity? Piss off, we can’t afford any of them and that’s that really oh and we’re cutting your 2010/11 funding by 30%.
For me unless these realities are addressed and debated it looks like what we’re going to see when it comes to the financial system and the economy is one big vested-interest cluster fuck focused on retaining as much as possible of the old regime, regardless of its flaws .
I should perhaps confess at this point I still think Marx had it more or less right when he wrote -
“these relations of production correspond to a definite stage of development of their material forces of production. The sum total of these relations of production constitutes the economic structure of society - the real foundation, on which rises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life determines the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.”
i.e. that’s what I mean when I say “it’s the economy stupid”. The challenge we have right now is that outwith the Treasury, the FSA, the Bank of England and the financial system theres too much focus on the superstructure and way, way too much ignorance about the base.
Monday, 6 July 2009
It’s stupid for all sorts of reasons like this one; so say house prices go up - remember when that used to happen? - then chances are I need to spend more to buy a house i.e. rising house prices transfer cash from buyers to sellers, who are more likely to be old with a good pension and suspect attitudes towards gender and racial issues. So if you can net off much of the supposed increase in wealth why do people continuously witter on about the “wealth effect” and consumer spending? I’m guessing this is because of two different theories, a “strong” one and a “weak” one.
Starting with the weak one, this is all about confidence and works along the lines of “Daphne! The Daily Mail says our house is now worth 50 grand more than we paid for it, I’ve just clicked on www.sneak-a-peak-at-how-much-your-neighbours-paid-for-their-house-without-asking-them.com and by jove they’re right, I’m feeling so mighty confident, lets buy some extra tins of beans and caviar to celebrate when we do the weekly shop!”
The strong argument is much less wanky. Instead, rising house prices provide more collateral for banks to lend against. Homeowners in turn take out equity release loans/increase their mortgage when their 2 year deal is up to get some serious spondollas to spend on stuff like diamond yachts and shit.
The significance to attach to both arguments is, of course, set in relation to the netting off effect. The strong argument can also be measured using bank lending statistics and in Britain equity release loans just aren’t that important a factor. The other thing of course is that house prices and consumer spending both tend to rise at the same time because they’re influenced by the same factors, which until the credit crunch largely meant the availability of cheap credit. Hence going daft in a shopping centre with 13 0% balance transfer credit cards with mad limits and taking out a 120% mortgages to buy a new build ensuite city centre flat were simply different sides of the same coin.
So given this is all bloody obvious why a wee while back when I phoned into an invite only tele-conference given by a leading investment bank did I hear one of their professional economists witter on about the “wealth-effect”? The long answer is sociological and takes into account individual ignorance, educational failings, vested interests in the production of economic commentary, prejudice and conformity. The short-answer is because they're an ignorant cock.
More depressing though was the new article on the otherwise fab Voxeu.org, wherein taxpayer funded academics disproved the wealth effect at great length. Presumably they’ll be following up this groundbreaking study with a detailed, econometric analysis of the moon’s cheese content. Cock 2x.
Friday, 19 June 2009
The biggie it seems is significantly changing the role of the Bank of England in relation to the financial system. You can read about much of what underpins this suggestion, idea and/or potential policy in a Centre for Policy studies paper written by Sir Martin Jacomb, deputy chairman of Barclays from 1985 to 1993 and a director of the Bank of England from 1986 to 1995.
His paper states “The Tripartite Arrangement needs to be recast. The FSA should become a subsidiary of the Bank of England. Its relationship with the Bank should be similar to that of the MPC.” And “Responsibility for the stability of the financial system as a whole should be entrusted to a third subsidiary, the Systemic Policy and Risk Committee. This would report in much the same way as the MPC.” Besides which “The idea of a greater role for EU regulation of UK financial services must be resisted.”
It’s almost too easy to rip the pish out of Sir Martin. There’s his grasp of history i.e. facts, like when he refers to Northern Rock as “the first run since Overend Gurney in 1866” and a “national disgrace”; mebbe aye, mebbe no except the last was in 1878 when the City of Glasgow Bank failed, a far more significant matter because it prompted the widespread adoption of limited liability and as such fundamentally changed the relationship between investors and companies in Britain. Even better according to Wikipedia Sir Martin also described insider trading a few years back as a "victimless crime", suggesting a somewhat interesting moral compass. Finally, the easiest criticism to make is that he’s simply an auld duffer who isn’t so much presenting an argument as moaning on over a rather good brandy about how it wasn’t like this in his day.
Its also good sport to see a think tank set up by Sir Keith Joseph articulating how to intervene in markets, but I guess that’s a somewhat more esoteric point. But, hey ho, if this is the cutting edge of Tory thought lets give it a think because politically it’s an absolute blinder.
1) It would establish real, clear blue water between the Tories and Labour who are much keener on retaining the existing tri-partite balance between the FSA, Bank of England and Treasury.
2) By replacing the tri-partite structure it denigrates what Labour previously did.
3) In the grand scheme of things i.e. compared to say quantitative easing, its relatively easy to understand.
4) It’s relatively easy to sell via soundbites e.g. a new dawn for financial regulation, a fundamental break from the past, CHANGE, CHANGE, CHANGE! Etc.
5) It doesn’t cost much – a new committee here, a new organisational structure there and bingo. Which in turn means you can go on Newsnight and say its a fully costed policy and aren’t we prudent.
And that’s about it really. What the principles and tools underlying all this CHANGE! might be aren’t really mentioned. Keeping out EU regulation is also as silly as a spotty sock with multi-coloured toes. Sure it’ll play well to home county duffers, UKIP voters and what not, but as the Fortis Bank collapse made unavoidably clear multinational banks require well co-ordinated, multinational regulation.
All that aside, I personally agree that the Bank of England needs more teeth. But, thats because I think the FSA is the banks' ineffectual bitch more than anything else. This made it interesting to see Adam Posen’s appointment to the MPC. For the FT what matters is he’s “an axeman” who in his testimony to the US congress on banks stated “have top management replaced and current shareholders wiped out.” Setting aside the city boy toss, the fact an expert on the Japanese lost decade has been appointed to the MPC should actually be making us all shit in our boots as to the prospects of that happening here. Second, he has clear, technical, detailed views on the reconstruction of the financial system.
That his appointment was swiftly followed (do these feckers actually co-ordinate this stuff I wonder? Nah, no chance) by the Governor of the Bank of England stating in a speech that “We (he?) need instruments to prevent the size, leverage, fragility and risk of the financial system from becoming too great” and that “If some banks are thought to be too big to fail, then, ... they are too big”, is kinda interesting cos it leads back to auld duffer Jacomb’s emphasis on a beefed up Bank of England give or take the Governor also making explicit reference to the important stuff (e.g. policy instruments & leverage), that actually matters and about which the Tories aren’t saying hee haw.
So it looks like a bun fight is developing with the only people supporting the FSA being the current government. This is doubly fun because the standard criticism of senior Bank of England appointments is they’re too academic i.e. what you really want is some posh, clubbable debt salesman (e.g. a banker) regulating the stability of the financial system (see the hassle over Charlie Bean becoming deputy governor fer instance). Moreover, besides the bloody obvious vested interest and maintenance of regulatory capture - which is the technical term for "being the banks' bitch" - this also plays well in Britain due to the widespread suspicion of people who can think.
Given this reality it’s hardly surprising the FSA stands out amongst the various regulators for being dominated by ex-bank workers unlike say the CEO of OFWAT who is a regulator and civil servant thru and thru. So with the Bank of England making some clear moves to try and increase its overly academic authority (1), it makes you wonder what the banking industry’s rear guard action will be. I’m guessing based on personal experience (a) they’re too thick and arrogant for the most part to realise before it starts approaching legislation and (b) the sole argument they will subsequently make against anything they don’t like will be that it undermines Britain’s position as a financial centre (the subtext here being tax revenues, tax revenues), regardless of whether a proposal is actually perfectly sound from the perspective of the economy as a whole.
Bunch of cock really.
(1) Alternatively it’s a cry for help because the Chancellor, the FSA and various city interest groups have already stitched things up.
Tuesday, 16 June 2009
Shame really. You spend however many years waiting for the inevitable collapse of capitalism and when it arrives you've hee haw to say. Being theoretically inclined or at least someone who likes the odd typology or two, I figure I’ll try and highlight where we are in terms of the politics of it all, the participants and outputs.
Stage 1: This is the “Fucking hell” phase and/or “We must do something!”
This is (was) the initial response to the credit crunch and later on to Lehman Brothers. The key participants at this stage would be Prime Ministers, Chancellors, CEOs and Central Bankers.
In terms of outputs absolutely everything is on the table because the key objective is fire fighting i.e. stopping things collapsing. Hence quantitative easing, part nationalisations and kidding on not cutting benefits equals the rediscovery of Keynesianism.
Stage 2: This is when “We must stop this ever happening again!”
Its also when bank execs, the great and the good e.g. very old, possibly incontinent bank chairman and quango bitches along with the British Bankers Association, senior Treasury civil servants and junior ones who really are on a fast-track, CBI directors, Deputy Central Bankers and terribly senior regulators get involved. All of the bods from stage 1 are still in the frame, but only to receive reports, chair committees and steering groups and intermittently give reassuring speeches/launch papers.
The output here in the first instance is proposal documents, position papers, suggestions and speeches, giving way to more concrete reports setting out strategies and principles after the feedback has rolled in.
Stage 3: This is the intentionally reassuring, almost back to BAU stage because “We are taking care of things”.
Would the Prime Minister be involved? Gordon Brown might be given his apparent temperament (and if he’s still PM), but essentially everything has been handed over to middle and senior managers who, with the aid of wonderfully expensive consultants, have been tasked with putting the outputs of stage 2 into practice. This is when stuff gets set in stone and some poor sod discovers he’s lumbered with implementing various stupid ideas signed off by committees stuffed with terribly, terribly senior bods.
Right now I think we're working thru stage 2. For me January was the tipping point when it came to stage 1. This was when RBS shares fell once again prompting rumours about full-nationalisation, except it eventually became clear it didn’t matter how low RBS shares fell, the government wasn’t for nationalising. Thereafter the sense, felt acutely last year, of waiting for something else to fall over, was lost. No more major institutions it seems will be allowed to fail, not even in the US.
Alongside this and from a British perspective the Bank of England is maintaining a stream of speeches that refer to the new tools needed to combat asset bubbles and the FSA issued a huge document setting out various proposals i.e. they feel able to lift their heads up to outline what they think things will be like after the credit crunch. More importantly, the US just saw Timothy Geithner outline some ideas of what the US re-regulation of financial services will look like, which matters because it sets the benchmark for what everyone else will do (I liked the response of US bank bods to the Geithner proposals reported in the FT “yes, but these are proposals” i.e. piss off.)
All of which brings us back to what the Left has to say that’s of any relevance at this vital stage.……………………….. still waiting ……………………………. anyone any questions or suggestions? No? Shame that as it’s only the re-regulation of a global financial system that’s brought about the worst economic downturn since the great depression. Best just leave it then to the same bankers, regulators, government ministers and civil servants who either caused or facilitated it in the first place.
Actually it’s worse than that. Besides the very real moral, economic and political issues this all raises, it actually impacts on the drivel the left has been churning out in teh meantime. Take the Fabian society’s housing apartheid – if there’s no more cheap credit available for owner occupiers and buy to let investors to actually buy houses and fewer get built, how can this apartheid (what a disgustingly inappropriate use of that term), be addressed? Similarly, new housing regs impose higher environmental standards, so no housing market = less environmentally friendly homes, whaddya think of that then Red Pepper? Or theres PFI/PPP that good old trade union, lefty bugbear that was built on the assumption cheap credit would always be readily available. So should we connect what credit markets will look like in this brave new re-regulated world (heres a clue – more expensive) to debates over whether PFI/PPP will ever pass value for money tests in future (or whether these will simply be flexed to accommodate this?) Ah well.
Hence me stealing a phrase a mate came up with in a completely different context. The pubes are the gits involved in stages 1 and 2 and the left. The crumbs? That’s what the rest of us will be left with at the end of the downturn.
(1) For me Robert Wade’s recent NLR article on things is an honourable exception to this for the most part.
Tuesday, 9 June 2009
The downside to this is straightforward; higher interest rates typically dampen down economic activity. In addition, propping up an over-valued currency misses out on the benefits of a cheap one i.e. if its cheaper to buy Latvian then exports are more competitive, domestic goods have an advantage over imports and more drunken Brits will go on stag weekends to Riga.
The particular problem Latvia has is the currency peg led to Latvians borrowing en masse in foreign currency to the extent that over 80 per cent of Latvian households now have debt denominated in Euros (for debt read mortgages). So if the currency is devalued by say 10% allova sudden everyone in the country owes 10% more. Now that’s an awfy good way to muck things up. It also means monetary policy is stuffed big time leaving fiscal measures the order of the day. Except for Latvia this means cutting public spending hard at a time when the economy is forecast to shrink by 20% this year alone.
By contrast the IMF had this to say yesterday about Euro Area fiscal policies “Given the large automatic stabilizers in the euro area, the discretionary measures currently adopted seem broadly appropriate, with further stimulus to be set aside for contingencies.” – the automatic stabilizers being benefit payments and what not which increase along with unemployment at the same time as tax revenues fall.
So the apparent consensus is Euro-area government shouldn’t cut public spending and should allow government borrowing to increase whereas Latvia needs to cut public spending regardless of Latvians no exactly being well off to begin with.
The bigger picture here is if Latvia devalues its currency or the economy collapses, then the question becomes which Baltic state will be next. Plus there’s the Swedish banks that were doing a big chunk of the lending who might find themselves well stuffed by all these Latvian borrowers defaulting.
All this leaves me wondering if the Latvian economy is being sacrificed to avoid a domino effect that could undermine the well-being of the broader Baltic region. Such an event could in turn undermine global confidence in the financial system just as its getting itself back together again.
if this is the case though shouldn’t more be getting done to help them? I mean in April Latvian unemployment reached 17.4% and is going to keep on rising meaning we’re looking at at least one in five people is going to be on the dole in a country where mass emmigration has been making the unemployment statistics look better than they actually are for years!
So there you are then, Latvia is totally stuffed and the degree of economic distress and all that brings is well beyond anything we’re going to experience. At the same time it’s just been announced 10 US banks are now allowed to repay the funds they’d previously received from the US TARP fund. The motive here is relatively straightforward – if they no longer have obligations to government, government is in a much weaker position when it comes to imposing restrictions on executive pay. Shame that the economy would benefit more from these banks using these funds to actually finance more lending, but what the hey, we can’t have the financiers who caused all this in the first place missing out on their bonuses for 2 years on the trot.
To get a sense of how much taxpayer help this involved just one US bank (JP Morgan) received $25bn in support. By contrast the Latvian government is going to cut public spending so as to get the next tranche of just $10.4bn in aid from the IMF.
So sure Latvia is looking to membership of the Euro in 2012 I think it is when presumably/hopefully/fingers-crossededly all this will be less of an issue. But, between now and then the economy is going to be absolutely humped and with it hundreds of thousands of peoples lives. And it gets worse because the reality, judging by the British experience throughout the twentieth century, is that over-valued currencies tend not to stay over-valued for ever and eventually get devalued, which implies much of the current Latvian pain is being endured for no good reason. But, hey ho, an eventual devaluation would at least allow Western investors to run in and buy up everything worth buying in the country.
In the meantime it appears that in much the same way that the Latvian government hacking back on public spending on the basics of life is necessary to maintain confidence in the global financial system, so is paying US bankers mega bonuses. Regardless of the fact I’ve only read about all this, it’s still difficult to avoid the bad taste it all leaves. Plus, if I was a Latvian I would be thinking what the fuck? And what the fuck has all this post-Soviet Union look West, not East actually got me i.e. theres potential political consequences here.
Thursday, 4 June 2009
This is understandable. Labour MPs are for the most part either public sector professionals or professional politicians. They have barely, if any, experience of the financial services sector nor much understanding of it. For the most part their grasp of economics typically sucks major ass as well. Right now we are in the most serious economic crisis since the great depression. This originated in complex financial instruments. Looking at the Labour party I'd guess only a very small minority have a reasonable grasp of all this.
This is a tragedy because financial services in Britain are currently being re-regulated. Doing so badly will be a disaster for the economy given it's economic as well as social, moral and political implications. Changing leaders and cabinet ministers is a good means of ensuring it is done badly.
The Tory party, in my view, have been a waste of space thru-out the credit crunch. Any discussion I've seen involving a Tory bod has been a waste of time because they have barely understood whats going on and have had no meaningful or practical alternatives to offer. Again this is understandable because in my view the Labour government has actually responded very well to the current crisis. Its easy to find examples of failure (e.g. overly complex mortgage benefit arrangements) and then theres the pre-credit crunch policies and their implications re: government borrowing. But, on balance the response has been a good one - wide-ranging, relevant, flexible and innovative.
Set against this is James Purnell's resignation and resignation letter. In my view he's decided Labour will get humped in the next general election, but so what? Government's tend not to survive serious economic downturns regardless of a leader's ability to "connect with the people". Accepting that and getting on with things regardless would be a genuine example of public service.
Instead, Purnell is playing a long game - its not about whether Gordon brown remains prime minister tomorrow or whether Alan Johnson can lead Labour to victory in the next election (his failure in turn clearing the way for David Miliband), its who might be foriegn or home secretary in a Labour government in 10 years time. By taking this stand today he is attempting to establish himself as a political big beast tomorrow. It strikes me as reasonable to assume his personal ambition is a key factor here.
Except, he is helping to destablise an administration that is, in my view, doing the best it can and doing better than most other Western governments. This is a tragedy given just debating whether Gordon Brown should remain prime minister by itself recently knocked down the value of the pound i.e. made things more expensive for everyone in Britain.
Alternatively, Purnell genuinely believes what he is doing is for the best. If so he is a fool. The current political climate is about trying to comprehend the revulsion felt by much of the electorate over MP expenses. The expenses scandal is a bad thing, but, it would be much better to have the economy sorted first. I can only read Purnell's actions as a genuinely selfless act from the perspective of the Labour party with Gordon Brown being positionined as the fall guy for the selfish actions of however many Labour (& Tory & Liberal) MPs. Except given this is undermining the government's ability to function and lets be blunt, it's future calibre at a critical juncture, it leaves Purnell placing party before country.
Purnell is himself involed in the expenses scandal. He is now the former work and pensions secretary who claimed more for food each month than an unemployed person recieves in benefits to cover their food, drink, utility bills, clothing and entertainment. As such he has no moral authority whatsoever. As a professional politician he lives at a significant remove from real life. It strikes me this distance is a key factor in his thinking and decsions.
Purnell has certainly made a name for himself, just not the one he is hoping for.
Wednesday, 3 June 2009
The principals here were the buyers of sub-prime debt. The agents were the brokers who sold the debt, the mortgage companies that provided it, the financial engineers who packaged it into asset backed securities and the investment bankers who sold it on to principles as securitisations.
Whereas the principal was looking for a nice, safe earner, the agents’ immediate interests didn’t include the safety of the individual credits. This was because the credit risk involved had been transferred to the principal leaving the agents to chase the fees and commission each new mortgage sale generated. Unfortunately, despite the principle having a clear interest in the underlying credit risk of what they were buying, they had less information about this than the agents. This was why rating agencies were so important; by rating the credit risk attached to the debt packages they performed the necessary due diligence on the principal’s behalf. So whether the interests of the principal and agent were aligned became apparently immaterial. Besides, anyone trying to sell on dross would be subject to reputational damage and a loss of trust that would undermine their ability to sell on their debt in future.
Neither of these checks turned out to be any good. The rating agencies, conflicts of interest aside re: who was paying their fees, got it wrong. Simple. End of. As for reputational risk well if everyone is selling dross, everyone’s reputation is damaged and the market as a whole is affected rather than individual reputations.
The big, big challenge is bankers, politicians, bank regulators and central bankers want securitisation to come back again. Securitisation gave retail banking customers indirect access to institutional investor cash, which they used to buy houses. This made new home owners happy along with builders and stamp duty collecting governments. But, most of all it made all the agents listed above smile like idiots. Unfortunately, right now no one can do a residential mortgage securitisation and sell it onto anyone other than a central bank. With the securitisation market effectively dead and no signs as yet of it recovering nobody is smiling.
This is a major factor when it comes to explaining why the regulations covering securitisation are going to be changed; there are too many vested interests at work for it just to be left to die. Instead bank regulators and central banks are going to try and make it more secure in the hope this will eventually prompt the return of private investors.
One of the main developments here is being led by Charlie McCreevy, the European Commissioner for Internal Market and Services, who is seeing to the introduction of a “5% retention for securitisation”. This means that the people trying to sell on debt will have to retain at least 5% of it. The logic of this is the principal-agent problem writ large because by retaining a small tranche of it the agents will be left with a vested interest in making sure its safe or to quote Charlie the change will mean in future they will retain some “skin in the game”.
It’s a nice idea. In fact for what its worth I’m all in favour, it’s just it’s also a little bit pants and here’s why; if you sell senior debt like a mortgage, worst case scenario at least you can call up the house, sell it and try and get some of your money back. However, if you provided equity instead you only get any crumbs left after the senior debt provider has tried to get their loan back i.e. chances are you’ll get hee haw.
This fundamental difference in risk is why equity investors (think dragons den) typically charge a lot more than lenders. Now, leaping from housing to the commercial property market, yes it saw plenty of commercial property securitisations, however it also saw more and more lenders providing more and more debt AND equity or in Charlie’s terms more and more banks had more and more skin in the game, yet they still fucked it all up.
The real issue for me is what kind of institutional and cultural arrangements see banks continue to throw money at asset bubbles even after they’ve burst regardless of whether they’re principals, agents or jabberwockies. 5% retention? 50% retention? Who cares, rather its about institutional investor expectations and the ability of corporate leaders to manage them, marketing departments that don’t understand the markets they lend to, executives fixated on next quarter’s sales targets and organisational sycophants who know damn fine well the way to get on is to fall into line rather than to apply commercial judgement and common-sense and question whats actually going on.
To give a practical example of this my understanding is in one bank an economics team were quietly advised well into last year not to use the term credit crunch in their reports in case a particular executive read them; because he didn’t believe there was a credit crunch all external analysis had to skirt around the issue. Now how fucked up an organisational culture is that? What kind of risks does it pose and should that level of institutionalised stupidity not also be a target for regulators?
Similarly, the debate over pay and bonuses also strikes me as pants. The big emphasis right now is on deferring compensation with the principal agent problem appearing to underly much of the thinking. Except for executives much of their compensation is already arguably deferred due to the emphasis on share options. Similarly the existing emphasis on rewarding people in shares also means they have a vested interest in the future performance of their employing organisation (think of the comments made by the bank execs summoned by the Treasury select committee about how much they’d personally lost).
I’d argue instead that deferring rewards simply hasn’t enough bite and that 2 additional measures are needed. The first is clawbacks – you do a deal today that ends up costing money in 5 years time? Clawback!Gie us some of your cash and if you haven't got it we'll bankrupt you! The second concerns severance terms.
Right now any banker of any seniority exists largely outside employment law i.e. the amount they’re likely to receive based on a standard compromise agreement of 6 months salary (with the first 30 grand tax free) relative to the maximum award for say constructive dismissal means they have no interest in taking their employer to an industrial tribunal unless they can claim some gender discrimination was going on in which case the potential pay out is uncapped (ahh, so that’s one reason why sacked gay and female financiers flag up gender issues!). Then theres the reputational aspect that means someone even moderately senior who fucks up big time is typically given the opportunity to resign rather than be sacked, which avoids any of the conflict that could lead to a banks institutionalised incompetence hitting the news.
So there’s arguably a culture in corporate banking of throwing money at human resource problems until they go away and/or sweeping them under the carpet. Changing what an employment tribunal can award to a salary multiple and/or the existing limit, whichever is higher, would address this and expose banks to more scrutiny because it would see more bankers taking banks to employment tribunals, which in turn get reported on by the media. Alongside this I’d also suggest reworking executive severance terms into two phases alongside a basic performance clause whereby people e.g. Fred Goodwin, who feck up get feck all. So this would take the standard executive benchmark of share prices and use it to assess (1) the applicability of existing reward policies and then (2) their application with a clear justification issued at each stage that requires signed approval by say a non-executive committee. You’ll still get people fucking up right enough, but hey ho at least they won’t have as much cash left to console themselves with. And for those that question the fairness of treating executives differently, they already are by specialist executive pay teams and consultancies that operate alongside the bods who work out how much to pay everyone else.
A P.S. 17th June - shoulda realised - a big thing with originators keeping a chunk of the debt is it clogs up their balance sheets. If they could sell it all on then their capital base is irrelevant. if they have to keep a slice, then the amount of debt they can originate is constrained by their capital base. So skin in the game is all very well, but here it seems to mean limiting the growth in mortgage finance.
Wednesday, 27 May 2009
The one that sticks in the mind involved an executive who had failed to deliver a high profile project the chief executive was taking a personal interest in. The executive was accordingly taken aside and told to piss off. This was reported later on in a newspaper article that instead paid tribute to the executive’s many, many achievements then waxed lyrically about their desire to pursue new career opportunities closer to family and friends. The journalist had simply cut and pasted from a press release.
He or she did so because they were presumably struggling to produce 3 different articles under 3 different names at the time and saw this as an open goal. Besides who would complain? The employer’s reputation was intact as was the executive’s which meant the journalist only had two more articles to write to meet that day’s deadline. Result! Except this example illustrates the mutual dependency that exists between journalists and corporate PR departments and the clear scope this has created for routine misrepresentation.
Thank god for the BBC then, that licence fee funded independent cultural giant! Except when I was looking at its business section today I read the following “top business” story headline – “Uncertainty 'keeps borrowing low'”. Does it? I’d best read on then what with us being in a credit crunch an'all.
The article started in bold with the British Bankers’ Association (BBA) assertion that “Uncertainty over UK householders' financial position is dictating their low levels of borrowing” and that this was evidence of “The "safety-first" policy of householders”. Despite this there was no need to worry because mortgage approvals had already stabilised. Then a spokesman from the mortgage broker Coreco offered some sage words of advice –if you’re about to come off an existing mortgage deal, DON’T just move onto your lenders standard variable rate. This “wait and see” approach could “prove very costly” because “the general consensus is that fixed rates are as cheap as they are likely to get”.
Shite. The BBA is the Banking industry’s mouthpiece and as independent of them on matters like this as my arse is of me after a kebab. Mortgage lending has collapsed because high risk lenders are closed to new business, foreign lenders have left Britain and those that are left have hacked back mortgage loan to values to the point where the average borrower typically now needs savings equal to a year’s worth of their gross salary to buy a house compared to the 5 to 10 grand people put on their credit cards before the credit crunch.
The fact the housing market collapse has been driven by supply-side constraints is why government is asking banks for commitments to lend money. But, what’s the point of that then if people have now adopted a safety first policy the BBA might say. But, that’s shite that is because mortgage lending has already stabilised despite every economic indicator and forecast getting worse i.e. if its safety first mortgage lending would still be falling.
So what we have is a BBC top story that blithely cuts and pastes from a BBA press release written in response to government intervention that also tries to recast supply-side constraints on mortgage availability as a matter of consumer caution. Quoting from mortgage brokers though is just insulting. Besides giving them a licence fee payer paid platform on which to publicise their brand they get the chance to dish out advice that essentially encourages people to get a new mortgage deal NOW. So OK why blame a dog for barking given mortgage brokers make their money selling mortgages. But, is there a general consensus on the future direction of mortgage rates? Mebbe if you’re polling fuckwits there is, but as the future availability of credit will be heavily influenced by what happens to secondary markets and the shape of these is currently being debated by global financial regulators, anyone that can claim there is a consensus when the latest word from the FSA is we’ll only start talking about things in more detail in September, by definition doesn’t know what they’re talking about.
So what we have here isn’t a top business story unless by that you mean
1) Uncritically providing a platform for a pressure group intent on influencing public perception of it's members and government policy
2) Handing over some free publicity to a salesman who clearly doesn’t understand the market he operates in.
But, hey ho in an age where its about being first with the story, first with the volume and first with the headcount reductions because with everyone now expecting free news on tap 24/7 no-one can afford journalists, its perhaps only to be expected.
Alternatively, introducing a policy whereby every comment by a spokesman or pressure group is prefaced with a clear statement of how they are funded and/or make their money would be a quick, easy and obvious response. It’d also be fun. Back in the 1970s the Glasgow University Media Group made its reputation largely by recording the adjectives news organisations routinely associated with trade unionists then pointing out what they took for granted as being common-sensical and objective was actually biased. Hence industrial correspondents (remember them?) talked about militant trade unions rather than just trade unions. Because updating this by say tagging the word git to the phrase mortgage broker might cause offence, we could use an FSA mortgage sales regulation style instead. Fer instance, any quote from say the BBA included in a BBC article or news report is prefaced by a statement that clearly sets out the vested interest involved. And some context might help as well.
So fer instance, the top story discussed here would instead read something like this -
“The BBA is the banking industry’s trade association in Britain. It is wholly (1) funded by the banking industry and has the primary objective of furthering the interests of banking organisations trading in Britain(2). At a time when government has sought to secure commitments from major high street lenders to lend money to customers in exchange for unprecedented levels of support the BBA has just issued a press statement claiming that it is actually uncertainty over UK householders' financial position that is driving the historically low levels of borrowing now being seen”
Comparable statements could similarly be used in relation to statements issued by PR companies, lobbyists, company spokespeople and so on i.e. the vested interests actually get spelled out. I’m sure all concerned would appreciate the transparency.
(1) The latest BBA annual report refers to what it does not it’s funding unfortunately, so perhaps they aren’t wholly funded by banks.
(2) What the BBA says is “The British Bankers’ Association is the voice of banking and financial services. We work with governments, regulators, media and the users of banking services to help build in the UK a world-beating banking industry within a competitive global market”. Except, that’s poncy self-serving wank that is.
Monday, 25 May 2009
Flexing the cost of credit in this way would in turn influence overall economic rates of activity e.g. if it was more expensive to borrow money to buy ladders, less people would buy ladders, the ladder industry would cut prices to encourage more sales and as ladders are included in the basket of goods used to measure CPI, CPI would fall.
That was then. A defining feature of the credit crunch has been the connection between base rate and other interest rates breaking down, in particular between base rate and LIBOR (London Inter-Bank Offer Rate), which is what banks charge when they lend money to each other. Base rate went down (and down and down), but LIBOR has remained persistently high because banks had suddenly become scared other banks were going to fail and on that basis stopped lending to each other.
Allova sudden it became awfy expensive for banks to get cash to lend to customers if they could get it at all. The result was credit rationing – less new credit is available than before and what is available became suddenly more expensive. Hence, the collapse in the confidence banks once had in each other eventually drove the economy into recession by hacking back the number of debt funded commercial and private transactions.
The thing is there were warning signs in the run up to the credit crunch. Asset prices e.g. of houses, companies and offices, were all growing like gangbusters in the run up to the crunch because the ready availability of cheap credit made them cheap to buy. Raising interest rates would have slowed this down and the MPC was certainly mindful of what was going on in the housing market judging by comments recorded in its minutes. However, that wasn’t the Bank of England’s job and anyway none of these things are included in the CPI basket of goods.
Hence the argument to set interest rates in relation to house prices as well as CPI. Except this is regarded as unacceptable by the Bank because setting interest rates like that might adversely affect every other part of the economy e.g. raising rates to stop house prices growing too fast could damage manufacturing by increasing its credit costs and the exchange rate, which would make exports less competitive.
Instead, when I attended a presentation on the latest Bank of England inflation report given by a lovely Bank of England Agent the other day he described how the Bank is discussing other methods of restricting lending. Except this raises all sorts of yucky issues.
There’s the specific debate already underway as to what method or methods should be put in place to be sure – should it be a cap on loans to value, the rate of growth in a particular type of lending, counter-cyclical capital provisioning, and so on and so on. But, that’s not the point here. Rather, its what this could mean for the Bank’s independence and remit that’s the issue.
We now know that when the Bank does something different like quantitative easing, barely anyone understands it. Because this might be the wrong thing to do, this strikes me as a bad thing. So there is the clear risk of the Bank acquiring new powers and targets no-one understands as opposed to its existing nice, neat and straightforward remit of setting interest rates to meet an inflation target.
Then there is the bun fight already underway as to who does what, like isn’t this something the Financial Services Authority should do? A problem here is regulatory capture with the FSA successfully giving the impression of being so up the banking sector’s arse it’s not true. I mean its something of an open secret as to how shit a lot of internal bank systems are that have been passed by the FSA and as its chairman said himself when deciding whether someone was a fit and proper person the FSA’s main criteria was whether they were a money launderer and that was it really. So you’ve a regulatory body that’s arguably in bed with the banks and not especially competent wanting to make sure no one else establishes tools for influencing bank lending because that’s its job. This is exactly the kind of situation likely to produce a compromise designed more to save face/appease vested interests than it is prevent another asset bubble.
Finally, there’s government. Government likes it when house prices go up because it generates lots of taxes and makes voters happy. So imagine the scene; an election is due and allova sudden the Bank of England wades in using its new anti-house price bubble blaster. What government is going to tolerate that kinda vote losing behaviour? Some might, but most probably wouldn’t, which raises the real risk of the Bank’s independence being compromised by politicians.
As to why this could be an awfy bad thing, perversely one of the big factors contributing to the credit crunch was the success of economic policy. Yup, thats right, its success. In the 1980s the Thatcherite monetarist experiement was a disaster, later on the EMU experiment and associated destructivly high interest rates use to prop up an over-valued pound prompted the last property crash. So by abdicating responsibility for rate setting government and taking itself out the equation, government generated a high degree of (over)confidence - no government rate setting = no early 90s style property crash ever again! Just a pain the banks chose to blow their own feet off instead. In future though we could see government reassess its role and that of economic policy in favour of more intervention.
So there you are then, right now the Bank of England clearly wants to change its remit and is discussing what new tools this will entail. The risk is they end up with a new remit and tools that -
1) Nobody understands (give or take a few professor's of financial economics)
2) Have been compromised to the point of being not very effective
3) Are awfy, awfy difficult to actually apply regrdless of need due to potentially destructive political interference.
I hope they're being awfy careful about what they wish for.
Thursday, 21 May 2009
I normally see this bit of the healthcare market as the outcome of three factors
2) Government policy
3) Supply-side conditions
Over the longer term I guess you can swap the supply-side for broader trends in personal wealth. Anyhoo, starting with demographics – the usual cliché here is we’re all getting older, which is a fair point, but its the growth in the old-old population i.e. 80+ that’s the issue because they’re the ones that usually need care.
Unfortunately, while more people are living longer, practically this means living longer in poor health e.g. the likelihood of dementia increases exponentially beyond the age of something like 70, so by the time you reach say 85 the odds of being senile are horrendous.
Besides age household composition is a big factor. In particular people are having less children. People are also more likely to be single. These trends are pains because children and partners are the main source of voluntary i.e. free care. More divorcees + less children = progressively less voluntary care resources for an aging population. Yet despite this the number of care home places has fallen in recent years along with the number of people receiving state funded care. How that then?
That’ll be government policy that will. The nice explanation is there’s a greater emphasis on providing care in the recipient’s home rather than in a home. This is true, but alongside this conditions that in the past would have received some sort of assistance now don’t because state funded care is being more tightly rationed. This is also why government focuses on the number of care hours provided rather than the number of state funded care recipients, an awfy good means of avoiding the reality which is a smaller number of people are receiving more intensive care.
But, what about all those who would have got state funded care in the past but don’t now? Good question, I’m not sure anyone has a particularly good answer other than they’ve been left to their own devices. With few signs of a significant increase in private intermediate care e.g. private home help arrangements,you could already argue that the elderly quality of life is getting worse.
What the governments we elect are willing to spend on care is also key, because it accounts for around two-thirds of the market. Here government has been pretty stingy on the one hand while pushing up the care home cost base with the other.
To give a quick and dirty example care homes are way labour intensive and reliant on cheap labour. So say labour costs = 50% of a care home’s cost base, which isn’t that far off if I can vaguely remember, then any increase in the minimum wage tends to feed straight through and if the increase in what government is willing to pay is less than half the national minimum wage increase, the care home is worse off (and that’s ignoring the accompanying push to raise standards and associated costs even if this is applied pragmatically e.g. the targets aren't too stretching because government doesn't want too many homes going bust/exiting). This is why businesses simply leaving the market because it doesn't pay is a key explanation of why the number of beds has fallen.
Nor is there much chance of a return to state provision. Because state employment conditions are normally more generous what with things like being able to claim expenses and what not, punting out auld yins to the private sector is a way of doing things on the cheap even allowing for care home profits.
Except, so many care homes went out of business some survivors started turning round to local authorities and saying no, we’re no taking in any more wholly government funded residents. This is why top-ups are increasingly important - these see families “top-up” the local authority contribution with more cash to ensure their elderly relatives actually get into a home.
So the rather shitty arrangement we now have is actual fees can increase faster than government conributions leaving relatives to make-up the difference. This is a largely unreported step away from the free at the point of use principle that underpinned the creation of the welfare state and NHS. As such it differs from the ongoing debate about the NHS and whether say people can get a free NHS bed but pay extra to get drugs the NHS is unwilling to pay for. Practically, top-ups also see relatives subsidising wholly state funded care recipients. Even better the use of means testing already means anyone who hasn’t passed on their house to their children before they end up in a home, loses the bulk of the equity before getting any state support anyway.
Then the demographics sneak back in – we’re all having progressively less children and becoming increasingly likely to end up single in later life remember! Then there’s personal wealth – the death of the final salary pension in the private sector and its replacement with the defined contribution pension means more and more people are increasingly likely to have lower pensions.
My guess is this combination of progressively more old people in need of care, poorer pensions and fewer voluntary carers, will produce an increasingly 3 tier system made up of the existing wholly private sector that only a teeny minority can afford, a mixed part top-up part state funded sector and a bottom rung of homes affecting a substantial minority you’d have second thoughts keeping a dog in.
Alongside this we'll see a growing army of "under-cared"; elderly people who can just about get by themselves, but not quite who are increasingly left to fend for themselves. To be fair this is already prompting something of a debate, but its a ghastly one - by leaving these people to their own devices until they really, really need help do they eventually end up needing more expensive care than they otherwise would of e.g. would a home help visit today have stopped them needing two nurses tomorrow.
In response the average age at which people stop working will creep ever upwards regardless of the official government retirement age. Working till you pop yer clogs will become increasingly common and with ever tighter rationing by the state there will be more and more focus on getting every penny an auld yin has before they get any state assistance whatsoever.
If only old people weren’t so embarrassing and (politically) set in their ways all this might prompt a more meaningful debate, its not as if this particular part of our future is difficult to work-out. Instead, all we have is a cringing sense of guilt everytime some headline grabbing care home scandal prompts clichéd comparisons with Italian families .
So save for old age? Sod that I’ll keep on smoking.
Then theres parliamentary expenses – my suggestion here would be
1) No more second home allowances. Instead, politicians do their bit for the credit crunch via parliament buying up 650 or so unsold new build flats across London. These are then provided free of charge to MPs. Those that don’t want them can rent them out via an agency with the proceeds of this the sole contribution to their alternative choice of home. If you need someone to pay for your constituency house then feck you, you're not of that area.
2) Alongside this a jury is borrowed from a court and used to assess the changes in expenses policy during and at the end of the revision process. The jury is given access to the press to express their views – and ideally get their puppies out if their half decent looking in a lad’s mag - and then post implementation a new jury is called in every 18 months to audit a sample of claims.
Michael Martin though, what a guy. He's made a good living off the Labour party for decades, so much so his son is now a professional politician. So having presumably been forced to resign from the gravy train he’s chosen to throw his toys out the pram and resign from his parliamentary seat as well, forcing what’s likely to be an embarrassing by-election defeat i.e. bite the hand that’s kept him and his family in chaueffers(1). Aye well, rather than honour,decency and loyalty, the words vanity, arrogance and ego spring to mind, that and slimey wee prickish fucker.
(1) a June 19th PS - mind reading about another Scottish Labour bod trying to persuade Martin to not stand down. Then read today he's obliged to. Still a grotty, vain wee prick right enough judging by his leaving speech