I mind someone telling me about one of the big Scottish broadsheets and how the same journalist wrote articles that appeared under different names to give the impression the business desk team was bigger than it actually was. The practical consequences of this became apparent when I read some articles about stuff I actually knew about.
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.
Wednesday 27 May 2009
Monday 25 May 2009
War of Independence
It was all so simple before the credit crunch. The Bank of England was given independence and tasked with keeping inflation (measured using the consumer price inflation or CPI) at 2%. To do this a monthly monetary policy committee (the MPC) meets for 2 days, surveys the data then votes on what the Bank’s base interest rate should be. As most other British interest rates are derived from this base rate, changing the latter would in turn see the others change.
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.
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
Different depressing chat for a change
As a committed smoker I can comment on care for the elderly with a high degree of objectivity; it’s not as if I’ll be around long enough to need it. Otherwise I’d be cacking myself.
I normally see this bit of the healthcare market as the outcome of three factors
2) Government policy
1) Demographics
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
I normally see this bit of the healthcare market as the outcome of three factors
2) Government policy
1) Demographics
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
Sunday 10 May 2009
A short guide to losing money investing in property
Lets pretend I’m a terribly sophisticated and experienced property investor. When I invest in property I’m there for the long-term. No fly by night in, out, sell-it-on about for me, oh no. Of course I’m mindful of total returns i.e. rental and capital gains, but really its the regular rent check I’m in it for, which is why when I look at a property valuation I always check to see to what extent it’s simply a multiple of annual rents before I do anything e.g. property X is worth Y and Y = say 10 years rental income.
Heres an example – an office is valued at £100. It has reliable tenants on a long lease paying £6 per annum rent. I think it’s so much of a go-er I borrow £70 from a bank and invest the remaining £30 of my own cash to buy it. The bank is charging me 5% on the debt, so that’s £3.50 a year, which leaves me with the remaining £2.50 to spend on whatever I damn well choose. And hey £2.50 a year when I’ve only invested £30? That’s an 8.3% p.a. return that is. Go me!
Except that’s more than a bit old school, I mean if I borrowed more and invested less (i.e. geared up/used the magical power of leverage), I could make an even bigger return. So instead of £70 I borrow £85 to buy the property (so that’s an 85% loan to value rather than 70%). Same property so same rental income, which means £6 rental income a year to cover interest at 5% or £4.25 p.a., leaving £1.75 for me to spend how I damn well please. And because I’ve only invested £15 that gives me an 11.7% p.a. return. Yahoo! And hey, I’ve still got £15 left to invest so I’ll do the whole thing all over again!
Except you’re thinking, why would anyone be daft enough to lend more money against the same property for the same 5% interest rate? Hasn’t the risk attached to the transaction significantly increased from the lender’s perspective so they should think about charging more to discourage borrowers/get more of a return in case of loss? The risks being (1) the margin between rental income and debt costs is far lower so if say a tenant left the borrower would be in schtuck that bit deeper and that bit quicker, and (2) worst case scenario the bank calls up the security and sells the office to get its money back its more likely to sell it for less than it originally lent at 85% than it is at 70%?
Yup, except for two things. Property lending got so competitive a lot of banks ignored that kind of reality and mispriced (i.e. under-priced) for risk and the idea that property prices were only ever a one way bet (that they would always increase) was a basic assumption underlying much of the British banking industry's business model.
Here though I’ve not explained how to lose serious money. In the run up to the credit crunch (and for a good bit after depending on how stupid a bank’s executives were), so much money was being thrown at property, property values shot up. Take the office example we’ve been using here. After a couple of years it now costs £150 to buy – same property, same rental income of £6 per year. But, hey I’m a sophisticated property investor who made millions in 2004, 2005 and 2006, I can make money here can’t I?
So this time I borrow 85% of the £150 purchase price (£127.50) at 5%, which will cost me £6.37 a year. Feck! This thing only pays £6 a year in rent and that’s less than the cost of the credit I used to buy it, what am I going to do? Borrow more money of course! 85% is for wimps, real property investors don’t get out of bed for loan to values under 90%. Then I can take the additional money I’ve borrowed and use it to service the debt until I eventually sell the office for huge amounts more than I paid for it because property only ever goes up in value!
So OK, I’m no longer investing, instead I’m speculating i.e. taking a punt on there being a sucker willing to buy the office at a later date for more than I paid for it (this mentality applied to most assets asset e.g. companies, oranges, lumps of zinc etc. before the credit crunch and shortly after - oil fer instance). Except, this is obviously only ever a finite option because you can't borrow to repay over the medium-term whatever Carol Vorderman might say in her refinace telly adverts and the supply of suckers is only ever a finite thing, honest. There again if I can find a bank dumb enough to believe me in the short-term, BINGO!
In the medium-term say 3 years plus or so, reality gets in the way of this kind of mince. Take the examples given here
1) Borrowed £70, rental income £6 – who cares what property values are this deal still works. Lost a tenant? Whoop de do, you can get another eventually and there should still be some margin between the cost of credit and rental income.
2) Borrowed £85, rental income £6 – chunk more marginal this because this kind of arrangement allowed investors to buy more and more property and chances are one of them will have come unstuck, but could be worse it could be ...........
3) Borrowed £127.50 in the first instance, rental income £6 – this is the kind of trash that’s going down in flames as I type this, forcing banks to do fire sales of properties (and other assets) where the proceeds are likely to be at least 30 to 40% down on original purchase prices i.e. they’re selling offices bought for £150 for £105 to £84 to try and repay the original £127.50 of debt. This in turn meant they were charging £6.37 for a year or two on a loan that subsequently lost £22.50 to £43.50 (1).
Bingo! So that’s how to lose serious money! Alternatively, just the bank loses because you've done all this via a limited company from which you took mucho big dividends in the run up to the credit crunch and made sure you were always out the office when the bank manager called asking you to sign an asset backed personal guarantee. You might even have charged consultancy fees and built those into the transaction costs.
Of course this might all seem a bit passé right now, I mean we know there was a property bubble and now its burst. Except, property investment being what it is – a relatively slow, cumbersome business – it’s only as we moved from the liquidity crisis into the credit crunch proper and finally the current recession that this kind of lending is being exposed most obviously because more and more tenants are failing.
So whereas for banks 2008 was all about increased funding costs and hacking back to market the value of assets they had bought, the examples given here explain what’s currently happening to bank lending books. There again if I was the kind of idiot banker that had put dross like the third example on the books I’d be awfy keen to emphasise how deals like this are in the past and that we should all be “looking forward” i.e. drawing attention away from my fundamental lack of commercial judgement.
If that didn't work I'd make some comment along the lines of "you know how it was back then, we all had to do stuff like this to meet the targets". Fingers crossed whoever is asking stops right there and ignores the gossip leaking out about how due diligence was regularly ignored if it was commissioned at all and that corners were regularly cut, things no one was ever told to do. There again, as most of the senior managers below the executive boards are still in place, they've got a vested interest in making sure no-one asks those kind of questions as well!
(1) Alternatively the bank doesn't sell the asset. Instead it sits on it hoping values recover in due course. This is a lovely thing to do give or take it means more and more money gets tied up in cack property deals and isn't available to lend to businesses, mortgages etc.
Heres an example – an office is valued at £100. It has reliable tenants on a long lease paying £6 per annum rent. I think it’s so much of a go-er I borrow £70 from a bank and invest the remaining £30 of my own cash to buy it. The bank is charging me 5% on the debt, so that’s £3.50 a year, which leaves me with the remaining £2.50 to spend on whatever I damn well choose. And hey £2.50 a year when I’ve only invested £30? That’s an 8.3% p.a. return that is. Go me!
Except that’s more than a bit old school, I mean if I borrowed more and invested less (i.e. geared up/used the magical power of leverage), I could make an even bigger return. So instead of £70 I borrow £85 to buy the property (so that’s an 85% loan to value rather than 70%). Same property so same rental income, which means £6 rental income a year to cover interest at 5% or £4.25 p.a., leaving £1.75 for me to spend how I damn well please. And because I’ve only invested £15 that gives me an 11.7% p.a. return. Yahoo! And hey, I’ve still got £15 left to invest so I’ll do the whole thing all over again!
Except you’re thinking, why would anyone be daft enough to lend more money against the same property for the same 5% interest rate? Hasn’t the risk attached to the transaction significantly increased from the lender’s perspective so they should think about charging more to discourage borrowers/get more of a return in case of loss? The risks being (1) the margin between rental income and debt costs is far lower so if say a tenant left the borrower would be in schtuck that bit deeper and that bit quicker, and (2) worst case scenario the bank calls up the security and sells the office to get its money back its more likely to sell it for less than it originally lent at 85% than it is at 70%?
Yup, except for two things. Property lending got so competitive a lot of banks ignored that kind of reality and mispriced (i.e. under-priced) for risk and the idea that property prices were only ever a one way bet (that they would always increase) was a basic assumption underlying much of the British banking industry's business model.
Here though I’ve not explained how to lose serious money. In the run up to the credit crunch (and for a good bit after depending on how stupid a bank’s executives were), so much money was being thrown at property, property values shot up. Take the office example we’ve been using here. After a couple of years it now costs £150 to buy – same property, same rental income of £6 per year. But, hey I’m a sophisticated property investor who made millions in 2004, 2005 and 2006, I can make money here can’t I?
So this time I borrow 85% of the £150 purchase price (£127.50) at 5%, which will cost me £6.37 a year. Feck! This thing only pays £6 a year in rent and that’s less than the cost of the credit I used to buy it, what am I going to do? Borrow more money of course! 85% is for wimps, real property investors don’t get out of bed for loan to values under 90%. Then I can take the additional money I’ve borrowed and use it to service the debt until I eventually sell the office for huge amounts more than I paid for it because property only ever goes up in value!
So OK, I’m no longer investing, instead I’m speculating i.e. taking a punt on there being a sucker willing to buy the office at a later date for more than I paid for it (this mentality applied to most assets asset e.g. companies, oranges, lumps of zinc etc. before the credit crunch and shortly after - oil fer instance). Except, this is obviously only ever a finite option because you can't borrow to repay over the medium-term whatever Carol Vorderman might say in her refinace telly adverts and the supply of suckers is only ever a finite thing, honest. There again if I can find a bank dumb enough to believe me in the short-term, BINGO!
In the medium-term say 3 years plus or so, reality gets in the way of this kind of mince. Take the examples given here
1) Borrowed £70, rental income £6 – who cares what property values are this deal still works. Lost a tenant? Whoop de do, you can get another eventually and there should still be some margin between the cost of credit and rental income.
2) Borrowed £85, rental income £6 – chunk more marginal this because this kind of arrangement allowed investors to buy more and more property and chances are one of them will have come unstuck, but could be worse it could be ...........
3) Borrowed £127.50 in the first instance, rental income £6 – this is the kind of trash that’s going down in flames as I type this, forcing banks to do fire sales of properties (and other assets) where the proceeds are likely to be at least 30 to 40% down on original purchase prices i.e. they’re selling offices bought for £150 for £105 to £84 to try and repay the original £127.50 of debt. This in turn meant they were charging £6.37 for a year or two on a loan that subsequently lost £22.50 to £43.50 (1).
Bingo! So that’s how to lose serious money! Alternatively, just the bank loses because you've done all this via a limited company from which you took mucho big dividends in the run up to the credit crunch and made sure you were always out the office when the bank manager called asking you to sign an asset backed personal guarantee. You might even have charged consultancy fees and built those into the transaction costs.
Of course this might all seem a bit passé right now, I mean we know there was a property bubble and now its burst. Except, property investment being what it is – a relatively slow, cumbersome business – it’s only as we moved from the liquidity crisis into the credit crunch proper and finally the current recession that this kind of lending is being exposed most obviously because more and more tenants are failing.
So whereas for banks 2008 was all about increased funding costs and hacking back to market the value of assets they had bought, the examples given here explain what’s currently happening to bank lending books. There again if I was the kind of idiot banker that had put dross like the third example on the books I’d be awfy keen to emphasise how deals like this are in the past and that we should all be “looking forward” i.e. drawing attention away from my fundamental lack of commercial judgement.
If that didn't work I'd make some comment along the lines of "you know how it was back then, we all had to do stuff like this to meet the targets". Fingers crossed whoever is asking stops right there and ignores the gossip leaking out about how due diligence was regularly ignored if it was commissioned at all and that corners were regularly cut, things no one was ever told to do. There again, as most of the senior managers below the executive boards are still in place, they've got a vested interest in making sure no-one asks those kind of questions as well!
(1) Alternatively the bank doesn't sell the asset. Instead it sits on it hoping values recover in due course. This is a lovely thing to do give or take it means more and more money gets tied up in cack property deals and isn't available to lend to businesses, mortgages etc.
Saturday 2 May 2009
passing stones
In a global financial system, whoever has the most lax financial regulations wins. We know this because of things like the US Sarbanes Oxley act, or SOX, introduced in 2002 in response to various accounting scandals at major US PLCs. Complying with SOX was regarded as being so onerous it arguably helped London overtake New York as the world’s leading financial centre.
This kinda harsh reality provides the backdrop to the report on reforming British financial regulations recently issued by our lovely FSA. The report sets out a whole mess of things to consider in due course, the emphasis being on the "due course" because if Britain goes apeshit with the regulation all those lovely financial people that avoid paying taxes while working in London (for companies/hedge funds etc. listed in say the Cayman Islands for tax purposes) will F’off elsewhere and stop buying things here. So essentially we're waiting to see what the US does, because its response sets the benchmark everyone else will use when reforming their own regulations.
This in turn poses the challenge of assessing whether the US is likely to come out with anything even appoaching sane given the risk of it being fucking insane is quite high. To give an example of this the US government first bailed out AIG, then handed it an additional $100bn so it could meet its obligations on insurance policies (credit default swaps) it had sold to various banks - the alternative being AIG could have been placed in administration, the useful bits nationalised and the creditors told to go swing or at best paid a fraction of what they were due.
Practically, this saw the US government using AIG as a Trojan horse for passing even more tax-payer dollars to banks it was already bailing out (and some British &Continental European ones). Having received billions of taxpayer dollars thru this initially covert handout (man did the US financial authorities bitch about and try to avoid fessing up to who got what and how much they got), Goldman Sachs turned round to the government and said now that you've given us loads of taxpayer dollars via the right hand we can disguise as commercial earnings, can we give you back the loads of taxpayer dollars you gave us with the left so we can avoid all the restrictions you're wanting to place on what we pay ourselves?
So if we can’t rely on the US to do anything vaguely decent at a time when the former masters of the universe have once again made clear how greedy, grasping, venal and disingenuous they truly are, what about the EU? Hmm, I’m not sure. The debate there is being led by France and Germany who hate private equity and hedge funds and want to go for them big time. This might seem fair enough, except in continental europe the lack of a vested interest stands out so clearly it kicks you in the nads bearing in mind France, fer instance, is teh country that helped out its car industry on condition it closed plant based elsewhere in the EU to save French jobs). Reading between the lines the proposals so far come across as “we don’t have a hedge fund industry so we don’t care if we over-regulate something we don’t have” i.e. they’re going after politically safe bogeymen and potentially ignoring say the extent to which German state owned landesbanks, fer instance, pissed away their credibility, liquidity and assets buying sub-prime dreck in the first place.
So Britain is somewhere between the devil (the US) and the deep blue sea (the EU). That the government now appears to have lost its authority at a time when the opposition parties are making noises in favour of a UK equivalent to the Glass Steagall act just adds to the confusion.
As for the initial passing stones reference, its about how easy it would be for:
- The US to pass financial regulations that permanently impinge on the big Wall Street bonuses and pay packets that insulate financiers from the consequences of their actions and as such encourage excessive risk-taking to the detriment of the broader economy
- The EU to pass financial regulations within say 3 years that anyone understands and actually constrain what Euro-zone financial institutions do to make money for more than the 3 months it might otherwise take say a big accountancy firm spot however many loopholes.
- The UK to pass financial regulations that (a) had teeth and (b) weren’t overly complex to the point that financial sector management consultancies aren’t already licking their lips thinking of the fees they'll be charging to interpret them on behalf of the British banking system.
A P.S. postscript is due here (May 7th). I forgot the EU vs Microsoft example and associated fines of an order you'd never see in Britain because that just wouldn't be cricket. Then there is the German efforts currently being made to merge the landesbanks. So mebbe the EU will set a good example?
This kinda harsh reality provides the backdrop to the report on reforming British financial regulations recently issued by our lovely FSA. The report sets out a whole mess of things to consider in due course, the emphasis being on the "due course" because if Britain goes apeshit with the regulation all those lovely financial people that avoid paying taxes while working in London (for companies/hedge funds etc. listed in say the Cayman Islands for tax purposes) will F’off elsewhere and stop buying things here. So essentially we're waiting to see what the US does, because its response sets the benchmark everyone else will use when reforming their own regulations.
This in turn poses the challenge of assessing whether the US is likely to come out with anything even appoaching sane given the risk of it being fucking insane is quite high. To give an example of this the US government first bailed out AIG, then handed it an additional $100bn so it could meet its obligations on insurance policies (credit default swaps) it had sold to various banks - the alternative being AIG could have been placed in administration, the useful bits nationalised and the creditors told to go swing or at best paid a fraction of what they were due.
Practically, this saw the US government using AIG as a Trojan horse for passing even more tax-payer dollars to banks it was already bailing out (and some British &Continental European ones). Having received billions of taxpayer dollars thru this initially covert handout (man did the US financial authorities bitch about and try to avoid fessing up to who got what and how much they got), Goldman Sachs turned round to the government and said now that you've given us loads of taxpayer dollars via the right hand we can disguise as commercial earnings, can we give you back the loads of taxpayer dollars you gave us with the left so we can avoid all the restrictions you're wanting to place on what we pay ourselves?
So if we can’t rely on the US to do anything vaguely decent at a time when the former masters of the universe have once again made clear how greedy, grasping, venal and disingenuous they truly are, what about the EU? Hmm, I’m not sure. The debate there is being led by France and Germany who hate private equity and hedge funds and want to go for them big time. This might seem fair enough, except in continental europe the lack of a vested interest stands out so clearly it kicks you in the nads bearing in mind France, fer instance, is teh country that helped out its car industry on condition it closed plant based elsewhere in the EU to save French jobs). Reading between the lines the proposals so far come across as “we don’t have a hedge fund industry so we don’t care if we over-regulate something we don’t have” i.e. they’re going after politically safe bogeymen and potentially ignoring say the extent to which German state owned landesbanks, fer instance, pissed away their credibility, liquidity and assets buying sub-prime dreck in the first place.
So Britain is somewhere between the devil (the US) and the deep blue sea (the EU). That the government now appears to have lost its authority at a time when the opposition parties are making noises in favour of a UK equivalent to the Glass Steagall act just adds to the confusion.
As for the initial passing stones reference, its about how easy it would be for:
- The US to pass financial regulations that permanently impinge on the big Wall Street bonuses and pay packets that insulate financiers from the consequences of their actions and as such encourage excessive risk-taking to the detriment of the broader economy
- The EU to pass financial regulations within say 3 years that anyone understands and actually constrain what Euro-zone financial institutions do to make money for more than the 3 months it might otherwise take say a big accountancy firm spot however many loopholes.
- The UK to pass financial regulations that (a) had teeth and (b) weren’t overly complex to the point that financial sector management consultancies aren’t already licking their lips thinking of the fees they'll be charging to interpret them on behalf of the British banking system.
A P.S. postscript is due here (May 7th). I forgot the EU vs Microsoft example and associated fines of an order you'd never see in Britain because that just wouldn't be cricket. Then there is the German efforts currently being made to merge the landesbanks. So mebbe the EU will set a good example?
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