Hero the Zero (with apologies to Daevid Allen)

So after placing blind, unwavering faith in sub-prime debt brought about the credit crunch and with it the biggest global recession since the Great Depression, Americans chose to pick up this same blind, unwavering faith and place it in the lap of a former investment banker who’d run an institution that’d been involved in, err, sub-prime debt.

The result, judging by these magazine covers, was that mainstream American opinion got to reaffirm its jack-off fascination with individuals as opposed to institutions, complex analysis, anything that might run counter to existing prejudices etc., to an unbelieveable extent.

Thats why I think all these pics need gathered together for posterity's sake; it's my wee attempt at making sure any history of what’s happened has a clear sense of how ridiculous things where and how deluded so many people turned out to be when it came to choosing a white knight (Yeah sure hindsight is a wonderful thing, but c'mon theres laying it on a bit thick and then theres the images presented here).

Even better with Paulson is the extent to which he totally, utterly, totally, utterly, totally fucked up. I mean there he was in the hot seat and whoops-a-daisy, turned out to be an utterly glakit, useless bastard.

It’s like in the Autumn of 2008 when the only thing holding the global financial system together was a belief that big banks wouldn’t be allowed to fail, Secretary Paulson said “Fuck that, let Lehman BURN muthafucka!” or words to that effect.

Here I’ll digress for a mo’ - a polite interpretation would be Paulson took a dealmaker approach to the credit crunch and in so doing displayed a flexibility, creativity and ability to devise bespoke solutions to specific problems of the highest order. Except, given this was a systemic crisis all that shite was completely beside the point.

Rather, what was needed was a contextualised strategy wherein the issue wasn’t so much should Lehman Bros be allowed to fail as it was what would the possible consequences of it’s failure be. And lets not even discuss the progressively more generous terms (for banks at the taxpayers’ expense) on which deals where reached.

Digression over - at this point you could go on about the extent to which Goldman Sachs, which King Henry used to run, overlaps with and even controls the US state in a big, vampire squid stylely. Or you could be a bit brighter and broaden this to include investment banks and Harvard MBAs more generally. But, given that’s essentially straightforward left-wing views of the ruling class and it’s formation I’d rather not waste my time (Very rich and powerful people have a disproportionate influence over government policy, taxation and public spending? Really? You've got to be shitting me. Really? No way, etc.)

Rather, it’s more fun to imitate the all-American cult of personality type thang. I mean yer man Hank (rhymes with ….) obviously posed for these photos indicating he chose to have himself represented in ways that leave me with the impression that Hanky boy clearly has more than a wee bitty of an ego.

Like when the magazine said Secretary Paulson may we call you ”Mr Risk”, he presumably said “yes” and when they said whaddabout “The Persuader” he said “YES” and when they said “King Henry”?, he said “yes, yes, YESSSS!!!!! Jezuz fuckin’christ YESSSSSSSS!!, I AM King Henry Muthafucka!”

Turns out (ignoring the however many seats on the boards of however many private equity houses and financial boutiques he'll take in the future or has already been offered), yer man was a useless bitch, byatch.

WANKER!!!!!!!!!!!!!!!!!!

“Is Sovereign Debt the New Subprime? That’s a question many on Wall Street are asking as 2009 comes to a close.” (or you could also click here)

Anyone interested in this would be advised to ignore the previous links and instead read Willem Buiter’s blog posts from (off the top of my head) a lot of 2008/early 2009, although doing so would raise a number of bloody obvious points (1) its not a new risk (2) seriously, its not a new risk, (3) I’m not joking, its not a new risk and (4) I’ve no idea why Buiter wasn’t cited in Prospect’s list of the 25 people who’ve contributed the most to public debate over the financial crisis other than the fact political economy really is Prospect’s gaping big whole of a weak spot.

Government borrowing and the concerns it's creating are already prompting clear responses. The Irish government, fer instance, has announced the following 2010 cuts in public spending –

• Public servants pay cuts ranging from 5% on those earning 30,000 euros to 15% on those earning more than 200,000 euros
• 760m euros on social welfare
• 980m euros on day-to-day spending programmes
• 960m euros on investment projects.
• A 16 euros per month cit in child benefit

So describing sovereign debt as the new sub-prime as if the discussion was about hemlines is an offensively off-hand way of referring to a situation that's already damaging the finances of millions of people. I mean whats so fashionable about cutting child benefit?

And for a phrase that’s being used so knowingly it’s actually a piece of shit comparison. Sub-prime was regarded as triple A by the exact same people now doing down sovereign debt. It's subsequent implosion highlighted the rating agencies’ deeply rooted technical inadequacies and the ignorance of the vast majority of the financial system (including “many on Wall Street”) what with a credit rating being a measure of probability of default i.e. an assessment of what is likely to happen in the future as opposed to the codification of a retrospective kneekerk. And because allova sudden no one had an utter scooby what the risk sub-prime posed actually was, the resultant uncertainty and associated crisis of confidence was what caused much of the credit crunch's damage to the global economy.

By contrast, people comparing sovereign debt with sub-prime typically trot out a list of countries that may or may not include Greece, Spain, Ukraine, Austria, Latvia, Ireland, Argentina and Mexico as evidence to substantiate their argument. This is all very well except the fundamental point about sub-prime was there weren’t any meaningful, direct comparators. Hence being able to cite relevant examples and historical episodes by definition makes clear sovereign debt defaults are nothing new nor particularly unquantifiable. Or to get all Donald Rumsfeld on your ass sovereign debt defaults are a known-unknown whereas sub-prime was so destructive precisely because it was an unknown-unknown. And just don’t talk to me about the fact that with this wee thing called the IMF there’s already a clear, if painful, safety net in place for national economies and their debt, another factor which didn’t apply to sub-prime (after the monolines went phut anyway).

So why make the comparison if it's spurious and poorly thought out? For one thing it’s catchy enough to comply with the media’s goldfish memory and bad news fetish. For another it's a product of underlying prejudices about government borrowing and spending. And finally, it reflects the position and associated ignorant arrogance of those making it; they’re not going to be affected by child benefit cuts so as a rule don’t give a fuck. Hence this post's title, which I’m putting forward as the universal response to anyone ghastly enough to call sovereign debt the new sub-prime.

Dumb and dumberer Pt 1

Starting with the dumb, professional commentators, authors, telly experts, think tank bods and what not frequently attach far too much importance to ideas. And so it was this morning on Radio 4, which broadcast some bloke who’d written a book and Will Hutton wittering on about the credit crunch.

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.

The Gnome (of Zurich) is dead long live the Gnome

Even if ratings agencies are a necessary evil, do they have to be so shite? By this I don't mean the jaw-droppingly obvious (and very lucrative) conflict of interest that saw them being paid by sub-prime debt salesmen to rate the self same sub-prime debt. And its not the fact the AAA ratings they actually awarded (which increased the debt's value and enabled it to be sold) turned out to be completely wrong either (ahh, but that was the credit rating, not its liquidity rating or some such bollocks said the rating agency PR department in the earlier stages of the crunch). Nah, I'm more thinking more about their general stupidity as opposed to collosal incompetence.

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.

Moral hazard 1 : Everyone else - 816,000

Moral hazard is one of those terms the media used so much its forgotten what it actually means. The phrase “privatisation of profit and socialisation of losses” captured a bit of what it’s all about i.e. when banks make money, the execs and the shareholders do mucho well, but when they lose they get bailed out by the taxpayers. What follows on from that is that banks have no incentive not to take potentially destructive risks (the moral hazard bit) because they know they'll get the goodies if it goes well (for a short time at least) whereas the taxpayers will step in to make sure they and their lenders (not shareholders interestingly enough who have lost big time), will be A-OK.

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)

Disingenuous basterds*

Lord Adair Turner’s name always reminds me of Red Adair, the American bloke who used to put out oil well fires. Except the British Red hasn’t so much been putting out fires as fanning heated debate what with his recent comments in Prospect about the social utility of certain financial activities. Not to be outdone the Goldman Sachs CEO subsequently put on much the same sackcloth and ash suit (the same tailor perhaps?) when he wittered on about the socially useless nature of some investment banking products.

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?

The return of business as usual Pt. 17

Forget the mega-2 yr-guarantied bonuses erupting across high finance like a bad dose of dickfuld (they never went away), you really know we're back in business now that Lucy Kellaway has finally returned from her spiffy hols to moan about management-speak.

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.