Tuesday, 24 July 2012

Northern Shock

* "sell-off nets extra £538m for taxpayers" - I saw this headline in an article on the sale of Northern Rock and thought cool.  

It stems from Virgin buying a further £465m of Northern Rock's mortgage assets and agreeing to pay an extra £73m in cash for the bit it’d already bought for £747m. Which is lovely and straightforward; 465+73=538. That plus 747 gives £1,285m doesn’t it? Except “UKFI has estimated that the government could ultimately receive more than £1bn” vs the original £1.4bn invested in it by government on the taxpayer’s behalf. 

This left me confused, like where’s the extra £285m gone then? Best to head over to the National Audit Office (NAO) report on all this and see what its saying. 

Ahhhhh, I see. The main NAO focus was on whether the Virgin deal represented value for money for the taxpayer, what with Northern Rock having been split into a good bank and a bad bank (the good bank being the bit Virgin bought). And aye weren’t there suspicions (and chat) at the time that it got a bargain what with it getting “Customer accounts of £21 billion matched by £10 billion higher-quality mortgages and £11 billion cash” for £747m?

Well the NAO think the Virgin deal was good value because Virgin paid 80-90% of the good bank’s book value at a time when the market prices for major UK banks was around 50 per cent of book value. Crikey, that does sound good.

Its just, its just …… the Northern Rock bit that got sold was in no shape or form comparable to a major UK bank; its an apple and they’re all oranges give or take the odd lemon. Like (1) It has a “clean” mortgage book made up only of the good stuff i.e. it involves a lower risk of future losses than the mortgage portfolios of any other major bank (2) It’s a purely retail i.e. mortgage bank, so is and is likely to remain far safer  than any of the universal portfolios major UK banks actually have i.e. there’s none of the corporate, by which I mean the leveraged finance and commercial property, dreck that have been and remain the primary drivers of UK bank losses. And (3) its no exposure to the Eurozone with all the risks (and associated losses) that entails. So too bloomin’ right it should have been sold at a significant premium to other major UK banks.

The other thing is the reference to the sale transferring billions and billions of cash. I’m not sure what that actually means like did Virgin pay £747m for £11bn in cash? If so I’d like some of that sweet, sweet action. Alternatively, it means that when it was sold Northern Rock had an incredibly liquid i.e. strong, balance sheet. Hence, this alternative report on the sale states Virgin got a “£14bn mortgage book” and “a £16bn retail deposit book”, which is a loan to deposit ratio of 88%. Crikey! That's low and again emphasises how the sale involved assets in no way comparable to other major UK banks.

And remember Northern Rock failed because it was overly, like MAD overly reliant on wholesale funding and had a loan to deposit ratio of something like I don’t know 20p in customer deposits for every £1 lent as opposed to the good bank’s eventual 16p for every 14p lent. So Virgin need only make modest tweaks to its new bank’s funding profile, shifting assets from no/low return highly liquid things into some-return less liquid things and it’ll increase its profitability in an instant. Hmmmm............

Then there’s the bad bank we’re still left with and its £54bn of mortgages that are being gradually wound down. This bad bank is so bad it made total profits before tax of £1bn in 2010 and 2011! And the increase in the return on the sale of Northern Rock stems primarily from the additional £465m in (profitable) mortgages sold to Virgin i.e. its not really that what Virgin paid for the good bank has increased, rather its paid out more for additiona assets that appear to be rather profitable. It’d also be interesting to know if Virgin buying these assets affects its loan to deposit ratio. It’d also be interesting to know if the plan here is to sell off more of the bad bank to Virgin in due course.

All this makes me wonder given it sets a precedent for the handling of the taxpayer’s remaining and far larger bank investments. Like based on the Northern Rock experience:

1)       Government appears willing to sell early at a chunky loss
2)       NAO assessments involve some seriously spurious bollocks
3)       Sod it, why wasn’t it held on to for a good few years more until market conditions for a sale had improved with more money repaid in the meantime and the EU told, in a French accent, to stick their December 2013 deadline somewhere Greek
4)       The reporting of this is pants, being either inconsistent, incoherent or both; like where’s this extra £285m gone then and can a distinction between the sale price and any cash generated via subsequent (and additional) asset sales no be made?

* apologies for the obligatory Northern Rock bank run piccie

Monday, 16 July 2012


I mind a colleague far better versed in the ways of “The City” than me referring to Barclays as Sharclays. I also mind someone I worked with heading off to work there, in BarCap to be precise. What made this bod memorable was that he was well known for being an arse and generally useless; last I heard he was doing rather well thank you very much. So really, the libor scandal is all about one bank’s culture, that and a few rotten apples who have thankfully been resigned allowing the lessons to be learned following a root and branch review.

Except, it very bloody obviously isn’t. As the former Barclays Chief Operating Officer has just made perfectly clear – the Bank of England had a word with the former Barclays CEO who then had a word with the former Barclays COO, who then told the relevant people to game libor. End of *.

Now some context here would help; in 2007 and 2008 the slightest whisper about a bank prompted all sorts of speculation, panic and potential crises of confidence. In this atmosphere, a quiet, unrecorded word with terribly important executives made pragmatic, if not legal, sense; better a “cheeky” wee fix now than another part-nationalisation later.

Unfortunately, the US’s more robust approach to white collar crime appears to have got in the way. Hence, we have the spectacle of the Treasury Select committee huffing and puffing, the FSA and the Bank of England saying they knew something was not quite right over at Barclays and the BBC's strenuous efforts to very obviously skew, distort and disguise what happened.

Hence for Robert Peston, our very own voice of objective financial market reportage and reason, the former Barclay’s COO saying he simply did what he understood the Bank of England said they wanted is actually proof of “Barclays' 'culture of pushing the limits'. This in turn followed an earlier Peston post asking if the Bank of England boy involved was a “Victim of his own innocence?” an interesting question to ask of a fucking deputy governor of the Bank because it’s so very obviously, but distractingly stupid.

The real point is straightforward; the party line here is to manage, massage and manipulate the news in ways that avoid exposing the status quo and limit any investigation of what went on; the "narrative" here is that some blinking foreigner and a few dodgy cronies at a rogue institution, off their own bat mind, gamed an honourable British system. Saying this often and loudly enough should hopefully drown out all the British financial regulators phoning their American counterparts to say “would you please be a good chap and shut the fuck up.”

Why this all took place is understandable. Given it’s documented in emails, there’s little debate as to its substance either. What subsequent events say about the way things are reported in Britain, how they’re managed, like how the SFO only eventually decided to investigate a very obvious fraud, i.e. the way “the establishment” works is actually the real story.

* From memory Barclays distinguished between two phases of gaming the system. One, the earlier phase, was out and out bent . The above only refers to the second phase.

Saturday, 14 July 2012

Grecian 2000 (and 12)

Despite his being that peculiar thing, a Scottish Tory, listening to Professor Niall Ferguson’s last Reith lecture, I was taken aback at how gifted and charismatic a communicator he truly is. And he’s got good hair.

The arguments he made about the current situation? Meh. Actually, delete Meh and replace with “pandering to the preservation of elite self-interest despite that being at the destructive expense of society and the economy as a whole”.

Professor Ferguson, of Harvard Business School no less, is of course a very talented Scotsman on the make who has established himself as a (very) well paid ornament of the aforementioned elite. His claim that government borrowing and sovereign debt is a betrayal of future generations is a dangerous one because it provides something that sounds like an intellectual basis that the elite might not otherwise have(or not be able to communicate so articulately) for hacking back government spending. It’s also pants with Greece providing a good starting point as to why.

Greece’s problems stem from two interlinked failures. One, successive governments racked up wodges of sovereign debt to waste on deeply inefficient public sector spending. In this respect Greece seemingly exemplifies the kind of arguments Professor Ferguson made better than any other country. However, there was and is a second Greek failure; successive governments allowed the Greek people and Greek business to dodge taxes on an industrial scale - Greeks love dodging taxes even more than they do sodomy and plate smashing.

The thing is the two failures are deeply, unavoidably and fundamentally entwined, which is why Greece actually lends little support to Professor Ferguson’s argument; a government unwilling to raise revenues i.e. taxes, has to find the money from somewhere to prop up inefficient dreck like Olympic Airlines. Hence, the Greek sovereign debt crisis is as much about tax dodging as it is wasteful government spending because debt financed both.

And as the people with the most benefit the most from tax dodging, Greece’s tragedy is as much about the wealthy camouflaging their swimming pools to avoid flying tax inspectors as it is civil servants receiving bonuses every time they wiped their arses (there is one difference between the two groups of course; Greece’s elite has been busily buying up luxury London property, off-shoring as many Euros as possible in a wonderful statement of national pride and unity. By contrast the civil servants are getting humped).

So even if you accept the notion government debt robs a nation’s children of their future at some point in the, well, future, right now Greece actually exemplifies how debt was and is being used to maximise the incomes and wealth of today’s elite.

But, Professor Ferguson is a historian and historians like facts, so lets have some. In fact lets approach this like say a Sir Lewis Namier, a dead historian who emphasised the importance of self-interest, something Professor Ferguson is profoundly enamoured with; hence, a recent study found doctors and engineers are the worst (or is that most effective?) professions in Greece for tax dodging. Now guess which two professions are heavily represented in the Greek parliament? Yup, failed vets and grease monkeys.

This is interesting. This suggests an alternative model for understanding how shit got to where it is, one where in the West economic and political elites used both public and private debt to mask the incredible growth seen in economic inequality, finance tax dodging (or tax cuts in the US/tax “efficiency” here) and, by seemingly boosting the incomes of us plebs, distract from the profound failure of “wealth” or “job” creators to create wealth for anyone other than themselves.

And sticking with Sir Lewis a mo longer, if I was a rich man, right now (or a rich man’s ornament), in between the yubby dibby dibby and the biddy biddy bum, I’d be going on at great length about how public spending needs to be cut back, how sovereign debt is a terribly bad thing, balanced budgets, couldn’t run a business/ household like that, yadda, yadda, yadda (biddy bum) i.e. doing everything I could to draw attention away from how higher taxes on capital and profits could also sort out sovereign debt (a practical policy suggestion here being howzabout next time there’s an “amnesty” for tax dodgers hiding their money off shore, the threat is pay everything or go to jail).